Russia is considered one of the main markets for the fruit sector of the Valley of Rio Negro and Neuquen. However, it is also a high-risk destination for the activity, as it traditionally starts with prices that are profitable for the system but that decrease when the supply that is shipped overseas increases.
The current season has been no exception. Faced with this situation, one wonders: why does the region continue exporting fruit to Russia given that destination's price curve? There are two answers to this question. First, because this is a market that buys low quality products and the Valley has plenty of fruit with these characteristics. During much of the 2000-2006 period, the trade equation worked for the region, as the fruit that arrived at the Russian market had very little competition. However, the sector began to lose its position after 2007 when third country competitors appeared in that market and offered importers pears and apples at a lower cost and higher quality.
Statistics are in line with these concepts. In the first months of the 2005 season, Argentina shipped more than 165,000 tons of pears and apples to the Russian market through the port of San Antonio. So far this year, the region has shipped 40,000 tons and, according to projections, the region will hardly export 70,000 tons of these products by the end of the season. In other words, the region is currently exporting less than half of what it shipped to that market a little more than a decade ago.
The other answer lies in the financing. The commercial relationship that Russian importers have with the exporters of the Rio Negro Valley focuses on the advance payment of a significant part of the price agreed before the cargo leaves to that destination. Some agreements range from a 70% to 90% advance of the merchandise's FOB value, in the best case. This allows importers to buy at a relatively low market price and exporters to have money to start the season, when there are no other means of financing.
When one analyzes the evolution of prices over time, historically these events tend to repeat. Importers agree to prices that are positive for exporters of the Valley, but then they collapse disrupting the entire system. This year, when pear operations began, the value of a box of pears stood at nearly 15 dollars, which means exporters were getting a little more than 10 dollars in advance.
A few weeks later, the agreed prices fell below 13 dollars and today they are, in some cases, around 10 dollars per box.
The math is simple, if this trend continues, to achieve profitability, exporters must sell sell a box of fruit for some 12 dollars. Below this, the activity begins having losses.
This year, the Valley's pear trade with Russia has grown tremendously. This happened because the pear harvest was characterized by a very low quality and because most of the companies in the region are experiencing a financial crisis.
"Many exporters have taken the decision to ship pears to St. Petersburg knowing that they were going to lose this cargo," stated a major operator in the region who preferred to remain anonymous. "The truth is that, after having invested the money in producing the pears and having the product, it is preferable to recover part of our investment than to lose everything," added the source with some guilt.
The scenario is worrying. The price of the Valley's pear is plummeting in the Russian market and there are still around 10,000 pallets crossing the Atlantic to enter the Russian market in a few days.
Russian importers are already saying that they won't be able to sustain quotations for this supply and that, in some cases, these pears could be redirected to other markets.
Imminent crisis
Unfortunately, things won't end well for much of Argentina's pear in Russia. The financial needs in the first stage of the season, where the payment of the salaries plays a decisive role, determined that many companies accelerate their shipments to get fresh money and thus to meet their commitments.
As a result, there was an oversupply of pears in the market that plunged prices. Private statistics give an account of this context. While total overseas exports of pears and apples through the region's different ports fell by a 10% year-on-year average, sales to Russia in the first quarter of 2017 increased by 26%.
According to the first reports from St Petersburg, the best quality pears will have chances of surviving in the market. The remaining pears, which are labeled as commercial or of lower quality, will face a complex sales scenario.
The competition also hit the market. Belarus' offer, the main supplier of pears in the Russian market, has continued to grow in recent times. This was due to the investments in infrastructure that allowed that country to keep its pear much longer in cold storage, and thus enter the Russian market with quality fruit when the supply of the southern hemisphere is arriving there.
Russia imports some 270,000 tons of pears a year, nearly 140,000 tons of which come from its western neighbor, Belarus. Argentina is the second supplier with 60,000 tons projected for this year.
Source: rionegro.com.ar