Analysis of the flour market in Russia: The investment attractiveness of flour mills is growing

The experts of the Interagro group analyzed the grain market, as well as the volume of flour production for 9 months. Main trends: rising prices for grain transportation forces processors to load capacities that were previously used only by half; the investment attractiveness of flour mills is growing, their profitability for 9 months of this year amounted to 8.6%.

Raw material

Table 1. Sown area and gross harvest of grain and leguminous crops in farms of all categories of the Russian Federation

Source: Rosstat, Ministry of Agriculture of the Russian Federation

*According to the Ministry of Agriculture of the Russian Federation, 98% of the harvested areas

By November 28 of this year, 98% of grain and leguminous crops were harvested in the Russian Federation, the gross harvest amounted to 151 million tons, including 99 million tons of wheat. The Ministry of Agriculture of the Russian Federation expects the second harvest record in the recent history of Russia, the first was set last year – 157.6 million tons. According to preliminary data, over the past 7 years, from 2017 to 2023, the grain harvest increased by 11.4%, which is primarily due to an increase in sown area (+0.7% for 2017-2023) and yield (+15.1% for 2017-2022).

Flour production

Graph 1. Production of flour from cereals, vegetables and other vegetable crops, thousand tons

Source: Rosstat

In January-September of this year, the production of flour of all types in the country amounted to more than 7.1 million tons, the production rate is ahead of last year's by 0.9% (7.06 million tons). In total, flour mills produced 9.66 million tons of products last year compared to 9.06 million tons in 2021. Over 6 years (from 2017 to 2022), the level of flour production increased by 0.5%, while the maximum figure was recorded last year. As we can see, the dependence of flour production and gross harvest of cereals and cereals is insignificant.

Graph 2. Dynamics of flour production from cereals, vegetables and other vegetable crops in the context of months, thousand tons

Source: Rosstat

According to graph 3, the production rates for 9 months of this year in comparison to the previous year range from 89.5% to 107%, in comparison to 2021 – from 102.4% to 115.7%. The largest production volumes occur in March-April and August-October, in the first case, grain growers vacate warehouses and prepare them for a new harvest, the second is the height of the harvesting, when raw materials are supplied for processing directly from the field. Based on the dynamics, flour production is expected to be no lower than last year this year.

Graph 3. Structure of flour production, million tons

Source: Rosstat

The main volume of flour production in Russia falls on wheat and wheat-rye flour, in January-September of this year, these types of products accounted for 93% of the total volume (6.6 million tons), which is in the greatest demand among the population. In total, 8.7 million tons of wheat and wheat-rye flour were produced in 2022, which is 6.1% more than in the previous period. It should be noted that the production of wheat and wheat-rye flour is directly dependent on the entire production of flour, over the past 7 years, these product categories accounted for about 90% of the total product structure.

Graph 4. Structure of flour production from cereals, vegetables and other vegetable crops by Federal districts in January-September 2023, %

Source: Rosstat

In the context of federal districts, the largest share in production falls on the Central Federal District (32.4% or 2.31 million tons). The second place is occupied by the Siberian District (19.8% or 1.41 million tons), followed by the Volga Region (19% or 1.36 million tons). The least flour of all types is produced in the Far Eastern District (0.3% or 0.02 million tons). By region, the Altai Territory (658.6 thousand tons), the Chelyabinsk Region (442.9 thousand tons) and the Ryazan Region (384.0 thousand tons) entered the top three.

Flour production capacity

The production capacities of flour mills in Russia allow processing 26 million tons of grain per year or producing 20 million tons of flour (1 ton of grain = 750 kg of flour). As we can see from Graph 5, domestic flour mills are not fully loaded, in 2022 the level was 58%, having increased by 6 percentage points since 2017.

Russia fully provides itself with flour, and self-sufficiency in grain by the end of 2022 exceeds domestic consumption by 84%. Since it is more convenient to export grain, store and transport it easier, raw materials are exported, which are already processed locally by local flour milling companies.

Graph 5. The level of the production capacities load of flour mills, %

Source: Rosstat

Profitability

Graph 6. Profitability of flour production from grain crops, %

Source: Rosstat

The profitability of flour production for 9 months of this year amounted to 8.6%, which is 2.4 percentage points higher than the annual index for 2022 and 2.7 times higher than the data for 2021. In January-September of this year, flour production was most profitable in such regions as Nizhny Novgorod (21.4%), Tver (14.2%) and Ryazan (13.2%).

Experts see low profitability of production in general in the "high social responsibility of the industry", mills cannot increase the cost of production, since prices are regulated by the state.

Export

Graph 8. Flour exports from Russia by season, thousand tons

Source: ProZerno

According to the graph, shipments of flour have increased significantly over the past two export seasons: 489 thousand tons of products were exported in 2021/22 (3.2 times more than the previous period), 802 thousand tons (1.6 times more) in 2022/23.

Industry experts suggest first of all to pay attention to the fact that in previous seasons exports were minimal, which makes the growth seem significant. But the fact remains that exports at a high level are associated with the introduction in June 2021 of quotas and duties on the export of grain from the territory of the Russian Federation.

According to ProZerno, in the 2022/23 season, the main importers of Russian flour were Iraq (192.48 thousand tons), Georgia (184.46 thousand tons), China (64.16 thousand tons) and Turkey (32.08 thousand tons).

Forecast

"In the new realities, the industry has all the prospects for further accelerated development, says Roman Nuriev, Commercial Director of Interagro Group. — We see that following the growth of flour exports, the profitability of production also increases: by the end of 2022, it doubled, and in 9 months of this year it increased by another 2.4 points. We believe that, taking into account the growth rate of exports, the profitability index will increase 1.5-2 times by the end of the year."

It should be noted that investment activity in the flour milling industry has also increased. For example, the large metropolitan grain holding Agroindustrial Corporation "AST Company M" plans to build a second production site on the basis of Kardail flour mill in the Voronezh region. The capacity of the new site will be 600 tons of flour per day, the cost of the project is estimated at more than 1 billion rubles. Also, KFH Agat LLC of the Stavropol Territory intends to build a flour mill for 708 million rubles by 2024 with a capacity of at least 500 tons of products per day.