November 29, 2018
Russian beef gradually pushes out its foreign competition
Stagnant consumption and expanding beef cattle herds make for long-term self-sufficiency. Over the shorter term, a one-year ban on Brazilian supplies has shaken importer market shares.
By Eric J. Brooks
An eFeedLink Hot Topic
November 2018 saw Russia announce that Brazilian beef is being allowed back into the country. Even so, the long-term trend of import substitution remains in place and eventual domestic self-sufficiency remains in place.
Having fallen 63% in 30 years, its secular long-term decline in beef consumption appears to be leveling out near 1.8 million tonnes. Moreover, after a long downtrend, both the quantity and quality of domestic beef is now increasing. Output leveled out near 1.3 million tonnes a few years ago and a trend of gradually increasing domestic production is now in place.
Even if one disapproves of economic protectionism, Russia's 2014 ban on western beef and subsequent 2017 blocking of Brazilian imports have clearly had a beneficial, stimulative impact on the nation's domestic beef production. The USDA reports that with tariffs constraining domestic supplies "Current beef prices are very favorable for local companies. They are earning profits and they are able to accelerate output despite a relatively stagnant consumer demand for beef."
On one hand, despite having almost the same population as 30 years ago, domestic beef consumption has fallen sharply from 4.93 million tonnes (33.5kg per capita) in 1988 to 1.82 million tonnes (12.6kg per capita) this year. With retail sales taxes increasing in 2018 and the retirement age being raised in 2019, consumers are expected to substitute chicken in place of beef. That will cause consumption to decline another 0.5%, to 1.81 million tonnes.
On the other hand, the last ten years have seen import volumes fall by 60%, from 1.227 million tonnes in 2008 to 0.495 million tonnes in 2018 and a USDA projected 0.470 million tonnes in 2019. The proportion of consumption accounted for by imports has also fallen, from 45% in 2008 to 27% this year and a USDA projected 26% in 2019.
Since 2008, this has been mostly due to demand for beef falling faster than domestic production. After 2015 however, the long-term trend changed: As the attached chart shows, despite suffering a severe three-year recession, since 2014's embargo on US and European import and subsequent recession, consumption did not fall as quickly as before and output also halted its downtrend.
While the quantity of beef imported has fallen, this is not the case for most suppliers. Prior to its ban in late 2017, Brazil enjoyed a dominant share of beef imports. As recently as 2013, Russia imported 1.023 million tonnes of beef and Brazil supplied over 410,000 tonnes of this total. Even when falling consumption trimmed its foreign purchases, 2017 saw Brazil supply 37% or 190,000 tonnes of the 516,000 tonnes of beef Russia imported that year.
Thereafter, ractopamine was detected in Brazilian beef, causing it to be banned from Russia from November 2017 through to November 2018, when it was allowed back in. With the ban rescinded so late in the year, large shipments of Brazilian beef to Russia are unlikely to arrive before early 2019 –and they will face a very changed competitive landscape.
While beef imports fell 4.1% in 2018 (to 495,000 tonnes), this is far less than Brazil's lost 37% market share. –Consequently, Belarus, Uruguay, Paraguay and Argentina increased their beef exports to Russia by up to 50% or more in some cases. Leveraging its undervalued currency, Argentina boosted its beef shipments to Russia from under 10,000 tonnes in 2017 to a Rabobank estimated 50,000 tonnes this year.
Moreover, whereas 30 Brazilian beef processing plants (capable of shipping over 400,000 tonnes/year) were approved prior to 2017, now only 5 plants are permitted to export to Russia. Unless more plants are approved for export, this will limit Russian beef imports from Brazil to approximately 70,000 tonnes.
Going forward, domestic beef production is forecast to rise a USDA estimated 1.1% (to 1.355 million tonnes) and consumption fall 0.7% (to 1.81 million tonnes). With the gap between domestic supply and consumption narrowing, 2019 imports will fall another 5%, to 470,000 tonnes.
Belarus will supply approximately half 2019's import volume of 470,000 tonnes, with Argentina providing around 80,000 tonnes. Brazil will export 70,000 tonnes of beef to Russia, with Uruguay and Paraguay supplying up to 50,000 tonnes each.
Beyond 2019, the long-run tendency for import volumes to keep falling by 20,000 tonnes to 50,000 tonnes annually is firmly in place. That's because Russia is only starting to raise cattle exclusively for beef.
Unlike America where 35% of the cattle herd is designated for meat production, beef cattle currently account for 19.5% of Russia's total herd. On one hand, the number of beef cattle has jumped by 500% in ten years, from approximately 600,000 head in 2008 to a USDA estimated 3.6 million in 2017. On the other hand, the slaughtering of spent dairy cattle continues to account for 84% of the country's beef production volume.
With small dairy producers exiting the industry and dairy cow productivity rising faster than milk consumption, total cattle inventories fell from 21 million in 2008 to below 19 million by 2014. That year, Russia's ban on US and European meats boosted domestic cattle prices and returns. It accelerated an ongoing increase in beef cattle inventories and partly offset falling dairy cattle numbers.
That helped boost beef production and after 2015 and helped stabilize Russia's total cattle inventory near 18.5 million head. 2019 will see a continuation of this trend: A 3% increase in the smaller beef cattle herd will partly offset a 0.6% 43,000 head decrease dairy cattle. As a result, total cattle inventories are staying essentially flat, falling 0.02% to 18.45 million head.
The USDA reports that out of approximately 3.8 million beef cattle entering 2019, 2.8 million are commercially raised with another one million in backyard farms. Russia's Central Federal District surrounding Moscow for 30% of the nation's beef cattle, Thirty percent of beef cattle in commercial operations are located at farms of the Central Federal District. The South Federal district which ends at its western border with Ukraine raises 23% of its beef cattle while the Volga Federal District that ends at its eastern border with Ukraine accounts for 18% of beef cattle output.
At this time, there is great variation in finishing weights, which average 409kg nationally but vary 603kg in Briansk to 284kg in the Republic of Kalmykia. Going forward, the closing of regional disparities in beef cattle finishing weights will play as large a role in boosting the quantity and quality of Russian beef as overall improvements in productivity and genetics.
But with a higher proportion of output coming from higher carcass yielding beef cattle, beef production will rise 1.1%, from 2018's 1.340 million tonnes to 1.355 million tonnes in 2019. After three decades of nearly continuous falls in Russian beef production, it will be the first time its output has risen for three consecutive years since the 1980s Cold War era.
Moreover, not just the quantity of Russian beef but its quality is also experiencing a longterm, secular increase. From less than 2% in 2008, the proportion of beef coming from cattle designated for higher quality meat production will rise to approximately 17% in 2019.
Alongside the above-mentioned blocking of western beef imports, high returns and narrowing gap between production and consumption, Russian beef cattle receive plenty of government support. From 2014 through 2016, the Russian government disbursed 21.7 billion rubles (U$325 million) to support 609 beef cattle projects. Its official goal of having 2.95 million commercial beef cattle and slightly under a million backyard farm beef cattle by 2020 looks achievable.
Once the demand shocks of 2019's higher retirement age and 2018's sales tax increase pass, Russia's ongoing economic recovery is coinciding with its first real population growth in nearly three decades. With beef consumption poised to stabilize near 1.8 million tonnes and import barriers ensuring high cattle rearing returns, we can expect the import substitution trend already seen in Russia's pork and poultry sectors to increasingly keynote its beef production too.
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