This year, the resources required for agriculture have become significantly more expensive, and this increase is not measured in a few percentage points, but is manifold, while at the same time, this increase is not reflected in product sale prices.
This is what Roberts Strīpnieks, Chairman of the Board of the agricultural services cooperative society Latraps, says in an interview with Dienas Bizness. He admits that the entire global economic system, which existed until 24 February of this year, no longer exists; with one stroke, the results of many years of work were destroyed, and a new one will be built in its place, the creation and regulation of which will take many years.
What is the current situation?
Ever since 24 February, when Russia launched its invasion of Ukraine, a total reassessment has been underway, because everything we relied on has been turned upside down, including agriculture. Only in this situation are we beginning to understand just how much the world has integrated over the last 30 years (following the Second World War and even more so the end of the Cold War), and every country fulfils a specific role in achieving common goals. As the existing order crumbles and falls apart, the thinking of self-sufficiency or subsistence farming is returning, where everyone tries to provide for their primary needs with their own strength and resources, whether in information, military, energy, or food security. World and European-scale strategists are trying to set a new course, but we are currently at a peculiar crossroads – a time of great reassessment – because the way things were will not return; things will be different, and everyone will have to adapt to this 'different'.
What is the situation in agriculture, given that humans will always need to eat, regardless of whether there is a crisis or a war?
Agriculture is no exception and, like many other sectors, it is in a difficult transition phase that many still do not even see. Specifically, the resources necessary for agriculture have become significantly more expensive, and this cost increase is not measured in a few percentage points, but is manifold, while at the same time, this increase is not included in the final sale prices of the produce. Although agricultural producers in Latvia had hopes that it would be the increase in sale prices that would compensate for the rise in costs, these hopes have currently been significantly shaken. Specifically, grain and crop sales prices have fallen by about 100 EUR/t since the middle of summer, and although no further drop is currently being observed, the current price level is such that it does not compensate for the real increase in costs. This year's harvest was produced using mineral fertilisers, diesel fuel, plant protection products, and other production materials purchased last year at the prices of that time, which allows one to see a good profit in the reports. Just one nuance: today's mineral fertiliser prices are around 900 EUR/t, whereas last autumn they were 250–300 EUR/t, which at the time seemed like a very high price to many. Such an increase in raw material prices is by no means priced into current export prices for wheat or rapeseed. If in 2022 we were factoring in a cost price increase of 25–30% compared to 2021, large agricultural strategists have calculated that in 2023 we should expect at least another +100% increase compared to 2022, and this means that current prices are unable to cover costs rising at this pace. This is a very significant aspect for Latvian farmers who, for both patriotic and administrative-bureaucratic reasons, very quickly abandoned everything that came from the East – raw materials, energy resources, and infrastructure services – but the sale of finished products presents a paradoxical picture: with its high cost price, it must compete in a free, unregulated market with those same Russian grains, for example in African and Asian markets. Such a situation does not create a basis for financial stability and profitability in the future. What we are seeing now is still only the beginning of the great transformation.
Latvian grain has to compete with Russian grain?
We are proud that Latvia is one of the countries in the world that feeds the world, rather than eating what is grown elsewhere. However, in a situation where one’s own produce must be sold in markets that secure their food supply through procurement (Egypt, Uganda, Nigeria, Saudi Arabia, etc.), one has to face competition from low-cost produce that is also grown in Russia, but what is grown in Latvia cannot be the cheapest. Consumers in African countries will choose the cheapest (survival) option and will not in any way associate their daily food purchases with high geopolitics. In a sense, this also creates a price ceiling for food wheat, even though there is no longer a ceiling on cost increases. These scissors are not pleasant, as wheat must be sown in the autumn to be able to harvest next year, but costs exceed the income from this year's harvest. Unlike forestry, where the cycle time (between planting and harvesting) is 50–80 years, in grain growing it is one year, and it is impossible to accumulate cost increases over several years or even decades, during which the costs of one or two crazy years could be smoothed out for the coming ones. In any case, there are many challenges for farmers this year, and there were also disappointments.
What kind of disappointments?
Yes, the harvest this year on average is by no means worse than in previous years; however, during harvesting, farmers had to experience greater or lesser disappointment, because the yield is lower and the quality is worse than the farmers had hoped to obtain, in connection with the cost increases already experienced. Specifically, the rapeseed harvest in 2022 is significantly smaller compared to 2021, when there was actually less land sown with this crop. In fact, in 2022, the total rapeseed harvest will be smaller than last year. Wheat yield is characterised not so much by the total harvest, but much more by the quality of these cereals, which was affected by the lodging caused by storms in early July in their key growing region – Zemgale. Therefore, the price of food wheat is much higher than last year, but unfortunately, due to climatic conditions, there is more feed grain this year compared to 2021, for which farmers receive lower payment. Furthermore, the harvested produce must be transported to its end consumers, and in this segment, companies like Latraps are already having headaches, because transportation costs have increased and logistics problems have emerged. Like it or not, on 24 February of this year, an Iron Curtain border was drawn along Latvia's eastern border, creating challenges. I doubt anyone had thought about how connected we are to this infrastructure in the East. Specifically, a large part of the infrastructure necessary for grain transport – railway wagons – remained in the East, becoming inaccessible. Therefore, the volume of grain transport from collection points to the port by rail is much lower than in previous years, and it must be transported by road, which increases road load and creates an increase in the price of road transport services, which was already increasing under the impact of rising fuel prices. We are currently in very harsh times with an unpredictable future, which at the same time mobilises us to fight for the discovery of hidden reserves.
Where are the hidden reserves?
This year is essentially a time of realising how small players like Latraps are in the global market, with an annual turnover of close to half a billion euros, which is a lot on a Latvian scale. This means greater cooperation with other Latvian and Baltic grain trading companies (currently even competitors) by implementing joint sales (possibly also purchases) of produce; ships are chartered jointly for product deliveries. Likewise, exchange transactions must be carried out with other market players, where volume is swapped without physical transport, thereby reducing costs. It is a kind of efficiency programme forced by the reality of life – how to work faster, cheaper, and more efficiently; it is a survival formula.
To grow a good harvest, mineral fertilisers are needed, but are they available at all, especially since the huge increase in natural gas prices has halted their production in our southern neighbour?
Russia's invasion of Ukraine began for the Latraps team with the question of what to do with a trainload of mineral fertilisers that was being loaded in Russia. And although there were no sanctions regarding transactions with Russian companies at that moment, Latraps decided to terminate the deal and refused Russian mineral fertilisers. In March of this year, panic set in the mineral fertiliser market because it was unclear to anyone how to compensate for the shortage of this product essential for grain growing, and prices reached cosmic figures – 1000 EUR/t and even more. And if late last autumn many farmers felt that a mineral fertiliser price of 250 EUR/t was excessively high and felt that they should wait for it to come down from its heights, then currently that seems like an incredibly low price. Undeniably, in conditions of mineral fertiliser shortages, offers of strange deals appeared on the market: we will arrange the deal from over there, just pay now. After a few months, the situation stabilised and prices even began to decrease to about 700 EUR/t, and there was already a conviction that European mineral fertiliser capacity would be able to compensate for the lack of imports from the East. This fragile situation persisted until questions arose regarding the availability and prices of natural gas. It was natural gas that dealt the second blow to the availability and prices of mineral fertilisers, because plants for this product in Europe were closed or, at best, production volumes were reduced. If a Europe-wide energy crisis is currently expected, then primary concerns will be warm homes and electricity, not mineral fertilisers. Thus, after the panic and stabilisation, we have reached a third phase – tension in the market, where we are faced with rising mineral fertiliser prices, which in the market means around 900 EUR/t, and it is possible that this is not even the highest price yet. There are currently no forecasts for mineral fertiliser prices; there are only guesses, hypotheses, or predictions. Of course, seven months have passed since the end of February, and this is time during which alternative offers from the rest of the world could have appeared. We have worked on developing new mineral fertiliser supply channels from Central Asian countries; there are offers from South America, but using these opportunities will require greater cooperation, because one company (even one like Latraps) cannot financially purchase the volume of mineral fertiliser that one ship can carry – 30,000-40,000 t. Such a volume requires Baltic-scale distribution, which is why Latraps is looking for potential cooperation partners not only in Latvia but throughout the Baltics. Such joint purchasing would allow for the purchase of mineral fertilisers needed in the next season at lower prices. Cooperation is a business of trust.
Could Latraps not process grain into other products and then export them, thereby creating new jobs in Latvia as well as selling more expensive products abroad and receiving higher income for them?
The fact that Latraps is taking the next step towards product processing – the production of higher value-added products – is not a new idea; it just hasn't been widely advertised. Today, more discussion is focused on the planned pea protein plant, although Latraps has followed the principle of gradualism and has established a relatively small malthouse and also a rapeseed oil press. At one time, Latraps also owned capital shares in a biodiesel production company, although those were sold some time ago. Latraps has acquired 50% of the stevedoring company Alpha Osta, thereby also becoming involved in the cargo (grain) handling business. Undeniably, work on the creation of the pea protein plant has been underway for several years, and regardless of what is happening in the world right now, plant-based protein will be a highly demanded product. Plant-based protein is the future of food, and the expansion – growth – of this field will happen regardless of whether it is realised by Latraps or others, because this is the food of the 21st century. Of course, the planned project requires large capital investments – amounting to tens of millions of euros.
Essentially, 2022 is decisive for the implementation of the planned pea protein plant project, because in 2021 work on the creation of the necessary infrastructure was completed – land has been purchased, and currently technical design and the obtaining of necessary permits are underway. In parallel, the identification of raw material sourcing is taking place, which could be supplied not only by Latraps members. The pea protein plant is not a forced project for Latraps members, because the relationship between farmer and processor must be based on mutual interest, be free, and not imposed. The planned plant will need raw material for production – peas – in a volume that exceeds the volumes of this crop currently grown in Latvia. At the same time, next to Latvia is Lithuania, which is one of the largest pea growers in Europe, and these are excellent opportunities to import some of these peas needed for processing. I think that at least initially, in the first years of the factory's operation, we will not be able to do without pea imports, because there is an agrotechnical specificity to growing this crop, and it will take time for the farmer to gain a comfortable sense of stability from growing peas. For example, the pea harvest time is very short – measured in days, not weeks, because if peas are laid flat due to different climatic conditions during harvesting, large yield losses are observed and in some cases they cannot even be harvested, and the crop is lost. Undeniably, the knowledge base is growing – breeding is developing, new pea varieties are appearing, and plant protection products are being improved and becoming more effective, and demand for the product will also grow, which are the main reasons for stimulating pea cultivation.
Another driver for pea cultivation, at least for the next five years, will be the factor of mineral fertiliser availability and price. Specifically, when growing peas, it is and will be an opportunity to fix natural nitrogen in the soil, which would allow for the growing of grain on the relevant plots the following season using minimal nitrogen-containing mineral fertilisers. Crop rotation (in order to obtain a good yield, the same crop should not be grown in the same place for several years in a row) is a significant factor affecting yields, because alongside wheat and rapeseed, beans are currently grown (although they usually have a very late harvest time), but another crop is needed, and this function could be partially successfully implemented by growing peas as well. As the pea processing project is very resource-intensive, for now, all attention will be focused on this priority.
If 2022 in grain growing had not been so bumpy, then Latraps would have started to take an interest in the members' forests (which for the most part come as a set with agricultural land) and, in the event of their consent, would have been represented in negotiations with the forest sector – forestry service providers and woodworkers.
How will the sector be affected by the EU Green Deal? Especially if it provides for the reduction of CO2 emissions, a 20% reduction in fertiliser use, as well as an approximately 50% reduction in the use of plant protection products compared to the current level, which creates advantages for old EU member states, and requires a certain percentage of the country's territory to be set aside for nature to manage itself?
The general situation is similar to the one I encountered in my previous job (JSC Latvijas valsts meži), where in the market one had to encounter certified timber from neighbouring countries, which was grown using methods that, if used in Latvia in accordance with the requirements of our regulations, could result in prison. Since significantly less mineral fertiliser and fewer plant protection products are used in agriculture in Latvia than in many old EU member states, I believe that conventional agriculture in Latvia provides high-quality and safe food, while at the same time the ecological footprint of producing it is commensurate with the value added generated by land management. Organic farming has and will have a place in the market, as consumers must have a choice – the freedom of what products they want to use and buy. Undeniably, conventional and organic food are produced with different costs and different profitability, and therefore their final prices on the market must also be different. And although there are excellent masters of organic farming in Latvia, alongside them there tend to be those who are focused not on the production of organic produce demanded by the market, but on the acquisition of EU money for organic farming. In a market economy, the most significant role is played by demand, not costs in the form of subsidies. Every taxpayer has the right to participate in discussions about where politicians direct – invest – the money collected in taxes. In general, I would like to answer with an old farmers' saying: “Count your chickens before they hatch.” Specifically, Russia's invasion of Ukraine, the availability and disproportionate price increase of energy resources, food security, and state security do not lead one to think that the path to achieving the goals set by the Green Deal will continue as originally intended. I think that many things and nuances will be subjected to discussions and corrections, because the situation now is already completely different from when they were decided more than two years ago. It is important that any kind of requirements that significantly affect the national economy are applied equally and simultaneously throughout the EU, and also sensibly. Otherwise, we may end up in a situation like the current one, where Latvia has cut ties with Russia, but a number of other EU member states continue trading, gaining economic benefits, and are more competitive than the Baltic states. At the same time, Latvian farmers compete in the market with those producers from other countries who use Russian mineral fertilisers, which have a price several times lower than those available in Latvia. And another question is the deadlines for the implementation of the EU Green Deal.
Specifically, everyone knows that in evolution there were initially fish, then reptiles, and in the end, flying animals – birds. Bird evolution took millions of years, so if you throw a fish into the air, it won't start flying, but if you throw it around for too long, it will fall to the ground dead. Nobody in Latvia wants that to happen to our national pride – agriculture.