March 8, 2017

An interrupted happy ending: Russia's broiler sector comes of age


An eFeedLink Hot Topic
  • After the Soviet Union's breakup, broiler output fell by nearly 60% by the late 1990s and imports accounted for nearly 80% of consumption
  • Import substitution policies caused output to rise almost 1,000%, imports fall 85% over 20 years
  • The boom was interrupted by an oil-crash induced recession
  • Low wages, good feed conversion ratios, improving operational efficiency imply that this country will become a second-tier broiler meat exporter in the 2020s.
Overshadowed by larger exciting markets in China and the Far East, Russia's broiler sector is an agribusiness Cinderalla story with an interrupted happy ending. It begins in the early 1990s, when the Soviet Union's breakup caused Russian broiler output to fall 56%, from 810,000 tonnes in 1990 to a nadir of 355,000 tonnes in 1997.
While production fell, demand grew such that by the late 1990s, Russia was importing over a million tonnes of chicken meat and approximately 80% of what it consumed annually. The US was the broiler import supplier of choice, providing 70% to 80% of any given year's imports.
After languishing below 400,000 tonnes through the late 1990s, the 2000s brought a protectionist but agribusiness friendly government. Providing much industry support, Vladimir Putin's import substitution policies stimulated a huge output boom. From a 355,000 tonne low in 1997, output expanded at a near 14% annual rate, rising a whopping 959% over the next twenty years.
By comparison, from 1995 to 2015, domestic consumption grew by a far slower (but still booming) 5.5% annual rate. From 1.31 million tonnes in 1995, the quantity of chicken consumed rose to 3.80 million tonnes by 2015. Even so, with broiler production growing 2.5 times faster than production, the net result was to squeeze out the imports once dominated Russia's domestic chicken meat market.
From being the world's top broiler meat importer and buying over a million tonnes annually in the late 1990s, shipments fell by over 80% by the middle of this decade, to USDA estimated 197,000 tonnes this year.
By the middle of this decade, domestic broiler meat production nearly equaled demand and Russia began exporting chicken meat for the first time. Unfortunately, circumstances beyond the industry's control brought skyrocketing the country's poultry fundamentals back to earth.
Russia's energy dependent economy contracted 10% when oil prices crashed by 60% after 2015. Curiously, despite the resulting steep plunge in Russian incomes, demand for chicken meat did not fall. With grocery budgets shrinking, chicken meat was substituted in place of more expensive pork.
Consequently, the good news is that while the recession flattened out demand growth, unlike that of more expensive red meat, it did not fall in absolute terms. Moreover, with Russia's rouble plunging in value, consumers happily both expensive red meat and costly imported chicken with cheaper domestic poultry meat.
The bad news is that while the recession did not destroy poultry's healthy supply-demand fundamentals. The USDA reports that, "A stronger ruble [in 2016] reduced price competitiveness in export markets and resulted in an excess supply of chicken meat that pushed down domestic commodity prices."
With chickens fetching lower revenues and domestic feed costs jacked up by higher import prices, broiler rearing profit margins, fell from 10% in 2015 to 3% in 2016.  This average figure however, betrays the fact that many smaller firms ran far steeper losses, causing their production to come in far lower than was initially anticipated.
Instead of coming in at 3.80 million tonnes as originally forecast by the USDA, 2015's production totaled 3.6 million tonnes, down 1.6% from the previous year's 3.66 million. Similarly, 2016's 3.84 million tonne forecast turned out too optimistic. Last year's output totaled 3.72 million tonnes. This is up 3.3% on 2015 but
The lower consumer demand led to lower import requirement. Instead of falling from 249,000 tonnes to a flat 220,000 in both 2016 and 2017, chicken meat imports fell to 215,000 tonnes last year and are expected to only total 200,000 tonnes this year.
While total imports are down 64% from 2013 level of 512,000 tonnes, only one supplier suffered the brunt of falling import demand: US broiler meat exports to Russia had already fallen from the 600,000 to 900,00 tonne range in the late 1990s (when it supplied up to 80% of poultry meat imports) to 267,000 tonnes by 2013. This was the result of Russia's policy of domestic poultry production being substituted in place of imports, which impacted all suppliers equally.
After 2014, political tensions between America and Russia resulted in the latter banning the former's chicken. On one hand, the drastic 2014-15 Russian rouble depreciation and subsequent rising price of imported chicken, the banning of US chicken made import substitution easier. The low price also made it possible to export Russian chicken meat for the first time since the Soviet Union fell.
On the other hand, with the economy recovering and rouble rising 21% against the US dollar in 2016, exports that had risen from 7,000 tonnes in 2010 to 71,000 tonnes in 2015 suddenly turned in a disappointing performance. Instead of increasing to 130,000 tonnes in 2015 and 150,000 in 2016 respectively, they only totaled 105,000 tonnes last year and will amount to 115,000 tonnes this year.
On one hand, this is a dramatic improvement from the zero exports and million plus tonnes of imports that was the norm before the late 2000s. Indeed, the downwardly revised production estimate for this year is solely due to lower exports. By comparison domestic demand has stayed stable and prices risen by 50% since 2016.
On the other hand, lower exports are the reason why output is only rising 0.8% in 2017 and not the 3% once forecast.
Going forward, with Russia's poultry trade deficit, which exceeded a million tonnes annually from the mid-1990s to early 2010s, has fallen to a negligible, nominally balanced 47,000 tonnes in 2017. While the USDA notes that, "the industry has reached the capacity to satisfy domestic demand", the industry's fundamentals imply something deeper is at work. Top ten producers account for 80% of output: They bring to the world stage wage levels comparable to those of Malaysia or Thailand and a 1.85 average feed conversion ratio can stand up to the world's most efficient.
With ongoing consolidation expected to further reduce unit costs and supported by a home market poised to expand 3% to 4% annually, we expect Russia to be a net poultry exporter within one or two years and a major world market supplier in the 2020s.
An emerging Russian poultry exporting machine?

Saturated domestic consumption, government-driven consolidation, supply chain integration could take Russia from poultry self-sufficiency to second tier exporter success by the mid-2020s


After years of near exponential increases, Russia's government recognizes that more than just a recession is at play in its poultry market. Amidst a drastic substitution of imports with domestic production, per capita chicken consumption has risen from 5.4kg in 1990 to 9.2kg in 2000, 15.3kg in 2005, 20.8kg in 2010, 26.5kg in 2016 and an eFeedLink projected 30kg by 2020.

With personal chicken consumption approaching the near saturation levels of developed countries, the Russian government is no longer putting further production gains at the center of its broiler sector development policy. 

From growth promoting subsidies, the last year has seen Russia's government more concerned with the sector's operational efficiency, especially relative to international trading rivals. Whereas previously all suppliers received subsidies, now many small and medium sized producers no longer qualify for government assistance in the financing of their operational needs.  

This is a profound change. Even without official government support for consolidation, nine producers with output ranging from 100,000 to 638,000 tonnes accounted for 72% of Russia's 2016 chicken meat production. Moreover, a strident economic nationalist policy means that except for Thailand's CP, eight of these nine top producers are domestically owned. The top five producers including CP collectively account for 47% of chicken meat produced.

As the accompanying graph indicates, some of these integrators produce feed in excess of their poultry's average 1.85 broiler feed conversion ratio needs, belying that many of them are also diversified into beef or pork production. Cargill for example, is not on the above graph, producing less than 20,000 tonnes of chicken annually, mostly for Russian McDonalds outlets. At the same time, its 850,000 tonne feed capacity belies its capacity to expand beyond pork production into poultry if market conditions treated it the same way as domestic companies.

At the same time, with the government openly favoring large poultry processors over smaller operators, we can expect the proportion of output accounted for by the top five or six producers to reach 75% by the mid-2020s.

When they do, the improved scale economies will also extend into their supply chain's back-end: Two new lysine making plants opened in the last year have made Russia self-sufficient in this vital poultry supplement for the first time. Over the short-term, quality problems with domestic lysine supplies did create growth problems among some broiler farms in early 2016. Over the longer term however, one aspect of Russia's economic nationalism cannot be denied: It gave the industry a two-decade 'breathing room' to become internationally competitive. From a near exclusive foreign chicken diet two decades ago, Russia's new, impressive poultry supply chain is domestically controlled, made the nation self-sufficient in this meat line and looks to be an internationally competitive exporter in years to come.

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