November 16, 2018
Russia's broiler boom tapers off, exports become the new frontier
Amid 33kg per capita consumption and dwindling scope for import substitution, can the industry transition to an export-driven business model?
By Eric J. Brooks
An eFeedlink Hot Topic
After two years of exceptionally rapid growth, Russia's broiler sector is facing overcapacity, with significantly lower prices, profits and growth forecast for 2019. Even so, this cyclical slowdown must be seen in context of ongoing improvements in the industry's structure, productivity and trade competitiveness.
Even during Russia's long deep, oil price crash driven recession, chicken consumption grew by more than 6% annually. When the economy recovered, healthy poultry demand fundamentals were further stimulated.
Russia's economic recovery finally took hold in 2016 and 2017. Coinciding with a ban on Brazilian red meat imports, it allowed consumers to skyrocket at an average 11.8% annual rate over two years, from 3.81 million tonnes in 2015 to 4.75 million tonnes in 2017.
Rebounding chicken consumption stimulated its production, with output rising 11.1%, from 3.6 million tonnes in 2015 to 4.0 million tonnes in 2016, then a whopping 16.5% to 4.658 million tonnes in 2017.
Even so, a succession of macroeconomic and microeconomic upsets brought growth rates back to nominal levels. 2018's increase in Russia's sales tax (from 18% to 20%) made consumption growth level off to 1.05% and 4.80 million tonnes.
Going forward, 2019's raising of the retirement age will make meat consumption fall among older Russians. It will keep chicken consumption unchanged at 4.80 million tonnes for a second consecutive year.
Consumption's sudden deceleration is producing a proportionate supply-side response. The USDA projects 2018's output increase at 1.4% or 4.725 million tonnes, followed by a 1.2% 2019 increase, to 4.78 million tonnes.
With output incrementally increasing amid leveled out consumption, falling prices coincided with rising costs. Cherkizovo, the nation's largest poultry meat producer, reported that as of mid-2018, whole broiler prices had fallen by 13% on-year.
While supply's overtaking of demand depressed prices, returns were also impacted by a succession of macroeconomic and microeconomic shocks. The Russian ruble fell 10% against the US dollar from January to May of this year. That made the cost of feed grains, imported hatching eggs, supplements and poultry farming equipment to rise proportionately.
A mid-2018 increase in international feed grain prices was compounded by the ruble's above-mentioned depreciation. Consequently, European Russia regions west of the Ural mountains (where most broilers are grown) saw the cost of feed wheat, corn and barley rise 28.5%, 24% and 31% respectively from their price in the same period of 2017.
The resulting feed cost inflation was compounded by a January 2018 fire BASF's German vitamin A and E premix production facility. The disruption in the supply of these feed supplements temporarily pushed some premix costs 2.5 times higher than a year earlier.
Facing simultaneous costs and revenue pressures, smaller farms went broke and the number of mergers increased. With loss-making smaller producers closing operations, Russia's poultry inventory had 4.8 million fewer birds on-year at the start of H2 2018. Flocks declined in nine out of Russia's twenty biggest producing regions that account for 77% of broiler meat output.
The January to May ruble devaluation decimated bottom lines reduced broiler meat output in 39 regions by 78,000 tonnes during this time. This, however, was more than offset by new capacity investments, which boosted production and scale economies in 33 production regions by 158,000 tonnes.
Just as integrators were poised to lead a production recovery, 76 bird flu outbreaks occurred over 13 production regions from June through August. Bird flu culling helped balance supply with demand and stabilized prices –but it also dented Russia's poultry trade, which is one of its brightest frontiers.
While accounting for 3.8% of production, exports have been rising rapidly. 2017's 115,000-tonne forecast was exceeded by 124,000 tonnes of exports. Rather than the 120,000 tonnes of exports expected for 2018, they are now expected to increase 21% to 150,000 tonnes, with another 20% increase to 180,000 tonnes expected in 2019.
Vietnam (29.3%), Ukraine (27.3%), Kazakhstan (17.5%), Kyrgyzstan (8.4%) and Azerbaijan (3.9%) absorb 86% of Russian broiler exports, with another 18 countries accounting for the other 14%.
Imports, by comparison, fell from a peak of 1.288 million tonnes in 2001 (when they made up 73% of consumption) to 225,000 tonnes in 2018 and are projected at 200,000 tonnes in 2019. Brazil (65%) and Belarus (30%) account for 95% of Russia's shrinking chicken import volume. Based on current production and consumption trends, Russia will be self-sufficient in chicken within a year and possibly a world chicken meat supplier by 2025.
This brings us to an important point: On one hand, its secular growth deceleration has been a graceful one: From 18.9% annual growth in the 2001 to 2010 decade, the post-recession years of 2016 to 2019 are on track to average 6.1% annual growth. On the other hand, with per capita chicken consumption at 33kg and the scope for import substitution exhausted, future growth will depend on foreign markets.
With low productivity being offset by Russia's devalued currency, exports increased at a 31.6% rate in the four years since 2014. With poultry meat self-sufficiency in sight, productivity-enhancing investments and controlling bird flu epidemics will determine if Russian broilers can transition from its current import-substitution model to being export-driven.
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