NORDIC ENVIRONMENT FINANCE CORPORATION (NEFCO)

Transcription

1 July 31, 2013 NORDIC ENVIRONMENT FINANCE CORPORATION (NEFCO) Review of Potential Russian and International Markets for Organic Fertilisers Produced in the Leningrad Region by Large Animal Farms

2 i Table of Contents 1 INTRODUCTION Background and Main Sources of Information Organic Fertilisers Organic Fertilisers: Definitions, Properties and Use Typical manufacturing process CURRENT MARKET OUTLOOK OF THE EUROPEAN UNION Global Trading Overview Organic Fertilisers: Production Volume and Dynamics in the EU Organic Fertilisers: Consumption Trends EU Market Balance EU Imports and Exports Overview of Average, Export and Import Prices of the EU Market Structure and Major Players in the EU Market CURRENT MARKET OUTLOOK OF THE RUSSIAN FEDERATION Overview on the Russian Federation Development of Agricultural Sector until Now Consumption of Organic Fertilisers Production of Organic Fertilisers Main Business Segments Exports and Imports Typical Market Prices Leningrad Region General Development of Agricultural Sector until Now Specific Development of Agriculture Creating the Demand for Fertilisers Market Structure and Major Players in the Russian Market FUTURE MARKET PROSPECTS IN THE EUROPEAN UNION Policy Changes and Other Market Drivers Product Market Outlook FUTURE MARKET PROSPECTS IN THE RUSSIAN FEDERATION Policy Changes and Other Market Drivers in Russia Production Forecasts Specific Features of the Leningrad Region Potential Markets for Organic Fertilisers Manufactured from Manure Trends in the Near Future with Agriculture and Planned and Potential Changes in Using of Manure in the Leningrad Region Future Price Aspects ANALYSIS OF DISTRIBUTION CHANNELS, COMPETITION AND COMPETITORS ACTIVITIES... 41

3 6.1 Introduction Main Distribution Channels of the European Union Competitive Environment in the EU Main Distribution Channels of the Russian Federation Competitive Environment in Russian Federation Competitive Environment in Leningrad Region Belgorod Region - the most important competitive region of exports to the EU and to the Near East COST-COMPETITIVENESS OF DELIVERIES TO REGIONAL, EU AND OVERSEAS MARKETS Regional Markets Export of organic fertilisers The European Union Near East, Africa and Other Overseas Markets Market development potential with incineration of poultry manure Co-operation possibilities with selected export countries with B2C-products Finland Latvia Germany The Netherlands CONCLUSIONS AND RECOMMENDATIONS ii Annexes 1 List of Major Players of Organic Fertiliser Business in the EU relevant to Leningrad Region 2 List of Major Players of Organic Fertiliser Business in the Russian Federation 3 Key Information on Peat Production in Russian Federation 4 Specific analysis of combined use of organic and inorganic fertilisers

4 3 1 INTRODUCTION 1.1 Background and Main Sources of Information This market study was carried out by Pöyry Finland Oy mainly in June and July The study has been financed by the Finnish Ministries of Environment and Agriculture through NDEP and administered by NEFCO, the Nordic Environmental Finance Corporation. It is based on the Terms of Reference of this project, data and analysis of the report Organic Fertilisers : European Union Market Outlook 2012 and Forecast till 2017, information search from Russian and United Nations (UN) statistics on fertilisers trading, interviews of various stakeholders by the study team members as well as the earlier data and publications of HELCOM, NEFCO and an on-going project managed by NEFCO and Leningrad Committee of Agriculture financed by EBRD/NDEP, the Finnish Ministry of Environment and the Finnish Ministry of Agriculture and Forestry by NEFCO and established for Sustainable Manure Management in Animal Farms in the Leningrad Region, Russia and implemented by Maxwell Stamp plc in Organic Fertilisers Organic Fertilisers: Definitions, Properties and Use Organic fertilisers generally come from plants, animals, or minerals. Soil organisms break down the material into nutrients that plants can use. Some organic fertilisers contain significant amounts of only one of the major nutrients, such as phosphorus in bone meal, but they also often have trace amounts of many other beneficial nutrients. In addition, some gardeners add organic material that improves soil structure and supports soil microorganisms, which helps make nutrients available more quickly, especially in warm weather when they are more active. As a general rule, organic fertilisers release about half of their nutrients in the first season and continue to feed the soil over subsequent years. Plant-Based Fertilisers Fertilisers made from plants generally have low to moderate N-P-K (nitrogen, phosphorus, potassium) values and not optimal nutrient ratios (nitrogen deficit), but their nutrients quickly become available in the soil for plants to use. Some of them even provide an extra dose of trace minerals and micronutrients. The most commonly available plant-based fertilisers include the following: Alfalfa meal: Derived from alfalfa plants and pressed into a pellet form. Alfalfa meal is beneficial for adding nitrogen and potassium (about 2 percent each), as well as trace minerals and growth stimulants. Compost: Compost is mostly beneficial for adding organic matter to the soil. It doesn't add much in the way of fertiliser nutrients itself, but it enhances and helps to make available any nutrients in the soil. Corn gluten meal: Derived from corn, this powder contains 10 percent nitrogen fertiliser. Application it only to actively growing plants because it inhibits the growth of seeds. The manufacturer recommends allowing after 1 to 4 months after use of this product before planting seeds, depending on the soil and weather conditions.

5 Cotton seed meal: Derived from the seed in cotton bolls, this granular fertiliser is particularly good at supplying nitrogen (6 percent) and potassium (1.5 percent). Look for organic cottonseed meal because traditional cotton crops are heavily sprayed with pesticides, some of which can remain in the seed oils. Kelp/seaweed: Derived from sea plants, you can find this product offered in liquid, powder, or pellet form. Although containing only small amounts of nutrients (N-P- K) fertiliser, kelp meal adds valuable micronutrients, growth hormones, and vitamins that can help in increasing yields, reducing the plant stress from drought, and increasing frost tolerance. Soybean meal: Derived from soybeans and used in a pellet form, soybean meal is prized for its high nitrogen (7 percent) content and as a source of phosphorous (2 percent). Like alfalfa meal, it is particularly beneficial to nitrogen-loving plants, such as roses. Humus: Humus, humates, and humic acids are organic compounds often found in compost. Humus is touted to increase soil microbial activity, improve soil structure, and enhance root development of plants. These products have no fertiliser value, but rather are used as stimulants to support soil microbial life that, in turn, support the plants. Animal-based fertilisers Whether by land, by air, or by sea, animals, fish, and birds all provide organic fertilisers that can help plants grow. Most animal-based fertilisers provide lots of nitrogen, which plants need for leafy growth. The following are some of the most commonly available ones: Manures: Animal manures provide lots of organic matter to the soil, but most have low nutrient value. A few, such as chicken manure, do have high available nitrogen content, but should only be used as composted because fresh manure can burn the roots of tender seedlings. Bat/seabird guano: It comes in powdered or pellet form and is actually high in nitrogen (10 to 12 percent). Bat guano only provides about 2 percent phosphorous and no potassium, but seabird guano contains 10 to 12 percent P, plus 2 percent K. The concentrated nitrogen in these products can burn young plants if not used carefully. They tend to be more expensive than land-animal manures. Blood meal: This is the powdered blood from slaughtered animals. It contains about 14 percent nitrogen and many micronutrients. Leafy, nitrogen-loving plants, such as lettuce, grow well with this fertiliser. It also reportedly repels deer, but may attract dogs and cats. Bone meal: A popular source of phosphorous (11 percent) and calcium (22 percent), bone meal is derived from animal or fish bones and commonly used in a powdered form on root crops and bulbs. It also contains 2 percent nitrogen and many micronutrients. It may attract rodents. Fish products: Fish by-products make excellent fertilisers. Fish emulsion is derived from fermented remains of fish. This liquid product can have a fishy smell (even the deodorized version), but it's a good complete fertiliser (5-2-2) and adds trace elements to the soil. When mixed with water, it is gentle, yet effective for stimulating the growth of young seedlings. Hydrolysed fish powder has higher nitrogen content (12 percent) and is mixed with water and sprayed on plants. Fish meal is high in nitrogen and phosphorus and is applied to the soil. Some products blend fish with seaweed or kelp for added nutrition and growth stimulation. 4

6 Typical manufacturing process There are different ways to produce organic fertilisers. Manufacturing process varies from type to type of fertiliser. Relevant technologies applied for manure-based organic fertilisers have been extensively described in the reports issued earlier in projects financed by NEFCO and HELOM in , and therefore they are not dealt in this context in detail. To summarize, they can be divided into: Biological treatment methods, such as o Passive composting method (i.e. piling of manure) o Active composting methods in windrows or tunnels o Special active composting technologies using worms or other biological means to catalyse the process, and sometimes including also mixing with other organic materials like peat o Anaerobic methods which produce biogas and a stable solid material fraction very similar to the output of active composting methods and which can be spread on fields with same type of machines which are used for spreading cattle manure. Physical methods, such as o Thermal drying with solar energy or hot air produced from fossil or renewable fuels or exhaust ventilation air from poultry farm ventilation, producing bulk material with dry solids content of % o Pelletizing producing pellets by pressing the material through a special perforated disc, which can be spread on fields with same machinery as when spreading inorganic fertilisers. Requires thermal drying before a Pelletizing unit. o Granulation producing granules similar to the inorganic fertiliser products, and which obviously can also be spread on fields with same machinery than inorganic fertilisers. Requires thermal drying before a granulation unit. o Incineration of manure with or without heat recovery (additional cost item) which produces bulk material consisting of fine ash particles. This material can also be used for production of pellets or granules.

7 6 2 CURRENT MARKET OUTLOOK OF THE EUROPEAN UNION 2.1 Global Trading Overview The volume of global trade of organic fertilisers is currently about 2.5 to 3 million t/a and its value was at approximately million USD/a in The trend of the global trading with these materials is presented in Figure 2/1 and it has grown to 5- fold 6-fold to the volumes and value it had in the beginning of 1990s. The volume of nutrient-rich poultry and pig manure generated in the large scale farming operations in Leningrad Region, which is estimated to be 1.3 to 1.6 million t/a. Hence the manure produced in Leningrad Region is about 50 % of the global trading (exports and imports) of organic fertilisers. 3,5 3 2,5 2 1,5 1 0,5 0 Net weight, million tons (primary axis) * 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 Figure 2/1 Global Trade of Organic Fertilisers in (Source according to UN comtrade, customs code 3101) From Figure 2/1 it can also be observed that the global trade of organic fertilisers grew almost 3-fold during the last ten years. It is however unlikely that it will grow as fast during the next decade, mainly due to the global financial recession. 2.2 Organic Fertilisers: Production Volume and Dynamics in the EU The EU Commission started to revise the EU Fertiliser Regulations to include organic fertilisers. The revision is based on the report Study on Options to Fully Harmonize the EU Legislation on Fertilizing Materials Including Technical Feasibility, Environmental, Economic and Social Impacts published in January It strongly advocates that all materials which provide nutrients such as organic fertilisers, organo-mineral fertilisers and soil improvers are included in the New Approach, and therefore have to fulfil the same obligations/restrictions as inorganic fertilisers (e.g. maximum levels for heavy metals, minimum nutrient levels etc.). The organic fertiliser sector has been a very traditional and regional activity for several centuries, but trends towards more sustainable farming may lead to organic nutrient products being used as a substitute for inorganic nutrient products. For the EU as a

8 whole, the main source of nitrogen input to agricultural land is inorganic fertiliser and livestock manure as the second one. However the situation varies considerably from one country to another. For example, in the early 2000s, inorganic fertilisers accounted for 50% or more of total nitrogen input in Denmark, Germany, Greece, France, Luxembourg, Finland and Sweden. By contrast, in Belgium and the Netherlands livestock manure was responsible for more than 50% of nitrogen inputs. (Source: Study on Options to Fully Harmonize the EU Legislation on Fertilising Materials. Annexes to the Final Report of 16 January 2012). The total values and volumes of organic fertiliser production in the EU during are presented in Figures 2/2 and 2/3. The value of it has grown from 421 million EUR in 2007 to 678 million EUR in 2011, corresponding to the growth of about 16 % over this 4 year period. The growth in volumes has been 45 % between 2007 and 2011, and the annual growth rates are shown in the Figures 2/2 and 2/3. 7 Figure 2/2 Trends in Organic Fertiliser Production, (EUR) Figure 2/3 Trends in Organic Fertilisers Production, (tonnes)

9 About 62 % of the total production of organic fertilisers in the EU took place in five countries shown in Table 2-1. Four of them Germany, Italy, France and Spain are also among the biggest producers of agricultural products, but Ireland has a market share in organic fertilisers which is higher than their share in production of various agricultural products. Table 2-1 Major EU Producers of Organic Fertilisers and Their Market Shares in Figure 2/4 Organic Fertiliser Market Segmentation by Leading European Union Producers in 2011 After these TOP 5 producers, the Netherlands, Belgium and Austria are major players in the market, because they belong to TOP 5 exporters of organic fertilisers. 2.3 Organic Fertilisers: Consumption Trends Agronomic needs and use of organic fertilisers vary significantly from the North to the South of the EU. Mediterranean countries use these products more than the Nordic countries as climate and soil conditions are more favourable to these type of products in the South and also because mineralization of organic matter in the soil is greater. (Source: Study on Options to Fully Harmonise the EU Legislation on Fertilising Materials. Annexes to the Final Report of 16 January 2012). A summary of consumption of use of livestock manures, inorganic fertilisers and municipal and industrial waste (sludge) is presented in Figure 2/5. It shows clearly that the direct use of livestock manures (including organic fertilisers produced from livestock manure) represented about 50 % of total nutrients consumption in farming in 2011.

10 9 Figure 2/5 Nutrients Consumption in EU Farming (Volumes) in 2011 The major consumers of organic fertilisers are largely the same countries which produce them. The UK is an exception, due to large imports from Ireland and the Netherlands, about t/a and t/a, respectively. The exports to the UK represented 72 % of total exports of Ireland and 26 % of total exports of the Netherlands. These examples illustrate very well the regional nature of the organic fertiliser business in the EU. Southern Europe, Northern Europe and the UK, Ireland, Belgium and the Netherlands are three main regions where organic fertilisers are traded inside these regions. Eastern European markets have been until now based on national trading of organic fertilisers. E.g. in Poland, the farms are relatively small, and the position of domestic production of inorganic fertilisers is so strong that even the market entry of foreign inorganic fertiliser producers has been difficult to the Polish market. From the Russian export perspective and especially thinking exports from the Leningrad Region to Northern Europe (Finland, Sweden, Denmark, Germany and the Baltic countries) has the most potential from geographical and transportation point of view. When the consumption patterns are considered in Table 2-2 and Figure 2/6, the TOP 6 consumers are mainly the same countries that are the producers, although the order is slightly different and the UK is included in this group. Five countries (TOP 5) account for 76 % of total consumption and when a sixth country is taken into account, the consumption of TOP 6 countries is as high as 87 %. Apart from Ireland, each of these countries has more than 40 million inhabitants and a big agricultural sector. Table 2-2 Major Consumers of Organic Fertilisers and their Market Shares, by Country in 2011

11 10 Figure 2/6 Organic Fertiliser Market Segmentation by Leading European Union Consumers in EU Market Balance Before analysing the exports from and imports to the EU, it is interesting to take a look on the market balance. The key information is presented in Table 2-3 (global trade), Figure 2/7 (global trade) and Table 2-4 (EU trade). The EU plays a very important role in total exports of this commodity, and 71.5 % is the share of this continent representing a total volume of 2.65 million t/a with a corresponding market value of about 535 million USD/a. Asia exports only 15 % of the volume of the EU export and the corresponding numbers are t/a and 95 million USD/a. The average export price CIF (including Cost, Insurance Freight) of the EU in 2011 was about 200 USD/t (145 EUR/t) whereas the average export price from Asia was about 250 USD/t (180 EUR/t) a difference of 25 % between the CIF-export prices. Table 2-3 Regional Structure of Organic Fertiliser Global Export Flows in 2011

12 11 Figure 2/7 Organic Fertiliser Export: Regional Structure in 2011 When we analyse the EU market balance shown in Table 2-4 and Figure 2/8, the following conclusions can be made: In , the share of exports from the EU varied between 10% to 15% of the total production During the same period, the imports share of total consumption in the EU varied less each year in proportion and from 0.77% to 1.22% of the consumption. Exports were about times higher than imports for the same year There has been a continuous surplus of organic fertilisers in the EU and that surplus has been exported out to the EU27-countries in Table 2-4 Organic Fertiliser Market Balance, (tonnes) Figure 2/8 Trends in the EU Organic Fertilisers Foreign Trade (USD and tonnes),

13 EU Imports and Exports From the point of view of the objectives of this market study, the imports to the EU are more relevant, because one potential market for organic fertilisers produced in Russia would be the EU. As stated earlier, especially the Northern Europe. When the largest importers of organic fertilisers in Figure 2/9 are analysed, none them are located in the Northern Europe. The closest large importers of Russia are the Netherlands and the UK, and the former is doing a lot of trading with organic fertilisers by both importing and exporting a lot of these materials. The imported volumes of the largest importer in 2010 were small compared to consumption or exports, in total only approximately t/a. Hence, there is not a natural market demand for organic fertilisers produced in Russia. Figure 2/9 EU Countries Largest Importers in EU (2011) Table 2-5 Structure of Import of Organic Fertilisers to EU27 in 2010, by Country The exports from the EU are interesting especially from the point of view where else Russia could export organic fertilisers, the EU imports being so small. The two biggest exporters of the EU are the Netherland and Belgium together covering about 70 % of total exports from the EU as shown in Table 2-6. Part of these exports is based on imports, and both countries are major players in trading of this commodity.

14 From Figure 2/11 and Table 2-7 it can be observed that three Asian countries account for about 44 % of the exports these being Vietnam, Philippines and Thailand. Due to the long distance and expensive basic transportation costs, this business is sustainable only with clearly lower export prices than the European prices as well as special arrangements with minimising transportation costs, such as using empty ships or empty return containers going otherwise to Asia to fetch goods. Table 2-6 Major Exporters of Organic Fertilisers among EU Countries in Figure 2/10 Major Exporters among EU Countries in 2011 Figure 2/11 Major Consumers of Organic Fertilisers from EU in 2011

15 14 Table 2-7 EU27 export structure of Organic Fertilisers by country in Overview of Average, Export and Import Prices of the EU The three Tables summarize the average prices for organic fertilisers based on statistical information presented in Organic Fertilisers: European Union Market Outlook 2012 and Forecast till It should be noticed that the prices in Table 2-8 are in EUR, whereas the export and import prices are in USD as they are generally traded in USD. The following observations and conclusions can be made when this statistical information is combined with the price information from several European traders, dealers and wholesalers collected in this study. The export and import CIF - prices are volatile and have varied between 260 and 800 USD/t ( EUR/t) in These prices are significantly higher than the average prices paid in the EU, which have varied between 127 and 150 EUR/t. This is due to two main reasons: (i) the export and import prices represent small deliveries of typically Business to Consumer (B2C) products, where the consumer prices are beyond these export/import prices, and (ii) this trade is partly based on short-term spot-markets, which also explains the volatility of prices.

16 15 Table 2-8 Average Annual Price (Calculated as Unit Value) for Organic Fertilisers in the EU, (EUR per tonne) Table 2-9 EU Export Price for Organic Fertilisers (FOB Valuation), (USD per tonne) Table 2-10 EU import price for Organic Fertilisers (CIF valuation), (USD per tonne) 2.7 Market Structure and Major Players in the EU Market Market Structure As stated briefly earlier, the EU market is divided in four main regional markets as follows: Northern Region consisting of Nordic countries, Baltic countries, Poland and Northern Germany Western Region consisting of the UK, Ireland, the Netherlands and Belgium Southern Region consisting of Mediterranean member states and Portugal Central and Eastern Region consisting of Southern Germany, Austria, Switzerland and new member states from Czech Republic to Romania The regional trading between areas with surpluses and areas with deficits of organic fertilisers are balanced within these regions, and the application of organic fertilisers per hectare is somewhat higher in Southern Europe than elsewhere in the EU because of different climatic conditions and soil properties. These markets are influenced a lot by the eventual subsidies of electrical power production from renewable fuels and raw materials, and e.g. in Germany there are biogas plants operated with cereals (typically maize) as raw material as well as organic waste materials like source-separated bio-waste from households, garden waste from small houses and various organic wastes from agriculture and food production. Animal manure belongs to the last category. Typical feature in these circumstances is that there is a regional surplus of organic fertilisers and that the producers of biogas and related organic fertiliser (digestate) have to pay to an external service provider to get rid of this solid by-product of biogas production. This creates a market surplus but it also allows the organic fertiliser traders, wholesalers and manufacturers to get part of their revenues from the producer of biogas, manure or other operator.

17 16 Market Segments Current market segments by type of application for using organic fertilisers have been: agriculture in general (mainly fertilizing and improving soil properties) organic food production in particular, city garden departments and small-scale gardens of individual houses small scale agriculture landscaping of roads, railways and landfills miscellaneous other purposes Market segments can further be divided into Business-to-Business (B2B) relations, including typically big farming companies or farming co-operatives, major dealers of soil and organic fertilisers, major construction companies, golf courses and other sports facilities, garden departments of cities etc. Business to Consumers (B2C) relations, including typically individuals having a small garden in connection to their house or practicing small-scale farming in cities or outskirts of them, and real estate owners and maintenance companies responsible for lawns and flowers around apartment houses etc. Major Players A comprehensive inventory of main producers of organic fertilisers was carried out and the names of different companies in the EU are included in the Organic Fertilisers: European Union Market Outlook 2012 and Forecast till 2017 and also other sources have been utilized by the study team. The most relevant of them from perspective of North-West Russia and Leningrad Region have been selected and listed in Annex 1. These companies include producers, dealers and wholesalers of organic fertilisers.

18 17 3 CURRENT MARKET OUTLOOK OF THE RUSSIAN FEDERATION 3.1 Overview on the Russian Federation Development of Agricultural Sector until Now Total area under crops decreased in Russia by over a third since 1990 from some 118 million ha in 1990 to some 76 million ha in It is both a weakness and an opportunity, as area under crops seems to level up in mid-2000s and it is expected to grow in the long run. Share of the North-West Russia is currently 2% of total in Russia (it was 3% in 1990). Figure 3/1 Development of Total Area under Crops (in Million Hectares) in Russia Total area under crops in the North-West Russia has decreased by nearly 60% in Since mid-2000s, the North-West Russia was the only federal region with a clear decline. Figure 3/2 Development of Russian Relative Area under Crops (in %)

19 Consumption of Organic Fertilisers The statistical decrease of consumption of organic fertilisers in Russia was much higher than drop in area under crops over sevenfold drop for organic fertilisers and only some 30-35% drop for area under crops. Back in 1990, consumption of organic fertilisers in North-West Russia alone was comparable with total consumption in Russia today. Figure 3/3 Development of Organic Fertilisers (in 1000 t/a) of the same Regions as in the Figure 3/1 In , industrial consumption of organic fertilisers in Russia was nearly flat while there were some changes in the regional distribution. Total consumption (industrial plus private) is estimated at app. 100 Mt/a in 2012, total market app. 1.5 BEUR/a. "Branded" industrial treatment represents less than 5-7% of the volume (less than 0.2 BEUR/a) Production of Organic Fertilisers According to official statistics, production of organic fertiliser in Russia still remains at a low level, about six to seven per cent (2,634 million tonnes) of the total fertiliser production output. There are a number of reasons for low production of organic fertiliser in the Russian Federation, namely: Small-scale application of organic fertilisers across the country; Undeveloped organic farming; Relatively low prices for chemical fertilisers and existence of government and regional subsidies to farmers applying chemical fertilisers; Small differences between prices for conventional agriculture products and organic farming products (this difference is 30% to 40% in the EU and USA) Until recently, the total volume of organic fertiliser application had been falling. According to the National Statistics Service of the Russian Federation, 53.1 million tonnes or organic fertilisers was used in Russia in 2010 or by 86 per cent less than in the

20 year of 1990 (389,5 million tonnes). Despite a relatively slow growth of chemical fertiliser production, it reached the record 39.4 million (the equivalent of 18.8 million tonnes of 100% nutrient) in The growth of potash and phosphorous fertilisers was the fastest and slowest (6.2% and 3.6%, respectively). Production of nitrogen fertilisers was growing at 4.7% per year. In spite of negative global trends, the domestic market of inorganic fertilisers reached the record 2.5 million t/a in The domestic demand for chemical fertilisers was stimulated by agreement between the government and fertiliser producers. Many experts estimate competition at the organic fertiliser market as quite weak. The latter is explained by small volume of organic fertiliser production in Russia. According to the National Statistics Service, organic fertilisers are applied on as little as 7.5% of all cultivated agriculture land Main Business Segments The market of organic fertilisers can be divided into two big segments: business-tobusiness (B2B) and business-to-consumer (B2C). The B2B market belongs to large agricultural enterprises and holdings that use fertilisers for their business activities. The B2C market is represented by owners of garden plots and private subsidiary farms who use fertilisers for growing vegetables and plants for own consumption. There is no uniform industrial market of organic fertilisers in the Russian Federation, mainly because of complexity of transportation of big volumes of manure or compost. This is true, first of all, for the B2B market, however packed fertilisers sold to gardeners and owners of personal subsidiary farms can be transported to neighbouring regions. As estimated by the Ministry of Agriculture, in Russia organic fertilisers are applied only to 7.5 % of the arable land. Practically these fertilisers consist of manure which is applied without preliminary processing. One of the biggest barriers to the development of the market of organic fertilisers is subsidizing the purchase of inorganic fertilisers by the government of the Russian Federation for all types of agricultural enterprises. The Government Program of Development of Agriculture and Regulation of the Markets of Agricultural Production, Raw Materials and Foodstuffs for adopted by the government of the Russian Federation in July 2007 provides for the following increase in deliveries of inorganic fertilisers to agriculture of Russia: up to 2.2 million tonnes by 2009, up to 2.5 million tonnes by 2010, up to 2.7 million tonnes by 2011 and up to 3 million tonnes by 2012 (calculated as per 100 % of active substances). (According to the State Committee of Statistics, 1.2 million tonnes of inorganic fertilisers have been used in the Russian Federation in 2008). In case of advancing growth of the demand for inorganic fertilisers in 2012 the total market can achieve up to 4,5 million tonnes of active substances (more than 13,5 million tonnes of physical weight), by estimations of the Russian analysts. Since 2000 a decrease in consumption of inorganic fertilisers in Russia was observed for a number of years, the basic sales of inorganic fertilisers being for export. However in 2008 during the economic crisis the foreign market of inorganic fertilisers has decreased. By the end of 2008 the basic world manufacturers including Russia undersupplied around 2 million tonnes of phosphoric, 1 million tonne of potash and 1.6 million tonnes of nitric fertilisers to the world market. It has forced the Russian manufacturers to develop home market more actively and to squeeze the organic 19

21 fertilisers out. Therefore a considerable part of fertilisers that cannot be exported is sold in the domestic market. Furthermore, in October 2008 the agreement between the Russian Association of Manufacturers of Fertilisers and the Agroindustrial Union of Russia has come into force, facilitating the increase in deliveries of inorganic fertilisers to the Russian agriculture in The Agroindustrial Union of Russia (Rosagroprom) includes 66 agroindustrial unions in all the regions of the Russian Federation, more than 20 branch unions (associations), 42 commercial enterprises (organizations). Creation of the Agroindustrial Union of Russia has been approved by the Order No 1354 of the Government of the Russian Federation dated September, 19th, 1997.) The world market of inorganic fertilisers has promptly developed in the last three years. The price increase has been from 40 % to 100 %. The global production capacity of inorganic fertilisers is being increased by reopening plants in e.g Geismar, Louisiana, USA or starting up new production e.g. in Iran and China (ammonium fertilisers), Saudi-Arabia, Brazil and China (phosphates) and Canada (several potassium projects in the pipeline by Indian, Australian and German companies). The driver of the demand is the increase in the population of the globe, essentially outstripping the expansion of arable lands. According the United Nations forecasts, by 2010 the global population will reach 6.9, and by billion. The per capita area of arable land will reduce from 22,800 m2 in 2000 to 18,300 m2 by 2020 and further to 7,000 by Increase of intensity of agriculture, including the use of fertilisers, seems the only solution to the problem of producing foodstuffs. One more reason for the growth in the demand for inorganic fertilisers is the rapid development of the industry of biofuel, which requires agricultural crops (oil seed rape, corn and sugar cane) as a source of raw materials. At the moment biofuel manufacture utilizes 1 % of the world arable land; however, by estimate of the World Food Organization, it will utilize about 20 % by Another factor considerably influencing the development of the market of organic fertilisers is the absence of environmental payments for manure storage. The maximum fine for the infringements related to recycling of manure is RUR under the Administrative Offence Code (Article on Non-Observance of Environmental and Sanitary-and-Epidemiologic Requirements during Handling of Waste and other Dangerous Substances) Exports and Imports In , trade of organic fertilisers was marginal below 0.2% of total production and consumption. Sporadic deliveries, mostly by trucks, with two exceptions in 2011: two vessel-loads from OOO Zarya (some 3700 and 3200 t accordingly, humus). 20

22 21 Figure 3/4 Import and Export of Organic Fertilisers in Russia in (million USD/a) Figure 3/5 Import and Export of Organic Fertilisers in Russia in (1000 t/a) The Russian Federation imports organic fertiliser of predominantly two types: (i) organic-based dressing for flower growing (52%) and (ii) chicken manure-based fertilisers of animal origin (48%). The recent study of Discovery Research Group shows that the Russian Federation imported 96,920 kg of organic fertilisers totalling USD 392,193 in The largest foreign suppliers of organic fertilisers to the Russian market are Flora Life (the Czech Republic) 48.7%, Schulze Und Hermsen (Germany) 43%, Biolan (Finland) 5.4%, Chrysal International (Slovakia) 1.8%, Hameleon Orchedeen (Slovakia) 1.1%). The Russian Federation exports mainly two types of organic fertilisers: humic fertilisers (62.9%), Potassium humate (31.8%), humus (2.3%), sapropelic fertilisers (1.95%), chicken manure-based animal fertilisers (0.4%), and microbiological fertilisers which are based on rhizospheric bacteria (0.4%) and sodium salts of humic acids (0.3%). The total Russian 2010 export of organic fertilisers was 553,793 kg totalling USD 4,812,624. According to the review of Russian exports/customs statistics, most of the exports of organic fertilisers have been delivered to members of Confederation of Independent States (CIS) such as Kazakhstan, Azerbaijan etc. Very little until now has been exported to the EU. And from the Leningrad Regions perspective, these members of the CIS are all located too far away to be a destination of export from this region.

23 Typical Market Prices The most popular organic fertiliser in the B2C market is specially prepared peat soil. Cost of peat/soil/fertiliser mixes in 2013 has been about 5 16 RUR/kg ( EUR/t) this is the range current consumer prices in retail shops vary for solid fertilisers. The prices of liquid fertilisers is typically RUR/kg ( EUR/t), but the liquid products are much more concentrated especially with nitrogen. Big volumes of organic fertilisers are less expensive than inorganic fertilisers. If organic fertiliser producers can deliver their products directly from the producer to the farm, the wholesalers margins do not increase the price and they can range between EUR/t. A comparison of inorganic and organic fertilisers is presented in Annex 4. Typical prices of inorganic fertilisers are shown in Figure 3/6. euro/tonnena Nitrogen fertilizer Phosphorus fertilizer Potash fertilizer Figure 3/6 Prices for Inorganic Fertilisers during (in Leningrad Region) A more detailed comparison would have to be based on many case-specific factors such as type of plant grown, soil quality, soil fertility analysis etc. whereas the price levels mentioned above indicate, that organic fertilisers could be economically competitive already now, and much more in the near future. 3.2 Leningrad Region General Development of Agricultural Sector until Now Total area under crops in the Leningrad Region and four neighbouring regions shrank more than twofold in : from 2.69 million ha in 1990 (0.44 in the Leningrad Region) to 1.13 million ha in 2012 (0.24 in the Leningrad Region). The largest areas under crops among the neighbouring regions are in the Vologda Region.

24 23 Figure 3/7 Area under crops in the Leningrad Region and Neighbouring Regions, million ha Total area under crops in the North-West Russia decreased by nearly 60% in Since mid-2000s, the North-West Russia was the only federal region with unabated decline. Figure 3/8 Area under crops in the Leningrad Region and Neighbouring Regions, 1990 = 100 % In the Northwest Region there are no big areas of arable land. The average size of a field is hectares. Besides, there are a considerable number of water reservoirs and rivers (protected by water protection buffer zones of m). The crops productivity is low. Therefore, recycling of manure is more expensive than in southern regions. The distance to the fields where the organics is applied can be considerable, and numerous water courses limit the application of economically feasible pipe systems. One of the basic indicators of the market of fertilisers is the cultivated area. Moreover, the capacity of the market for fertilisers directly depends on the cultivated area.

25 3.2.2 Specific Development of Agriculture Creating the Demand for Fertilisers The agro-industrial complex of the Leningrad Region is a significant producer on the sector of animal husbandry. Production of milk, pork, beef, eggs and poultry meat have been concentrated to the Region during several decades. Consumer demand for products has rapidly increased, and the trend seems to go on. The amount of farms has slowly decreased; the distribution between large agricultural companies and the smaller farms has not significantly changed. A lot of previously used fields have been abandoned in different parts of the Region % 92.3% 0 7.7% 3% Leningrad Region area Crop area Other agricultrual land Figure 3/9 Share of the Cultivated Agricultural Area in Leningrad Region 37 % 63 % Unfertilized cultivared area Fertilized cultivated area Figure 3/10 Shares of the Cultivated Fertilized and Unfertilized Areas in Leningrad Region 15 % 2 % Large farms 83 % Medium-sized farms Small farms Figure 3/11 Share of Agricultural Land between Different Farm Types in Leningrad Region

26 Peasant farms Small enterprises, thous ,2 796 Agricultural organizations in agro-industrial complex Other organizations in agro-industrial complex Figure 3/12 Amount of Four Types of Enterprises in Agro-Industrial Sector, Leningrad Region Enterprises of all types kg/ha Cereal crops Potato Field vegetables Figure 3/13 Yields per Hectare of Agricultural Crops in Leningrad Region in 1990 as a Benchmark and more recently in A significant number of crop production units, and recourses for them, exist in the region. The main products of them are forage, cereals, vegetables and potato. Majority of the crop production area and farms has a link with milk and meat production chains, by feed produced, and manure recycled.

27 Enterprises of all types 1000 tonnes Cereal crops (in weight after rework) Potato prelim. Vegetables total 'Protected ground' vegetables Field vegetables Figure 3/14 Total Yields of Agricultural Crops in Leningrad Region, in 1990 as a Benchmark and more recently in tonnes Agricultural organizations prelim. Cereal crops (in weight after rework) Potato Vegetables total 'Protected ground' vegetables Field vegetables Figure 3/15 Total Yields of Agricultural Crops on Agricultural Organizations of Leningrad Region, in 1990 as a Benchmark and more recently in , ,4 19,6 12,6 7 16,4 14,8 19,2 Total area, 1000 ha Total yield, 1000 tons Yield, tons/ha Total enterprises Private enterprises Agricultural enterprises and farms

28 27 Figure 3/16 Cultivated Areas, Total and Hectare Yields of Potatoes in Leningrad Region, Distribution between Farm Types. Potatoes, vegetables and part of grain crops are used by consumers. According to statistical data the yields per hectare of all crops in Leningrad Region are lower compared with the ones in the Northern and Central Europe, but quite moderate when compared with the yield data from the southern part of Russia. This is caused by various reasons regarding climate and weather, poor soil fertility and drainage, lack of crop protection, pesticides, old varieties, poor quality of seed potatoes and modern cultivation technology, etc. The main reason, however, is inadequate and unsatisfactory managed supply of nutrients through fertilization. Agricultural organizations kg/ha Cereal crops Potato Field vegetables Figure 3/17 Yields per Hectare of Agricultural Crops on Agricultural Organizations in Leningrad Region, in 1990 as a Benchmark and more recently in The total cultivated are of both vegetables and potato has decreased during last two decades. The main open field vegetable species produced in the Leningrad Region are cabbage, carrots and beetroot, of which cabbage has the largest area. Potato and vegetables are mostly produced on smaller farms. 31 % 16 % 1 % 52 % Cabbage Carrots Red root Others

29 28 Figure 3/18 Most Important Open Field Vegetable Species Produced in the Leningrad Region Of all cereals barley is the most common; nearly 2/3 of the total area of grain production is covered by barley. Grain is mostly grown for fodder for cattle and pigs. Grassland management covers the majority of all the agricultural land in the Region due to the importance of milk production. 4 % 22 % 12 % 62 % Barley Oats Wheat Triticale Figure 3/19 Distribution of the cultivated land between cereals by species in Leningrad Region Animal production is the main sector of agriculture in the Region. Majority of the animals is held by big agricultural companies. Animal husbandry inevitably may cause environmental harm, if the waste, principally manure, is not handled and utilized in a proper and sustainable way. Nutrients or/and the energy of manure should be recycled, one way or another. Due to the vast import of nutrients into the Region in the form of feed for poultry and pigs, the nutrient balance in the Region shows surplus, as a whole. Inorganic fertilisers are purchased only on part of the agricultural companies and farms, and they are only used on a small minority of the cultivated agricultural area during recent and previous years, apparently due to the lack of financial resources. Exact information of the targets of inorganic fertilisers isn t available. The economic situation on agricultural companies and farms is unsatisfactory under the press of hard international competition, without practically any such forms of financial support, which are available for farmers in EU. Permanent lack of skilled labor exists, as well. Purchasing inorganic fertilisers on a farm has been subsidized by the Russian Federation as well as by the Leningrad Region. In the near future, the subsidies will be removed, when Russia became a member in WTO. Simultaneously the prices of inorganic fertilisers have been in continuous increase. In the worst visions and economic predictions, the companies and farms will be able to purchase inorganic fertilisers significantly less than today, if at all. This might cause a collapse in the yields per hectare and more generally, in efficiency as well in profitability of the production. A significant resource of excess nutrients, in the form of manure exists inside the Leningrad Region. This resource could potentially be used as organic fertiliser. Majority of the cattle manure nutrients obviously is rotating inside the farms. Nutrients rotate between feed production on farms own fields and their animal production. Nutrients are normally imported from outside in the form of concentrates for feeding. Although nutrient recycling may, in many cases, be in moderate order, and the forage leys be renovated often enough, there is always need for intensification, enhancing and development towards more sustainable management of nutrients. Unsatisfactory manure

30 storing and timing of manure application are the most obvious failures. The relatively low yields in crop and forage production and certain problems with fodder quality show that there exists lack of nutrients; nutrients are not at right time in the right place. If there would be qualified and tailor-made organic fertilisers available for a reasonable price, even cattle farms might be customers for them, and replace expensive inorganic fertilisers with them. Companies and farms specialized in producing cereals, potato and vegetables need all the nutrient supply from outside the farm. Requirement is high, because the crops need and use a lot of nutrients during growing season. This need can be satisfied by both inorganic and organic fertilisers, or by using both of them, if the properties and prices of fertilisers will be on sustainable level. Crop production of the region requires a huge amount of nutrients (N, P, K). It was calculated that about 40 thousand tonnes of both Nitrogen and Potassium, and 20 thousand tonnes of Phosphorus will be yearly needed to fulfil the requirements of fertilization in the Leningrad Region. In the calculation the common yield level achieved in Finland, which is not even comparable with the yield level in the Central Europe, was set as target. The distribution between cultivated areas for different crops was assumed to stay as current. Application of manure cover today part of the requirement of nutrients, and recycling will, in any case, be in crucial role on cattle farms. Processed organic fertiliser products could be a supportive element in replacing inorganic fertilisers. Achievement of such higher yield level would obviously have effect on crop market by growing supply. Would it be profitable to produce crops on such a wide area as today? Due to the complexity of the problems to be solved, different actors and parties mostly try to optimize their own part in the chain. 3.3 Market Structure and Major Players in the Russian Market Market Structure and Market Segments Regarding the channels for selling, it is possible to indicate a number of directions by which it is possible to segment the market. Like in the EU, also in Russia the current market segments can be divided by type of application for using organic fertilisers: agriculture in general (mainly fertilizing and improving soil properties) organic food production in particular city garden departments and small-scale gardens of individual houses small scale agriculture landscaping of roads, railways and landfills miscellaneous other purposes Market segments can further be divided into Business-to-Business (B2B) relations, including typically big farming companies or farming co-operatives, major dealers of soil and organic fertilisers, major construction companies, golf courses and other sports facilities, garden departments of cities etc. Business to Consumers (B2C) relations, including typically individuals having a small garden in connection to their house or practicing small-scale farming in cities or outskirts of them, and real estate owners and maintenance companies responsible for lawns and flowers around apartment houses etc. 29

31 One example of market segmentation which has been classified in a practical manner can defined as follows. Territorial segmentation, i.e. by the distance between the agricultural enterprises and the producer of the organic fertiliser or a large animal farm. By this principle the traditional organic fertilisers (manure and compost) could be delivered to the nearby enterprises, while the granules can be transported to remote locations. Segmentation by the way of transportation of fertilisers. Some fertilisers must be transported by special vehicles and some of them can be transported with conventional trucks. Segmentation by the way of application of fertiliser. Here it is possible to speak about replacement of inorganic fertilisers with organic granules. In this instance the granules can be dispersed by seeders/ planting machines, while traditional bulk organic fertilisers are applied by conventional method with a cart driven by a tractor Segmentation by the agricultural activities (organic or non-organic agriculture). If various segments are present, the enterprise can differentiate the manufacture of organic fertilisers, orienting towards the most attractive segments of the market. Major Players A comprehensive inventory of main producers of organic fertilisers was carried out and the names of different companies in Russia have been listed in Annex 2. As general observations and conclusions it can be stated that There are a lot of big- medium-size and small companies involved in this business There are significant and separate regional markets around Moscow, Saint Petersburg and other big cities in Russia B2C products can be transported and sold across these main regions There are major surpluses of large animal farming manure around Moscow and in Leningrad, Beograd and Krasnodar Regions A lot of major peat producers are involved in this business sector. A separate summary of peat production in Russia in included in Annex 3. 30

32 31 4 FUTURE MARKET PROSPECTS IN THE EUROPEAN UNION 4.1 Policy Changes and Other Market Drivers The two main policy changes and EU Directives having a significant influence on the markets of organic fertilisers are: The Nitrate Directive [directive number to be completed], which is currently being implemented in the Member States The new waste framework directive [directive number to be completed], which has been implemented in most Member States The former regulates primarily use of nitrogen fertilisers with the intention of inter alia to reduce the leaching of nitrates from inorganic fertilisers to ground water. It is likely to increase and promote the use of organic fertilisers. The latter will limit the disposal of all organic material to landfills. In all countries the national implementation has included restrictions to dispose organic soil materials and biological wastes, whereas in some Member States also plastic materials have been included in the restrictions. This directive will further increase the surplus of organic material in the EU after 2015 and will significantly increase exports of organic fertilisers and decrease the imports of them to a minimum. 4.2 Product Market Outlook Figures 4/1 and 4/2 show the information included in the report Organic Fertilisers: European Union Market Outlook 2012 and Forecast till With regards to the production (Figure 4/1) of organic fertilisers, the increased surpluses due to the implementation of EU Waste Framework Directive are most probably not taken into account. The impacts of the EU Nitrate Directive are likely to influence in consumption of organic fertiliser after 2017.

33 32 Figure 4/1 Trends in Organic Fertilisers production, (tonnes) Figure 4/2 Trends in Organic Fertilisers Consumption, (tonnes) The price forecast of organic fertilisers in the EU is based also on the report Organic Fertilisers: European Union Market Outlook 2012 and Forecast till 2017 and shown in Figure 4/3. As a conclusion, very small increase is forecasted with regards to the average sales price of organic fertilisers by Figure 4/3 Trends in Organic Fertilisers Prices,

34 33 5 FUTURE MARKET PROSPECTS IN THE RUSSIAN FEDERATION 5.1 Policy Changes and Other Market Drivers in Russia WTO membership of Russia is by far the biggest driver of change in the use of inorganic and organic fertilisers. It has already affected the agricultural subsidy system in Russia. Recent removal of direct subsidies for inorganic fertiliser purchases is the first step in favour of organic fertiliser use. Support for inorganic fertilisers has in earlier studies been named as one of the most effective inhibitors of development of the market for organic fertiliser products. It has been possible to compensate up to 90% of the purchasing price. Many of the stakeholders interviewed representing the agricultural sector saw this policy change as a very crucial step. On the other hand, some of them were also strongly looking forward for specific regional incentives for organic fertiliser use in plant production and transportation of manure to the large animal farms to cultivated fields for storage and beneficial use as organic fertiliser. The second major driver with agricultural production in Russia is to increase the share of domestic production and security of supply with potatoes, cereals, feed and other products where the market share of imported products is huge, ranging with some product groups between %. There is a significant upside potential to produce more from the same cultivated area, like the comparative numbers of production per hectare and use of fertilisers per hectare in Figures 5/1 and 5/2 and Table 5-1 are showing. Finland is located in the same geographical latitudes with the North-West Russia and the Leningrad Region is located in a warmer climatic area in summer than Southern Finland, so the climatic conditions are equal or slightly better in the Leningrad Region. With increased use of fertilisers ideally in a combination of organic and inorganic ones, it is possible to increase the yields of cereals between % depending on the species kg/ha Barley Oats Rye Wheat Barley Oats Rye Wheat Barley Oats Rye Wheat Barley Oats Rye Wheat Barley Oats Rye Wheat Finland Germany Poland Leningrad Reg (agr.organis.) South Rus.Fed Distr (agr.org.) Figure 5/1. Yields per hectare of cereals in four countries on 2009

35 34 kg/ha Finland Germany Poland Russian Federation Figure 5/2. Use of inorganic fertilisers in four countries, during Table 5-1 Inorganic fertilisers used for cultivated land in different countries kg/ha, Country Finland 136,5 118,6 132,8 134,3 134,6 123,6 130,7 108,0 Germany 220,1 219,7 215,1 208,8 194,4 221,9 159,6 181,4 Poland 116,2 128,9 129,1 161,9 159,3 171,3 151,1 141,8 Russian Federation 13,6 11,0 11,4 11,8 12,5 14,3 15,9 15,6 A third driver of future use of manure as raw material of organic fertiliser production could be environmental policy and enforcement of related laws and other regulations. One of the fundamental reasons behind current and future problems with manure management in the Leningrad Region has in the past been related with policy priorities and enforcement of laws and other regulations. Restoring and maintaining regional food production remains as the top priority for regional authorities, while environmental concerns tend to get compromised or enforcement of it is postponed. There is still no regulation on animal stocking density, which would limit how many animal units can be kept per hectare of land used for manure spreading. Hence, huge livestock units can be operated without any arable land of their own. Requirements for manure storages to be built in connection with new animal houses have, however, been tightened up. The farms should also have documentation on their manure handling practices. There are also new requirements for agricultural companies on personnel, since each farm should nominate an employee responsible for environmental questions and educate him/her accordingly through special training. There are, however, also new developments from the point of view of environmental incentives and enforcement of regulations. In June 2012 the Government of the Leningrad Region made a decision to establish a new committee, which is supposed to prepare new legislation on utilisation of agricultural wastes. The intention is to increase the enforcement of sanctions on environmental violations but also to develop new incentives for organic fertiliser use.

36 Representatives of the agricultural sector were willing to improve the current legislation in a way that it would recognize the value of manure for its nutrients and other useful qualities (energy potential, soil enricher) instead of classifying raw poultry manure simply as hazardous waste. It was considered that manure handling and transportation is currently so strictly regulated, that it tends to inhibit manure use in nearby plant production farms unless it will be dried above % dry solids content. Leningrad regional government did apply a special subsidy for transportation of composted poultry manure, but the documentation needed for receiving it was considered so demanding that according to the interviewees nobody ever applied for the subsidy. Agricultural actors have also raised the question of raw manure application, which is fully acceptable in the EU but prohibited according to the Russian legislation. Adding peat or straw to the manure compost easily doubles its volume, which raises the already high application costs even more. The interviews conducted with the different stakeholders indicated that there is some pressure towards large livestock production companies from local residents, cottage owners and environmental NGO s. Environmental authorities and environmental prosecution investigate possible environmental violations mainly based on appeals coming from citizens. Still, the public pressure for environmental improvements in livestock production can be considered rather modest. Environmental law enforcement is not very exhaustive either, and it does not threaten the existence of even badly managed farms. Paying standard waste fees and possible fines for violations often remains the least expensive option for the farms compared to any other alternative of developing their manure management. At the moment maximum single fine is defined as RUB (approximately 6000 EUR), and according to the environmental authorities, maximum fines have not been applied to agricultural enterprises. Another mechanism, paying for environmental damage, would allow much higher fines, but this type of sanction has not been applied to agricultural companies at all. Yet another field of legislative development and cultural change of new generations is related to marketing and increasing of consumption of organic food. This international trend and increased focus on type of food consumed of generations born in 1980s and 1990s may have certain effect on the organic fertiliser market over time. It may change attitudes towards manure as a valuable resource, and there is a recently launched law drafting process for organic agricultural production in Russia. Until now, Russia has lacked national legislation regulating organic production and there has not been any unified system for certification of organic products. A draft law on the production of organic agricultural products was introduced by the Ministry of Agriculture in November 2012, and the law is expected to come into force in The interviewees recognised that if organic production is to develop gradually also in Russia, there will be a small niche for organic fertilisers in this field as well. In summary, even in the market economy circumstances, federal and regional policies and the regulative framework play decisive role in defining the market situation for organic fertilisers. Large poultry production companies have not had significant incentives for manure processing and the demand for organic fertilisers, especially among larger farms, has been minimal. Recent developments, however, suggest that this tendency may gradually be reversed. The most important factors, which may influence the opportunities for poultry manure utilisation, are the recent removal of direct subsidies for inorganic fertilisers and expected development of regional legislation, which would both harden the environmental sanctions for poor manure management and offer new incentives for manure utilisation in plant production. 35

37 Production Forecasts No official forecasts of agricultural production in Russia were available, but the recent development during the past 20 years show a declining trends in all main regions in the federation (as described in section 3 above). There is no reason to believe that a significant change upwards would take place quickly, but there are several positive signs of Russian investors and also foreign companies in investing in agriculture and food products in Russia. The development is probably uneven in different regions, but as described in section 5.3, some agricultural segments are foreseen to increase in the Leningrad Region and there is a potential and market demand to produce more food in the Leningrad Region for the growing population and growing food demand of St Petersburg. Vegetables, eggs and poultry meat are foreseen to increase, together with the production of agro-enterprises and small-scale farms. 5.3 Specific Features of the Leningrad Region Potential Markets for Organic Fertilisers Manufactured from Manure It should be stated that the problem of poor crops produced by the vegetable-growing and potato- growing agricultural enterprises is related to low quality of soils in the Leningrad Region and the Northwest Region of Russia. Efficient and inexpensive organic fertilisers capable to enrich the soil for a number of years could increase the potential fertiliser market capacity by 50 % in comparison with its current level. Good capacity of the market for agricultural products, particularly fresh vegetables and potatoes in Leningrad Region and the North-West Federal Region creates a possibility for potential growth of the demand for fertilisers. Under consumption of fertilisers is an obstacle for the development of vegetable-growing industry (there is a potential for doubling the currently cultivated areas). Table 5-2 illustrates the potential market capacity for various types of organic fertilisers. The calculation was based on the area of arable land and the norms of applying various kinds of organic fertilisers. The calculation has shown that Primorskaya poultry farm would have to occupy 16 to 23 percent of the market formed by the agricultural organizations and 7 to 10 percent of the market formed by private subsidiary farms in the Leningrad Region, in order to sell all the manure produced by the poultry farm.

38 37 Table 5-2. The market capacity of Leningrad region for various types of organic fertilisers (Source : Leningrad Region Liquid bird manure of natural humidity Composted manure products Agricultural Enterprises The area of arable land under vegetables, 1000 hectares Organic fertiliser products manufactured with advanced technology Norm of applying, vegetables, tonnes Market capacity per year, 1000 tonnes The area of arable land under potatoes, 1000 hectares Norm of applying, potatoes, tonnes Market capacity per year, tonnes Production of manure by Primorskaya, 1000 tonnes Production of organic 23, fertilisers % of the market demand Private subsidiary farms The area of arable land under vegetables, 1000 hectares Norm of applying, vegetables, tonnes Market capacity per year, 1000 tonnes The area of arable land under potatoes, 1000 hectares Norm of applying, potatoes, tonnes Market capacity per year, tonnes Production of manure by Primorskaya, 1000 tonnes Production of organic 23, fertilisers % of the market demand

39 According to the Department on Horticulture, there are approximately 560,000 garden plots in Leningrad Region and St Petersburg. Assuming the area of an average plot is 600 m2 (0.06 hectares), the total area of garden plots is around 33,000 hectares. Assuming that third of this area is used for vegetables and potatoes and taking into account the norms for application of fertilisers, the market capacity for gardening plots could be t/year for liquid chicken manure of natural humidity or t/year of compost or t/year of organic fertilisers. According to the opinion of experts, as well as the Department on Horticulture in St. Petersburg and Leningrad Region, the number of garden plots is probably underestimated by approximately 30 %, so the actual number of garden plots can be multiplied by the factor of 1.3. Around 77.5 % of the gardening plots exist as large settlements. The biggest of them, such as Pupyshevo, Voskhod, Mshinskaya and Posadnikov Ostrov have a population of people and more (during summer). Such large horticultural settlements can become attractive target audience for organic fertilisers ((Source : Trends in the Near Future with Agriculture and Planned and Potential Changes in Using of Manure in the Leningrad Region Russia joined the World Trade Organization (WTO) in the autumn 2012, which affected significantly on the agricultural subsidy system and regulation of the foreign trade. New conditions have had a drastic effect especially on pig production, which is currently in deep crises and production is declining due to competition with imports from Brazil and Belarus. Due to severe draughts in central and southern Russia, all fodder prices rocketed in 2012, which affected pig and poultry production sectors. Even if poultry production has not been hit as hard as the pig production, it is, however, going through major structural changes in the Leningrad region. A few largest producers in the region are consolidating the business, expanding in size and increasing their production, while the majority of farms have cut down their production and the number of birds has been reduced. By far the largest poultry farm in the Southern part of the Leningrad region, Poultry factory Lomonosovskaya, is nowadays a production unit of Severnaya Poultry Farm. Voyskovitsy Poultry Farm belongs to the same Dutch owner. Poultry production volume has been growing fast in the Leningrad region. During 2012, egg production increased by 6% and poultry meat production by 17.7%. However, since autumn 2012 the sector has been affected by several factors, which have brought many farms to cut down their production. Of other poultry farms in the southern part of the Leningrad region the Russko-Vysotskaya farm has gone bankrupt and the future of its production activities is as yet unknown. Lenoblptitseprom reports to have cut down the number of chickens substantially from 0.3 million birds in Lenoblptitseprom currently owns a quail production company Perepelochka. Poultry farm Skvoritsy operated under Lenoblptitseprom for a few years before going bankrupt in All production activities of the Skvoritsy farm have been run down, and the facilities are likely to be converted to plant production purposes. A couple of other poultry farms in the region are reported to be on the verge of going bankrupt. The only poultry farm in the southern parts of the Leningrad region, which has been able to increase its production, is Agrocomplex Oredezh. Oredezh is also a welldocumented example of new type of cooperation between the farm and another company, Biozem, processing manure and selling manure based organic fertilisers at the 38

40 regional market. The current volumes are unfortunately only % of the planned ones which would use the whole amount manure produced in the farm. Poultry production in the Leningrad Region has during recent years been exclusively based on feed, imported from other regions. Many poultry farms do not have any arable land, or even if they do, it has not been used for feed production. This has resulted in high nutrient surplus in the region, when nutrients are first imported from outside, and then detached from the nutrient cycle when not used as fertilisers. Over the years all big poultry farms have built their own feed mills and the smaller ones are following the example of processing the feed themselves even if the raw material is imported from outside the region. Drastic increase in fodder prices has given initiative to develop also grain feed growing in order to secure reasonably priced feed supply. Many poultry farms have already started growing some of their feed in close by fields, while others are attending arable land to do so in the future. Even if the acreage is still relatively small, integrating livestock production with plant production is the most obvious and environmentally sound way of developing manure management, provided that manure handling and application are carried out in a proper manner. Poultry manure production and processing options were looked at from the primary production point of view to assess the raw material base for potential organic fertiliser production in the region. It was known from other studies [and from the interviews conducted] that the largest poultry farms, located in the northern and eastern parts of the Leningrad Region (Sinyavinskaya, Severnaya and Roskar,) already have certain manure processing activities or plans for the near future which imply using all or nearly all of their manure in biogas production by Rika Biofules Ltd (Sinyavinskaya and Severnaya) or by the poultry farms and the neighbouring farms (Roskar). With regards to the other about 10 poultry farms, there is more (100%) or less (60 80%) excess manure produced, and with a few of them (e.g. Oredezh) there are on-going sales plans to utilise poultry manure as raw material of organic fertilisers. As far as Oredezh in concerned, the demand for the produced fertilisers is rather restricted, and currently only 10% of the farm s manure is being processed. Biozem is, however, looking for new domestic and export markets in order to expand its production. With regards to cattle farms, there is much less surplus manure produced and some organic fertiliser companies are partly using this type of manure in their organic fertiliser production (e.g. ECO V / Biosprout LLC). As far as pig farms are concerned, the number of them and excess manure amount produced at these farms is not as high as with the poultry farms. The main difference with cattle and pig manure with poultry manure is that it can more easily stored, recirculated and spread to the nearby cultivated land without processing. Cattle manure is typically stored in piles or heaps and pig manure is stored in lagoons between the spreading seasons Future Price Aspects There is a major change going on with the prices of fertilisers to farmers, who have received significant subsidies as a refund against receipts and other proofs of using them. Up to % from the gross price has been subsidised by the federal and regional governments together. City garden departments and other institutional users have not received these subsidies intended to support domestic agricultural production. According to the information obtained from several sources in the interviews and reviews of relevant documents, the federal subsidies have already been cancelled as of January 2013 and the regional subsidies will cease to be valid and paid out as of January 39

41 2014. Table 5-2 shows a calculation of gradual change of the prices for nutrients in fertilisers in the past (2011), at present (2013) and in the near future (2015). Table 5-3 Prices and Subsidies for Inorganic Fertilisers in the Leningrad Region in 2011, in 2013 and in 2015 (Estimate)* 40 Case Leningrad Region Price for nutrients in inorganic fertilisers EUR/tonne (N) (P) (K) 2011 Total cost for farm Subsidies From Federal and Regional Governments Net cost for farm Total cost for farm Subsidies From Regional Government Net cost for farmer (no Federal subsidy applied) Estimate Total cost for farm Subsidies Estimated net cost for farm * Federal subsidy in 2011 was 1190 RUR or 28 EUR in case of inorganic fertiliser application 130 kg/ha. Hence, like the bottom line of each sections of the Table 5-3 shows, the current price level increase has already been + 33 % and in it will increase up to + 122% compared to the level it was in All consequences of this major change are very difficult to predict, but one consequence will most probably be a decrease of overall use of fertilisers: the inorganic fertilisers are far too expensive and the production of organic fertilisers has not yet been increased to meet and compensate the total demand of the cultivation of cereals, potatoes, vegetables and feed raw materials.

42 41 6 ANALYSIS OF DISTRIBUTION CHANNELS, COMPETITION AND COMPETITORS ACTIVITIES 6.1 Introduction There are more than one hundred producers, dealers and wholesalers listed in the report Organic Fertilisers: European Union Market Outlook 2012 and Forecast till 2017 and that list does not contain by far all players in the market but the most important of them in biggest exporters and importers of organic fertilisers. From the perspective of Russia and in particular North-West Russia and Leningrad Region, Finland (closest but a relatively small market), Germany (huge but very competative market in the Baltic Sea area) as well as Estonia and Latvia (small domestic agricultural sectors with relatively modest use of fertilisers per hectare - but potential gateways to German and Swedish markets) are the most interesting distribution channels to Northern Region as defined earlier in section 2.6 The regional market around Saint Petersburg in Leningrad Region is absolutely the most interesting market for manure-based organic fertilisers produced in the same region. The other regions in Russia were accessible during the former Soviet Union time but no longer. The export markets in member states of the CIS or further in the south in Iran, Jordan and other countries in the Near East are target countries for Russian organic fertiliser producers who have their production facilities in South Russia. The distance and high transportation costs through many countries and customs prevent in practice the deliveries from Leningrad Region to e.g. Iran, which is a country otherwise importing quite a lot of organic fertilisers from the EU. 6.2 Main Distribution Channels of the European Union A typical distribution and sales channel structure in the EU can be summarized as presented in a simplified and somewhat generalized way in Figure 6/1.

43 42 Figure 6/1 Typical and generalised structure of distribution of B2B and B2C - products in the EU Bulk materials are delivered from producer s storage to wholesaler s intermediate storage and from there delivered to companies and farms with tonnes deliveries with standard trucks. Pelletized or granulated products which are then packaged in l plastic of woven cloth bags are wrapped on pallets at the production plants and delivered to retailers intermediate storages. One or several pallets are then distributed to local dealers, garden departments of cities, infrastructure contractors or gardening shops of gardening departments of supermarkets, and the two last operators distribute bags to individual consumers, which buy a few bags at a time. Each player in the supply chain will take their margins and in addition, the transportation costs in different steps from producer to end-user come on top of the sales margins of wholesalers, retailers and smaller shops. The prices of B2B products are usually 1,5 2 times higher than the ex works -prices of producers and with B2Cproducts the prices can be 2,5 3,5 times higher than the ex works -prices. With regards to exports and imports there are two main types of operators between the foreign producers and wholesalers or retailers. They are Small and medium-size trading companies (agents) which operate between a few countries or a limited number of main suppliers and they are owned by individual entrepreneurs, small number of shareholders or e.g., a logistics company who are importing or exporting also other goods Bigger trading houses specialised in global trading of big volumes of all kinds of commodities and which are stock-listed companies or owned by large agricultural companies with hundreds of owners. In Northern and Western Region of the EU (as defined in section 2.6) especially but also here and there elsewhere in the EU, internet trading of fertilisers is increasing

44 rapidly. Since the farmers in the EU have to carry out extensive reporting of their production, sales and report their revenues to the tax authorities via internet, they are increasingly buying agricultural machines, tools and fertilisers via internet as well. Some fertiliser importers have responded to this demand by taking care of all customs clearance activities and other formalities required for imports and trade their products mainly on demand ; meaning that when they get an order from the farmer, they place the same order to the foreign producer or dealer of fertilisers, and they are able to operate with very small intermediate storage costs. Taking two examples (one representing big markets and major import volumes in the Northern Region of the EU and the other representing small markets and small imports in the immediate vicinity of Leningrad Region) these being Germany and Finland - of potential export target of North West Russia and Leningrad Region, the reported total imported volumes of organic fertiliser volumes in were as follows : Total imports to Germany t/a, of which 46 % from the Netherlands, 16 % from France, 15 % from Belgium and 10 % from Austria, these being in total 87 % Total imports to Finland were very small and only 380 t/a in 2011 and 590 t/a in These amounts consisted from imports from Sweden, Germany, Belgium and the Netherlands, which were in total between % depending from the year. As an interim conclusion from the information presented above, it can be stated that neither of these countries offer major export opportunities for the Leningrad Region in the near future. In the mid-term horizon, Finland can be somewhat easier export market for the Leningrad Region because its proximity and upside potential with organic fertiliser volumes. In the Netherlands, there is a major national initiative and trading effort started a few years ago to reuse and recycle phosphorus from agricultural wastes and municipal waste water sludge as raw material of inorganic fertiliser production. ICL in the Netherlands is using currently a monthly volume of corresponding 5000 t/a and by the end of 2013 the company is planning to increase this a monthly volume of corresponding an annual volume of t/a. The position of European Fertilisers Association is that phosphorus recycled from agricultural waste is much more acceptable raw material than municipal waste water sludge. The European Fertilisers emphasize the global nature of fertiliser markets and the fact that they do not want to compromise with or take any risks with the final product quality Competitive Environment in the EU Competition takes place like the production, markets and distribution also on regional basis. Major players in this market have been characterized earlier in section 2.6 and a list of relevant market players of the EU are listed in Annex 1. Based on the information obtained in the interviews and from other sources as well, none of the companies involved in the trading of organic fertilisers has been active in North West Russia or Leningrad Region until now and investigated possibilities to utilize the unused raw material resources in these regions. This is probably due to the

45 fact that Russia has joined the WTO very recently and these business opportunities have not been realised until now. 6.4 Main Distribution Channels of the Russian Federation A typical distribution and sales channel structure in the Russian Federation is very similar to the one in the EU and it can be summarized as presented in a simplified and somewhat generalized way in Figure 6/2. 44 Figure 6/2 Typical and generalised structure of distribution of B2B and B2C - products in Russian Federation The main difference with the distribution channels in the EU is that there are more direct deliveries from relatively small producers from the customer especially from the small and medium-size producers. Bulk materials are delivered from producer s storage to wholesaler s intermediate storage and from there delivered to companies and farms with tonnes deliveries with standard trucks. Pelletized or granulated products which are then packaged in l plastic of woven cloth bags are wrapped on pallets at the production plants and delivered to retailers intermediate storages. One or several pallets are then distributed to local dealers, garden departments of cities, infrastructure contractors or gardening shops of gardening departments of supermarkets, and the two last operators distribute bags to individual consumers, which buy a few bags at a time. Each player in the supply chain will take their margins and in addition, the transportation costs in different steps from producer to end-user come on top of the sales margins of wholesalers, retailers and smaller shops. The prices of B2B products are usually 2-2,5 times higher than the ex works -prices of producers and with B2Cproducts the prices can be 3-4 times higher than the ex works -prices.

46 With regards to exports and imports there are much less operators in this business and this is probably due to the fact that Russian Federation joined the WTO very recently and before that period, the high customs applied in the EU and/or in Russia did not encourage to exports and imports of large volumes of organic fertilisers. Large producers of inorganic fertilisers were much more engaged in international business and they obviously possess all necessary skills and resources for it Competitive Environment in Russian Federation Competitive Environment in Leningrad Region Current Organic Fertiliser Producers NEFCO Project Implementation Unit (PIU) for Sustainable Manure Management in Animal Farms in the Leningrad Region, Russia and implemented by Maxwell Stamp plc has carried out a preliminary market review in retail shops in Saint Petersburg and collected publicly available information on many companies who have their products for sale mainly for consumers. Hence, this market review represents more or entirely the B2C-market segment, but many producers are active in the B2B market segment as well. The objectives of this pre-review was intended to become familiar with the current situation of the organic fertiliser market in Leningrad oblast, products available in retail stores, price offers, competitive environment and trends in the regional market of organic fertilisers. Besides, the research aimed at building a true picture of the existing market niche for the purpose of developing and implementing projects in processing manure produced by poultry and animal farms in Leningrad Region and developing realistic pricing policies by enterprises participating in the project. According to the findings of this study, there are at the moment eight organic fertiliser producers in the Leningrad Region. The location of production units of these companies are shown in Figure 6/3. Most of these producers are operating south-east from Saint Petersburg and one is operating in the south of the city. It can be added already here that one company interviewed by the study team of this market study the company ECO V Biosprout has two plants also in the north near the border between Russia and Finland. This company will be dealt in more detail later on in this report.

47 46 Figure 6/3 Map of organic fertiliser producers in Leningrad Region The list of these eight companies is presented in Table 6-1. Three companies (Nr 1-3) have branded their solid organic fertiliser products and one company is specialised in liquid fertiliser products (Nr 4). The annual production volumes of these companies is not included in the pre-study or otherwise known in detail, but based on general information obtained in several interviews, the annual capacities of companies Nr 1-3 are likely to range from 200 t/a to 500 t/a and that order of magnitude at most. There are four companies (Nr 5 8) in the Table 6-1 which extract uppermost layer of peat from wetlands and topsoil from abandoned agricultural land and from different construction sites, where organic soil has to be removed before other excavation works and eventually also blasting works can be carried out. The production volumes of the companies Nr 6-8 are much bigger than the small producers mentioned above and operate with peat volumes of several millions m 3 /a. E.g the company PHART has large factory in St. Petersburg and 5 regional representative offices in Moscow, Perm, Novosibirsk, Krasnodar and Ulyanovsk, over 70 product brands, which are sold all over Russia, Ukraine, Belarus, Moldavia, Lithuania, Latvia, Estonia and Kazakhstan. One company mixes peat before bio-fermentation of poultry manure with peat, but it is not producing peat but buys it from supplier nearby Oredyzh poultry farm with a capacity of less than 500 t/a, of which about 50 % is peat and current manure utilisation is about 250 t/a, which is 12 % of the originally planned capacity. The investment costs of this small pilot production unit were 18 million RUR ( EUR).

48 47 Table 6/1 List most organic fertiliser producers operating in Leningrad Region The main conclusions of this pre-study carried out by Maxwell Stamp plc in 2013 are worth summarizing also in this context and they are as follows. 1. Retailers offer organic fertilisers and soil of 49 descriptions in small packages (0.4 kg; 2 kg, 13 kg, one litre, 5 litres, 10 litres, 20 litres, 25 litres, 30 litres). Most organic fertilisers are intended for flower growers. The selection of regionally produced (i.e. produced in Leningrad oblast by Antaeus, Pelhorskoye, peat production company, North-West peat company) organic fertilisers and soil mixtures available at the surveyed retailer chains (A) is moderate. Most of these products are peat-based soil with added polynutrient chemical fertilisers. Individual amateur flower growers, homestead and dacha owners, and small farmers are major consumers of organic fertilisers.

49 2. Organic fertilisers contain plant nutrients in the form of organic substances of plant or animal origin manure, compost, green fertilisers, guano etc. Such fertilisers improve physical, physical-chemical, and biological properties of soil and intensify life-sustaining activities of microorganisms. The content of basic elements N, P205, K20, Ca in active materials of organic fertiliser is significantly smaller than in chemical fertilisers. The difference may be up to dozens of times: for example, the nitrogen content in horse manure., chicken droppings, ammonium nitrates, and carbamide are 1.2%, 2.5%, 30%, and 46%, respectively). One needs to apply up to 10 tonnes of organic fertilisers per hectare to maintain soil fertility which would cost RUB 1,400 to 1,600 / tonne or RUB 14,000 to 16,000 per hectare. For the comparison purpose: most common chemical fertilisers are available from retailers at RUB 9,500 for a tonnene of ammonia nitrate, RUB 14,200 for a tonnene of carbamide, RUB 15,200 for a tonnene of azophoska, RUB 14,800 for a tonnene of nitrogen-phosphorus fertilisers. 3. The application doses of fertilisers depend on the natural soil fertility and crops. For instance, nitrogen fertilisers are applied in the amount of 30 to 180 kg of active material per hectare. 30 to 90 kg of nitrogen is applied per hectare of grain crops. The dose is increased up to 60 to 120 kg per hectare if potato or vegetables are grown. 120 to 150 kg of nitrogen per hectare is applied in case of high productive pastures or valuable technical crops. 4. Experts believe that if the organic fertiliser production capacity is increased and the distribution system is well developed the price for a tonne of organic fertilisers can be reduced down to RUR 1,000 which would allow customers to save RUB 4,000 to RUB 5,000 per hectare. As a result, the market of organic fertilisers could be extended to farms and medium-sized agriculture enterprises. Besides, organic fertilisers and soil mixtures could be supplied to international markets. Large volumes of organic fertilisers have to be spread on agricultural land with the same type of equipment currently used for inorganic fertilisers. This will in turn require that the organic fertilisers have to be granulated or pelletised. 5. However, the current domestic demand for organic fertilisers is still small. Organic products account for one per cent of the Russian food market whereas in the EU the share of organic products is six to seven per cent. Such situation is explained by that the Russian market of organic products is at an early stage of its development. Organic products are offered predominantly by small specialised shops and farmers. Despite the total number of organic producers is growing, the total organic production output is still small. It is important to note that the level of consumer awareness of organic products is growing gradually. More and more Russians perceive organic products as those of better quality. 6. In the Project experts opinion, the Russian organic market may attract large investors in the near future as the profitability of organic production is up to 40 per cent, and the demand for organic products keep growing at both domestic and international markets. While distribution had been a major problems faced by organic producers until recently, now many supermarkets are interested in selling organic products. 48

50 7. Investments in organic farming and demand for organic fertilisers will grow once laws regulating this business have been adopted. There are many companies willing to be engaged in production of organic fertilisers and organic farming. However, they need to be supported by the government, especially at the initial three years of operations i.e. during the period of transition from traditional farming to organic farming. 8. Development of organic fertiliser production will also improve the environmental situation. It is well known that manure is a source of pathogenic bacteria, thus posing a danger to people and the environment. Manure is a potential source of contaminating the environment (soil, underground water, flora and fauna (e.g. flies)). To avoid problems in this respect, poultry litter should be dried before storage and spreading of it. A medium-sized poultry farm (keeping 40,000 laying hens or 10,000,000 broilers) produces 35,000 to 83,000 tonnes of manure and over 400,000 m3 of effluent with elevated concentration of organic components per year. On the other hand, poultry manure is one of the best organic fertilisers containing all basic nutrients needed for plant growth. 9. That being said, the Project specialists believe that development of low cost and highly efficient technologies which would ensure guaranteed production of decontaminated and safe fertiliser becomes very important for the purposes of improving soil fertility, public health and safety; protecting the environment; and increasing production profitability. Interviews of organic fertiliser producers and one inorganic fertilize producer were continued in connection with this market study in order to collect complementary information, especially about the B2B-business. These meetings with companies which were willing to meet and discuss were very interesting and productive, but several companies were also unwilling or unavailable for a meeting. The study team tried seriously to approach also peat producers, which is a very significant business in Russian Federation and also in this region. However, at the moment the producers appear not interested in organic fertilisers whereas they did not disclose the reasons of their unwillingness to meet and discuss. Through secondary sources of information, it was found out, that many peat producers consider this organic fertiliser very small and time-consuming, because a lot permits, certification efforts etc. would have to be carried out of relatively small volumes compared to their core business. A brief summary of peat business in Russian Federation is included in Annex 3. One interesting organic fertiliser company which has operated about 10 years now is ECO V Biosprout. It uses large scale animal farming manure currently mainly from cattle farms, but according to the owners and developer of the technology, also poultry manure which is relatively dry can be mixed with cattle manure in the future. The production technology is based on Califronian earthworms which process organic manure or vermicompost much faster and more completely than the soil microorganisms absorbing a huge amount of crop residues together with the soil. At the moment two factories are operating in the Leningrad Region, providing production of 100 m 3 of Biohumus and 140 m 3 of liquid extract monthly which corresponds a capacity of about 900 t/a solid fertilisers and 1700 t/a liquid fertilisers. The actual production depends on the orders received and has been in total about 1000 t/a. 49

51 Belgorod Region - the most important competitive region of exports to the EU and to the Near East Belgorod region (as well as the Leningrad region) has significant concentration of large poultry farms. It poses a threat to production of organic fertilisers based on poultry manure in the Leningrad region as Belgorod is located considerably better towards possible buyers in the South Russia. Figure 6/3 Location of Belgorod Region The main features of this region can be summarized as follows: Belgorod Region has over 10% of total Russian headcount of poultry and considerable volumes in swine- and cattle animal breeding. Fertilisers (as a main side-product in case of production of electricity/heat) might be sold to agricultural regions nearby, inc. South Russia. South Russia is considerably closer to the Belgorod region compared to the Leningrad region, which poses a threat to production of organic fertilisers in the Leningrad region. Similar threat is seen from the Belgorod Region regarding some export opportunities which can be reached by truck and rail deliveries (e.g. Belarus, Ukraine, in-land European regions) while the Leningrad region offers water transportation as the main option. The largest enterprises in poultry sector are: ZAO Prioskolye (Novy Oskol and Valuyki), headcount over 20 milion; OOO Belgrankorm-holding (Belgorod and Rakitnoe), headcount over 10 million; Belaya Ptitsa (8 sites), headcount over 7 million; ZAO Ptitsefabrika Severnaya (Belgorod), headcount 0.8 million. The key statistical information of this area is shown in Table 6 2.

52 Table 6 2 Population, agricultural crop production and large animal farming headcounts in Belgorod Region 51

53 52 7 COST-COMPETITIVENESS OF DELIVERIES TO REGIONAL, EU AND OVERSEAS MARKETS 7.1 Regional Markets Altogether t/a inorganic fertilisers were sold in Leningrad Region The area fertilized was hectares (37 % of the total cultivated area). The calculated average fertiliser dose will be 91 kg/ha, assuming that all the fertiliser used was spread on equal dose, which probably is not the case. Soil lime treatment was conducted on the territory of 495 ha. No statistical information about the types of crops, which received inorganic fertiliser, and on which dose, is available. The proportion of land which received fertilisers is, anyway, quite limited, and the dose is low, especially if used for grasslands. ( The demand of inorganic and organic fertilisers or a combination of them has been analyzed in more detail in Annex 4. According to these calculations, the optimal amount of different fertilisers in the Leningrad Region is in total about t/a. When the total sales of inorganic fertilisers in 2012 (8.600 t/a) is compared to optimal amount of these fertilisers t/a presented Annex 4, it can be observed that the sales have been less than 10 % of the optimal fertiliser volumes. When it is taken to account that until 2012, the use of inorganic fertilisers were subsidized by the federal government and regional government, and the consumption was no more than about 10 % of the optimal use of them, it is very unlikely that the use of inorganic and organic fertilisers in the near future and after 2014 would increase from t/a but decrease from that level more or less. Assuming an optimistic scenario and availability of relatively inexpensive organic fertilisers in the future, the total use of inorganic and organic fertilisers which the farming companies and farmers can pay for would be in total about 70 % of the level of 2012, which would be about t/a. If the decrease would be as high as 50 %, the total consumption would be about t/a in the entire Leningrad Region. It should be noticed that the past volumes and use free-ofcharge of manure from large animal farms (cattle farms, pig farms and poultry farms) are not included in the amounts mentioned immediately above. These volumes are not known in detail, and since they are received free-of-charge, they do not reflect the affordability of farms to pay for nutrients. Assuming a weighted average price of 400 EUR/t for inorganic fertilisers, the maximum costs would be in the two scenarios as follows: Scenario A with t/a would correspond a value of 2,4 million EUR, and Scenario B with t/a would correspond a value of 1,7 million EUR These estimates assume that only inorganic fertilisers would be used and paid for. If the same amount of fertilisers would consist 100 % of organic fertilisers and the average price at farms would be approximately 100 EUR/t (c.f section above), the total volumes would obviously be four times higher and with organic fertilisers the two scenarios would be as follows: Scenario A with t/a would correspond a value of 2,4 million EUR, and Scenario B with t/a would correspond a value of 1,7 million EUR

54 The current prices of organic fertilisers are based on production scale of about t/a per production unit. The producers have indicated that larger production volume would imply somewhat lower production costs because the share of fixed costs would be divided to a bigger production volume. If e.g. a 20 % sales prices per to of product could be achieved, the amounts of organic fertilisers consumed and paid for in the Leningrad Region could be about Scenario A with t/a with 80 EUR/t would correspond a value of 2,4 million EUR, and Scenario B with t/a with 80 EUR/t would correspond a value of 1,6 million EUR To conclude, the maximum affordable volume of organic fertilisers which could support regional production of them would be about t/a. This is only less than 2-3 % of the total volume of manure generated currently in the Leningrad Region. For the remaining big volumes spread to agricultural land at the moment, there are two main types of use and captive market associated with it: Practically all cattle farms, many pig farms and some poultry farms as well possess or have rented fields for the production of the feed or part of the feed consumed at the farm in question. This can be called captive market share of own consumption by the large animal farms. No transfer of payments is related to these volumes or organic fertiliser. Many poultry farms produce % more manure than they can utilise and recycle to their own fields and this is the big unutilized part of manure production, which could be used in production of organic fertilisers. This type of excess manure is reported to be usually composted with very simple and inexpensive composting technology and delivered to the nearby farms free-of-charge to the farms receiving it. The composting and transportation to the final disposal is not free of cost for the producers of manure, and e.g. Roskar poultry farm has been spending approximately EUR/a for treatment and transportation of manure. This farm is using extensively their own manure (in total about t/a) on their own fields, partly to the fields of neighbouring farms and in addition, there is a granulation line with a capacity of t/a for B2C-products which are packaged and distributed through Russian retail chains. The information on revenues of this small-scale business is not available. The regional market may in the future be significantly influenced by two major projects, which target to the production of liquefied biogas as main product and principal source of revenues, but which would produce significant amounts of organic fertilisers as byproduct. These projects are briefly characterized in the following paragraphs. Gasum Oy from Finland is investigating possibilities to produce liquefied biogas also in Russia. This company is operating the Finnish natural gas distribution network. In connection with them Gasum has made agreements with several biogas producers in Finland and is buying biogas from them. The biogas is cleaned from carbon dioxide, sulphur compounds and other minor impurities and the compressed to the pressure of high-pressure national gas distribution network in Finland. In Russia, the concept of delivering biogas from Russian biogas producers to the Finnish national grid would require a liquefaction of the biogas after the cleaning stage and transportation of the 53

55 liquefied biogas with special trucks to Finland, where the liquefied gas would be unloaded, gasified and compressed to the natural gas distribution network. Gasum Oy is interested in importing refined and liquefied bio-methane to Finland and it has identified a business partner for the biogas production in Russia. This partner has been prospecting the possibilities to use also large animal manure for the biogas production. The biogas production will generate as a by-product big solid material output and the volume of it roughly corresponds the amount of raw material input in the biogas process. This material would be stable and hygienic enough to be used as organic fertiliser in the Leningrad Region. The issues with sourcing of raw material as well as sales and marketing of the organic fertiliser material are currently being investigated by the business partner of Gasum Oy. Rika Biofuels Ltd registered in the UK and Russia, have issued plans to produce liquefied biogas also in Russia but exclusively for the Swedish markets. The key features of this project can be summarized as follows: Liquefied biogas would be sold to AGA, Sweden based on a long term-agreement (a minimum of 10 years) Raw material for biogas production in total approximately t/a poultry manure - would be sourced from Severnaya and Sinovynskaya poultry farms near Kirovsk, where the biogas plant would be located. There is a ten-year pre-agreement for the raw material sourcing, which is deemed to be long enough to raise money for the required investments. The main revenues would be based on production of liquefied biogas and gaseous carbon dioxide which would be sold to the Russian beverage industry. Additional revenues are expected from one by-product which is sold to a Latvian company. Based on the information obtained so far, no major revenues are calculated to be receivable from the organic fertiliser by-product and no details about the destination of this approximately t/a material flow is currently available. It is possible that part of it possibly a significant part of it - will be recycled to the two poultry farms which will supply the raw material for the biogas plant. If the main revenues are coming from other products than this organic fertiliser, the sales price expectation of this by-product would correspond the required transportation costs to the end-customer + a small margin on top of it. When analysing these relatively recent developments which have been disclosed in public as late as in April May 2013, they would obviously have a significant impact on the regional market, it both or one of them would be implemented in the next 2-4 years. Implementation time of two years is probably the shortest possible time for the Rika Biofuels Ltd to start production and if Gasum Oy and its partners will go ahead to implementation, this project could be implemented as a minimum in about three years. 54

56 55 Figure 7/1 Poultry Farms in the Leningrad Region, by headcount (million heads) and location in 2013 When we take a look on the current size of poultry farms in the region which is shown in Figure 7/1, we can draw the following conclusions: As mentioned earlier, the Roskar poultry farm has invested quite a lot and is spending annually more than EUR/a to treat, recycle and manage their entire manure volume. Net impact on manure utilisation is approximately t/a. If the liquefied biogas plant project developed by Rika Biofuels Ltd would go ahead and be implemented, this would utilised a major part of poultry manure generated in the two biggest poultry farms in the region. Net impact on manure utilisation is approximately t/a. If also the liquefied biogas project of Gasum Oy would be implemented, this could potentially utilise t/a additional poultry manure and additionally e.g t/a cattle or pig manure. Depending on the location of this plant which is neither planned nor decided this volume would be relying on the large scale manure farming manure from Northern Part or Southern Part of the Leningrad Region. Like can be concluded from Figure 7/1, the sourcing of this plant would require contracts for raw material deliveries from 3 6 different farms. Potential net impact of poultry manure utilisation and cattle of pig manure utilisation are mentioned immediately above. The remaining amount of poultry manure could be utilized by several smaller producers of organic fertilisers located somewhere in the Leningrad Region. As mentioned earlier and shown in Figure 6/3, most of the existing producers of organic fertilisers have their plants in Southern or South-Eastern Part of Leningrad Region, and only 1-2 plants of one company are located in the Northern Part of the Leningrad Region and relatively close to the Finnish border. Potential net impact of about ten smaller and medium-size users of large animal manure would be t/a consisting of a mixture of cattle manure and poultry manure which both are relatively dry materials at source and can relatively easily be co-composted in windrows or more advanced tunnel composting technologies. If all above-mentioned utilization project will be implemented and produce organic fertilisers with full capacity, the total manure volume consumed and utilized would