Grain Storage Market Served by Elevator Storage Centers in the Russian Federation

FAS Russia is concerned with the current situation on the grain storage market when some elevator storage centers (service providers) can refuse to accept grain from the producers (service users) for storage. Therefore, FAS Russia has analyzed the market of storage services offered by elevator storage centers.



Grain storage is an important technological process, critical for maintaining consumer quality of the goods (grain) for a considerably long period of time.



The given services are characterized by homogenous functionality and have no consumption substitutes.



Grain can be stored in elevators; grain-collecting outlets (GAO); grain-products centers (GPC); storage facilities owned directly by the grain producer or by any other gain-producing businesses; or grain storage facilities owned by grain processing companies.



It has been found that elevator grain storage can be substituted by grain storage in GAO and GPC (under the single concept of an elevator center (EC).



Product market boundaries have been defined as grain storage in elevator centers.



At the moment Russian Federation has more than 1147 ECs of total grain storage capacity around 102 mln. tons. In 2003 the average utilization level was - 41%, and in 2004 - 56%.



Research shows that supply of the grain storage services considerably exceeds the demand for them.



The existing variety of buyers and sellers of the analyzed services is conducive to the conclusion that competition takes place between the buyers as well as between the sellers. However, due to underutilization of the ECs capacities, in reality completion exists only between the buyers.



Geographical market boundaries are determined by the established economic links, minimal transportation costs, and storage / transportation costs ratio (the cost of transportation to the storage facilities at the EC) as well as easy access of the buyers to the sellers.



Calculations show that average distance for grain transportation from the loading depot of an agricultural producer to the EC storage facilities does not exceed 90 km. In view of their actual geographical boundaries, therefore, the grain storage markets are local.



Based on the quantitative concentration indices (CR-3, HHI), the Russian Federation is divided into the 3 types of territories: with highly-, moderately- and low concentrated market structure.



Territories with highly concentrated market structure (Vladimir, Smolensk, Novgorod, Leningrad, Arkhangel'sk, Tuymen, Tomsk, Sverdlovsk and other regions): Grain production does not exist at all or only in small quantities; storage need is quite low. Thus, ECs are required only for storing the grain from a regional fund and one elevator center per region usually would be enough.



Territories with moderately concentrated market structure (Tula, Ryazan, Orel, Nizhny Novgorod, Ul'yanovsk and other regions): Mostly zones of risky agriculture, with unstable weather conditions. Just a few ECs would be sufficient to store the whole grain-crops harvest.



Territories with low-concentrated markets - the Black Earth zone, southern and most fertile areas of Russia, with most favorable conditions for grain-crops growing. There are many elevator centers and practically all of them serve local markets. The market is quite developed; completion exists in form of a spatial oligopoly.



Regional low- and moderately concentrated markets for grain storage represent a set of highly concentrated local markets with diffuse boundaries, or spatial oligopolies.



Main entry barriers to the grain storage market are caused by Economic conditions and are almost insurmountable. They are related to low demand for such services due to insufficient supply on the grain market, as well as to considerable initial capital investment.



ECs profitability rate is quite low which can be explained by the seasonal nature of the business, high degree of equipment depreciation and low paying capacity of agricultural producers.



Currently, regional markets for grain storage display a clear trend towards higher economic concentration. There is an ongoing formation of vertically integrated structures based on a closed cycle «Production - Storage - Processing - Sales».



Such integration may lead to restricted competition and closure of the market for the companies - non-members of the integrated structures. For this reason the antimonopoly authorities monitor the market to prevent dominating position of certain economic entities on respective markets.



Thorough analysis of the market has not revealed any problems between the EC and their clients, related to refusals to accept the grain for storage.



Positive practice of developing vertically integrated structures, triggered by unprofitability of several independent elevator centers, would mean growing integration of the market for grain storage.



Therefore, FAS Russia will continue monitoring the market in order to prevent competition restrictions, particularly caused by the dominating position of any market player.