September 30, 2016
Saved by free trade: Ukrainian broilers export their way out of crisis
By ERIC J. BROOKS
An eFeedLink Hot Topic
- Before a civil war, economic crisis and political coup disrupted it, Ukraine had one of world's fastest growing broiler sectors, expanding 3,560% over the previous decade
- With export expansion exceeding a sharp drop in domestic demand, the crisis years slowed down growth but did not stop it
- With stability returning and consumption recovering, expansion is again exceeding above expectations
- Top integrators invested windfall foreign earnings in productive capital, used the crisis to consolidate
- Ample feed inputs and a low cost base could make Ukraine a top five exporter broiler meat exporter
Blessed with abundant arable land and plentiful feed resources, Ukraine, despite its many political and economic troubles has the potential to become a poultry meat exporter of note. Based on USDA estimates, before a coup, economic crisis and civil war derailed its economy, the previous decade saw broiler meat production jump 3,560% or 43% annually, from a mere 20,000 tonnes in 2000 to 733,000 tonnes by 2010. The crisis years slowed down but did not stop the industry's momentum, with growth from 2011 through 2016 averaging 5.7%.
With domestic consumption growing a healthy (but slightly slower) 34% annual rate during the 2000s, Ukraine went from importing 45% of its consumed chicken meat in 2000 to production exceeding consumption and achieving net exporter status in 2013, just before its three-year political crisis struck.
With its economy in crisis even before its political coup and civil war struck, domestic chicken meat consumption jumped from 45,000 tonnes in 2000 to a peak of 854,000 tonnes in 2010 –a consumption level that was not achieved again until 2015. The only thing that kept chicken meat consumption from falling far more steeply was impoverished consumers substituting it in place of red meat, as the latter became more unaffordable.
While this kept chicken consumption's volume from falling by slightly less than 10%, consumers substituted offal and cheaper cuts in place of more expensive parts. Hence, the crisis years saw the value of chicken sold domestically fall significantly more than its volume.
Fortunately, its broiler sector was able to take advantage of the massive currency devaluation that occurred at this time to export whole birds and high-value parts, thus keeping output growing even during those dark years. From no exports in 2000 and a mere 23,000 tonnes in 2010, volumes expanded 591% during its five crisis years to total 159,000 tonnes by 2015. From producing less than half the broiler meat it consumed in 2000, exports equaled 3.1% of output in 2010 to a USDA estimated 21% this year.
Accounting for 8% of this year's consumption, imports reflect producer's pursuit of export markets and not any real shortage of chicken meat. On one hand, the economic crisis saw consumers replacing substituting marginally profitable offal in place of more profitable, higher-end chicken parts. At the same time, exporters found they could easily export both whole chickens and high-end parts more easily than they could sell within Ukraine itself.
Consequently, the USDA noted that, "The domestic industry was not able to supply enough offal, creating space for imports", 88% of which were sourced from Poland and Germany. With overseas markets offering stronger demand and superior prices for whole chickens and high-end parts, broiler producers, "exhibited little willingness to satisfy domestic demand, preferring export markets."
Nor is there any break in its trade momentum. Instead of rising by 3.8% or 6,000 tonnes as initially projected by the USDA, 2016 saw exports jump by 35% or 56,000 tonnes. From 159,000 tonnes in 2015, Ukraine is now projected to export 215,000 tonnes this year, with shipments expected to rise another 11.6% to 240,000 tonnes in 2017.
Most of these exports are destined for the Middle East or the country's Central Asian neighbors. From January to May of this year, Ukrainian government statistics indicate that Iraq was the largest overseas market, taking in 28% of exports, followed by Egypt (7.8%) and Kazakhstan (6.1%). Together with Uzbekistan (4.4%), Georgia (3.2%) and United Arab Emirates (2.8%), the Middle East and Central Asia accounted for slightly over half its shipments. Going forward, the country hopes to soon achieve trade access to Saudi Arabia's fast growing poultry market and that of several African nations.
With the terms of its free trade agreement with the EU limiting European exports to 20,000 tonnes, this large market accounts for less than a tenth of its shipments, with Netherlands (5.9%) and Germany (3.1%) accounting for most of its shipments to Europe.
Sustained by such export-led growth, the world's 20th largest broiler meat producer is recovering from the war-and-recession induced troubles faster than was expected. In 2016, instead of rising a USDA projected 1.6%, output is now expected to rise a much faster 5.8%, from 956,000 tonnes in 2015 to 1.01 million tonnes this year.
Going forward, the country' partial economic recovery has restored domestic consumption back to 2010 peak levels. Unfortunately, just as consumers substituted cheap chicken parts in place of red meat, with their incomes recovering, they are now boosting their red meat consumption at the expense of chicken.
This has left Ukraine's per capita chicken consumption some 5% below peak levels amid flat domestic consumption. As a result, 2017's 4% production growth (to 1.05 million tonnes) is entirely due to a projected 25,000 tonne increase in exports and 15,000 fewer tonnes of imports.
Alongside the country's currency devaluation and natural competitive advantage in broiler growing, Ukraine's broiler export success story also reflects its efficient, highly consolidated industry structure. The latter is partly due to its recent crisis, which drove out of business all but largest, most capital-rich producers.
At this time, six integrators produce 93% of broilers with the largest company, Myronivsky Hliboproduct (MHP) accounting for 63% of output and over 75% of exports. Its operations span 350,000 hectares and its integration scope includes feed mills, broiler farms, processing facilities and retail stores. In the EU, its joint venture with Dutch producer Jan Zadbergen, whereby MHP exports slaughtered birds which undergo further processing at the latter's Netherland's facility.
Agromars, the second largest integrator accounts for 13% of output. While a significant proportion of its facilities are EU-approved for export, the latter's small, 20,000 tonne Ukrainian import quota tends to limit its potential.
Because so much of their output is exported, the past three years have been unusually kind to these producers. While the crash of Ukraine's currency was disastrous on a macroeconomic level, MHP and Agromar's export earnings were denominated in foreign currencies. Thus, the value of their rising export volumes was further multiplied by very large increases in the value of their destination country's currencies. Flush with cash, the USDA reports that, "Producers were able to secure uninterrupted imports of key inputs (hatching eggs, veterinary drugs, spare parts and equipment)."
Going forward, these two firms face the following challenges. First, with its currency stabilizing and gradually rising in value, Ukrainian integrators will no longer be able to undercut rival producers and enjoy windfall profits at the same time. With the country's inflation rate running near 13%, the medium term could produce cost pressures not fully offset by higher productivity arising from the above mentioned capital investments.
Second, due to Russian political pressure, Ukrainian exports destined for former Soviet Union states such as Uzbekistan and Kyrgyzstan must now be transshipped through Belarus via Russia. Chicken exports must be in sealed container cards equipped with Russian GPS tracking devices. Drivers need to receive special slips when entering the Russian territory and surrender them upon exiting.
Because alternative export routes have higher transport costs, the complex bureaucratic rules and paperwork deliberately introduced by Russia has made Ukraine's exports to Uzbekistan and Kyrgyzstan fall by more than 50% over two years. Only Central Asian exports to Kazakhstan (which do not need to pass through Russia) have continued growing. With export volumes to most former Soviet Union states in a secular decline, they partly offset anticipated growth in shipments to Africa and the Middle East.
Third, while domestic consumption will grow strong compared to the west's stagnant markets, those 30%+ annual increases that keynoted the 2000s are over. The good news is that per capita consumption is 18kg and could easily be doubled in decades to come.
The bad news is that while this can be boosted into the 30kg to 40kg range in decades to come, with its population flat at 46 million, domestic consumption will only rise by 2% to 3% annually. This means that if producers want to maintain the growth momentum of the last 15 years, they need to become even more export-driven than they are at the present time.
Despite these challenges, amidst all the crises it has endured, Ukrainian poultry has made impressive strides –and appears poised to continue doing so. From having half its domestic demand met by imports 15 years ago, Ukraine is now a top 15 world exporter.
Producers even leveraged their country's economic crisis and re-invested the resulting hard currency windfall into productivity boosting capital equipment. As a result, Ukraine's abundant feed inputs are now complimented by state-of-the-art broiler growing technologies. With its low cost base and technologically efficient production facilities, the opening of new markets could easily boost export volumes by another 200,000 tonnes.
Consequently, if the country can negotiate trade access to fast growing markets in Africa, the Middle East and Southeast Asia, Ukraine could, within the space of five to ten years, become a top five second tier exporter comparable to Thailand or Argentina.
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