Wheat is one of the most important commodities that Russia and the United States export in the global trade market considering the fact that the world-wide production of wheat in growing. This is due to the fact that the world population is growing and the living standards in many developing countries are improving over time. Over the past two decades, Russia has been defined as one of the larger exporters of wheat because of the large areas used for planting, lower production costs, exploitation of mild winters, and a high quality of wheat production has increased demand for its commodity in the global market. The United States of America has been a traditional wheat exporter on foreign trade, but this position sometimes is fluctuated because of the global competition which has resulted in the wheat supply increase and price reduction. In this report, I will evaluate the absolute, comparative and factor endowment advantages of Russia and the United States regarding wheat export in the global market trade.
Absolute, Comparative and Factor Endowment Advantages Between Russia and the United States
Russia is estimated to be one of the leading exporters of wheat in global trade market, because of the transition from this commodity import to export in the last decades. This fact has increased the role of Europe in the global trade market, making this continent one of the largest wheat exporters in years 2016-2017. Russia has many advantages that help its leading position in exporting this commodity. It has a large plant area, with the appropriate climate conditions to produce wheat of a high quality, which is becoming a much-demanded commodity of various populations nowadays. Another advantage for Russia is the lower production cost, which has influenced a lot in positioning this country among the grain exporters.
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In addition, Russia is orienting the process of wheat production from spring corps to winter ones, based on the fact that its climate is continental and subarctic according to its geographic locations. Using this advantage, nowadays, Russia is taking about 60% of harvests from the winter corps, unlike previous years, where it used mainly spring ones. This fact is helped also by the climate change trends, which are making winters milder, allowing the farmers to produce a large amount of wheat from winter corps. S&P Global Platts Analytics expects Russia to occupy 20% of total global exports in 2019-20, which is a very positive figure keeping in mind the growing competition in the wheat global trade.
Thus, this can help in increasing the total harvested area, but this can happen only if the winter climate conditions are favorable. What is observed in the last year is that weather conditions were not favorable for what harvest in this country, showing increasing figures comparing to the years 2017-2018. This disadvantage is mitigated by the increased quality of the corps, so the protein percentage of the wheat is increased to nearly 10% of total wheat production, so it became 80% compared to 70% in the previous year. Another disadvantage that can threaten its profits in Southeast Asia, Middle East and other regions, is the politics of International Marine Organization, which aims at cutting Sulphur oxide emissions from ships with the aim to improve air quality, thus protecting the environment and reducing negative effects in the human health. This is known also as the MARPOL Convention. Of course, that freight tariffs, in this regard, will impact even other competitors in the wheat market.
If we refer to the comparative advantages even with other major players of the wheat exports like Australia in Southeast Asia, Russia has offered lower and very competitive wheat price and has gain a very motivating market share in this region. This is also due to the climate change effects (increased drought and reduced production of wheat) that Australia is facing in the last years. If we refer to the raise in the freight tariffs because of the abovementioned politics, the wheat competition of Russia will be reduced in Southeast region, because Australia is closer to that region, as a result will have lower tariffs. In this regard, even Russia is more advantaged in exporting wheat for Middle East, South Asia and West and North Africa.
Another advantage of Russia is its ability to negotiate for wheat exports in the new markets, such as Saudi Arabia. This foreign economic politics enable this country to have a sustainable increase in the wheat production. Also, an agreement with Vietnam enabled Russia to won again the license rights for export in this country. Another target market, on which Russia wants to expand, is China, which has a very large population and food consumption as a result. This politics of exports’ expansion is related with the growing trend of imports. For example, USDA shows figures, such as: increase in the global wheat imports for Southeast Asia (15%), Middle East, North and West Africa (30%), making Russia exports of wheat very favorable in these markets, mainly because the competitive price it offers.
The United States of America is another exporter of wheat in the global market trade. It has been a medium or a short-term exporter of smaller volumes than Russia in the European Union, Australia and China. A major competitor of the USA in this market and for this commodity is China, which has expanded the export market in the last two years more than the USA, including markets, such as Egypt, North & South Korea. The figures are not favorable for the USA in the wheat global exports. It is ranked in the fourth place regarding the largest wheat exporters in the last year, according to the USDA (United States Department of Agriculture). This is due to the increase in the global competition, which has resulted in the wheat supply increase and price reduction, favoring more countries with a competitive price, such as Russia. Higher exports volume from most competitors, can have a negative impact in US wheat exports, limiting it to export only in traditional markets such as Latin America and Asia. Also, another disadvantage for US wheat exports relies in the fact that the demand for their crops has decreased because of the dollar currency. For example, today 100 dollars are equal to 5900 rubles. Another comparative disadvantage of the US, for example in Mexico market is the fact of shipping costs. Even though the US have lowered its transportation costs, Russia is evaluated not only for traditional low shipping costs but also for a weaker ruble than dollar. Also, the USDA has predicted that US farmers will plant 10% fewer acres of wheat in the winter season, which is a decrease in the wheat production compared with Russia. These facts show that the competitive advantage of US regarding wheat exports has diminished. Advantages for US wheat exports can be the severe climate conditions of the other countries, as well as currencies differences with the existing ones. However, according to the USDA, the global wheat exports will increase by 5% in the current year. Both Black Sea grain production in increased by 6 percent during 2018/19 to 131 MMT but also US wheat production increased by 2 percent compared to 52.3 MMT in the previous year. In addition, exports to five of the top 10 US wheat markets have surpassed the previous years. For example, US wheat exports to Mexico have increased by 27 percent annually.
Russia and the USA are among the countries that have reached the highest net exports for wheat during 2018, but Russia has a superior competitive advantage for this commodity in the global trade market.
Porter's Theory Applied in Russia and United States Wheat Production Export
Local Market Resources and Skills
Regarding local market resources and skills, Russia can significantly increase wheat production due to the high quality of existing lands. Currently, this country has 30423401.722 acres of agricultural land, and 105022912.46 workers engaged in the agricultural sector, which results in 36.32 workers / acre of land.
While the United States has an area of 899, 500,000 acres of agricultural land and a workforce of 629,000 workers, 0.0007 workers / acre of land. In terms of land factor and labor it turns out that the US has a much higher sufficiency than Russia in terms of land. On the other hand, in terms of labor the figures are higher for Russia. In terms of advances in natural resources, we can say that Russia's climatic conditions for wheat cultivation are much better than those of the US, mainly for winter crops, which are gaining more attention in the latest years.
Local Market Demand Conditions
Regarding technological development and innovation and its impact on wheat production in Russia we can consider the lower use of fertilizers, which have started to be used only in recent years and because frequent changes in the legislation have occurred sporadically or not at a proper level. Such a problem directly affects the amount of harvest. Quite the opposite has happened in the US, where fertilizers have been widely used to accelerate the growth cycle of wheat. Moreover, in the US, the use of innovative technologies for the creation of hybrid seeds has already begun, which also has implications for crop yields.
Local Suppliers and Subsidiary Industries
Other constraints to Russia's agricultural sector and particularly in wheat production are outdated rural infrastructure, low public and private investment in agricultural research and development, and significant shortages of skilled workers and farms managers. These restrictions reduce agricultural production stability and increase and adversely affect the investment behavior of Russian farms. The market transparency of US wheat market is generally high. There is a high exchange of information due to the high engagement of farmers and traders, in relation to commodity trading. US farmers and grain buyers regularly participate in future markets to mitigate price risk and detect market prices. As prospective commodity markets dominate US price discovery processes, market participants pursue this information regardless of their geographical distance.
Characteristics of the Local Firm
Regarding conservation of export quantities and export markets for wheat, Russia is currently focusing for wheat exports on countries such as Saudi Arabia. It has also signed agreements with the main importer in Vietnam to resume Russian grain shipments in October, after the latter urged Russia to ban grain export licenses because of quality concerns. Russia is also lobbying with China to increase its imports of wheat from Russia. While the major Southeast Asian countries are expected to account for 15% of total global wheat imports in 2019-20, the Middle East, North and West Africa, China and Bangladesh are estimated to account for over 30% of the global total of wheat importers. This is where Russian wheat would have a clear price competition advantage over the major wheat exporting regions. On the other hand, the USA is taking advantage of the problems facing Argentina and Australia in drought-producing wheat and is focusing on increasing exports to the Egyptian, Indonesian and Brazilian markets as the volume of wheat imported from these three countries is growing at 4% every year.
Conclusions
Unlike the United States, Russia started international trade operations only after the 1990s, so its position in export markets throughout the years has been steadily fluctuating This has happened due to policy issues related to agricultural development, outdated technology, infrastructure problems, and problems with transparency and price stability. At the other hand, in the year 2018, has been ranked as the most favorable country for the wheat production export in the world, which shows the optimal use of its competitive advantages in the global market. The USA has shown increase too in wheat exports, but at a lower rate than Russia. This is the reason why it is applying price strategies to overcome its competitors in the global wheat market.
References
- Hutchins, C. (2019). USDA Forecast: World Wheat Production and U.S. Export Volume to Increase (Online). Available from: https://www.uswheat.org/wheatletter/usda-forecast-world-wheat-production-and-u-s-export-volume-to-increase/ (Accessed: 13.02.2020).
- Elafany, K. (2019). Russia Dominates Global Wheat Trade. Will Its Exports Continue to Grow? S& P Global Platform (Online). Available from: https://blogs.platts.com/2019/12/27/russia-global-wheat-exports/ (Accessed: 13.02.2020).
- Trading Economics (2020). Russia - Employment in Agriculture (Online). Available from: https://tradingeconomics.com/russia/employment-in-agriculture-percent-of-total-employment-wb-data.html (Accessed: 13.02.2020).
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