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COMMITTEE ON COMMODITY PROBLEMS |
INTERGOVERNMENTAL GROUP ON BANANAS AND ON TROPICAL FRUITS |
First Session |
Gold Coast, Australia, 4-8 May 1999 |
RUSSIAN BANANA MARKET IN 1994-1998 |
1. At its Fifteenth Session, the Group reviewed import demand prospects in new and emerging markets. Among these was the Russian Federation where imports reached 660 000 tonnes in 1997. In August 1998, however, a severe economic crisis hit the Russian Federation, affecting all imports including bananas. In light of the importance of this market, and the impact this crisis has had on demand, an assessment of the current Russian market is presented in this document.1
2. Prior to the economic crisis in August 1998, bananas were readily available in practically all Russian cities and towns (except for those situated in remote northern territories with limited navigation periods during which boats can supply foodstuffs via rivers). Bananas were also available to rural residents living in the proximity of cities. Bananas have become a popular fruit in Russia. At the peak of the market in 1997, per caput availability reached 4.24 kilos per caput, compared to an estimated 0.65 at the end of 1998.
3. Since 1995 bananas have headed the list of imported fruit. In 1995 and 1997 the volume of banana imports exceeded the aggregate for all citrus fruit (by 8 percent and 15 percent respectively).
4. Over the past few years, supply has shifted from transhipment through western Europe to direct shipment to Russian ports. Larger companies capable of purchasing whole cargoes of bananas now dominate this trade. In 1997, 97 percent of total imports came from three Latin American countries - Ecuador 61 percent, Colombia 23 percent, and Costa-Rica 10 percent. The Philippines, China and Vietnam satisfy demand in the Russian Far East (about 2 percent of imports). Banana imports from Europe have practically ceased.
5. The Russian banana market is rather concentrated. In the first half of 1998, 4 companies controlled 77 percent while 8 companies controlled 96 percent of banana imports:
Source: the Russian Fruit Association.
6. There are three different levels of market operators. The first level includes importers that usually buy direct from producing countries by the vessel lot - up to 1 vessel a week before the crisis. The large scale of their operations helped them to establish good relations with their partners and to get some preferential contract terms - lower price, delayed payment, supplier credit.
7. This group of large importers has storage facilities and affiliates in seaports and large population centres. In order to attract wholesalers, these companies diversify their product range through truck deliveries of other fruit from Europe.
8. The second group is much broader - it includes about 200 smaller firms acting as regional suppliers. They usually buy bananas from the companies of the first group, although they sometimes charter a vessel. These firms provide banana supplies to a 300-km radius, but there can be several of them in large cities.
9. The third group is the most numerous - it includes small wholesalers and retailers.
10. The August collapse changed the situation radically:
a) After the financial crisis of August 1998 large importers incurred the greatest absolute losses due to the scale of their operations and the fact that they had to deal in foreign exchange markets. When the crisis began some firms had currency obligations, which became 2-3 times harder to fulfil. Many accounts were "frozen" in commercial banks. Almost all exporters now require advance payment
b) The same factors affected the activity of the second group of firms; however, they were able to re-orient towards purchases from large importers and away from direct importing, thereby avoiding exchange rate difficulties.
c) Small wholesalers and retailers were affected by reduced demand.
The after-effects of these events will be probably felt for at least a year and may bring about changes in the banana market structure.
11. Prior to the economic crisis, a substantial percentage of the imported volumes were ordered by regional buyers, generally on a cash on delivery payment arrangement. After the chartered vessel arrives at the Russian port, large importers distribute the cargo in one of 2 basic ways:
a) Part is forwarded to temperature controlled storage (40 percent) for subsequent shipment to regional buyers or more localized sale.
b) Another part (60 percent) is directly forwarded to regional customers by truck and refrigerator railway sections (consisting of 4 cargo and 1 dual mode heating-refrigeration car and capable of carrying up to 120 tonnes), suitable for long distance transportation.
12. As a result of the crisis the share of direct deliveries to regions sharply dropped (e.g. to 5 percent in the case of "Rusagro," the largest importer), as foreign companies began to require advance payments.
13. Based on responses to a survey conducted for this study, the normal pattern of household purchases of fruit is as follows:
a) Street vendors (named by 64 percent of respondents). Outlets are usually situated in crowded areas: near metro stations, bus stops, along main streets. However, street vending has several shortcomings limiting its importance:
i) In winter bananas cannot be sold due to cold weather;
ii) Prices are usually high;
iii) Scales are not officially certified for accuracy.
b) Supermarkets (47 percent). The importance of supermarkets grows in winter when people, who purchased bananas from street vendors, become their buyers. The poll showed that 60 percent of retail stores pick up their bananas from fruit and vegetable wholesale markets, and 36.6 percent get them under contracts with suppliers (wholesalers and middlemen). After the crisis retailers faced new problems - suppliers no longer give them credit, demanding 100 percent cash in advance. Some stores in the low-income districts simply could not afford bananas. The trade margin differs greatly depending on a store's location and space and may vary from 10 to 50 percent (21.5 percent on the average).
c) Wholesale and open-air markets (35 percent) became popular in recent years. Their basic advantage is a lower price for most foods. When bananas cost 15-16 roubles per kg in stores and street outlets, they could be found here for 10 roubles. According to official statistics wholesale and open air markets account for almost half of total retail fruit sales in the Russian Federation.
14. It is considered that the current financial crisis will modify the existing distribution system by reducing the number of mediator links. It may force large banana importers to descend to lower steps of the distribution chain - some of them already are engaged in retailing at storage sheds, wholesale markets and large stores.
15. Total consumption is assumed to equal imports less re-exports and losses. Banana re-exports are negligible. In recent years volume was less than half of one percent of total imports.
16. Banana consumption patterns are greatly affected by such factors as residence, regional conditions and income levels. Based on the latest data available (July-September 1998) average monthly per caput consumption was less than half of pre-crisis levels.
Table 1 - Estimated average monthly banana consumption in major cities
Before the crisis |
Following the crisis
| |
(.............................kg............................) | ||
Moscow |
1.86 |
0.79 |
Rostov |
2.08 |
0.78 |
Oryol |
1.53 |
0.99 |
Irkutsk |
1.03 |
0.77 |
Pskov |
1.19 |
0.56 |
Novosibirsk |
1.12 |
0.45 |
17. The population of the Russian Federation does not have a long-standing tradition of consuming bananas. Nevertheless, bananas have become one of the most popular fruits, accounting for about 1/3 of total fruit consumption. Through the informal survey it is estimated that 19 percent of consumers will buy bananas at any price, and that 72 percent are likely to stop buying bananas in case of financial difficulties. Russians buy bananas because they find them tasty, healthy (44 percent) and convenient as a snack. Retailers find it easier to sell bananas than other fruit.
18. Fruit and berries grown in Russia can compete and partially substitute for bananas only in summer and autumn. There is an obvious downward trend in banana prices during this period. It is estimated that one-third of consumers buy fewer bananas in summer. There are 3 basic explanations for that:
a) During the summer many urban residents (especially pensioners and children) move to rural areas (villages, "dachas") where bananas are less or not available;
b) In summer, purchased fruit are partially substituted by home-grown fruit and berries, which account for 25-30 percent of the total fruit and berries consumed;
c) Most consumers tend to vary their fruit consumption by buying fresh domestic fruit and berries that are available for a rather short period.
19. In other seasons the demand for bananas is relatively stable, the only exceptions being before holidays (especially the New Year) and weekends when it can rise several fold.
20. Most Russian banana consumers do not distinguish greatly between different grades, brands and countries of origin. Size and ripeness of bananas are the main "quality" factors affecting the choice; however, price is the most decisive criterion for most respondents.
21. The consumption of bananas in the Russian Federation follows the trend that is typical for most fruit: its consumption level differs greatly for children and adults. It is estimated that children consume about twice as many bananas as adults in the total population (in families having children the difference is even bigger - almost 3-fold).
22. There are 2 basic reasons for the above mentioned trend:
a) Children in Russia like bananas and greatly prefer them to other fruit;
b) Many families cannot afford to buy enough bananas for all their members while still trying to provide children with a balanced diet.
23. As a result of the financial crisis the difference in consumption levels between children and the general adult population has increased from 2.23 to 2.54 times. In addition, and according to official statistics about 32 million Russians are younger than 16 and their share in the total population is falling- from 23.3 percent in 1994 to 21.9 percent in 1997. Doctors often recommend banana purée as one of the first firm foods at 2-months. Parents of older children give bananas as a convenient snack. Bananas are also popular as a snack among young people. Health-conscious consumers striving to include more fruit and vegetables into their diet also appreciate bananas.
24. Retailers report that pensioners were, and continue to be, regular buyers. Their purchases are usually small - usually 1-2 bananas at a time. On average pensioners consumed 0.74 kg of bananas monthly before the crisis and 0.24 kg currently (which is still 1.5 times the average consumption of other adults in their income group). According to official statistics currently more than 30 million Russians are included in the pension-age group (men - 60 years and over, women - 55 and over) and their share in the total population is growing - from 20.0 percent in 1994 to 20.7 percent in 1997
25. About 73 percent (107.1 million) of Russia's citizens live in cities and towns. The share of urban residents in banana purchases exceeds their share in the total population due to several factors: 1) poor supply in rural stores; 2) lower incomes in rural areas, frequently below the monthly subsistence level of 411 roubles (Russian Government suggested level); and 3) most rural residents have orchards or access to orchards where fruit and berries are grown.
26. Geographic location plays an important (sometimes even critical) role in determining banana consumption patterns. The extensive territory of the Russian Federation is rather heterogeneous with regions differing by:
a) Availability of supplies;
b) Density of population;
c) Population well-being;
d) Prices;
e) Household production of fruit and berries.
27. In the extreme northlands, due to the severe climatic conditions and poor development of the transportation network, the supply of food is possible only during a rather short navigation period - sometimes only 2 weeks. Thus perishable products (such as bananas) are practically not available for about 8 percent (11.9 million) of the Russian population.
28. Another factor affecting regional differences in banana consumption is the difference of living standards. Being highly dependent on price levels, banana consumption is also determined by regional price differences. For example, in the September-December 1998 period, prices ranged from 14.5 roubles per kg in St Petersburg to 18.8 roubles per kg in West Siberia.
29. The recent financial crisis in the Russian Federation dramatically increased differentiation by income groups and their ability to purchase bananas. While in the pre-reform period the difference between the highest and the lowest income groups' consumption was slightly over 2-fold, in mid-November-early December 1998 (the period when the poll was done) it reached 7.32 fold, primarily due to the sharp drop in the poorest groups' consumption. In September 1998 the income of 44.3 million Russians (30.1 percent of the population) did not reach the subsistence minimum.
30. More than half of the poorest consumers stopped buying bananas. They partially replaced them with domestic apples, which were cheaper and abundant in autumn. Many families maintained their expenditures on bananas, but in spite of the fact that banana prices fell 38 percent between July and September, as sellers at all levels of the market lowered their profit margins, they were only able to consume half as many bananas as their incomes fell far faster than banana prices. Only the higher income quartile could afford to retain its consumption patterns, but this group is too small to influence the demand for bananas noticeably.
31. In 1997 and January-July 1998 the average retail price for bananas was about US$1.3 per kg. By September 1998 it fell to US$0.78 and in the following months didn't exceed US$1 per kg (in the pre-crisis period it was always higher) but prices in Roubles rose.
32. The August 1998 crisis proved that demand for bananas in the Russian Federation is very price-elastic. Demand shrank 53 percent after prices in July-November 1998 doubled in Rouble terms. At the end of 1997 the per kilo banana price constituted 40.7 percent of the per kilo beef price, in July 1998 45.8 percent, in late November 71.2 percent. Bananas are currently almost 25 percent more expensive than apples.
Table 2 - Average retail prices for fruits
1997 |
1998 |
Banana prices | ||||||
(non-denominated* roubles per kg |
(denominated* roubles
|
(US$ per kg) | ||||||
|
Apples |
Bananas |
Oranges |
Apples |
Bananas |
Oranges |
1997 |
1998 | |
January |
7 120 |
7 825 |
7 625 |
7.38 |
7.13 |
8.17 |
1.39 |
1.18 |
February |
7 487 |
8 017 |
7 677 |
7.57 |
7.62 |
8.16 |
1.41 |
1.26 |
March |
7 616 |
8 354 |
7 940 |
7.58 |
7.71 |
8.27 |
1.46 |
1.26 |
April |
7 563 |
8 380 |
8 039 |
7.59 |
8.00 |
8.33 |
1.45 |
1.31 |
May |
7 716 |
8 142 |
7 849 |
7.69 |
8.97 |
7.57 |
1.41 |
1.45 |
June |
8 156 |
7 843 |
7 743 |
7.76 |
9.15 |
7.23 |
1.36 |
1.47 |
July |
8 410 |
7 813 |
8 246 |
7.76 |
7.88 |
7.29 |
1.35 |
1.26 |
7 months' average |
7 724 |
8 053 |
7 874 |
7.62 |
8.07 |
7.86 |
1.40 |
1.31 |
August |
7 158 |
7 502 |
8 655 |
... |
... |
... |
1.29 |
... |
September |
6 508 |
6 497 |
8 805 |
7.41 |
12.47 |
13.11 |
1.11 |
0.78 |
October |
6 378 |
6 658 |
8 637 |
9.50 |
15.73 |
17.95 |
1.13 |
0.99 |
November |
6 655 |
6 535 |
8 325 |
12.60 |
15.67 |
20.11 |
1.10 |
0.86 |
December |
6 985 |
6 432 |
8 171 |
n.a. |
n.a. |
n.a. |
1.07 |
n.a. |
Annual average |
7 313 |
7 500 |
8 143 |
n.a. |
n.a. |
n.a. |
1.29 |
n.a. |
* The 1 000-fold re-denomination took place on 1 January 1998.
Source: SSC unpublished data.
33. Several factors are now at work in the banana market in the Russian Federation.
The first set will tend to depress demand:
a) The sharp drop of per caput real incomes. Between August and December 1998, real incomes dropped by 15 percent which curbs demand as bananas are income elastic.
b) Faster growth in prices for imported products along with shrinking incomes will lead to the redistribution of food expenditures towards cheaper domestic commodities. Being highly dependent on the US$ exchange rate, prices for bananas have become higher in both absolute and relative terms. Retail prices per kg are approaching a level that the survey found prohibitive for most consumers.
c) A declining birth rate and lower numbers of small children in the population.
34. Another group of factors works in the opposite direction:
a) The population is now accustomed to bananas. They will probably be regarded as a necessary, from time to time "indulgence," rather than a convenient snack and may re-attract demand from exotic fruits and some other more expensive "food luxuries".
b) There now exists a developed and rational institutional and marketing infrastructure. The market operators will not easily abandon their capital investments. They will try to retain their market niches.
c) Market participants are reducing profit margins.
35. Although the market in the Russian Federation is considered by most participants to offer good prospects over the longer term, the current crisis has brought uncertainty and a decline in banana consumption, and few are willing to predict when growth will return.
36. In light of the importance of the banana market in the Federation of Russia to the growth prospects of exporters the Group may wish that the Secretariat continue to monitor both this market and other emerging markets.