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Russian starch growth hit by raw material shortage

02-Nov-2004

Russia has a long history of starch production, but the collapse of the Soviet Union was a major blow to the industry, from which it is only now beginning to recover. But with almost all of the growth coming from corn starch, rather than the more traditional potato variety, future developments could be hamstrung by a lack of raw material, writes Angela Drujinina.

The industrial production of starches in Russia was launched at the end of the 19th century, and while a few companies developed starch from rice, wheat or maize, most concentrated on potatoes, the most readily available raw material.

But the end of Communism also led to a decline in fortunes for the starch industry, with a nine-fold drop in dry starch output between 1990 and 1996, from 217,000 tons a year to just 24,000 tons. Production of starch-derived sweeteners, meanwhile, dropped from 262,000 tons to 75,000 tons.

Although dry starch production remains very low, at just 72,000 tons in 2003, the market for sweeteners is now growing once again, topping Soviet-era levels for the first time last year at 276,000. But the growth figures mask a wholesale change in the development of the market, according to Evgeny Ivanov, an analyst at the Institute for Agricultural Market Studies (IKAR ). He said that 90 per cent of the total dry starch output in 2003 came not from potatoes but from corn.

While growth of any sort is obviously welcomed, Alexander Dimitriev of research firm Market Advice told Cee-foodindustry.com that the switch to corn could be something of a false dawn. "The production of potatoes for the starch industry is not particularly profitable - indeed, in western Europe it is subsidised by the state authorities - and In the USSR, the Soviet authorities subsidised 50 per cent of production costs, meaning that there was no incentive to seek alternative sources.

"But now there is no support for potato starch production, and as a result most Russian starch is produced from corn. This may be cheaper to process, but supplies are limited to the southern Russian regions of Stavropol, Krasnodar and Dagestan, meaning that growth could be difficult to maintain."

Given that Russian domestic production of starch does not cover even 50 per cent of the country's needs, according to Ivanov, it is not surprising that a growing number of producers are looking to step up starch production there - provided they can source their raw materials at competitive prices.

According to Market Advice, US-based Cargill is Russia's leading starch producer through its Efremovsky GPK unit in Tula, and it led the increase in production in 2003 with a 47 per cent hike compared to 2002. Other foreign players include Raisio Chemicals, KMC, Lyckeby Starkelsen, Amylum and Emsland-Staerke, and more are likely to arrive in the future, according to IKAR. "Investors are sparing no expense to develop the starch industry here," Ivanov said.

The reason for this is clear - as the Russian food industry expands, so does the need for good quality, inexpensive starch. A recent survey of leading Russian starch users by Market Advice shows that it is the foreign operators in Russia which supply most of their ingredient requirements, with some food makers prepared to pay between five and eight times more than the average market price for a top-quality product.

The need for more - and better - domestic production is likely to become even more urgent if proposed increases in starch import duties are adopted by the Russian authorities, a major concern of most of the companies surveyed by Market Advice.

One of the survey respondents - which included more than 60 leading companies from the ingredients, dairy, meat processing and oils and fats sector, among them WBD, Rollton, Campina and Efko - suggested that increasing duties was a much of a risk to future growth as raw material concerns.

"If tomorrow the government raises the duties on imported starch, my plant will stop working," he told Market Advice.

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