July 20, 2017 / 12:24 PM / a month ago

Russia's inflation fight may be lost in the mud of a vegetable plot

A view shows a cabbage field owned by the Lenin State Farm outside Moscow, Russia July 19, 2017.Sergei Karpukhin/Files

MOSCOW (Reuters) - Attempts by Russia's central bank to bring inflation to a post-Soviet low of 4 percent this year may come down to the price of vegetables.

Heavy rain and cold weather have hammered crops, sending up prices. The impact on inflation won't be known, agriculture specialists say, until autumn when it becomes clear whether production was reduced or only delayed by the weather.

"Not a single tractor is able to get to a field. Our agronomist lost his boots in the mud," Pavel Grudinin, head of a 2,000-hectare farm just outside Moscow told Reuters.

During its 99-year history, his Lenin State Farm, which produces vegetables, fruit and strawberries, has been through a lot but this year is especially difficult for vegetables sown on 200 hectares in April-June.

Some vegetables may have quadrupled in price.

"I have been working for 40 years and I do not remember a year like this one," Vladimir Zinin, the farm's agronomist, said while making his way to his cabbage fields.

"I went to a shop and there was cabbage at 80 roubles ($1.35) per kg! Oh, dear! It had been at 20."

Russia, home to 146 million people, has relatively high share of food inflation in the consumer price index (CPI) compared with more developed countries whose citizens spend a smaller proportion of their monthly income on food.

So rising vegetable prices are a headache for the central bank.

They particularly came into focus when annual inflation suddenly accelerated to 4.4 percent in June from 4.1 percent in May as bad weather delayed the crop in many regions.

Officials are not giving up yet, however.

NO PROBLEM YET?

Employees remove weeds in a cabbage field owned by the Lenin State Farm outside Moscow, Russia July 19, 2017.Sergei Karpukhin/Files

The central bank has said it sees no risks to its 4-percent target so far. It is a view supported by Russia's weekly CPI which has slowed to 0.1 percent in the last two weeks from 0.4 percent.

"The problem is not building up yet," Dmitry Polevoy, at ING Bank, said. "But the crucial moment will be towards the end of the autumn when the whole (grain and vegetable) crop is harvested and the size of the gap between supply and demand, if any, becomes clear."

Russia's grain crop has also been delayed by rain this year and is expected to decline from a year ago. For now, that is not expected to impact domestic prices since large stocks remain from last year's record crop.

Russia produced around 31 million tonnes of potatoes and 16 million tonnes of vegetables in 2016, according to the state statistics service.

Slideshow (6 Images)

"These levels are reachable (this year) if there are no new weather disasters," Kirill Lashin, an analyst at the National Fruit and Vegetable Producers Union, said.

He said even a fall of 10-15 percent from last year's high production levels would do no harm to the domestic supply and demand balance. Prices are expected to start to decline from mid-August, he added.

"Everything will depend on whether the seasonality shifts or the (vegetable) crop declines," Ekaterina Urakova at VTB Capital said. "It will become clear towards the end of the summer."

A lower crop could impact prices until the 2018 harvest gets to shop counters, she added. VTB Capital currently expects Russia's annual inflation in the vegetable and fruit segment to slow down to single digit towards July 2018 from double digits now.

Roman Vilfand, head of weather forecaster Hydrometcentre, farmers are already expected to harvest fewer vegetables per hectare than a year ago.

"Heavy rains in the European part of Russia made the soil too wet, cucumbers and tomatoes are maturing poorly," Vilfand told the TASS news agency on July 17.

Some farmers want to increase the cabbage sowing area next year because of sky-rocketing prices for it, Alexei Krasilnikov, the head of the Russian Potato Union, said.

Zinin, the Lenin farm's agronomist, says that the situation has improved in his fields since a week ago, but that there is still an excess of moisture in the soil which is affecting the quality of cabbage and potato sowings.

($1 = 59.0953 roubles)

Reporting by Olga Popova and Polina Devitt; Writing by Polina Devitt; Editing by Jeremy Gaunt

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