AGWEEK EXCLUSIVE: American in Russia
RASNODAR, Russia -- At 33, Ryan Offutt covers a lot of ground. He carries the title of vice president of international business development for his family's Fargo, N.D.-based equipment company, which largely means responsibility for its Russia op...
RASNODAR, Russia -- At 33, Ryan Offutt covers a lot of ground.
He carries the title of vice president of international business development for his family's Fargo, N.D.-based equipment company, which largely means responsibility for its Russia operation. In this capacity, he keeps an eye on opportunities for the company's Agricultural-Construction Technologies based Krasnodar, a key agricultural areas in southern Russia.
When in Russia, Offutt splits his time between a downtown Moscow apartment and Krasnodar, a city of about 1 million people and a two-hour flight from Moscow. The company is led locally by operating partner Andrey Rybalkin.
ACT so far has nine dealerships in a world of tough and emerging competitors. Besides John Deere machinery, it also is the No. 1 dealer of Amity Technology sugar beet equipment in Russia, which is led by Howard Dahl.
On a cool Monday morning in early April, Offutt and an Agweek correspondent flew commercially into the Krasnodar airport -- busy but reminiscent of Hector International Airport in Fargo. A driver in a Mercedes SUV awaits us, and we make our way through a city that seems more like an overgrown town, even though it is home to nearly 1 million people. Offutt comments that Krasnodar has come a long way since he first saw it, in 2003, when it was reeling from the effects of switching from Communist control to capitalism. The region is taking pride in the fact that the 2014 Winter Olympics -- XXII Olympic Winter Games -- is scheduled Feb. 7 to 23, 2014, in Sochi, Krasnodar Krai. Sochi, a city of about 330,000, is in far southwest Russia, along the Black Sea, with access to the Caucasus Mountains. The resort area is called nicknamed the "Russian Riviera," but is near the volatile and unstable North Caucasus.
In a half-hour, we've stopped for coffee at an upscale McDonalds and have made it to the ACT headquarters, a shiny refurbished building in the middle of an agricultural research institute After dropping his briefcase in an office that translates to "Ryan Offutt, partner," we are in the office of the company's managing partner, Andrey Rybalkin.
An evolving interest
Ryan Offutt isn't one to seek much publicity. He explains that he grew up in Fargo and Stillwater, Minn. He studied political science at Reed College in Oregon and graduated in 2000. After stints working at the Woodrow Wilson Center for International Scholars and some political campaigns, he moved to Fargo to join the family business in 2003.
Ryan's father, Ron D. Offutt of Fargo, is one of the world's most influential potato producers and one of the most successful businessmen to come out of the Red River Valley. Ron remains chairman of the board for RDO Offutt Co. Ron's son-in-law, Keith McGovern, is its chief executive for the farm divisions. One of Ron's daughters, Christi, is RDO Equipment's chief executive officer. Other family members work in different capacities
The Offutts have been interested in Russia for more than 20 years.
Ron traveled to Russia four times in the 1990s, consulting with food giant ConAgra, based in Omaha, Neb. ConAgra had interest in a farm and had been looking at putting potato processing into Russia, and Ron advised against the move at the time, cautioning them because of the uncertainty in property laws and other factors in the wake of the Soviet collapse in 1992.
In 1994, Ron Offutt met Andrey Rybalkin, an economics student who at the time was driving a potato truck for the ConAgra farm. Rybalkin had graduated from high school in 1990.
"I was 17 when one of the greatest empires in the world collapsed," Rybalkin says.
In 1998, RDO tried to sell some farm equipment in Russia, sending four combines and six tractors to the region. But it arrived two weeks after a crash in the value of the ruble, and no one could afford the equipment.
One of the RDO Equipment Co. directors, formerly with ConAgra Foods, had purchased an interest in a farm that Rybalkin was running. To salvage some of the equipment value, RDO invested in the farm. It was a modest 8,000-acre farm.
Running a farm
"Earlier, it had been a bankrupt state farm," Ryan says. "It hadn't been idle, but it was run incredibly ineffectively."
Technically, the land belonged to the state and still does. RDO contributed the equipment in exchange for an equity stake. It produced popcorn, soybeans, wheat and sunflowers.
The ownership group brought in Rybalkin as a partner and manager. Initially, the farm was run in the Soviet style and had employed 320 people. Rybalkin downsized that to 25.
Shortly after starting with RDO, Ryan started seeking the Krasnodar region of Russia for its long-term business potential. Ryan traveled to the area in 2003.
This is in the world-famous "black soil region." Farmers in the region grow not only standard cereal crops, but vegetables and fruits -- orchards to the east and west of Krasnodar and south to vineyards. It is famous for cognac and brandy. When we visited, the temperatures were like early April in North Dakota -- quite cool, in the 40s and low 50s. Year-round, the climate here is reminiscent of Iowa or Illinois. The region includes a half-million acres of irrigated rice, thanks to a North Korean flood irrigation project in the 1960s.
The area is historically one of the Russian breadbasket regions. It represents 2 percent of Russia's vast arable lands, but produces about 13 percent of the nation's grain production, because of proximity to Black Sea ports, and most of its grain for exports. Because of this, area farms are able to acquire close to "world prices" for their commodities, while farms in the north in Siberia often do not.
Rybalkin, who had gotten his doctorate in 1999, was leading the Krasnodar (Agro-Alliance) farm when he suggested RDO Equipment approach John Deere to get a franchise going in Krasnodar. Ryan Offutt was among Krasnodar's enthusiasts.
"I just saw the benefits from using good tractors and combines vs. (substandard) tractors and combines," explains Rybalkin, who has a talent for frankness. "I thought, if I liked it, probably other farmers would like it, too," he says.
Rybalkin was hungry for business opportunities. He'd already owned a winter wheat flour milling business. His grandfather had been a Soviet "collective" farm employee in Azerbaijan. His father was a head of a regional agricultural scientific institute in Krasnodar. He'd also started a side business building dairy and hog barns, with imported equipment.
Rybalkin and Ryan Offutt saw a "replacement gap," when farms didn't purchase much equipment from the late 1980s to the early 2000s.
"I saw it as an opportunity to build an interesting business, and an opportunity for us to strengthen our partnership with Deere," Ryan says. "They were telling us needed good dealers, and this would give us international experience."
Ron and Christi Offutt, president of RDO Equipment, followed for a visit in 2004, and the Offutts decided to make a move.
The business was named Agro-Construction Technologies, allowing initially for activities in both agriculture and later in construction, as RDO does in the United States, and co-located, although the business didn't add construction equipment until 2009.
The move fit well with a Deere goal of starting strong, independent dealer network in the country, Ryan says.
"We're happy to be aligned with that goal and supporting it," Ryan says.
There are about 16 Russian-based Deere dealers, but ACT is the only U.S.-based Deere dealer in the country. ACT is RDO's only major foreign investment, Ryan says.
ACT formally started operations in summer 2005, Offutt says, but 2006 was the first full selling season. It is analogous to a limited liability company in the United States, with partners now including RDO Equipment and Rybalkin. The company started construction product lines in 2009.
ACT runs and operates stores, although they are not the U.S.-style showplaces with lawn-and-garden complements. The first of the agricultural parts and service centers was placed in what had been the farm tractor repair center Dinskaya, about 20 miles north of Kransodar. Eight more have followed.
"It's difficult to do new construction, or get permitted in areas where you want to put a dealership," Offutt says.
Much of the available land is restricted to agricultural use, and it's hard to switch it to industrial. The new stores typically have gone into the Soviet-style machine sheds, which were cookie-cutter in nature -- the same sort of buildings from village to village. Farms all had separate staffs of tractor drivers and mechanics, each with their own building for the purpose.
A typical store has three to four salesmen, each covering a geographical region. A store tends to cover a 50- to 100-mile radius.
Converting farm shops
The "sales and service locations" carry a full line of equipment, including tillage and sprayers. ACT tends not to take trades in Russia.
"There has yet to be a market demand to trade in used machinery," Ryan explains.
The company has invested heavily in parts and service and employs 125 technicians, companywide. They take pride that they have kept and paid employees during economic downturns. About 85 percent of service work from the ACT centers is done at the farms, where customers have robust shops, left over from the state farm and collective days.
In an economy undergirded by improved oil and gas production, the construction market is improving. Three of the company's locations carry both John Deere's agriculture and construction lines.
Most of the customer base involves farms of 10,000 to 25,000 acres.
"We have customers with up to 1 million acres," Ryan says.
The company handles grain storage equipment, a Danish dairy equipment line, hog equipment, as well as irrigation and vegetable storage ventilation.
"One of the things the Soviets did well -- in Romania, in Ukraine -- they invested in massive irrigated infrastructure," Ryan says.
In the transition period from communism to capitalism in the1990s, people were starving. The irrigation equipments has been stripped, melted down and sold for scrap. Even at the reduced staffing levels, a third of the employees were in security, guarding against both internal and external theft.
A regional force
To capitalize on their agricultural opportunities, it is evident that farms in Russia need western-style machinery. All the world players have arrived -- Klaas, AGCO, CNH, as well as smaller Italian makers, and others.
"Still, today when you drive around Krasnodar, you'll see way more Soviet-designed equipment than western machinery," Offutt says.
Russia had its own tractor and combine factories. One factory in Roskov, which once produced tens of thousands of units a year, and now a fraction -- about 3,500 today. Generally speaking, the Russian equipment was too small.
Russian Combine Factory RostSelMash Ltd. in 2007 bought the majority shares of Buhler-Versatile, with entry into the Russian tractor market. Another is well-known Belarus tractor, a common 80-horsepower model, which had a task of plowing up the region's vast resource of dark, rich soil.
Offutt says the country continues to feel the effect of an investment gap from the 1980s that continued into the 2000s.
The biggest obstacle to technological updates is that farmers are conservative, wanting to replace this tractor, that air seeder, but keep their Soviet combines. More progressive farmers simply close down their on-farm workshops and let the employees go, substituting their old equipment with high-capacity sophisticated technology.
A John Deere tractor might be $300,000, and the Belarus tractor, at 80 horsepower, might be $20,000. The Belarus tractors make up the "absolute majority," Rybalkin says -- maybe 70 percent. Russian-style combines would "throw a lot of grain out the back ends" and aren't what's needed, Ryan says.
Smaller time windows
While U.S. farmers typically want sufficient machinery to be able to plant their crop in a five-day window, to maximize yield, Russian farmers, with a deficit of machinery, have been used to doing their work over a longer period.
Rybalkin says the more expensive, higher-performance equipment is "just a tool" that can help farmers be more productive, especially in the face of a scarcity of qualified help. He is frank when he says there are difficulties in hiring reliable, "sober operators." The persuasive selling points are the service, the best spare parts inventory and the short distance to a dealer.
The Soviet government ran with some large "state farms," but others were the collectives, in a cooperative way -- all privatized by President Boris Yeltsin in 1992 after the collapse of the Soviet Union
About 30 percent of the land in the Krasnodar region, for example, was in the state farms and now are operated by large, complex organizations, headed by oligarchs. Many of them are vertically integrated, with livestock production and outsourced management.
A 1 million-acre entity is far afield from the U.S. farm, both in scope and philosophy, but there are several of those in Russia today.
Another 70 percent of the land was in the hands of former collectives. The collectives initially split up into the labor force, with all employees getting a land share. In the Krasnodar area, that typically would be a 5-to 7.5-acre piece. That land either is gathered into the very large entities, or some remnant of the collective. These entities are often run by a family, renting from the collective members, or are being gathered into a large organization.
Land is not sold in a public, free-market economy, as it is in the United States. Collective owners often have held on to their shares. Often, the peasant wives have insisted on taking rent in the form of commodities -- so many kilos of flour, sunflower oil, sacks of sugar, or perhaps some forage wheat to feed animals -- which aren't easily converted to alcohol or some other diversion. Children of collective owners often move to the cities and want to sell shares, many of which are attached to land that still is idle in bankrupt entities.
"They say that 24 million hectares (60 million acres) that were in production in 1988 are still fallow," Ryan Offutt says.
In the Krasnodar area, half of the land is in wheat, and the rest is rotated into corn, sunflower, sugar beets and a little soybeans. There is rice and alfalfa, specialized farms. The Soviets built giant irrigation canals and artificial manmade lakes to irrigate rice paddies. But the 3- to 5-hectare paddies are smaller than what people would like. Sugar beet plants are privately owned. No genetically modified crops are grown here.
The principal difference between the Russian and American mentality in farming is that the American would out-source everything except the agronomy -- "maybe even the agronomy," Rybalkin says.
The service businesses in Russia are underdeveloped. The Russian farms keep their own garage, own all of the trucks and do all of the trucking themselves. If they need a welder, they have an employee-welder. If they need to feed people, they own their own "dinery" rather than paying a caterer. When ACT started to offer mechanical services, customers at first didn't understand they could "call us if something broke down," Rybalkin says.
ACT offers a different kind of service tailored to Russian needs and different than American dealerships.
"I'd say 90 percent of our service revenue is from field service," Offutt says.
Financing is an area that's changed considerably, even in the eight years Ryan Offutt has been in the game.
"In 2004, the 'long-term' financing was 12 months," he says. "That was the longest tender of debt you could probably find. A lot of the people in the equipment business, out there trying to hustle machinery had a 'trading' mentality. There was no long-term mentality for building long-term relationships with customers."
The Russian State Bank of Agriculture and Sberbank are both significant players in equipment sales.
"Prior to that, there was no financing available, Deere is in the processes of expanding its credit work there. Inflation is 7 or 8 percent, which drives the cost of money, which carries an annual interest rate in the low teens," he says.
ACT imports through St. Petersburg, in roll-off ships. One big development is that John Deere last year opened a final assembly factory in Moscow, making 8000 and 9000 series tractors as well as combines.
Sam Allen, board chairman for Deere & Co., is well focused on Russia. The company also is producing construction and forestry equipment there as well.
"That helps us," Ryan says. "It's important for us to have locally built products, for access to Russian-based financing. It indicates that John Deere has made a serious and long-term commitment to the Russian market, invested big dollars."
Dealing with downturns
In 2008, the Russian economy went through a downturn, along with the rest of the world. The country also started a drought in 2010. ACT went from $100 million in 2008, to 180 million 2008, to $68 million in 2009.
"It was a great learning experience," Offutt says. "Our sales dropped. We had too many tractors for awhile and did lay off some employees. But for the most part, we preserved our infrastructure, our people and locations.
"We still have 350 employees," he says.
Offutt says he's proud that ACT had done a lot of cross-training and was able to keep much of its staff during the crisis, and paid employees what they promised they would. Many of the staff members have been to the U.S. several times for training in Fargo.
In 2010, the company rebounded. They finished the year with a little more than $105 million in sales. A major damper was a ban on exports of wheat in the wake of the drought.
Various experts think it might take Russia a few years to recover from that, but Offutt still is optimistic.
"The way I look at it, there's a huge, latent demand for equipment here. With oil prices high, the Russians have more money," he says.
The crisis was "obviously pretty scary," but because the company is carrying on its U.S. values of building long-term relationships, it will continue to survive.
"That's normal in the states; it's not normal in Russia," Offutt says. "I would not consider Russia the easiest place to do business, and it can be unpredictable at times, but we live in an unpredictable world. If it was an easy place to business, we wouldn't have as significant an opportunity."