February 18, 2004
Russian Beef and Swine Herd Numbers Fall On Deteriorating Feed Situation
A deteriorating feed situation following the 2003 grain harvest is forecast to increase slaughter rates and decrease the beef and swine herds in Russia compared to previous expectations. Beginning stocks and the pig/calf crop were also both lowered from previous forecasts. The grain situation is expected to hold down what had been consistent growth in the swine industry. Additionally, instead of possibly reaching a production floor, the beef industry is heading for further decline.
Russian imports in 2004 will also be higher than previously forecast due to higher Ukrainian beef exports and slightly higher tariff rate quotas (TRQs) on beef and pork. Higher imports will permit slight growth, though less than in a free market, in consumption in 2004.
Unfortunately, the difficult feed situation will force an even larger drop in the forecast cattle herd in 2003 and 2004. Cattle ending inventories in both years were reduced from the previous forecasts. Similarly, the forecast calf crop in Russia in 2004 was reduced from the previous forecast and is set at six percent lower than 2003. Despite the higher slaughter rate, production forecasts for 2003 and 2004 were both lowered due to the decrease in slaughter weights.
The Russian swine herd is forecast to begin 2004 at roughly 17.2 million head, a three percent decline from the previous forecast. The 2004 pig crop and slaughter are also expected to be lower than previously forecast due to the worsening feed situation. The feed situation caused producers to increase slaughter rates in late 2003, which led to an increase in the estimated pork production in 2003 and to the reduced 2004 pig crop. However, a return to normal feed production in 2004 should herald a stabilization of the swine herd and a rise in swine ending stocks going into 2005.
There are 120 historic pork producers in Russia, which had a total swine herd of 2.58 million pigs in 2003. These producers actually have capacity to raise 7.5 million head. To illustrate the excess capacity still existing in the industry, only seven farms are currently utilizing their capacity in full, 20 plants are at 50 percent capacity, and 52 plants are at less than 50 percent capacity. Forty-one of these farms were out of operation in 2003.
The low 2003 grain harvest, increased grain export volumes, and increased feed consumption by some livestock producers created feed shortages in the Russian Federation at the end of 2003 that will continue through the first half of 2004. The price of one metric ton of feed wheat has reached about $160, barley $130, and corn $175. Significant feed stock reduction in 2003 in comparison with 2002. However, despite the very high prices, the feed price effect has been mitigated to some degree by the very high profitability (per kilo of meat) of leading producers, increasing efficiency of feed utilization, and that small farmers use non-traditional feeds and/or feed not accounted for by national statistics. Nonetheless, producers are experiencing difficulties in obtaining the volume and quality of grain (mostly wheat) necessary in some regions due to the poor inter-regional transportation of grains.
Artificial administrative or other barriers to free transit of grain inside Russia have forced many producers to shift from the traditional predominately wheat ration to other components, including imported soy and other feed ingredients. While cattle depend on grain to a lesser degree than swine, the feed shortage is more severe for these producers because of the very weak financial situation of such a large portion of the industry.
In 2004, the forecast for consumption of beef and pork was increased slightly. In both cases, higher forecast imports are expected to more than make up for production fluctuations. Consumption right now is constrained in all meat categories by the TRQs. While pork and poultry are most constrained, Ukraine acts as a safety valve for beef because it is not inside the TRQ and has significant exportable supplies.
Higher rates of pig and cattle slaughter due to winter feed constraints will prevent prices from moving higher in the winter of 2003. Higher beef and pork TRQ volumes announced for 2004 will also have a dampening effect on prices. Prices are expected to continue rising in the spring and throughout the rest of 2004 unless another poor harvest forces high slaughter rates to continue throughout the fall and winter of 2004.
The 2004 Russian import forecasts for beef and pork were both revised upward due to the announcement of slightly larger than expected TRQs for 2004. (Note: The basis for the previous 2004 forecast was a pro rated 2003 TRQ.)
This move implies that the Russian Government acknowledged that the relative 2003 TRQ volume would not have allowed consumption growth in 2004. The beef estimate for 2003 was also increased because of stronger than expected beef imports from Ukraine. Ukraine is also an important factor in the 2004 import picture due to the high rate of slaughter in Ukraine due to a similar feed grain shortage. It is expected that Russia will be able to absorb any beef that Ukraine is able to export in 2004 due to the price advantage that Ukrainian beef receives from a zero tariff, being excluded from the TRQ, and strong Russian demand.
BSE and U.S. Exports
The overall Russian reaction to the detection of a BSE positive cow in the United States has been subdued. The media immediately announced the news of the BSE case in major newspapers, television, and on the Internet. News coverage was balanced and mainly relied on published (newswire) sources. Due to a swift public announcement of a ban by the Russian Ministry of Agriculture and the relatively small role of U.S. beef on the Russian market, the consumer reaction was hardly registered.
In reaction to other BSE outbreaks, measures taken by the Ministry of Agriculture have reassured the public and Russia continues to import from countries with histories of BSE with certain restrictions based on the type of outbreak and a regionalization approach. For example, Russia only buys boneless beef from EU regions with a history of past BSE cases in addition to other safety guarantees.
In response to the U.S. BSE case, the Russian Federation banned all the following products, shipped after December 23: live cattle, beef, beef containing products, and feed, feed additives, collagen, and pet food of bovine or ruminant origin. The ban does not cover dairy products, milk, semen, hides, skins, or embryos.
Government Support to the Livestock Sector
As mentioned above, 2003 and 2004 will be difficult years for the livestock sector due to the grain shortage. However, the beef industry has been in decline (herd size and financially) since the fall of the Soviet Union.
Pork production, though growing for several years prior to 2003, is profitable among a relatively small group of companies. Livestock producers (though not processors) now stand out even more than the grain sector as in dire need of a coordinated policy approach. Russian policy specialists and political leaders have long recognized this, but are only now are ideas coalescing about the best way to construct and implement a coordinated strategy.
The key strategy gaining widespread credence is that the livestock sector needs both price support and production support. Price support comes in the form of protection from imports, which has already been implemented. Initiated in 2003, the TRQs act as a mechanism to boost prices and effectively to maintain a floor price that provides producers additional revenues for investment and a captive, secure market for their products.
The second leg is production supports. While some production and breeding sector supports exist, they are not available or used by the majority of producers. In discussions surrounding the creation of a new overall farm program (analagous in intent but not similar to the U.S. Farm Bill), direct producer supports have strong backing and will likely be included, especially for the hard-hit sheep and goat sector.
In addition to the possible expansion of federal support programs, many regional governments have forged ahead in creating regional support programs for livestock producers. At the current time, estimates place combined regional direct and indirect production supports as much as two times greater than federal outlays. In the near term, it appears that Russian producers can expect increasing regional and federal government production support. However, as always in Russian agricultural programs, the key will be efficient program operation and implementation and ensuring that the right people receive the benefits of the program.
The government and in particular the Duma have come to realize that roughly half of Russia's livestock product output comes from smallholders, who hitherto have received little to no support. New policies are under consideration for adoption this spring which would improve services to smallholders, especially marketing infrastructure. The volume of investment needed is massive, however, and funds from federal coffers are unlikely to be forthcoming in greater volumes than in the current budget.