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Snapshot of the Russian agroindustry — 2017Deloitte CIS Research CenterMoscow, 2017

Contents

Foreword 03

Introduction 04

Key findings 05

Key macroeconomic indicators 06

Production and consumption 08

Domestic consumption 10

Foreign trade 12

Grain exports: highlights and main logistic channels 14

Sunflower oil exports: highlights and main logistic channels 17

Wheat prices: forecasts by experts 18

Representatives of the leading agribusinesses on the state of the industry 20

Issues facing the industry 21

Competitiveness drivers 22

Development strategies 23

Imports and exports 24

Government support 25

Innovation and green agenda 26

About the respondents 28

Contacts 29

03

Foreword

Rinat KhasanovDirectorAgribusinessDeloitte CIS

Deloitte acknowledges our appreciation for the participants in our survey connected with our research project Snapshot of the Russian agricultural market in 2017. We would like to thank all the participants for their time and interest in this undertaking.

Your expert opinions have not only helped us identify issues, developments and growth drivers in the Russian agroindustry in 2017, but have also helped us detect significant trends, providing a real view of annual changes in the agroindustry.

We are pleased to present the full version of the research report. The main conclusions of this report will be published by leading Russian media outlets.

We look forward to inviting you to take part in our next survey.

If you have any questions regarding this research, please do not hesitate to contact us.

Mikhail KsenofontovInstitute for National Economic Forecasting of the Russian Academy of Sciences (INP RAN)

Over the last 10-15 years, the active growth in the agroindustry has been underpinned by the initially weak capacity as regards meeting the demand, as well as by fast growing household and public income. Russia has almost reached the supply saturation point for core agricultural commodities and products. Given the current stage of development of Russian agribusinesses and the Russian agroindustry as a whole, a growth in production when assessed within “the more the better” framework can no longer be seen an efficient versatile measure.

Agribusinesses have to adapt themselves to increasingly stricter constraints on the demand side. Such constraints seem to be more related to a relatively high level of satisfaction of consumer needs, in terms of natural units, rather than to purchasing power. In this context, avoiding overproduction, building a case for greater capacity of the traditional markets and expanding into new ones should become a key focus for economic policy.

Snapshot of the Russian agroindustry — 2017

04

Introduction

DefinitionsWe are pleased to present the findings of our annual research report Snapshot of the Russian agricultural market prepared by Deloitte CIS.

This is the third time we have conducted our research in Russia. The opinions provided by the respondents have enabled us to identify major concerns, key drivers and development priorities for the Russian economy, including a comparative analysis of the existing trends.

The survey was held in September 2017, with 50 experts providing their responses.

This report has been prepared by the Deloitte CIS Research Centre in Moscow.

Survey goalProvide a comprehensive view of the trends in the Russian agroindustry

Survey objectiveAssess the developments and future prospects of the industry

MethodologyResponses have been collected via the online questionnaire form and face-to-face interviews.

Our comprehensive analysis included the following approaches:

• Identification and examination of general market trends

• Comparative analysis of the market data trends

• Multifactor analysis of the findings to obtain a deeper understanding of hidden specific features and integrate the findings

SamplingThe survey was performed on a random sample of respondents from a closed, highly specialized population. The final sample included 50 respondents.


05

Key findings

Profit before tax (crop production and animal farming in 2016)

Subsidies share in companies’ profit

in 2014–2016

Product profitability in the key agricultural segments in 2016

Wheat price forecast by IPN RAN for 2018

with a barrel of oil at USD 50

Share of agricultural producers’ operational profit

in the structure of Russian wheat export prices

in 2016

Total subsidies issued

in 2013–16

Efficiency of government support to the agroindustry, according to respondents (on a scale of -1 to +1)

The strongest driver of competitiveness

Top three strategies for agribusinesses in 2017

Top three technologies implemented by agribusinesses

183 USD/tonne

251

RUB billion

87 %

20 %

825 RUB billion

-0,08

11%32 %

Food as a share of total household spending

in 2017

Growth in corn exports (in monetary terms,

2016 vs 2015)

Companies with a positive view

of the situation in the industry

Cost reduction

Direct supply chain

Higher production

output

Accumulation of genetic

data

Expansion into

new markets

Precision farming

78 %

1 12 23 3

38 % 43 %

More stable legislative and regulatory policies


06

In 2016 the share attributable to agriculture and fishery output in the national GDP continued to grow, up by 0.1 pps in nominal and real terms.

GDP in nominal terms(Current prices, RUB billion)

Agroindustry’s share of GDP(%)

GDP in real terms (2011 prices, RUB billion)

GDP trends in the agroindustry (%)

Industry 2016 2015

Real estate 13,314 12,975

Commerce 12,390 12,274

Manufacturing 10,636 10,294

Mining 7,297 7,218

Public administration 6,102 5,823

Transport and communications 6,067 5,799

Construction 4,781 4,780

Agriculture (including fishing) 3,674 3,408

Financial activities 3,455 2,921

Healthcare 2,921 2,789

Energy 2,416 2,223

Education 2,011 1,936

Hotels and restaurants 649 638

Industry 2016 2015

Real estate 10,080 9,990

Commerce 8,353 8,623

Manufacturing 7,143 7,062

Mining 5,180 5,165

Transport and communications 4,067 4,050

Public administration 4,062 4,061

Construction 3,696 3,860

Financial activities 2,612 2,591

Agriculture (including fishing) 2,275 2,202

Healthcare 1,832 1,869

Energy 1,722 1,678

Education 1,337 1,335

Hotels and restaurants 457 474

2011

2015

2012

2016

2013

2014

3.73.9

4.14.2

3.9

3.83.7

4.1

4.64.7

3.9

3.6

2012

2016

2013

2014

2015

4.3

2.8 3.2

-1.2

1.5

-1.8

2.8

0.2

-3.7

-0.7

GDP in nominal terms

GDP in real terms

GDP of Russia

GDP of agriculture

Source: Russian Federal Statistics Service, the Russian Central Bank

Key macroeconomic indicators

The real term YoY GDP growth in agriculture remained at 3 percent, unchanged from 2015.


07

Fixed capital investment increased by 21 percent in 2016 YoY.

Agricultural producers saw their margins go down by 4 pps for crop production and 5 pps for animal farming.

Despite the decreased profits in the animal farming sector, the aggregate profit (Figure 3) generated by the agroindustry in 2016 remained unchanged from 2015, at RUB 333 billion (2015: RUB 334 billion), boosted by profits in the crop production and fishing segments. Translated into US dollars at the CBR’s annual average exchange rates for 2015 and 2016, annual profits for 2016 decreased by 9 percent.

* Profit/(loss) before tax

Profit*(Current prices, RUB billion)

Profit(Current prices, USD billion)

Product profitability trends(%)

Fixed capital investment(RUB billion)

Crop farming

Animal farming

Fishing

2012

2016

2013

2014

2015

37

133

108

81

123

38

137

143

4867

23

6482

23

11

2012

2016

2013

2014

2015

1.18

2.24 2.14

1.561.72

1.17 2.17 1.61

2.59

3.18

0.711.05 1.23

0.730.29

2012

2016

2013

2014

2015

3

1611

11

1813

3632

16

2322

62 62

22

33

2012

2016

2013

2014

2015

511

499

604

458

509

Subsidies(Subsidies issued, RUB billion)

Actual

Plan

Profit (crop and animal farming)

2013

2017

2014

2018

2015

2019

2016

2020

270

170

237

216198 194 194

159183

187

189

218

251

198

75

222

Over the last three years government subsidies accounted for 87% of the profits of agro-industrial companies, so it is too early to discuss any full payback of agro-industrial projects,

as subsidies remain a key factor in agro-industrial investment decision making.

Rinat KhasanovAgribusiness ServicesLeader, Deloitte CIS


08

Production

Источник: Росстат, ЦБ РФ, Министерство сельского хозяйства РФ

Production and consumption

In 2016 total meat output on the Russian market grew by 1 percent from 2015. Domestic production showed a growth of 4 percent while imports were down by 17 percent.

In 2016, the Russian market witnessed an increase in grain production by 13 percent, a more than threefold growth from the same period in 2015.

In 2016 total milk output on the Russian market was down by 3 percent from 2015 due to a decrease in imports by 12 percent. Milk imports accounted for 18 percent of the market in 2016.

2013

2015

2014

2016

104.8

0.8

165.8

60.2

120.7

1

186.5

64.8

92.4

1.5

137

43.1

105.3

0.9

158.8

52.6

2013

2015

2014

2016

30,797

7,917

40,834

2,120

30,724

6,950

39,622

1,948

30,529

9,445

42,006

2,032

30,791

9,155

41,928

1,982

2013

2015

2014

2016

9,565

1,360

11,732

807

9,919

1,123

11,854

812

8,545

2,480

11,863

838

9,070

1,952

11,892

870

Grain (production) (Million tonnes)

Meat and meat products(Thousand tonnes)

Milk and dairy products (Thousand tonnes)

Stock, beginning of year

Output

Imports

Total

Crop production was a key driver of growth in the agro-industry for some years, however this year the situation is different. Despite the record harvest (up approximately 13% from last year), it has not offset a decline in prices

(from 10% to 25% depending on the type of crop), which means that revenue and profit in the sector in 2017 will be worse than last year. On the other hand, this will result in a lower cost of animal feed, thus leading to lower pork and poultry prices at the end of 2017 and into 2018. So cattle farmers may expect higher profits in 2017.

Rinat KhasanovAgribusiness ServicesLeader, Deloitte CIS


09

Total consumption of grains also saw a 9 percent growth (vs a 2 percent growth in 2015). Domestic consumption and exports grew by 8 percent and 10 percent, respectively.

Total meat consumption increased by 1 percent. Domestic consumption, which is 97 percent of the total consumption, was characterised by a similar growth. Exports were up by 59 percent. However, they are more than four times lower when compared meat imports in weight terms.

In 2016 total milk consumption decreased by 3 percent. Domestic consumption, which accounts for 90 percent of total consumption, is also down by 3 percent.

2013

2015

2014

2016

20.9

30.7

48.3

101

1.122.3

33.9

52.3

109.6

1.120

19

44.6

84.8

1.221

30.1

46.5

98.6

119 18 1518 143 228117 135

2013

2015

2014

2016

10,712

10,920

10,795

11,083

10,812

10,999

47 4551 56

10,876

11,085

606 645628 629 34 2632 36

2013

2015

2014

2016

34 934

38,886

34 190

37,904

35 633

40,035

3,312 3,0433,742 3,482

35 661

39,808

Grain (production) (Million tonnes)

Meat and meat products(Thousand tonnes)

Milk and dairy products (Thousand tonnes)

Productive consumption

Domestic consumption

Losses

Exports

Total

Сonsumption

Over the last several years we have noted a trend toward a decline in dairy product consumption, especially milk intensive ones, such as cheese and butter. In 2016, per capita milk consumption decreased by 2.3% to 233.3 kg, while the WHO recommendation is 325 kg. This is due primarily

to higher prices of dairy products and declining disposable income. Commodity milk production is actively growing, albeit with the first signs of excessive production already evident. We expect that demand for raw milk will continue to slow next year, which may lead to a decline in prices. This may have a negative effect on the development of the sector unless additional measures are taken to boost demand.

Andrey Danilenko,Chairman of the Management Board, Soyuzmoloko


10

120

13

2017

2014

2015

2016

9.25

9.569.44

9.65 9.69

220

13

2017

2014

2015

2016

5.21

4.73 4.71

5.40

4.98

3

2013

2017

2014

2015

2016

3.69

4.16

3.87

3.633.99

4

2013

2017

2014

2015

2016

2.772.90

3.07

2.652.85

5

2013

2017

2014

2015

2016

2.45

2.69 2.69

2.49

2.45

Vegetables, including potato

Confectionery products

Milk and dairy products

Alcohol

Meat products

Food products in overall consumer spending(%)

Share of top five food products in overall consumer spending(%)

Domestic consumption

Food products account for 38 percent of overall consumer spending. Meat products, alcohol, vegetables, milk and pastries are the most popular food products.

2013

2017

2014

2015

2016

36.51

38.00 38.08

37.0837.31

Source: Russian Federal Statistics Service, the Russian Central Bank and the Russian Ministry of Agriculture


11

Retail price* structure for staple foods (%)

* Average price per kg in Russia

** Processing is provided by producer, the income icon indicates poultry breeding costs

The cost of commodities makes the largest contribution to the retail price structure of staple foods. Commodity costs are highest for beef accounting for 62 percent of the retail price, respectively. Commodity costs are lowest for wheat flour, accounting for 30 percent of the retail price. Government gains the biggest profit (in tax) from 1 kg of beef — RUB 30.

Processing

Agriproducer

Intermediaries

Retail

Buyers

Profits

Income

Costs

Taxes

Beef

Pork

Chicken**

Wheat flour

Milk

Sunflower oil

40% 7% 3% 4% 29% 8% 7% 2%

110 RUB

45% 22% 3% 6% 7% 9% 6% 2%

54 RUB

30% 10% 2% 4% 33% 10% 8% 2%

38 RUB

53% 9% 2% 5% 11% 9% 7% 3%

261 RUB

62% 8% 4% 6% 2% 8% 8% 3%

348 RUB

47% 21% 7% 6% 7% 7% 5% 2%

141 RUB


12

2016 2015

Item/ country

USD million

Thousand tonnes

USD million

Thousand tonnes

Banana 999 1,356 789 130

Ecuador 981 1,332 896 1,209

Soybeans 976 2,282 940 2,178

Paraguay 429 1,006 459 1,085Brazil 413 946 252 550

Frozen cuts (cattle) 767 248 1,092 306

Brazil 580 163 400 129Paraguay 348 94 229 75

Tobacco 761 129 789 130

Brazil 201 32 250 37India 113 24 120 25

Palm oil 647 885 641 887

Indonesia 513 736 516 747

Tangerines 607 758 623 783

Marocco 182 204 162 177Turkey 175 255 186 276

Cheese 604 156 605 151

Belarus 531 139 480 123

Frozen pork 576 233 825 250

Brazil 553 223 736 223

Vine 513 288 485 276

Italy 136 62 131 61France 94 40 95 43Spain 75 55 65 48

Tomatoes 492 465 681 671

Marocco 165 126 91 67China 106 86 114 86Azerbaijan 92 98 57 65

Foreign trade

Foreign trade

Imports (USD million)

2013

2015

2014

2016

16,126

1,356

22,954

5,472

12,530

1,774

20,109

5,806

22,895

2,863

37,466

11,708

22,534

2,571

34,823

9,718

Exports (USD million)

2013

2015

2014

2016

11,780

2,789

15,002

433

12,921

3,150

16,613

542

11,568

2,819

14,905

518

14,210

2,874

17,612

528

Balance (USD million)

Crop farming

Animal farming

Fishing

Total

Imports

Agricultural imports are represented by a wide variety of products, with each export position generally coming from one key exporting country.

Source: Russian Federal Customs Service.

In 2016, total agricultural imports into Russia decreased by 12 percent from 2015. Total exports grew by 11 percent.

2013

2015

2014

2016

-4,346

-5,039

1,433

-7,952

391

-5,263

1,377

-3,496

-11,327

-11,190

-44

-22,561

-8,324

-9,190

303

-17,211


13

Exports

The structure of Russian agricultural exports remains stable, with wheat, sunflower oil and corn as the three key products.

In 2016, wheat exports grew by 7 percent in monetary terms. Exports of sunflower oil and corn went up by 21 percent and 43 percent, respectively.

North Africa (Egypt and Sudan), the Middle East (Turkey, Iran, Lebanon, Saudi Arabia and Yemen) and the South Caucasus (Azerbaijan, Georgia and Armenia) are currently the main export destinations for Russian grains.

Most exports are transported via Black Sea and Azov Sea ports.

Turkey, Egypt, Iran, China and the CIS countries (particularly, Central Asian countries such as Kazakhstan, Uzbekistan and Tajikstan) are the main export destinations for vegetable oil.

2016 2015

Item/ country

USD million

Thousand tonnes

USD million

Thousand tonnes

Wheat

Total: 4,171 25,146 3,915 21,106Egypt 989 5,824 841 4,532Turkey 419 2,627 565 3,108Bangladesh 280 1,860 146 892Nigeria 244 1,412 169 866Azerbaijan 189 1,135 235 1,233

Sunflower oil

Total: 1,439 1,791 1,191 1,446Turkey 431 564 467 605Egypt 184 243 101 133China 107 129 40 45Kazakhstan 107 130 105 123Uzbekistan 103 115 92 98

Corn

Total: 855 5,329 599 3,697South Korea 155 936 216 1,368Turkey 127 838 151 900Iran 120 704 28 175Netherlands 95 569 25 133Lebanon 63 409 23 137

HS categories used: imports — 100199, 151211, 151219, 100590, exports — 080390, 120190, 020230, 240120, 151190, 080520, 040690, 020329, 220421, 070200.


14

Logistic companies: ZAO RusAgroTrans is the largest railway carrier for grain commodities. In 2016, it had a negative margin (-2 percent).

In 2015 the margin was positive (6.6 percent).

Railway transportation costs depend on the route. According to estimates by RusAgroTrans, grain commodity transportation rates for the route “Kavkazskaya Station (the Krasnodar Region) — Novorossiysk”, including costs related to port documentation and transshipment services, were RUB 2,640 per tonne (USD 46 per tonne at a USD/RUB exchange rate of RUB 57 in 2015); RUB 2,845 per tonne (USD 44 per tonne at a USD/RUB exchange rate of RUB 65) in 2016; RUB 2,444 per tonne (USD 43 per tonne at a USD/RUB exchange rate of RUB 57). Given the expert estimates of port-related costs of USD 21 per tonne for 2016, railway carrier services were at about USD 23 per tonne.

Transportation by road can be competitive against railway transportation for distances of up to 600-800 km.

Agricultural producers: The margin of grain production varies greatly across producers, depending on soil quality, climate, environment and the technological maturity/size of a producer. According to SPARK-Interfax data, margins of certain large grain producers from export-oriented regions varied from 15 percent to 50 percent in 2015–16, with an average margin of 35 percent in 2015 and 30 percent in 2016.

Grain exports: highlights and main logistic channels

Main logistic channels:

The Krasnodar, Stavropol, Rostov and Volgograd Regions

minor ports in the Azov and Black Sea Basin

(offshore transshipment in the Kerch Strait may also occur)

Turkey, Egypt and other countries

in the Middle East and North Africa

The Krasnodar, Stavropol, Rostov and Volgograd Regions and areas in the Black Earth Region

deep-water ports in the Azov and Black

Sea Basin

grai

n el

evat

ors almost

all countries with sea access

Transportation by road

Agribusinesses/traders (reselling may also occur)

Transportation by railway

Ports

Freight

Buyers


15

Ports: Deep-water ports for the transshipment of grain exports: Novorossiysk (PAO Novorossiyskiy Kombinat Khleboproduktov, with a transshipment volume of 3.5 million tonnes in 2016); AO KSK, with a transshipment volume of 3.3 million tonnes, AO Novorossiysk Grain Terminal, with a transshipment volume of 3.2 million tonnes; Taman (ООО Taman Zernovoy Terminalniy Kompleks, with a transshipment volume of 2.7 million tonnes; Tuapse (AO Tuapse Zernovoy Terminal, with a transshipment volume of 1.8 million tonnes).

Transshipment rates offered by these ports have only slight differences, staying currently in a range of USD 15–20 per tonne. Specifically, Novorossiyskiy Kombinat Khleboproduktov charges USD 17 per tonne; the grain terminal KSK charges USD 20 per tonne and USD 15 per tonne forlarger volumes.

Margins earned by grain transshipment providers can be obtained by analysing financial statements. This analysis shows that margins can vary significantly, from 20 percent through to 80 percent. Therefore, an average margin for deep-water ports is about 74 percent and it is 35 percent for shallow-water ports. It should be noted that these are somewhat rough estimates because these ports act as export channels for a wide variety of shipments other than grain.

Traders: Margins earned by the largest grain exporters vary significantly (-2.0–6.2 percent), with an average margin of about 1.5–2.0 percent. In addition, large traders generally work directly with smaller resellers such as Trade House RIF, rather than with agricultural producers. As a result, trader margins that are estimated based on financial statements of the incumbents may be underestimated due to the fact that such estimates do not include a full picture of grain resales.

There are few pure exporters among companies because many of them are diversified businesses engaged in the production and processing of oilseeds; exports of vegetable oils; the production and processing of grain, etc., with oilseed production continuing as a core business for certain companies such as Artis-Agro, Russian Oils and Sodurzhestvo Trade House.

Freight services: Freight rates for grain shipments can vary depending on (i) the vessel type (e.g. shipments via the Azov Sea and the Black Sea can be carried by vessels with a deadweight of 5,000–7,000 tonnes and 43,000–60,000 tonnes, respectively) and (ii) demand, with an average freight rate of USD 10–15 per tonne for vessels with higher carrying capacity and USD 20 per tonne for vessels with lower carrying capacity.

The Volgograd, Saratov, Samara and Orenburg Regions

inland harbours on the Volga

River or Caspian ports

IranThe Stavropol Region gr

ain

elev

ator

s Azerbaijan The Central Federal District, primarily the Black Earth Region

Baltic ports

grai

n el

evat

ors mainly Central

Africa and Latin America, primarily

Nigeria and Mexico

Other logistic channels:


16

Below is an analysis of income distribution in grain export channels in 2016:

Exports via the Black Sea: Grain is shipped from the Krasnodar or Stavropol Regions by railroad or trucks to deep-water ports in the Black Sea.

Exports via the Azov Sea: Grain is primarily transported by truck from the Rostov Region to shallow-water ports, with about half of the shipments being further transshipped offshore to Handysize and Panamax vessels in the Kerch Strait.

1 2Customer price structure for exports in 2016

FOB Novorossiysk + Freight

FOB Rostov + Freight




Ports

Freight

Traders

Buyers

Profit

Costs

163 USD/tonne

55% 24% 0% 0% 5% 3% 0% 2% 11% 0%

48% 20% 13% 0% 2% 7% 0% 2% 8% 0%

182 USD/tonne


17

Profit

Costs

Sunflower oil exports: highlights and main logistic channels




Ports

Freight

Processing

Buyers

Main logistic channels: Other logistic channels:

Agribusinesses{sunflower seeds}

Oil extraction plants (OEP) + transshipment terminals working in cooperation

with oil extraction plants

Turkey, Egypt, Iran, China

or other countries with sea access

Agricultural producers: Cost efficiency of sunflower farming varies from farmer to farmer, depending on the climate and environment, soil quality and technological maturity. According to estimates by the Russian Ministry of Agriculture, the average cost efficiency in Russia was 56 percent in 2016. As a result, with the existing shortage in feedstock and alternative options to supply sunflower seed for processing or export, the distribution of margins across the sunflower oil export supply chain has shifted more to agricultural producers.

Processing providers: Margins earned by processing providers vary significantly by oil extraction plant, depending on the local market characteristics, which primarily includes competition for feedstock among processing providers and feedstock prices. This segment is characterised by processing capacities significantly exceeding the feedstock supply. According to experts, the industry had an average EBITDA margin of 8 percent in 2015–16. Based on our estimates, the average margin for processing services is about 7 percent.

Customer price structure for exports

Agribusinesses{sunflower seeds}

Sunflower oil

OEP The CIS countries or China

oil transshipment terminal

Turkey, Egypt, Iran, China

or other countries with sea access

Bulk transportation of sunflower oil is dominating export shipments. It accounted for about 70 percent

(1.23 million tonnes) in 2016. Unlike with grain exports, sunflower oil exports are distinctly characterised by the absence of clearly defined traders in the export channel. Shipments are generally handled by large processing providers or their trade houses without engaging with wholesale intermediaries. There are only a few instances when exports are channeled via companies that are not engaged in oil processing (e.g. International Grain Company). Another important aspect is that almost all major processing providers engaged in exports have their own export terminals and/or have an interest in the share capital of specialist companies. In addition, many players (e.g. Aston, Yug Rusi and Efko) have their own trucks or vessels to transport oil and also run their own large facilities that cultivate oil-bearing crops.

Mikhail KsenofontovInstitute for National Economic Forecasting of the Russian Academy of Sciences (INP RAN)

37% 47% 9% 7%

770 USD/tonne


18

Wheat prices: forecasts by experts

Forecast methodology proposed by IPN RAN:Below is a description of a potential forecast methodology for global wheat prices. Stage 1 uses a linear regression model to estimate future prices against a reference to the global grain market — American wheat. To arrive at prices for exports from Russia, Stage 2 involves a number of assumptions about a potential discount rate for exports of Russian wheat, as compared to prices for American wheat. Stage 3 is focused on determining prices in the domestic grain market, using the netback approach and making assumptions about changes in costs for transportation and port transshipments.

The regression analysis above helps identify key factors that should be added to the linear regression equation to estimate future prices for American wheat. These factors are:

• Ratio of global annual wheat consumption to global carry-over stock at year end;

• - Average annual price for Brent crude oil.

It is further assumed that oil prices are impacted by FRS policies with the effect of a stronger or weaker US dollar. The ratio of global annual wheat consumption to year-end wheat stocks has been selected as it provides a better approximation, compared to year-end global stocks or, for instance, the reverse ratio of year-end stocks to global annual wheat consumption. This is due to the fact that this ratio takes into account a growth in global wheat consumption that was seen throughout the retrospective period.

Below is the linear regression equation for estimating average annual prices for American wheat:

Y = 41.6 + 19.14 * X1 + 1.72 * X2,

Where: Y is the average annual FOB price for American wheat HRW no.1 (USD/tonne)

X1 is the ratio of global annual wheat consumption to global wheat stocks at the end of a crop year

X2 is the average annual price for Brent crude oil (USD/barrel).

This model has a coefficient of multiple correlation of 0.94 and a coefficient of determination of 0.88. Therefore, the model allows for quite a good approximation. It should be noted that the model does not look at American wheat export prices within a specific year while providing rather rough estimates of potential average annual export prices. Average monthly prices on the global grain market are subject to volatility and driven by multiple short-term factors that are not addressed by the model.

Building scenarios is a key component to forecasting export prices for wheat. Based on the analysis of historical trends in the global consumption of wheat and wheat stocks, the consumption demonstrates a steady growth while wheat stocks remain volatile. The consumption-to-stocks ratio varied within a range of 2.8 (higher stocks) to 4.5 (lower stocks), with an average ratio of 3.5 over the last 20 years. It can be expected for the forecast period that the growth in global consumption of wheat will continue at historical rates while 2017 will see a significant increase in global wheat stocks due to record-high yields globally. However, subsequent years will see this growth lag behind the growth in global consumption, partially due to a high base effect. This means that the consumption-to-stocks ratio can be expected to decrease to 2.7 in the short term, with a potential subsequent growth. Both of these scenarios are based on the assumption that the consumption-to-stocks ratio will continue to increase gradually to reach 3.5 by 2025.

The scenarios differ in the forecast trends for oil prices. Scenario 1 assumes that average annual prices for Brent oil will see a moderate growth of up to USD 60 per barrel by 2025 while Scenario 2 is based on the assumption that oil prices will decrease down to USD 40 per barrel by 2025.

Source: INP RAN, the EIU


19

To arrive at export prices for Russian wheat, it can be assumed that the trend of price discounts that have been decreasing against prices for American wheat over the recent years will continue. Although the difference between prices will remain significant in 2017 (5–10 USD per tonne) due to the crop failure

Forecasts by other experts:The Economist: In Q3 2017, the global wheat markets were quite unstable. A growth in prices driven primarily by droughts in some regions in the USA and Canada was subsequently offset by high yields in the Black Sea region, mainly in Russia. Despite the strong global supply and harsh competition for available market shares, prices for wheat produced by the key farming regions decreased by about 5 percent. Profits earned by producers in the USA fluctuated due to supply chain issues

sufficient funds to settle their short-term liabilities, with the result that a number of producers are reluctant to sell their products at current prices. Russian exports are expected to remain high throughout the season while strong export competition is likely to slow down a growth in prices next year. Given the assumption that yield forecasts will not deteriorate, the EIU expects that export prices for HRW (12%, FOB Gulf) will decrease during 4Q 2017 and 1H 2018, with a subsequent slight growth.

Forecast scenarios 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Global wheat consumption to year-end stocks

3.24 2.95 2.70 2.90 3.10 3.25 3.40 3.50 3.50 3.50 3.50

Brent oil (USD/barrel) 52.4 44.0

Scenario 1 51.6 55.0 56.0 57.0 58.0 59.0 60.0 60.0 60.0

Scenario 2 51.6 50.0 48.5 47.0 45.5 44.0 42.5 41.0 40.0

HRW no.1 wheat (USD/tonne) 194 174

Scenario 1 182 192 197 202 207 209 212 212 212

Scenario 2 182 183 184 185 185 183 182 179 177

Prices HRW No. 1 FOB US Gulf (USD/tonne)

in the USA and the record-high yields in Russia in 2016–17, it will continue to decrease to reach nil by 2025. As a result, the rough estimates for average annual export prices for Russian wheat (Grade 4) would be at 172–177 USD per tonne (FOB, Novorossiysk) and 150–155 USD per tonne (FOB, Rostov).

Given the emerging shipment and transshipment rates for grain, domestic prices will be at 140–145 USD per tonne in the Krasnodar Region (according to RusAgroTrans, logistic costs for shipments from the Kavkazskaya station are at USD 42 per tonne). Similar estimates can be made for other regions and other periods.

caused by hurricanes, overloaded capacities of ports in the Persian Gulf and heightened concerns over the future of crops in Australia and Argentina, opening additional potential opportunities for exports. Increased demand and logistic solutions have acted to strengthen export quotations in the Black Sea Region, especially in Russia where the port of Novorossiysk is planning to expand its capacities, probably this season. In addition, some farmers have announced that they have received

206 205 210210 210 215205 205 210

217

210 215

1 Qtr 2017

1 Qtr 2018

1 Qtr 2019

2 Qtr 2017

2 Qtr 2018

2 Qtr 2019

3 Qtr 2017

3 Qtr 2018

3 Qtr 2019

4 Qtr 2017

4 Qtr 2018

4 Qtr 2019


20

Representatives of the leading agribusinesses on the state of the industry

Opinions on the current state of the Russian agroindustry(Trend in the weighted index for the current state of the Russian agroindustry*)

Opinions on the current state of a company (Trend in the weighted index for the current state of a company)

Prospects of the Russian agroindustry(Trend in the weighted index for prospects of the Russian agroindustry*)

Outlook for business growth(Trend in the weighted index for the outlook for business growth*)

Unlike in the previous periods, leading agribusinesses expressed a more positive view of the situation in the industry, with the index up by 27 pp. Among the companies, 78 percent note that the situation is positive or rather positive.

The index for opinions on the state of affairs in a company has increased significantly from last year by 29 pp. Almost 90 percent of the respondents expressed a positive or rather positive view on the position of their companies.

Prospects of the industry are perceived with reserved optimism. Even though the indicator is down by 5 pp from 2016, it remains positive. Among the respondents, 40 percent do not expect any significant changes in the industry.

While remaining positive, the business growth outlook index has declined significantly, down by 20 pp, with 14 percent of respondents indicating that the outlook may worsen.

2015

2017

2016

0.330.14 0.06

2015

2017

2016

0.480.58

0.19

2015

2017

2016

0.170.080.22

2015

2017

2016

0.190.33 0.39

* (a range from -1 to +1 where -1 and +1 correspond to a negative view and a positive view, respectively)


21

Issues facing the industry

Top issues facing the Russian agroindustry in 2017

2017

2016

2015

The overall rating of the top issues facing the Russian agroindustry in 2017

This year a lack of skilled personnel has become one of the top three issues facing the Russian agroindustry, representing a significant shift in the rating. Insufficient government support and shortcomings of government regulation remain key issues for the industry. Сurrency risks are no longer on the top three issues list because the industry has adapted to high RUB/USD exchange rates.

The top three issues remained unchanged in 2016 and 2015.

Insufficient government support and financing

Lack of skilled personnelShortcomings of government regulation in the industry

44%

36%

30%

Shortcomings of government regulation

Currency risk


40%

36%

29%

Shortcomings of government regulation


Currency risk

47%

36%

32%


Lack of skilled personnel

Shortcomings of government regulation in the industry

High energy prices

Insufficient purchasing power

Lack of tax flexibility to account for the nature of the industry (seasonality, etc.)

Geopolitical risks (EU sanctions, food embargo, etc.)

Insufficient adoption of high technologies

Commodity stock price fluctuation risk

Insufficient capacities and production base

Limited appeal of the agroindustry for external investors

Currency risk (weaker ruble)

Corruption

Insufficient optimisation of logistical processes

44%

36%

30%

22%

20%

18%

9%

9%

9%

7%

7%

6%

5%

4%

This year the overall rating of top issues features an increased importance of high energy prices (2017: 22 percent; 2016: 6 percent; 2015: nil) and insufficient purchasing power (2017: 20 percent; 2016: 13 percent; 2015: 3 percent).


22

The rating of domestic competitiveness drivers for the Russian agroindustry (Weighted rating*)

The rating of domestic competitiveness drivers for the companies(Weighted rating*)

Top five factors for 2017

Top three factors for 2016




Among the global competitiveness drivers, stable government regulation (a rating of 0.8), lower energy costs and cost reduction (a rating of 0.79) are a particular focus for respondents.

In 2015 and 2016, administrative barriers and logistics were noted by respondents from the leading agribusinesses as the most important drivers, with a rating of 0.69 and 0.94, respectively. Over the last three years, stable legislative and regulatory policies have been regularly mentioned as a priority global competitivenessdriver.

Top five factors for 2017

With a rating of 0.9, cost reduction is emphasized by respondents as one of the domestic competitiveness drivers: 82 percent of the respondents note the importance of this driver.

Another highlight from the survey is that skilled personnel has continued to grow in importance as a competitiveness driver, with a rating of 0.67 in 2015, 0.74 in 2016 and 0.82 in 2017.

This year over 70 percent of the respondents note technologization as a new competitiveness driver for the Russian agroindustry. Given such attention from the industry, we have addressed technologisation in more detail in the Innovation and digitalization section.

Technologization

Government support

Stable legislative and regulatory policies

Update of the energy infrastructure

Cost reduction

0.80

0.79

0.79

0.77

0.76

Optimization of logistical processes

Government support

Availability of financing

0.94

0.89

0.89

Cost reduction

Talent upgrade

Domestic demand growth

Technologization

Implementation of new capacities

0.91

0.82

0.81

0.78

0.78

Availability of financing

Domestic demand growth

Optimization of logistical processes

0.91

0.91

0.76

Optimization of energy and commodities costs

Lower administrative barriers

Talent upgrade

0.83

0.69

0.67

Lower administrative barriers

Currency risk reduction

Stable legislative and regulatory policies

0.69

0.67

0.67

Competitiveness drivers



23

Leading agribusinesses on priority strategies for 2017

The top five strategies have generally remained unchanged over the past three years, with cost reduction continuing as a key business growth strategy (a rating of 0.83). It should also be noted that expansion into new markets has risen in importance. This strategy was outside the top five strategies in 2015. However, it has continued to retain third place since 2016.

Respondents (43 percent in 2017) tend to note that their strategy horizon runs from 3 to 5 years.

Top three strategies for 2017*

2017

2016

2015

Cost reduction

Higher production output

Expansion into new markets

0.83

0.70

0.66

0.79

0.65

0.76

0.81

0.78

0.68

Overall rating of priority strategies by leading agribusinesses for 2017 in Russia

M&A strategy

Currency risk hedging

Cost reduction

Higher production output

Expansion into new markets

Upgrade of production and technological base (implementation of new capacities)

Business development via organic growth

Talent investment

Invesment in advanced technology

Raising capital from external sources

New product/service launches

Procurement strategy redesign

Working captial optimisation and operating model redesign

More investment in R&D and business development

Exit from non-core assets

0.83

0.70

0.66

0.65

0.62

0.60

0.58

0.47

0.29

0.04

0.03

-0.03

-0.16

-0.38

-0.46

In 2017, we asked our respondents to rate the priority of investment strategy for innovative technologies. Interestingly, unlike talent investment, innovative technology strategy has a lower priority in the overall rating. However, the number of respondents who have clearly named investment in innovative technologies as their priority is higher, by +8 pp.

Priority

Some priority

Non-priority

Investment in advanced technology

Talent investment

14%

10%

59%

51%

27%

39%

Strategy horizons

11%

1–2 years

3–5 years

6–10 years

Over 10 years

43%

22%

22%

12%

50%

11%

28%

11%

44%

28%

17%

Development strategies


24

Engaged in imports:

Engaged in exports:

Even though the respondent views on government support of exports have improved by 0.23 pp since 2015, the weighted index remains negative.

Staple foods: exports geography

Staple foods: imports geography

Government support of exports(Trend in the weighted index**)

2015

2017

2016

-0.21-0.44 -0.38

South East Asia: wheat

The CIS: formula feed, wheat, grains, dairy products, meat and meat products (poultry, beef and pork)

The EU: meat and meat products (poultry, beef and pork)

China: meat products (poultry)

Africa: wheat and grains

South East Asia: vegetable oil

The CIS: mineral fertilisers, formula feed, seeds, wheat, dairy products, meat and meat products (beef and pork)

The EU: formula feed and seeds

South America: meat and meat products (poultry)


20%

41%

24%

8%

Planning to become an importer or expand their import footprint:

Planning to become an exporter or expand their export footprint:

Imports and exports


25

Efficiency of the government’s efforts in supporting and developing the Russian agroindustry

The weighted index* Plans for increasing the share of unsubsidised financial support

The perceived overall efficiency of the government’s efforts in supporting the Russian agroindustry remains below average. However, 2017 has seen a growth in the weighted index of government efficiency.

Among the respondents, 43 percent reported that their companies have plans to increase the share of external unsubsidised funding via borrowings or contributions to capital.

2015

2017

2016

-0.08-0.06 -0.15

The rating of the most attractive financing sources

According to respondents, loans from Russian banks and internal financing sources remain the most attractive sources.

Have plans

No plans

57%

43%

Loan

s fr

om

Russ

ian

bank

Inte

rnal

fin

anci

ng

sour

ces

Stra

tegi

c pa

rtne

rshi

p

Loan

s fr

om

fore

ign

bank

0.42

0.55

-0.4

0

0.62

0.13

0.40

-0.0

3

0.50

-0.0

7

0.36

-0.0

30.17

2017

2016

2015

Subsidy experience

The overall satisfaction with the process of obtaining subsidies has been declining. In 2017, respondents have less positive views on the subsidy criteria such as the completeness and availability of information on subsidies. Last year this view was positive.

Government support

Size

of p

refe

rent

ial l

oans

App

licat

ion

proc

essi

ng p

erio

d fo

r pre

fere

ntia

l loa

ns

Com

plet

enes

s an

d av

aila

bilit

y of

info

rmat

ion

on p

refe

rent

ial l

oans

Sim

plic

ity

of fo

rmal

pro

cess

es

(adm

inis

trat

ive

dim

ensi

on)

-0.4

3

-0.4

3

0.43

0.20

-0.2

00.20

-0.0

4

-0.1

3

-0.3

4

-0.1

3


26


Innovation and digitalisation in the agroindustry

Need for improving the economic efficiency of business via automated key processes

Russian agroindustry: up to date with global trends in agriculture?

Agricultural processes and technologies implemented

The weighted index* showing how much the Russian agroindustry is up to date with global trends

Agricultural processes and technologies planned for implementation

Most popular trends among advanced customers*

Technologisation and high technology have often been named by respondents as growth drivers in the previous sections.When asked about the need for automation as a key goal of digital transformation, 90 percent indicated this need.

While many companies note the implementation of some technologies and processes, the overall weighted index for staying up to date with global trends is negative (-0.18), indicating that agricultural processes and technology are still emerging in the Russian agroindustry.

A majority of the respondents (65 percent) have indicated that the trend for greener products is most popular among end consumers.Meanwhile, customised products are named among the least popular (55 percent).

More than half of the respondents (55 percent) have replied that their companies have in place a direct supply chain where products go directly from farms to shops. More than a third of the respondents (35 percent) have indicated the use of technology for collecting and storing genetic data as part of the production process.Almost one third of the companies are planning to implement energy-saving solutions in the near future.

Need for automation

No need for automation

90%

10%

Genetic data accumulation and processing

Personalised offering

Direct supply chain

Precision farming

Biotechnology

55%

35%

33%

31%

29%

Focus on healthy food

Products on demand (24x7 availability)

Promotion of green agenda

Personalised products

0.29

0.24

-0.33

-0.43

Energy saving

Higher processing efficiency

Direct supply chain

29%

20%

16%

Genetic data accumulation and processing

Energy saving

Precision farming

Personalised offering

Higher processing efficiency

Smart farms

-0.20Biotechnology

Direct supply chain 0.35

-0.12

-0.57

-0.21

-0.33

-0.16

-0.19

Innovation and green agenda


27

Hi-tech innovations in agriculture

Innovations implemented

Innovations planned for implementation

Innovation adoption in the Russian agroindustry

Completely automated individual business processes are the most popular innovation, with 29 percent of the respondents indicating that they have implemented it. A number of companies adopting this innovation may increase up to 64 percent over the next two years.

The weighted index for innovation adoption is 0.11, which corresponds to the overall innovation adoption index (0.11) we defined for leading Russian companies in 2017. Innovation adoption is highest among companies in the technology, media and telecommunication (TMT) sector (0.20).

* Please see Deloitte CFO Survey of the Leading Companies in Russia

Internet of things

Selected business process automation

Cloud-based technology

Advanced accounting systems (CRM, ERP)

Chain of business processes automation

29%

21%

18%

18%

12%

Selected business process automation

Chain of business processes automation

Big data

Advanced accounting systems (CRM, ERP)

Cloud-based technology

35%

33%

27%

24%

14%

0.11

Highest adoption level

Innovation adoption in the Russian TMT sector

1.00

0.80

0.60

0.40

0.20

0.00

Promotion of a green agenda

Importance of environmental risks

Efficiency of environmental risk management

As part of the framework documents, a green agenda is actively implemented by 43 percent of the companies.

While most respondents note the importance of greener products for consumers, only one third (35 percent) have indicated that environmental risks are also high on the agenda.

Many respondents have rated environmental risk management as having average efficiency, with 57 percent indicating so.

Green agenda

A green agenda is part of our framework documents; it is actively implemented by the company.

Even though it is not part of our framework documents, a green agenda is implemented by the company.

A green agenda is not part of our framework documents. It is being implemented on a voluntary or nominal basis.

A green agenda is not part of our framework documents. We are not planning to implement it.

High

Average

Low

High

Average

Low

22%

12%

43%

57%

43%

8%

35%

14%

35%

31%


28

About the respondents

Respondents’ professional areas:

Number of employees

Revenue in 2016

Companies’ business areas:

Business strategy horizon

Type of business ownership

Management (CEO)

Finance (financial reporting, financial control, taxes, etc.)

1–2 years

3–5 years

6–10 years

Over 10 years

Below RUB 2 billion

RUB 2–10 billion

Over RUB 10 billion

Below 500 employees

500–2,500 employees

Over 2,500 employees

Publicly traded/joint-stock company

Private business (farm incorporated as OOO or run by a self-employed entrepreneur)

90%

10%

12%

22%

22%

43%

16%

27%

57%

27%

34%

39%

67%

33%

Manufacturing

Production

Processing and sales

Services

4%

33%

78%

2%


29

Contacts

Egor MetelkinPartnerAudit Consumer & Industrial Products Leader Deloitte [email protected]

Authors:

Lora ZemlyanskayaManagerResearch Centre LeaderDeloitte CIS

Dmitriy KasatkinSenior Specialist Research CentreDeloitte CIS

[email protected]

[email protected]

[email protected]

Rinat KhasanovDirectorAudit AgribusinessDeloitte CIS

mailto:emetelkin%40deloitte.ru?subject=

mailto:lzemlyanskaya%40deloitte.ru?subject=

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deloitte.ruAbout Deloitte

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Invest in Russia, investment in Russia - Snapshot of the Russian … · 2017. 12. 22. · Russia...

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