September 18, 2014

Food embargo pushing Russian meat processors into bankruptcy

Dozens of Russia's meat processors are on the brink of bankruptcy due to soaring raw meat prices triggered by the food embargo.

Moscow has stopped food imports from the US and its EU allies in retaliation for the economic sanctions the West had imposed on Russia for its involvement in the Ukrainian conflict.

In an open letter to President Vladimir Putin, Russia's National Union of Meat Processors (NUMP) seeks urgent assistance from the government to help meat processors which have become unprofitable due to import restrictions.

"In the meat processing industry there is now a crisis, thanks to high commodity prices, which threaten to escalate into 'industry default', the letter says.

Since August 6, it adds,"pork and poultry producers have raised their selling prices by 12-14%. So, taking into account the earlier rise in prices this year, the jump in the price of raw meat during 2014 is estimated to have gone up by 62-67%."

On top of the rising cost of raw meat, the government also has unofficially banned any rise in the retail prices of finished meat products to avoid any social unrest.

"The large retailers froze any adoption of new prices for sausages and other finished meat products, based on the recommendations of the Russian government,"the open letter says.

"To return to a minimum level of profitability, large meat processors would need around a 10-15% increase in the selling prices of finished meat products. But right now, it is impossible to raise prices even by a couple of percentage points, as the government has promised its population that the prices of products that fall under the sanctions will not be raised. So retailers will not increase prices without certain signals from government representatives," said an industry insider, who wished to remain anonymous.

As a result of the sharp increase in the cost of raw materials, meat processors have said they "have no prospect of avoiding serious losses in the long run. This will lead to some businesses going bankrupt, with a reduction in budget revenues and social tension likely to follow,"the NUMP letter says.

"But within all this, we understand that a sharp rise in the price of meat products, including finished meat products, could lead to a decline in sales. We have to sacrifice part of our profitability to smoothe the rise in prices, so that consumers can adapt to the new conditions," said AnatoliKosinsky, head of the NUMP.

One measure that should be implemented immediately is tax breaks, according to the NUMP.

The situation is particularly difficult in the far east of Russia, where meat processors have been left with almost no raw meat, following the import restrictions, according to PatvelKetaeve, president of the Association of Meat Processing Enterprises of PrimorskyKrai.

"If we talk about the far east, then the share of imported raw materials is not less than 95%. In contrast to the western part of Russia, where breeding is well developed, thefar east is poorly developed, "he said, adding that meat processors here are now urgently looking to buy meat from new markets like Argentina and Brazil.