USDA FAS Russia Fresh Deciduous Fruit

Recently noted this USDA FAS report on Russia Fresh Deciduous Fruit

Report Highlights: Russia is the largest importer of apples and pears in the world, and despite the economic crisis, devaluation of the ruble, and negative income growth, imports in 2009 remained steady. Fruit remains popular with consumers, but they are buying less exotic fruits, pears, and grapes. Demand for most U.S. fresh fruits is growing, and U.S. fruit importers continue diversifying their product lines. Domestic fruit production is limited, and growers already suffering from the economic crisis are facing increased competition from imports.


Executive Summary: Russia is the largest importer of apples and pears in the world, and despite the economic crisis, devaluation of the ruble, and negative income growth, imports in 2009 remained steady. Fruit remains popular with consumers, but they are buying less exotic fruits and pears. Consumers are spending their food budgets on more affordable and necessary products, and Russians bought 30 percent less exotic fruits, 17 percent fewer pears, and 5 percent less grapes. Russia imported 5.1 million metric tons (MT) of fruit while domestic production was only 2.1 million MT. Fruit imports from Europe and the Southern Hemisphere are declining, while imports from the Commonwealth of Independent States (CIS) and Poland are increasing. Demand for most U.S. fruit is growing, and importers of fresh fruit from the U.S. continue to diversify their product lines. Domestic fruit production is limited, and growers already suffering from the economic crisis are facing increased competition from imports. The main commercial fruit crop is apples and both the area planted and production fell in 2008. The Russian Government provides subsidies to stimulate production and investment in plantations with perennial crops and help growers modernize and remain in the industry. Investment in new rootstock and equipment is continuing, but at a pace of only 2 to 3 percent per year. The Russian Far East remains a stable market for U.S. fruits, responsible for 30 percent of the total volume imported to Russia. U.S. fruit sales and their price competitiveness in Russia will depend a lot on the U.S. Dollar/Russian ruble and Euro/Russian ruble exchange rates.

Production: In preparation of this report, Post obtained 2008 production data from the Russian Federation State Statistics Committee (Rosstat) and the figures indicated that apple production in Russia had declined by 30 percent from the previous year. Post made an additional request with Rosstat for 2007 data and the statistics provided differed from the data provided by Rosstat last year for the same period, including revised figures for apples and grape production and for the area planted for pears. GAIN RS8308 the Fresh Deciduous Fruit Report 2008 contained data and analysis based on the information provided by Rosstat in 2008. While we cannot know all of the reasons behind the revision of the 2007 data, we believe Rosstat has now provided us the most accurate figures available. Post analysis for this report was done utilizing the revised data provided by Rosstat in 2009 and tables have been revised to account for the updated figures for 2007 and the new data for 2008. The economic crisis negatively impacted development of the fruit growing industry in Russia. In 2008, Russia reported a decrease in apple production, as well as area planted. In 2008, Russia produced 2.1 MT of fruit. Apples account for 52 percent of the total fruit crop, followed by stone fruits with 26 percent, grapes were 13 percent (including table grapes), and pears were 9 percent. Apples and grapes are the only fruits commercially grown in Russia. Other fruits, berries, and nuts are grown on household plots for household consumption and the surplus is sold in local wet markets. Most commercial apple production is in southern and central Russia. Golden Delicious, Red Chief, Semerenka (Russian light green sour variety), Granny Smith, Gala, and Fuji are the major apple varieties cultivated in Russia. In 2008, Russia produced 1.1 MT of apples, 15 percent less compared to the revised yield data for 2007. Rosstat reported a 4 percent decrease in area planted. According to the Russian business magazine “Expert,” 80 percent of apple orchards are more than 35 years old, demanding major investment in replanting, irrigation, modern storage, and packing technologies in order to be efficient and produce good yields. In 2008, apple yields averaged 5.8 MT per hectare, six times less than the yields in China’s apple growing provinces. The Russian horticultural industry is largely outdated and inefficient, but experts say there are additional factors leading to decreased apple production in Russia. First, 2008 was a “down” year because trees needed “rest” after the good yields in 2007. Another hurdle was the lack of affordable credit for operating costs which impaired the industry’s ability to harvest and it is likely that some crops were simply abandoned. Finally, storage facilities and packing technology are inadequate to preserve the crop year around, and the existing distribution channels may not be sufficient for smaller producers to market and sell their crop. Increasingly, imported apples produced in the CIS and Poland are pushing Russian apples out of the market because distributors and major retailers prefer working with imports because they are more consistent in quality, sizes, price, and supply. Despite the difficulties facing the Russian horticulture industry, some in the industry have been implementing modernization and development projects for at least the last four years. Apple producers in the major apple growing provinces such as Krasnodarskiy Kray, Linetskaya, and Volgogradskaya Oblast, are replacing rootstock and are developing new orchards according to new “intensive garden” technology. This technology uses higher yield planting material, which is smaller in size to help maximize productivity. The number of trees can exceed 1,500 per hectare while traditional gardens would typically have only 300 trees in the same space. The gardens can be harvested within 2 to 3 years after planting. According to industry experts, only 10 percent of the total are planted in Russia is this newer, intensive variety. Russia’s overall apple orchard replacement rate is 2 to 3 percent compared to the world average of 10 percent. According to Expert magazine, one hectare of intensive garden costs around $25,000 including irrigation equipment and storage and packaging facilities. The larger horticultural producers such as Sad Gigant, Sadi Pridonya, the Centralno-Chernozemnaya Company are continuing investment projects. The yields from intensive gardens are better quality and have longer shelf life and are usually in demand from retail chains. Russian consumers like buying locally produced apples and consider them the most ecologically safe and natural product on the market which helps support sales of Russian apples. The long term viability of the intensive garden projects is threatened by the lack of available credit and increased competition from imports. Post expects the larger commercial players in Russia to continue modernizing. According to Selskaya Zhizn’ (Agricultural Life), the main agricultural newspaper in Russia, 11,700 hectares of new fruit orchards were planted in 2008. A small percentage of the drop in production from 2007 to 2008 could be attributable to the lag time between cultivation from old orchards and the new intensive gardens which do not begin producing fruit until the second or third year. The Russian Government continues to provide domestic support in the form of subsidies for agricultural producers. According to Selskaya Zhizn’, the government provided 116 billion rubles ($4.1 billion) for agricultural projects in 2008. In 2009, 302 million Rubles ($10 million) went for subsidies for new orchard planting and treatment and state support for horticulture is planned to reach 420 million rubles ($14 million) in 2010. The subsides are intended to stimulate investment and production on plantations with perennial crops, such as fruit orchards, berry farms, horticultural nurseries, and help growers modernize and remain in the industry. Selskaya Zhizn' reported that the horticultural industry requested increased subsidies from the Federal government to help cope with the challenges they faces. Currently they receive 140,000 to150,000 rubles ($4,660 to $5,000) per hectare of perennial gardens and an additional 25,000 rubles ($800) per hectare for cultivation. Thus far, the government has not responded to the industry’s request for assistance. According to Russian producers and distributors, 2009 has been a very good year for apples in Russia. The World Apple and Pear Association forecast a 7 percent increase in apple yield in Russia in 2009/2010 compared to the previous year, but stiff competition from imported apples from Uzbekistan, Ukraine, Moldova, and Poland is expected to continue. Considering the ongoing competitiveness problems in quality, shelf life, and price, the crisis could be acting as a catalyst for farm failures now and in the future. Post expects that the rate of crop abandonment and waste to increase unless there is additional intervention by the government. Of course, the government has shown no hesitation to use sanitary and phytosanitary issues to manage trade, such as the MRLs applied to fruit imports from the EU. The government may choose to address increased competition with new trade barriers in order to protect domestic production.

Consumption: In Marketing Year (MY) 2008, the size of the Russian fruit market totaled 6 million MT, which is level with figures for 2007. Total trade and production statistics indicates that per capita fruit consumption rose in Russia to 40 kgs per year, a 20 percent increase compared to 2004 data. According to the Rosstat, Russians consumed 9.4 kgs of apples, 5.9 kgs of citrus, 5.6 kgs of bananas, and 2.6 kgs of grapes in 2008. According to Post estimates, pears are one of the most popular fruits in Russia, and per capita consumption is approximately 3.2 kgs. According to research conducted by the international marketing and media information agency, Nielson, 69 percent of Russians eat fruit at least once per week during the summer, but that figure falls to 55 percent in the winter months. According to the Russian produce industry analysis firm, the Fruit and Vegetable Alliance, Russian consumers favor the following fruits: ? Favorites: apples (40 percent of Russians prefer apples to other fruits), bananas (31 percent), and oranges (28 percent); Popular fruits: grapes (22 percent) and pears (21 percent); Regularly purchased fruits: apricots, peaches, water melons, mandarins, grapefruits, lemons, plums, pineapples and kiwifruits (7-18 percent); and Other fruits include mangos and avocados (less than 4 percent). Fruit consumption in Russia is driven by two factors - the level of income and retail prices. According to the Rosstat, fresh produce retail prices increased by 15 percent in 2008 as the ruble was losing its value and real income decreased. Thirty percent of Russian consumers shifted their shopping habits toward lower quality, lower priced goods. According to Nielsen, Russians chose to spend their food budget on fruits such as apples, bananas, and oranges in 2008. The market share of other fruits dropped significantly as Russians bought 30 percent less exotic fruits, 17 percent less pears, and 5 percent less grapes compared to MY 2007.

Consumption figures also vary widely depending on geographic location. In rural areas, Russians tend to consume locally grown fruits and vegetables where a lot of canning in traditionally done in order to preserve fruits and vegetables for out of season consumption. Fruit consumption, especially imported fruit, is substantially higher in urban areas. Russian consumers like locally grown produce because they believe that it is fresher, contains less pesticides, and is ecologically safe, and these ideas are perpetuated by the media and government officials. In summer and early autumn, many families grow their own berries, fruit, and vegetables on private plots. Tending gardens and collecting apples at dachas (summer cottages) is a beloved pastime for Russians. In addition to apples, other popular items include strawberries, pears, plums, cherries, apricots, blueberries, green onion, cucumbers, dill, and other herbs. Even Russians who do not have land for gardens of their own enjoy buying from local open air markets and street vendors. Therefore, demand for imported products is lower when local products are fresh and readily available. Produce grown in the CIS countries of Azerbaijan, Uzbekistan, Moldova, Ukraine, Tajikistan, and Kyrgyzstan are popular with Russians as well due to historic distribution channels that date back to Soviet times when these were the only sources of exotic fruits for Russians. These products are not usually the highest quality items available on the market, but the varieties and characteristics are familiar and represent the historic “standard” of these products to Russian. Russians prefer products from these CIS countries such as grapes, watermelons, peaches, apricots, and plums when they are in season over imported products. In the late summer months, more than 40 percent of fruit sold on the Russian market are these seasonal items. Many Russians are seeking healthier lifestyles and new products. The Russian Government launched a social advertising and education campaign to discourage drinking alcohol, smoking, and overeating. The number of people quitting smoking, beginning exercising regimens, tracking calories and nutritional content, and eating healthier foods is rising. Diets are changing as consumers chose more fresh and dried fruit as a substitute for other snacks. Fruit-based desserts are increasingly available in foodservice, and people are drinking more freshly squeezed juices. August 2009 was the first month within the last 5 years when the birthrate was higher than the death rate in Russia. If the trend continues, consumption rates should rise as well. As previously reported, 65 percent of all fruit is sold through wholesale and wet markets. Russian consumers prefer to buy fruits at markets rather than in retail stores because they believe the prices are lower and the product is fresher when there are fewer people involved in the supply chain. However, the popularity of retail chains has become more popular for fruit consumption because the larger chains such as X5, Metro, Aushan, Lenta, O’Key, and Pyatorochka are spreading to smaller cities in provincial Russia and their higher volumes mean they can offer competitive prices and conveniences. Retail chains have improved the assortment of fresh produce available for consumers at various income level that are well merchandised and there are numerous choices of consumer packaging. According to the marketing company, Express–Obzor, the ten top retail chains by annual receipts, are: ? X5 Retail Company - 221 billion rubles ($7.6 billion) Auchan - 142.4 billion rubles ($4.9 billion) Magnat- 132.9 billion rubles ($4.6 billion) Metro Group Russia - 125.9 billion rubles ($4.3 billion) Lenta - 58.2 billion rubles ($2 billion) Kopeyka - 51.6 billion rubles ($1.7 billion) O’Key - 50.3 billion rubles ($1.7 billion) Dixie - 47.8 billion rubles ($1.6 billion) Sedmoy Continent - 43.9 billion rubles ($1.5 billion) Victoria, GC - 34.9 billion rubles ($1.2 billion) Trade: According to Global Trade Atlas, Russia is a net importer of fruits, the third largest after the United States and Germany by volume. Russia’s climate conditions and outdated infrastructure impede development of the commercial fruit growing sector, and thus, the country remains heavily dependent on imports to satisfy consumer demand for fruit. According to Global Trade Atlas, during MY 2008, Russia imported 5.1 million MT of fruit and nuts. The value reached $4.3 billion, a 10 percent increase compared to 2007, primarily due to inflation. The global economic crisis had a negative impact on the Russian economy and by mid 2009, Rosstat showed negative income growth. The Russian ruble depreciated against the U.S. dollar and Euro making imported products more expensive and less competitive with the produce from Poland and the CIS. Consumers reacted by purchasing more affordable and necessary products. The crisis demonstrated how over reliant both importers and retailers in the Russian market are on credit for operating capital. The lack of available credit has made what little there is available, very expensive, to the point of being almost cost-prohibitive. Even the top players in the retail sector are expecting 90-day credit terms from their suppliers putting importers in an even tougher position with working capital tied up in prepayment to exporters while their retail customers are slow to pay. Last year, the two largest fruit importers in Russia were forced into bankruptcy while others shifted to smaller fruit shipments out of concern over reduced sales in Russia. From December 2008 to June 2009, Russia’s imports of apples and citrus remained steady with calendar year (CY) 2008 figures. However, Russians bought 30 percent less exotic fruits, such as dates, figs, avocados, guavas, and mangos; 17 percent fewer pears; 5 percent fewer grapes; and 3 percent fewer bananas. Russia buys fruit from all over the world, but the effects of the crisis are apparent when looking at fruit trade statistics. For example, the European Union (EU), which traditionally supplies pears and apples to Russia, exported 20 percent less in MY 2008. Russia also imported less from the Southern Hemisphere countries of Argentina, Chile, and South Africa. In 2008, Russia’s largest suppliers of fresh produce were Ecuador (bananas), Poland (apples), Turkey (citrus, grapes, and stone fruits), Argentina (apples, pears, and citrus), Chile (grapes), and China (apples, citrus, stone fruits). The CIS countries of Azerbaijan, Uzbekistan, Moldova, Ukraine, Tajikistan, and Kyrgyzstan play an increasingly important role as fruit suppliers to Russia. The volume of fruit import to Russia sourced from these countries reached 400,000 tons, a 25 percent increase over the previous year. These countries which have historically supplied fruits to Russia, have a built-in transportation advantage and lower prices. Since Soviet times Uzbek, Azerbaijani, Tajik suppliers handled the fruit trade throughout Russia and created fully integrated systems of product distribution including imports and wholesale distribution to the regions, as well as sales at wet markets nationwide. Post expects fruit imports from these CIS countries to increase at least 5 percent in MY 2010. As reported previously, Russia is a vast country stretching for 12,000 km from East to West and spans 11 time zones. The food market in Western Russia differs significantly from the Pacific coast market.

There are two points of entry for imported foods to the Russian Federation. The Port of St. Petersburg is the major trade route handling around 80 percent of imported food shipments to Russia. Most consumption is concentrated in the Western market, with approximately 120,000 million people in the territory reaching from the Western border stretching to the Ural Mountains. The fruit market in Western Russia is very competitive because suppliers from the EU, the Middle East, and the CIS are in close proximity to this market. Importers of U.S. products face several difficulties such as, complicated logistics (30-day transit time from the U.S.), lack of awareness about U.S. fruit quality among consumers, and strong competition from neighboring countries. The fresh produce market in the Russian Far East (RFE) differs from that of Western Russia. The climate condition in the RFE is not conducive to commercial production of fruit; and therefore, all fruit is imported. Moreover, there is a great distance between the RFE and major fruit suppliers in the EU, the Middle East, and even Russia’s fruit growing region. The RFE imports directly 114,000 tons of fruit, mostly from Asian Pacific countries. Chinese fruit is dominant in the RFE with more than 80 percent of total fruit imported to the region. The RFE remains a good market for American fruits despite the crisis because the U.S. fruit industry has been present on the market doing promotional campaigns and the products are widely recognized for their high quality and taste. U.S. apples and pears have been available on the market for more than 10 years and importers have long standing relationships with their suppliers on U.S. West coast. The typical fruit shipment is on the water between the U.S. and the RFE only 18 days. According to Russian Customs, in MY 2008, the RFE was responsible for 30 percent of the total volume of U.S. fruit imports to Russia and shipments of apples, pears, and citrus for MY 2009 are already well underway for what is expected to be a strong season. In MY 2008, Russia imported 27,900 MT of U.S. fresh fruit, a 7 percent drop from MY 2007. U.S. apples sales went down 45 percent and totaled 9,700 MT, due to the limited supply of apples appropriate for the high-end Russian market (extra large and bright in color) and decreased demand for premium produce products. The volume of pears held steady while imports of citrus and grapes were at a record high, more than doubling the 2007 level which had been the previous record. Western Russian tested American pomegranates and citrus and found that even during the crisis, there is demand for this product, and Post expects pomegranate imports to increase in MY 2009. U.S. fruit sales and their price competitiveness in Russia will depend a lot on the U.S. Dollar/Russian ruble and Euro/Russian ruble exchange rates.

Apples Apple imports are forecast to be 1.2 million MT in MY 2009, up four percent from the 2008 record. Apples are the most popular fruit in Russia and according to Global Trade Atlas, Russia remains the largest importer of apples in the world with record 1.1 million MT (949,000 MT in 2007), valued at $565,000. The Russian domestic apple market reached 1.1 million MT in 2008. Domestically grown apples are available only until December due to their short shelf life, and when the supply sells out, prices for all apples tend to increase. According to some Russian distributors, they do not bother to deal with domestically produced apples because the quality, size, and supply are too inconsistent to supply retail chains. However, the crop from the new intensive gardens is more consistent with the international varieties and has a longer shelf life, but prices are higher than typical Russian apples because growers need to recoup some of their investment in the new orchards. In MY 2008, Russia imported 21 percent less European apples, meanwhile, Russia increased imports of lower quality, less expensive products from CIS countries and Poland. In late 2008, Russia lifted a ban on Polish apples, and 30 percent of all imported apples to Russia were from Poland. The supply of affordable apples from the CIS countries doubled accounting for 236,000 MT. According to Russian importers, apples from CIS countries and Poland were sometimes less expensive than locally-grown and are larger and better quality, which contributed to increased sales in 2008. Post expects this trend of higher quality, inexpensive apples from CIS and Poland to continue which could make it even more difficult to develop commercial apple production in Russia. Apples from Belgium and France typically arrive in Russian in September and U.S. apples arrive in late November. U.S. apple exports to Russia decreased 45 percent compared to the record volume in MY 2007, totaling just 9,550 MT. Russian consumers like large, richly colored apples, which are characteristics that U.S. suppliers can normally provide. The U.S. apple crop in 2008 was smaller than in previous years and there were fewer products available for export. The decrease in apple imports from the U.S. can partly be attributed to the short supply, higher prices, and consumer demand shifting to more affordable options during the economic crisis. However, the RFE remains a stable market for U.S. fruit. In MY 2008, the total amount of U.S. apples imported to the RFE reached 3,500 MT, a 6 percent increase. European apples, comparable in both price and quality, are the main competitor to U.S. apples on the Russian market and importers will be examining the U.S. Dollar/Russian ruble and Euro/Russian ruble exchange rates when making purchasing decisions throughout the coming year. According to an estimate from the World Apple and Pear Association, in 2009 European apple production dropped 7 percent compared with 2008, primarily due to lower yields in Poland. The total crop is expected to reach 10.7 million MT (22 percent of the crop is Golden Delicious, 10 percent is Gala, 6 percent is Red Delicious, and 6 percent is Jonagold). China will produce 10 percent fewer apples in 2009. The crop in the Southern Hemisphere will go up 4 percent and amount to 5.3 million MT. According to importers and apple industry representatives, U.S. apple imports are expected to increase in MY 2009 because the crop size, quality, and color are appropriate for the Russia market and should be price competitive. The Russian ruble recently began to appreciate against the U.S. dollar which could help increase exports if the exchange rate holds or continues to improve.