Loan costs surge | Farmers looking to reduce debt could drive down crop prices
MOSCOW/LONDON (Reuters) — A significant rise in the cost of borrowing for Russia’s agricultural sector, partly caused by western sanctions, is fanning a grain export rush as farmers cash in on crops to repay increasingly expensive bank debt.
Russian farmers are heavily dependent on loans to finance crop cycles, but brisk selling from the world’s fourth-biggest grain exporter to service debt may prove counterproductive, as it is likely to push down prices.
Corn and wheat have already hit four-year lows on bumper global supplies.
Farmers rushed to sell grain in Russia’s south, a trader said.
“They were selling to cover their liabilities.”
The situation may now shift to Russia’s Central and Volga regions, he added.
Moscow nursed farmers through the financial crisis of 2008 and droughts in 2010 and 2012 with easy access to finance, helping to stave off job losses.
European Union, Canada and U.S. sanctions are the latest rough patch, but the government is likely to be less able to help this time.
Last month, the European Union agreed to its toughest sanctions yet against Moscow in response to Russia’s annexation of Crimea and support for separatist rebels in Ukraine.
Russia’s largest lender Sberbank and Russian Agricultural Bank, two major creditors to the farm sector, have been added to the EU’s sanctions list, preventing them from accessing the EU capital markets. Russian Agricultural Bank is on the U.S. list.
According to Russia’s central bank, ruble-denominated debt in the agriculture and hunting sectors stood at $35 billion US as of July 1.
“The situation with credit resource availability is critical in the agriculture sector,” said Andrey Oleynik, managing director of Russian company Basic Element’s agribusiness.
“All (of the Russian) agriculture sector is critically dependent on imported plant protection products, complex fertilizers and seeds.”
Interest rates on loans to the agricultural sector are up between three and four percentage points compared with a range of 12 to 14 percent at the start of the year, due to rising key central bank rates, Oleynik said.
Traders said that this had resulted in Russian farmers front-loading crop sales, to pay off debt as quickly as possible. Front-loading means selling most of a crop early in the season.
“If interest rates go up, you will have front-loading, people will cash in to repay credit rather than carry goods,” said a trader.
Russian Agricultural Bank has reported persistently weak asset quality, reflected in a high level of problem loans, which accounted for 23 percent of gross loans at the end of 2013, Moody’s rating agency said in a recent report.
“The high level of problem loans is primarily explained by weak credit underwriting practices in the past. It also reflects the bank’s policy mandate to service a broad range of agricultural borrowers, including borrowers with relatively weak profiles to which many other banks do not lend,” Moody’s added.
Russia exported a record 3.1 million tonnes of grain in July, up from the previous record of 2.5 million tonnes in July last year, agriculture consultancy IKAR said.
“People are talking now about a 60 million tonne wheat crop. There’s no doubt the farmers will keep selling,” a European trader said.
“Russian wheat will stay cheap because there’s plenty of it. They have the quality, but they have no big chance to ask for better prices. There’s too much.”