Tractor plant CEO: Inflation will send prices for agricultural equipment in the South soaring

A higher key rate will negatively affect the renewal of agricultural equipment fleet in Russia. Petersburg Tractor Plant CEO Sergey Serebryakov told RBC TV South why the situation will be less critical in the South

Sergey Serebryakov, Petersburg Tractor Plant

The harvesting campaign of 2023 is at its peak, and harvesting of certain types of crops is almost complete. Could you comment on the status of agricultural machinery of the Russian farmers, especially those from the country’s South, in view of this harvesting campaign? How critical is the wear and tear of equipment, considering that, as a rule, farmers are not especially willing to replenish and upgrade their machinery fleets in the current economic environment?

If you mean our capability to supply the agricultural sector with machinery for farming and harvesting of different crops, on the whole, it is not a problem today, but the timing is not always optimal. Accordingly, the agricultural sector suffers certain losses. There are internationally established standards in the area of machinery supply to the agricultural sector, with the volume of supply usually measured in horsepower per 1 ha, or the quantity of tractors and harvesters required for the total area of ploughed fields. In this respect, Russia is not in the best position and cannot be currently called a leader. We need to increase the volumes of agricultural machinery supply, improve its availability on the market and quality, improve our maintenance processes.

It would be unfair to say that nothing has been done in this area in the past 10 years. The volumes of the machinery supplied have definitely increased. Its quality has become higher. However, the intensive utilization of machinery forces us to maintain its upgrade rates, and those dropped sharply in 2023. If the situation with agricultural machinery supply does not change — and I mean the demand and paying capacity on the side of the farmers — we will see some negative trends in future.

This May, the ASKHOD Russian Agricultural Machinery Dealers Association reported that sales of domestically-manufactured machinery dropped almost 8% in monetary terms in the first quarter of 2023. The demand — in terms of volumes — dropped by a quarter. Do you agree with this assessment?

The decreased demand for agricultural machinery is the objective reality. Depending on the manufacturer, the demand in some cases dropped by 70%. If you take the Petersburg Tractor Plant, for instance, the demand drop for them was around 10% (in the first half of 2023 — RBK TV Yug editor’s note). We will see how this situation develops in the second half of the year. There are events which affect the market negatively, such as increase of key interest rate, slowdown in provision of preferential loans to the agricultural sector. It also does not seem that grain prices are going to rebound in the increasing direction any time soon. Right now, all the market players are very apprehensive of the situation, and patiently wait to see how the harvesting campaign ends and how things stand when the autumn comes.

The South of Russia has traditionally been the most developed region, especially when we talk about Krasnodar, Stavropol and Rostov Regions, or North Caucasus regions. The vicinity of the Black Sea ports and certain climatic conditions are beneficial in this regard. It affects both the demand and the paying capacity of the population. If you look at the southern regions, you will notice that the decrease in demand there is significantly lower, and the prices rebounded much faster in comparison with other regions of Russia. Grain prices in the South today are rising sufficiently fast. I am not saying that it is enough from the perspective of ‘optimal financially reliable demand’, but there is a significant difference if you compare it to, say, Siberian regions of Russia. So, right now the South looks the best.

On agricultural machinery prices

This June, Dmitry Patrushev, Minister of Agriculture of Russia, said at the closing meeting of the Ministry of Agriculture board that the prices of the most popular Russian-manufactured tractors might drop by 20% compared to the current level. Do you agree with this prediction? In your opinion, what is the current level of agricultural machinery prices? Have we already gone over the peak?

This year, agricultural machinery prices for the end customer have decreased, but it would not be possible without subsidies allocated under Government Decree No. 1432. In the recent years, we are seeing a rather serious inflation process in industry, especially in the first half of 2022. A sharp rise in expenditures was observed at that time.

In my opinion, more stringent policies on the side of the Central Bank of Russia will accelerate the inflation in industry. And here you need to understand what will be affected. For instance, you can recall all these controversies and bold statements concerning metal prices in the past three years. All the equipment that we manufacture is made of metal. Add utility costs, transportation, and the sharp rise in fuel prices. All these factors affect the expenditures.

So, this inflation situation looks very alarming to me. We can see that even if the inflation was moderate in the second half of 2022 and the first half of 2023, it is visibly accelerating now. So, we will try to sustain the prices. It is critically important for our plants, because the paying capacity in the agricultural sector leaves much to be desired — due to the grain pricing environment.

Government Decree No. 1432 will remain in force until the end of year, and everyone will strive to maintain status quo. A decrease in prices cannot be expected as of now, as the currently existing conditions would prevent that.

In the Kuban region, the subsides for agricultural machinery purchase doubled in 2023. The total amount of subsidies in the current year has been increased to 80 million roubles. 10% of the farmers’ expenses associated with purchase of domestically manufactured (and manufactured in a number of other countries) agricultural machinery will be reimbursed. In your opinion, how effective are those state support measures? Are they sufficient for Russia in general, and for the South of Russia in particular?

This will probably sound a bit harsh, but in these conditions we should be happy with what we are given. It would be a correct thing to say that our agriculture needs sufficient, transparent, stable revenue, when the results of the farmers’ work are purchased at economically justifiable prices. When this is achieved, the agricultural sector will no longer need any subsidy ‘crutches’ in such an environment.

But we have to rely on subsidies, because the economic links between industries are in disbalance in Russia. Some years, planters have high revenues and profitability, while the flour-milling industry is faced with challenges. Some years it is the opposite, and the planters complain that they cannot invest or purchase agricultural machinery and fertilizers. And the prices in stores never drop as a result. Meaning that your average housewife does not feel any positive effect on the family budget. This tells us that no one is really in charge of the cross-industry link between the field and the store. And this is the main challenge.

And I think that we need to study its root causes. A drop in demand for agricultural machinery is always related to grain price fluctuations. The market also reflects this situation. The second major aspect are credit instruments. These are an important link in the chain of provision of the agricultural sector with operating investment assets.

The peaks of expenses fall on field operations, and both sowing and harvesting seasons, while the only revenues result from harvest sales. In other words, we have a rather pronounced cash flow gap between the production process and the revenue side. As a result, we have to subsidize loan interest rates, and provide the so-called preferential investment loans. To be honest, it just means that we are pumping funds from the budget to the banking sector.

On competition with China and exhibitions

We had extensive discussions with representatives of your industry on the subject of Chinese machinery actively entering the Russian market. In your opinion, how competitive are Chinese manufacturers in the Southern Russia market right now? What is their share of the market now, and what share can they potentially expect in the future? How suitable is the Chinese machinery for operating conditions in the Kuban, Rostov and North Caucasus regions, compared to Russian equipment?

I would divide the answer into three sections. The Chinese machinery comes with a variety of specifications and performance characteristics of tractors, harvesters and other machinery types, including tillers, self-propelled sprayers, etc. The Chinese supply tractors in the market segment up to 260 h.p. We should note that their products are reasonably good and are not to be underestimated. They have come a long way in terms of technology development for their industry and plants, as well as innovations.

What should be of concern for us here is that such machinery is not manufactured in Russia at all. Our colleagues from Belarus manufacture machinery of this class, however. And they certainly face rather serious challenges as they feel the pressure in terms of competition from Chinese manufacturers.

The tasks they need to accomplish include improvement of machinery quality, technological development of plants and redesign of some models, improvement of servicing quality and their distribution networks. These tasks should be addressed by industry players jointly with the respective industry-specific agencies of their countries. We should also think of the market protection and regulation measures.

There is information that the Chinese machinery is being sold at the Russian market much cheaper than its price in China. This tells us that they have some kind of an export program. Some time ago this already happened in the sector of road construction machinery, when they subsidized the export using certain state support measures, and took the market by way of direct dumping. It is a very important point.

We have a serious competitor in the industrially powerful China which, on the one hand, provides a high technology level which cannot be denied, but on the other hand, has serious state export support programs allowing the Chinese manufacturers to undercut the competitors’ prices by crashing prices of their products on the internal market. It is beneficial in the short term. In the long term, strategically, we, of course, lose.

We need to create our own programs to support the component development, because our machines have to be made of parts, obviously, and take some measures to protect our market.

How has the agricultural machinery market competition between the Russian companies changed in the past year or year and a half? How competitive the manufacturers of the South of Russia are compared to their colleagues from other regions and countries?

The South of Russia has very good, strong companies with highly qualified staff. Today, there are very many companies manufacturing machinery components. The development and effort are evident. There are challenges, of course, but the progress is there — including the South of Russia.

What do you expect from farmers in the current environment? What stance will they take in terms of their fleet replenishment? Should we expect the so-called ‘mass cannibalization’ of the existing fleets hinted on by many experts?

They will be cautious as any reasonable person would be when faced with high level of uncertainty in terms of prospects and planning. Today we see that the demand for spare parts has experienced a sharp rise, telling us that the farmers prefer to repair their equipment and extend its life cycle. And they will remain cautious until the situation clears up.

And before making any projections, we need to understand how the export rules will be changing, and how big the harvest will turn out to be. People should have clear signals on what the political trends will be, and if we will be able to streamline the internal processes in such a way that each cross-industry chain of food and agricultural products manufacturing stays in the positive economic zone. If they do not have such signals, they will just cautiously sit and watch how the process unfolds.

In the South of Russia there is a major trend of consolidation of agricultural businesses. I refer to this process as the ‘monopolization’. There are quite a lot transactions associated with purchase and sale of agricultural businesses. This will also make an impact on the issues related to agricultural machinery purchasing.

This November, Krasnodar will host the 30th International Exhibition of Agricultural Machinery, Equipment and Materials for Crop Production. How important is the participation in YugAgro for you? From past years’ experience, how beneficial is it? What do you plan to present at the exhibition this year?

Undoubtedly, the participation in YugAgro is important for us. Exhibition events are a major component of operation of any business in any industry. We understand this, and we actively participate in YugAgro exhibition. We will present a machine featuring a domestically-developed system for precision farming and auto-piloting, new versions of engines, new variants of transmission gear for K-5 and K-7 tractor series. We will be active at YugAgro 2023 and we will give a good account of ourselves.