THE PAST AND THE FUTURE OF THE RUSSIAN MILLING INDUSTRY Haziran 2020

“Over the past 20 years, the Russian Federation has taken a worthy place in
the agricultural export market and become the world’s number one wheat
exporter. However, in terms of state support, the main focus is on grain
exports, not on processed products. Over the past decade, Russian annual
flour exports have fluctuated at no more than 200-250 thousand tons,
although production capacities allow increasing the volume to at least 2-3
million tons.”

Igor N. Sviridenko Vice President The Russian Union of Flour Mills and Cereal

Plants

The Russian flour milling industry has been developing over the past hundred years
and has undergone a number of changes by the second decade of the 21st century.
During the Soviet period, especially in the '60s-'80s of the last century, state
programs were developed and adopted at the government level, pursuant to which
the production of their own high-performance and flour-grinding equipment,
contemporary for that period, was created. Almost all enterprises in the industry
were either re-equipped or re-created. At the same time, special attention was paid
both to the enlargement of production (in the main megacities of the country -
Moscow, Leningrad, now Saint-Petersburg, Nizhny Novgorod, Novosibirsk), and
bringing production closer to consumers. In accordance with the task set for the
industry by the country's leadership, each regional center should have had at least
one flour mill. By 1991, these tasks were practically resolved. There were 358 mills
in the RSFSR, which made it possible to produce up to 20 million tons of flour per
year. At the same time, old mills that do not meet modern requirements were
almost eliminated.

Production was carried out at the maximum technical capacity. In respect of flour-
grinding equipment, almost 100 percent capacity utilization rate was achieved,
production and marketing of products were carried out in accordance with the
state planning. The industry reached its peak at the end of the 1990s, and during
this period undoubtedly the Russian Federation occupied one of the leading
positions in the world both in terms of the level of technical equipment and flour
milling volume.

However, the political changes in the country that occurred in the early 90s affected
all spheres of public life without exception to the milling industry. With the onset of
the market economy, the trend of consolidation of state flour mills changed to the
exact opposite - there was an explosive increase in the number of flour mills
(mainly small ones, with a capacity of up to 20 tons per day) with a simultaneous
reduction in the number of industrial enterprises. At the same time, the number of
industrial mills decreased to 285, and their share in the total production of flour by
60%.

A more cost-effective approach to the system of production and distribution of

products, the desire to reduce logistics costs during the transportation of raw
materials and finished products led to the redistribution of production capacities
within the country. Also, in addition to the desire to reduce the cost of the
production process, changes in the structure of grain export and import played a
role in this. Thus, flour production began to focus closer to the areas in which
marketable grain is produced. This ultimately led to the fact that the leaders in the
production of flour were not the largest megalopolises in Russia, but remote
regions with grain-grinding standards nearby and, at the same time, located quite
far from the ports being deprived of the opportunity to develop exports. In
addition, flour mills located near such large ports as the Baltic, White Sea (Barents
Sea), and the Pacific Ocean through which imported grain coming in USSR during
the Soviet period lost their importance and economic feasibility.

Simultaneously, with the reduction of industrial flour milling in remote regions and
large megacities, road transport of flour was developed over considerable distances
(up to 500-600 km), including bulk delivery by heavy-duty flour vehicles. For large
enterprises, it became economically necessary to create their own fleet of such
special vehicles.

Volumes freed up due to the reduction in industrial production are filled with
products produced by low power mills. Many of these industries are vertically
integrated and are either part of the structure of grain producers or large
producers of bakery products. These productions are in more favorable conditions
compared to industrial enterprises, as they have cheaper input raw materials
and/or guaranteed sales of all produced volumes. Therefore, this segment has
been developing rapidly in Russia for the past 20–25 years, has occupied a market
share of up to 6 million tons, and now although it has slowed down somewhat this
process is still far from complete.

Due to the disparity in the prices on the milling market, a significant number of
unused production capacities and the unregulated development of small mills, the
profitability of flour production in Russia has significantly decreased and does not
exceed 5-6% for the most successful enterprises. On average, profitability is 0,5%,
which slowed down the development of the industry in terms of improving the
industrial segment.

Considering that about 30-40 years have passed since the large-scale renovation,
reconstruction and modernization of enterprises, the industry is in urgent need of
re-equipment. A number of support measures have been taken at the state level in
the country both for machine-building enterprises for the food and processing
industry, and directly for mills. However, an increase in state support for the
industry is required, including in the direction which will allow the industry to enter
new markets.

Over the past 20 years, the Russian Federation has taken a worthy place in the
agricultural export market and become the world’s number one wheat exporter.
However, in terms of state support, the main focus is on grain exports, not on
processed products. Over the past decade, Russian annual flour exports have
fluctuated at no more than 200-250 thousand tons, although production capacities
allow increasing the volume to at least 2-3 million tons.

Also, the development of exports may be affected by the harmonization of the

regulatory framework of foreign countries with the technical regulations of the
Eurasian Economic Community (EurAsEC), as the relevant domestic regulations are
more stringent than in potential importing countries. Promising foreign countries
that it is advisable to organize appropriate methodological support are the CIS
countries, China, Mongolia, Southeast Asian countries, the Middle East, and also
North and Central Africa, including Iran, Egypt, Korea, and India.

Unfortunately, there are no real projects in these regions, although the

implementation capacity is very high. In order to radically change the situation with
the export of flour, it is necessary to begin to carry out state support for efforts in
this direction of export at all levels.