April 18, 2016

 

Are clouds piling up on Russia's pig industry?

 

By VLADISLAV VOROTNIKOV

                                   

An eFeedLink Exclusive

 

 

Since the early 2000s when Russia adopted its first food security doctrine, the development of the country's swine industry has been riddled with the competitive struggles between domestic farmers and imported pork.

 

Russian pig farms have chronically been stricken with a low level of efficiency, so government agencies have been forced to help them by imposing veterinary barriers on imported pork, from time to time.

 

Also each year government officials have been urging investors to commission new production capacities, in exchange for soft loans and various subsidies.

 

While the country's swine industry has been developing this way for almost 15 years, the situation has changed somewhat this year, as the state no longer sees further increase of pork production as one of its top priorities. As a result, according to some Russian analysts, the swine industry is today probably entering some period of uncertainty.

 

Where to sell?                                                                                                                                 

 

In 2015 Russia produced 3.2 million tonnes of swine in live weight. Representative of the Russian Swine Industry Association Valery Sharnin has estimated that current capacities will let manufacturers boost the volume of production by 300,000 to 400,000 tonnes per year within the coming years.

 

The growth in production, in his opinion, should also accompany a rise in consumption. In 2014 consumption amounted to 25 kilograms per capita, and the association forecasts that within three to four years, it should reach 30 kilograms per capita. This would bring Russia's pork production to 4.2 million tonnes.

 

However, actual figures would likely differ from these forecasts. As the Russian economy is currently going through hard times, overall meat consumption should logically fall. Head of the Russian Meat Union Musheg Mamikomyan estimated that in 2016 overall meat consumption may drop to 9.8 million tonnes, from the peak of nearly 10.6 million tonnes in 2013.

 

Since the start of the recent economic downturn, Russians have cut their spending on pork and beef, opting for cheaper poultry products. As a result, in 2016 pork consumption per capita should amount to only 23 kilograms per capita, according to some forecasts. This means that overall consumption will reduce to 3.38 million tonnes, and will be the first time in the history of modern Russia that internal pork production exceeds internal demand.

 

If this more likely scenario proves to be true, then it is unclear where Russian agricultural holdings will be selling their pork to.

 

Speaking domestically, in 2014, after the Russian food embargo, most market leaders announced expansion of capacities, attracting soft loans under the government's import substitution programme. Eventually, however, only the top-three producers — Miratorg, RusAgro and Cherkizovo — confirmed new projects which would add about 250,000 tonnes of pork to the market within the next four years.

 

Overseas, Russian agricultural minister Alexandr Tkachev promised that within the coming years, Russia will export 200,000 tonnes of pork, mainly to Asian countries. The most promising market for Russian pork in his opinion is China. Other plans for expansion into Asia have also been confirmed by producers, including Miratorg. However, so far these plans have seemed baseless, as no exports have been approved.

 

Most Russian experts believe that the country's agricultural holdings may be less competitive in foreign markets due to the weak ruble, but the bigger problem is that most of the companies have little experience in international trade. It does not help that the Chinese market is already saturated with pork, including those from strong international companies, and it would take several years for Russian pig farmers to learn how to compete with them in the absence of governmental assistance, which they have been used to enjoying back home.

 

Pressure on profitability

 

As the domestic market itself is becoming saturated, pork prices are decreasing which puts heavy pressure on the profitability of most market players. Almost all the largest holdings saw a temporary rise in profitability in 2014 after the Russian embargo, but by mid-2015 its positive effect had exhausted.

 

Miratorg's EBITDA fell from 31.4% in 2014 to 27.7% in 2015. Cherkizovo had a heavier fall from 24.7 to 16.4%. Results were similar for most other top-20 producers.

 

Meanwhile, about 30% of all pork production or about 1.2 million tonnes is accounted for by small to medium-scale farms. These segments according to the opinion of most analysts are most vulnerable to profitability losses, as on the large part they consist of old pig farms, or pig farms that do not have their own facilities to produce compound feed.

 

In 2013, prior to the embargo, about 40% of these small to medium-scale farms have been teetering on the brink of profitability, according to data from the Russian Pig Union. In 2014 the situation had improved, allowing some of them to avoid bankruptcy. However, the short-term effect of the embargo had only delayed their problems, not solve them.

 

In addition, the profitability of small and medium-scale farms is most susceptible to the threat from African swine fever (ASF). The disease forces such producers to invest heavily in biosecurity on their farms. Otherwise, they risk facing ASF outbreaks or being closed by the Russian veterinary watchdog Rosselhoznadzor.

 

For agricultural holdings this issue is less critical, as since 2010 they have converted all their production facilities into closed-cycle operations with tight biosecurity.

 

The market share of small and medium-scale pig farms decreased from 32% to nearly 21% in the period 2008 to 2015, and according to all forecasts will continue to decline. However, they still account for a large share in remote regions of the country in the Urals, Siberia and the Far East, as it is not profitable for the major producers to deliver their products in those regions.

 

Table 1: Swine production volumes in Russia in slaughter weight (tonnes), 2014-2016 

 

2014

2015

2016

January

114,146

142,286

158,408

February

125,679

144,438

163,868

March

132,026

151,537

 

April

134,381

155,163

 

May

133,922

154,991

 

June

137,234

157,478

 

July

137,769

162,506

 

August

133,092

166,991

 

September

138,414

174,455

 

October

152,794

177,722

 

November

154,849

169,978

 

December

170,708

190,412

 

Total:

1,665,016

1,947,959

322,276

 

Table 2: Average price of pork per kg in 2014-2015 Rub (US$)

 

2014

2015

January

214.05 (3.2)

278,32 (4.2)

February

214.21 (3.3)

276,14 (4.2)

March

215.93 (3.3)

274,80 (4.1)

April

224.12 (3.4)

277,30 (4.2)

May

246.01 (3.7)

278,22 (4.2)

June

252.84 (3.8)

277,72 (4.2)

July

255.31 (3.9)

278,76 (4.2)

August

260.07 (3.9)

279,02 (4.2)

September

268.41 (4.0)

280,11 (4.3)

October

272.38 (4.1)

277,21 (4.2)

November

267.26 (4.0)

273,34 (4.1)

December

272.36 (4.1)

271,08 (4.1)


 

Table 3: List of top-20 pork producers in Russia in 2015

 

Company

Swine production in live weight (tonnes)

Share of overall production (%)

1

Miratorg

384,900

12.0

2

RusAgro

187,820

6.0

3

Cherkizovo

169,560

5.4

4

Agro-Belogorie

162,850

5.2

5

JSC Agrarian Group

106,250

3.4

6

AgroPromComplectatsia

102,130

3.2

7

CoPitanie

93,200

3.0

8

Velicoluksky pig complex

85,220

2.7

9

Agro-Industrial Corporation Don

69,190

2.2

10

Group of companies Ostankino

65,000

2.1

11

Agricultural firm Ariant

61,900

2.0

12

AVK Exsima

61,000

1.9

13

Belgrankorm

58,740

1.9

14

AgroEKO

55,250

1.8

15

Kama Bacon

49,010

1.6

16

Prodo Management

44,800

1.4

17

Group of companies Komos Group

41,720

1.3

18

Agricultural holding Talina

41,190

1.3

19

Agricultural holding Ohotno

39,630

1.3

20

JSC Zvenigovsky

38,100

1.2

Overall for top-20 producers

1,917,470

60.8

Other producers

1,236,580

39.2


All rights reserved. No part of the report may be reproduced without permission from eFeedLink.