Drought hammers agriculture

Russia has declared a state of emergency in four more regions - hit by the worst drought in a century – making for 27 regions across central Russia seeing production hit, and economists concerned about inflation.

Cracking soil and dead plants – such apocalyptic pictures can be seen in many Russian regions. The heat has burnt out more than 10 million hectares of grain-fields. The wheat harvest may fall by a quarter this year. Like many other farmers Andrey Danilenko is counting his losses – amounting so far to 50% of his farm’s yields.

“Grain production, vegetable production, in essence all crop production that’s open field crop production. And primarily the dairy industry – we are losing a significant volume of milk because of the heat. But as soon as the heat is over we’ll eventually bounce back. The quality won’t be quite the same. The cost of the feed won’t be quite the same.”

Drought has a knock-on effect on almost every agricultural sector. The cost of producing grain, milk, beef and hogs has doubled. Cattle breeders have lost their grass – and now are running out of cheap grain.

As drought continues economists such as Natalya Orlova, Chief economist at Alfa Bank are warning about the possible impact on inflation.

“In 2007 we saw a similar rally on the agricultural market. Its true that Russia received a huge push to its local inflation. So personally I just upgraded inflationary forecast for this year by 0.5% from the level of 7% to 7.5%, but it’s not a very big adjustment. I don’t believe that inflation at this level can restrain the economic recovery.”

Market players say there’s no reason for panicking and promise to keep prices at acceptable levels so the government doesn’t have to intervene. But looking into the future they can see another problem looming according to Andrey Danilenko.

“We have to change our whole policy on insurance – There’s only about 10% of the crops have been insured, and the insurance companies are not very friendly towards not only insuring the crops, but they are not terribly friendly on paying obviously once the situation happens.”

He says insurance companies should change their approach – but also farmers must shoulder more responsibility – rather than stretching out their hand to government.