February 10, 2005
Russian beef industry to continue 'implosion'
While Russia's pork sector is forecast to resume faster expansion in 2005, the beef industry will continue its decade-long implosion.
Executive Summary
Russian livestock producers faced more difficult conditions than expected in 2004, as input costs remained high and rising meat prices enticed producers to slaughter at lower than normal weights. As a result, beef production declined and the pork sector grew slower than previously forecast. Despite the decline in the swine herd in 2004, the sector is forecast to expand faster in 2005 as the pig crop rebounds. The beef industry will continue its decade-long implosion, as investments prove more attractive in other agricultural sectors. In 2004, rising prices resulted from increasing demand unfulfilled by Russian production, tariff and non-tariff barriers to imports, increasing input prices, and high prices in key exporting countries.
Production
The Russian swine herd is forecast to increase by four percent in 2005. Ending stocks in both 2004 and 2005 were revised down from the previous report due to lower than expected pig crops. High feed costs and pork prices encouraged early slaughter in 2004 at lower than normal weights. The downward revision in the swine herd is reflected in reductions in the 2004 and 2005 production forecasts. Nevertheless, Russian pork production in 2005 is forecast to increase by two percent due to a larger pig crop and a return to normal slaughter weights.
Cattle ending stocks are forecast to decrease by almost six percent in 2004 due to higher than expected slaughter rates. In 2005, the cattle herd is forecast to decrease another five percent. Correspondingly, beef production is forecast to decrease by three and five percent in 2004 and 2005.
Feed supplies
Total feed supplies were lower in 2004 in comparison with 2003, but decreasing cattle numbers kept this situation from becoming a crisis for the swine and poultry sectors.
Trade
Russian pork imports are forecast to increase by five percent in 2005. The forecast for Russian imports in 2004 was revised down by five percent because of several factors: foot and mouth disease in Brazil, rising pork prices in Europe, changing EU agricultural market structure due to expansion, and the appreciating euro.
Russian beef imports are forecast to rise by six percent in 2005 due to the decrease in Russian production and continuing strong consumer demand. In 2004, Ukrainian domestic production and supply problems led to a shift toward Brazilian and Argentine imports. Due to the preferential trading agreement that keeps Ukraine outside of the TRQ, it will regain its spot as the largest exporter to Russia in 2005 if beef supplies are sufficient.
The TRQs are also causing the amount of processed pork and beef imported by Russia to rise. Processed meat products (tariff code 16) are not covered by the TRQs and its tariff has remained unchanged. Thus, the TRQ licensing difficulties and high over-quota tariff have made imports of processed pork and beef more attractive relative to raw meat than in the past. The second change induced by the TRQ is an increase in the amount of boneless meat being imported. While this trend is strong for both meats, Russian beef imports have shown the most significant change as imports went from mostly bone-in beef to almost 90 percent boneless beef in 2004.
The shift toward boneless meat has happened because Russian importers want to use their limited TRQ licenses on higher value and more profitable cuts. (Note: When calculating Russia's imports (carcass weight equivalent) for 2004, the increase in boneless beef and pork compensated for the decrease in total product weight reported in the Russian import statistics.)
Though 2004 data is incomplete, it is clear that the pork and beef TRQs will not fill completely due to the problems administering the TRQs in the first quarter of 2004 and other issues.
Two Food Ingredients Banned
The Russian Federal Service for Health and Protection of Consumer Rights (RosPotrebNadzor) recently banned the importation of food products into the Russian Federation that have been processed or manufactured using the preservatives E216 (propylp-hydroxybenzoate (propyl paraban)) and E217 (sodium propyl p-hydroxybenzoate).
Ministry of Agriculture Plans for the Future
The Ministry of Agriculture has developed a strategy to reduce the market share of imported meat in Russia to 20 percent by 2010. The strategy also predicts that Russian production of animal products will increase by 80-90 percent in the next 15 years. The strategy document outlines that the main instruments for achieving the goal of "forced development of livestock farming" as "restrictions on imports of meat and customs tariff and non-tariff regulation in order to ensure the predictability of the TRQ mechanism for the next 5-7 years." The ministry expects household and government spending on meat and dairy products to continue growing and that per capita meat consumption could increase by 100 percent over a 15-year period. The ministry urges greater state support for livestock farmers and breeders, including through leasing domestic and foreign breeding stock. The strategy calls for subsidized investment capital for modernizing infrastructure and production equipment and the construction of new enterprises. It also notes the importance of streamlining and centralizing procurements of animal products for state needs and ensuring veterinary and sanitary control over meat quality. According to the Agrarian Marketing Institute, imported meat had a 30 percent share of the Russian market in 2003, including 51.5 percent of the poultry market, 21.6 percent of pork, and 18.8 percent of beef. In the first nine months of 2004, the total import share was 26 percent, including 43 percent for poultry, 15 percent for pork, and 21 percent for beef.
The Ministry's strategy is an interesting indicator of the changing attitude in Russia regarding the need for greater government intervention in the agricultural sector. In contrast to the grain sector, in recent years the livestock sector has increased lobbying for more government subsidies and protectionism. Though the implementation of the plan seems unlikely due to the Russian Government's budget constraints, it is more sophisticated than previous versions because it argues for subsidies through mechanisms already in use for other programs (such as subsidized credit for farm machinery) rather than proposing the creation of new ways of distributing subsidies solely to livestock producers.
Policy
On January 11, the Russian Government published the resolutions that renew the poultry quota and beef and pork tariff rate quotas (TRQs) for 2005. On February 3, Russia released the final documents that allow the 2005 import licenses to be distributed to Russian importers and trade to begin. Please see GAIN report RS5002 for a full translation of the resolutions.
The frozen beef and chilled beef TRQs were set at 430,000 MT and 27,500 MT, with the United States to receive a specific part of the frozen beef TRQ (17,700 MT). The frozen beef TRQ was raised by 10,000 MT in 2005 and the U.S. share was increased by 500 MT. The fresh/chilled beef TRQ remains the same. However, since the detection of one case of BSE in December 2003, the United States has been unable to export beef or bovine products for human consumption to Russia.
The United States was allocated 53,800 MT of the 467,400 MT pork TRQ. The pork TRQ was increase from 450,000 MT in 2004 and the U.S. share of the pork TRQ was raised by 11,600 MT. An unexpected compromise between Russian meat processors and meat producers was included in point 4 (f) of the pork TRQ resolution. It requires the creation of an additional proposal for pork trimmings in June 2005 to come into force in July 2005. Though the nature of this proposal is not clearly outlined, its mention shows that Russian processors complaints about problems keeping the low-priced pork trimmings inside the TRQ have been taken into consideration. The final proposal might be a secondary TRQ for trimmings with a lower in-quota duty, a removal of trimmings from the TRQ, or a method for allowing processors to import trimmings using special licenses.
Separating trimmings from the TRQ could be an important temporary market for U.S. exporters. Currently, exporters are allowed to ship cutting fat outside of the TRQ, but Russian processors would also like to import trimmings. Trimmings are an important ingredient for sausage production, but its current inclusion in the TRQ makes it relatively expensive for processors.
Russian trade policy in general had a significant impact on the poultry and meat markets during 2004. For complete details, reference GAIN report RS4068.
Marketing
Russia's sophisticated and competitive retail sector is booming thanks to six straight years of strong economic expansion. According to official sources, total retail turnover in 2003 was $146 billion (including $68 billion for food retail turnover), although unofficial estimates place total sales at least 50 percent above this level. It is clear that the expanding market has caught the attention of retailers - both local and foreign chains. Experts forecast growth will peak by 2012, so for U.S. exporters of food products for retail sale, the clock is ticking down.
As chains expand, quality becomes more important, an advantage for U.S. products. The growing retail sector in Russia must become a factor in U.S. exporter strategy as the traditional markets, where most U.S. poultry is currently sold, slowly give way to large retailers. This will require re-evaluating what products and packaging will satisfy consumers' demand for quality goods.
According to market experts, per capita monthly income in Russia will keep growing and will reach $600 in Russia and $1,500 in Moscow by 2012. Per capita income in large Russian large cities will increase twofold over the same period of time. This represents a large future growth in consumption of food because of Russia's large population.
Source: USDA
