Russian pesticide market: The window of opportunity

We live in interesting times. Just getting ready with your thoughts to assess the impact of the sharp increase in the price of active ingredients in China and the difficult logistics, as even more significant factors start to affect the market: the special operation in Ukraine, the actual boycott of the EU and US market by financial and commodity interactions, the logistical blackout of the main Russian ports (Novorossisk and Saint Petersburg) through which most pesticides were imported and the closure of Baltic ports for the importation of any goods into Russia. 

Pour the green tea. I will tell you a fascinating and different story on what has happened in the pesticide market in Russia since October 2021, what is happening, and what is likely to happen soon.

Introduction

Chinese rapid pricing up in 2021 stimulated Russian market players to buy up residual crop protection products inside the country at an unprecedented rate. A rough calculation showed that the domestic selling prices (DDP) of pesticides were much lower than the new purchase prices (EXW) in China, not to mention the price of glyphosate, which showed a four-fold increase and put this product in a position of complete pointlessness due to its high price. As early as 2021, end-users began experimenting with mixtures of products that allowed for comparable effects in application with a reduction in the cost burden on Ha by a factor of two or more from current glyphosate prices. Sales were conducted on principle from cheap to expensive and no brand preferences were taken seriously - the main thing was the price. 

At the main exhibition in October 2021 in Krasnodar, buyers were faced with a complete lack of a sensible offer from major manufacturers. The exhibition was held without a single closed deal on the sale of pesticides and declaration of current prices. Participants (those interested in the urgent purchase of drugs) were anxious, the final producers were in the usual ignorance of the approaching storm. Unnoticed was the forcible and total levying of 53% anti-dumping duty on imported pesticides by the Russian Customs for any herbicides imported into the country and accruing to some companies retroactively duty to pay these taxes for previously imported goods. Because of the crisis, the Russia Customs failed to meet its annual payment collection plan and tried to save face before the government in this barbaric way.

A cursory analysis of the situation on the active substances market showed that the purchase at peak prices was risky. A price rollback in China was highly probable and the companies that had plants in Russia were forced to buy active substances at peak prices to maintain the balance of production and supply in 2022. Importers bringing in formulation were divided into two parts: who imported and who took a pause. Both strategies could have been dictated by financial problems and a consciously chosen strategy not to get into a risky handicap.

Under pressure

February 24 changed everything and nothing. The rapid growth of the dollar exchange rate up to 75 rubles per dollar up to 150 rubles per dollar did not offer any optimism in the future. The state commission for purchasing currency reached 30% and then was reduced to 13%. The actual cancellation of currency sales to individuals affected the spread, which reached 100%. Purchased goods as formulation and active substances sent by containers to the ports of Baltic, Novorossiysk and Saint-Petersburg began to unload in transshipment ports. They were left without movement by the decision of container-carrier companies. At the beginning of March, the main Russian and multinational players were faced with blocking up to 100 containers each, which already threatened a full crisis of pesticide shipments to Russia. 

At that time leading Russian market players (multinational and local producers) jointly controlling more than 70% of the Russian market began to withdraw credit contracts with the country’s largest agricultural holdings and distribution network. This shocked the Russian agricultural elite, accustomed to looking down on pesticide suppliers for the past 20 years. Having realized the depth of the problem and not having found alternatives to supply pesticides within the country, agricultural holdings in search of supplies and not understanding the complexity and regulation of the market reached through the Ministry of Agriculture and the Chamber of Commerce to the Eastern European medium manufacturers, and money shaking tried to conclude contracts for pesticide supply at any price. Professionals understand that even with money and the availability of goods in the warehouses of European factories, it is impossible to solve the issue of pesticide supply to Russia in a month. 

European business

The galloping sanctions on everything and everyone hit the European business. New unsolvable problems were added to the stuck containers. The refusal of business insurance in Russia has killed the credit scheme for the distribution of goods through the distribution network. The unwillingness to insure transport to Russia and intensified inspections in Europe put an end to the rhythm of supply for multinational companies, which were not very rhythmic before the crisis, bringing in everything at the last moment because of the difficulty in obtaining licenses in Russia. Things went so far that unofficially the largest multinational companies declared a reduction in imports of up to 40% of their production volume. 

Pricing policy

Traditionally, the prices of the leading multinational companies are the primary trend of price formation on the Russian market. Based on these prices, Russian producers set their selling prices, while independent suppliers, having received the commercial policy of foreign and Russian monopolists, synchronize their watches and build up their trade policy. This year the change in current price lists broke all records. Publishing price lists in October 2021 for the next season, the multinationals changed their price lists in rubles 3 more times (probably not the last time), and BASF, at the end of the price list, changed it to Euro, which was the last time in 2008. Two weeks before the special operation on the 13th International Conference of agricultural producers and suppliers of means and services for the agricultural sector, the head and owner of JSC Shchelkovo Agrokhim Salis Karakotov predicted an increase in selling prices in dollars by 20-40% in the season of 2022. And that's without the new impacts that hit Russia after February 23. No comment.

Distribution

I have not found anything suitable for local distribution in a long time and several years ago. Stagnation and a deep distribution crisis have been developing for several years. What will happen to distribution now I cannot imagine. I think the main trends will be: bankruptcy, consolidation, and the emergence of small new disposable companies. This is a terrible and decisive blow to a network holding on to the straw of lending from multinational companies to maintain a precarious balance - now they don't have that straw.

Manufacturers in Russia

Deficits in active ingredients. Uncontrollable costs due to dollar volatility. Loss fixing. 

Importers

Higher import costs. Reduced sales. Leftover goods at ultra-high cost or selling at a loss.

Farmers

The purchase price became four times higher in local currency, regardless of the current dollar exchange rate. The collapse of the credit system for purchasing pesticides after 20 years of paradise. Total shortage of all pesticide products. 

State regulation

The state promptly took measures to stimulate the market, viz:

a. Abolition of the 5% duty on formulation

b. Abolition of anti-dumping duties

c. Abolition of the ban on paralleling market

d. Consideration of a waiver of prosecution of illegal use of trademarks

e. Financial support for the construction of new infrastructure 

f.  Postponement for a year of the Cerberus pesticide traceability system

Market impact and emerging trends

The rollback of selling prices in China is good and bad. No matter how this season ends, competition will resume in the market with an even more uncompromising force. The main blow will be received by the end users and the distribution network, which cannot promptly re-credit due to the withdrawal of all lines of credit by banks and the increase in the refinancing rate from 4.25% in 2021 to 20% in 2022. Total change in market shares due to the actual departure of multinational companies and the deep crisis of Russian manufacturers, which can only cope by next year. 

Opportunity

The window of opportunity is already open for companies that are not bound by credit obligations within the market and have valid registrations in Russia. Therefore, it is necessary to act right now, playing on the counterpoise of the Chinese and Russian markets. 

The current attractiveness of the market in terms of vacancy and potential growth is counterbalanced by low liquidity and a future fierce price war between new players or those who want to take the vacant place under the sun.

I am not saying it is not good, I do not believe it will be easy, but I am willing to bet that it will be even more interesting going forward.