30 April 2010

21 minute read

2009

Annual and Semi

2008

Annual

Semi-Annual

2007

Annual

Semi-Annual

Summary

Attaining self-sufficiency through import substitution is the goal of the GOR. To this effect, at the beginning of February 2010, the GOR adopted Russia's Food Security Doctrine, which prescribes Russia to reach 85 per cent self-sufficiency in total meat and poultry by 2020. Accelerating this goal to be reached within 3-5 years, Minister of Agriculture Skrynnik more broadly notes that innovation, developing the retail market for food, modernising materials and technology, and developing small business will help further the agriculture's sustainable development. The tariff-rate quota (TRQ) for meat and poultry was extended through 2012, albeit with tighter access restrictions. Non-tariff barriers remain in place to continue an unpredictable and non-science-based trading atmosphere; however, GOR officials continue to comment they are making moves to reform. As a result, Russia has made steep cuts to import supplies of animal protein (specifically, poultry and pork) and less than offset these reductions with production gains, forcing meat consumption to contract and artificially boost self-sufficiency estimates. While meat and poultry prices began to stabilise in 2009, they remain fragile in 2010 as animal protein supplies will remain heavily connected to resolving the chorine ban in the poultry sector and meeting GOR production targets throughout the livestock and poultry industry.

Swine and Pork

Russian pork production missed its mark to fully replace import quota cuts in 2009, driving prices higher and consumption lower. More of the same is expected in 2010. USDA-Moscow forecasts pork production to increase 1.1 per cent to 2.225 MMT while imports decrease -4.1 per cent to 0.810 MMT, resulting in a -0.3 per cent cut to consumption. The three biggest market movers since September was a combined 31,900 MT reduction in pork quota, higher tariffs on live hog imports, and resumption of US eligibility to ship. Considering demonstrated over-quota trade that occurred in 2009 and a foreseen tighter supply for animal protein in 2010, USDA-Moscow feels higher prices will again lead to importing outside the quota in order to meet consumption demand in the current year.

Cattle and Beef

Beef imports remain sustainable only because the beef industry is in its infancy and 95 per cent of beef production is an offshoot of the steadily declining dairy herd. As a result, USDA-Moscow forecasts beef production lower -1.6 per cent to 1.255 MMT and imports higher 0.6 per cent to 0.900 MMT, resulting in a -0.8 per cent cut to beef consumption as compared to 2009. The enlarged quota and transferred allocation from the European Union to “other countries” (e.g., Brazil) should have negligible impacts on increasing imports. The enlarged quota comes at the expense of a more restrictive high-quality beef definition, and the reallocation of unused EU beef quota to “other countries” had become an annual and predictable event.

Production

At the beginning of February 2010, the GOR adopted Russia's Food Security Doctrine. The doctrine prescribes Russia to reach 85 per cent self-sufficiency in total meat and poultry by 2020. The Ministry of Agriculture has accelerated this goal to be reached within 3-5 years.

Livestock Policy

At the beginning of February 2010, the GOR adopted Russia's Food Security Doctrine. The doctrine prescribes Russia to reach 85 per cent self-sufficiency in total meat and poultry by 2020. The Ministry of Agriculture has accelerated this goal to be reached within 3-5 years.

Ministry of Agriculture Budget

Subsidies to support agricultural production and rural development will total RUR97.9 billion ($3.3 billion) in 2010, down slightly from RUR99.7 billion ($3.3 billion) in 2009. The State programme of Development of Agriculture and Market Regulation 2008-2012 consumes RUR85.5 billion ($2.9 billion) of this total, of which, RUR79.4 billion ($2.6 billion) is allocated for interest rate subsidies, a 30 per cent increase over 2009. The State programme also includes a RUR3.5 billion ($117 million) allocation to subsidising pedigree livestock in 2010, down from RUR5.6 billion ($186 million) in 2009.

Minister Skrynnik has indicated interest rate subsidies helped finance the construction of over 250 new dairy, meat, and poultry facilities in 2009. On March 12, the Minister expects 124 the construction and renovation of 124 meat and poultry farms will add 646,000 MT (live weight) in 2010 production capacity. This is an upward revision from her earlier statements suggesting plans for 92 farms and an addition of 400-500,000 MT (live weight). We believe this earlier figure included 23 planned poultry farms totaling 320,000 MT (live weight), but the breakdown of the current plans remain unclear. Also, according to the Ministry's forecast, by 2012, farms built or renovated since 2006 will produce 62 per cent of Russia's poultry meat, 40 per cent of its pork, and 36 per cent of its beef.

Pork and Beef Development Programmes

On 30 November 2009, the Ministry of Agriculture issued Order #567 “On approval of the branch target programmes „Development of pig farming in Russia for 2010-2012." The RUR7.5 billion ($250 mln) programme targets to produce 2.7 MMT of pork (slaughter weight) by 2012 in order to reduce imports share in the market from 29 per cent in 2009 to 14 per cent in 2012.

On 6 November 2008, the Ministry of Agriculture issued Order #494 “Development of beef cattle breeding in Russia, 2009-2012.” This order grants the beef cattle programme RUR19.2 billion ($600 million) to increase the number of pedigree beef cattle from 142,900 head in 2007 to 500,000 head in 2012, including an increase of 66,300 to 200,000 cows. Later in 2009 and again in 2010, the GOR budgeted RUR3.5 billion ($110 million) for 23 regional beef cattle programmes to subsidise cow/calf operations and heifer purchases at RUR5,000 ($160)/cow.

Regional Implementation of State Programmes

Since many regions didn't meet their commitments under the state programme for boosting meat production in past years, the Ministry of Agriculture has also indicated its intent to implement strategic planning and strengthen control of how regions meet their commitments on developing agriculture. In 2010, the regions are expected to develop programmes that ensure all indicators contained in the state agriculture development programme are met.

One example of new projects is located in Moscow oblast. Earlier this year, the provincial government approved a $40 million Thai proposal for a swine project which envisages 35,000-head (or 5,000 MT live weight) of production annually by 2011. Pigs for the project will be imported from Thailand. The Moscow government expects the products will be consumed domestically, as well as exported. In 2009, the Thai investor built a feed mill and in the future has plans for several more pig farms, a meat processing plant, and a distribution network. The total planned investment in the Moscow region is $500 million.

Swine and Pork Production

The swine industry underperformed government expectations in 2009, and in doing so, steadied our confidence in USDA-Moscow's September forecast. Government subsidies continue to tease new investors with cheap money, but many remain apprehensive. Such apprehension resulted in numerous reports that the number of planned construction and renovation projects for swine farms were not fully realised in 2009. We expect this to continue into 2010, regardless of the 30 per cent increase to subsidise interest rates. As a result, USDA-Moscow holds its 2010 inventory and production numbers mostly unchanged. In general, we only revise swine slaughter to reflect higher tariffs placed on live hog trade, starting January 1, 2010. For a clear view of the swine industry's progression, slaughter numbers need to be compared after excluding live hog imports, since the majority is sent straight to kill. We also confirm our expectation that 2010 pork production growth will trail growth in slaughter as average kill weights drop. Additionally, African Swine Fever will continue to plague Russia's top pork-producing regions and may be poised for new and continued outbreaks.

Long-term Structural Changes Taking Place

USDA-Moscow expects the overall growth of the swine industry will continue to originate from the success and transition to heavily state-subsidised agricultural enterprises while the importance of private households is marginalised. At the end of 2008 (2009), the Federal State Statistics Service (Rosstat) reported agricultural enterprises accounted for 57.2 (61.3) per cent of the swine inventory and 41.8 per cent of production. Private households accounted for 37.9 (34.3) per cent of inventory and 54.4 per cent of production, and private farms accounted for 4.9 (4.4) per cent of inventory and 3.8 per cent of production. The dressing per centage from live to slaughter weight in Russia was 75.9 per cent in 2008.

The growing number of head at agriculture enterprises attributed to 22 per cent higher production at such facilities in 2009. Deputy Minister of Agriculture and General Director of National Union of Swine Breeders Korolyov noted in March 2010 that Russia has 200 such industrial pork producers, 20 of which are highly efficient and post 25 per cent profits with a production cost of RUR48-49/kg live weight. In total, these 20 companies represent 43 per cent of industrial production and 90 per cent of pork production growth in 2009. By 2012, Korolyov forecasted these producers will represent 50 per cent of Russia's industrial production. However, due to high variations in slaughter weights, two head need to be added at these enterprises to match the slaughter weight of a single hog located in private households. For that reason, we expect swine inventories will continue to rise faster than production. This is also reflected in our slight revisions of slaughter (higher) and pork production (lower).

African Swine Fever

Controlling African Swine Fever (ASF) continues to be problematic for Russia following its continual reappearance on the territory since the end of 2007. ASF's move north to the major pork producing region of Stavropol, Rostov, and Krasnodar threatens over 25 per cent of the country's production. Furthermore, ASF's leap to St. Petersburg and previous appearance along Russia's southern border with Kazakhstan signify ASF is not solely a problem to be blamed on the Caucuses. Instead, feeding practices, control of Russia's veterinary service, and the population of swine held at private households throughout the country have and will likely continue to come under increased scrutiny. Considering the continuing situation in spite of actions already taken, the Ministry of Agriculture is right to have a pessimistic 2010 forecast for ASF, predicting its possible spread to Voronezh, Lipetsk, Saratov, Belgorod, Moscow, Tatarstan, and Mordovia.

Imports of Live Hogs for Slaughter Up in 2009 but Should Fall in 2010

Russia imports of live hogs for slaughter rose 68 per cent in 2009 to 1.403 million head, but USDA-Moscow expects this number will fall dramatically in 2010, as a result of higher imposed tariffs, effective January 1, 2010. The GOR raised the tariff from 5 per cent to 40 per cent but not <0.50 €/kg. The nearby Baltic countries remain the most likely to continue supplying these hogs while transportation costs and constraints should curb trade from central Europe. Considering these factors and lower January 2010 trade in spite of higher pork prices, USDA-Moscow projects 2010 live hog trade to fall at least back to 2008 levels. That said, sustained high pork prices should provide enough incentive to continue circumventing the pork quota at significant levels until domestic pork producers can properly supply slaughter facilities. Deputy Minister Korolyov noted live hog trade could again flow rapidly under the new tariff regime if prices on live hogs reach RUR80/kg live weight. Current prices are RUR76/k

Cattle and Beef Production

As cattle numbers contract in line with an ever-economising dairy industry, beef production will continue to follow. Generally, like the pork industry, potential outside investors in the beef industry have not fully returned since the onset of the crisis. Some of those that have returned have downsized development plans. Furthermore, poor cattle husbandry continues to hinder the Russians from developing on their own, and many plans require foreign experts in order to train and guide the projects. As a result, the beef industry mostly lived down to our 2009 expectations, and this trend will most likely continue in 2010. Beef cattle numbers will continue growing in share but will remain mostly insignificant to the total and overall trend over the next 10 years.

USDA-Moscow took account of Rosstat's inventory growth rates to refine 2009 and 2010 beginning inventory. Better than expected implementation of support for the dairy and beef cattle breeding programmes signaled 2010 beginning stocks were cut only 1.5 per cent, rather than our earlier forecast 2.5 per cent decline. Government support also overcame financial struggles in 2009 to support an increase in live cattle imports. Considering the slightly improved trading climate, we expect imports to grow, but ultimately limited by vessel availability in 2010.

Long-term Structural Changes Taking Place

As the beef industry develops, USDA-Moscow expects agricultural enterprises will constitute nearly the entire beef breed inventory. Like pork, the success and growth of agricultural enterprises will be dependent on continued state support. However, in beef, this support will be necessary in both purchasing genetics and construction. Unfortunately, tracking the structural shift will be difficult since the Ministry of Agriculture does not differentiate between beef and dairy cattle by producer type. Resulting from these market conditions and fused datasets, at the end of 2008 (2009), Rosstat reports agricultural enterprises accounted for 46.9 (45.9) per cent of the cattle inventory, including 42.8 (41.5) per cent of the cow inventory, and 34.4 per cent of beef production; private households accounted for 47.3 (47.7) per cent of the cattle inventory, including 52.4 (51.8) per cent of the cow inventory, and 61.5 per cent of production; and private farms accounted for 5.9 (6.4) per cent of cattle inventory, including 6.0 (6.7) per cent of cow inventory, and 4.1 per cent of production.

In 2009, beef production from agricultural enterprises fell five per cent in total. The average dressing per centage from live to slaughter weight in Russia in 2008 was 56.8 per cent.

Establishing a beef industry in Russia is a long-term project, regardless of what self-sufficiency targets and Ministry of Agriculture projects might call for in the next three to five years. As the long-term restructuring and modernisation of the dairy industry is underway to replace the current herd size with fewer, more efficient cattle, this will perennially decrease the number of dairy cattle available for slaughter. According to Rosstat, agricultural enterprises produced 5 per cent less beef in 2009 than 2008. Also, USDA-Moscow foresees broader adoption of sexed semen genetics in the coming years further eroding the dairy industry as a traditional beef source. GOR financial support to both dairy and beef industries should continue as oil and gas fuel the Russian budget, but domestic support limitations will arise once Russia accedes to the World Trade Organisation. Considering these factors in spite of the negative impact low dairy prices played in 2009, it is permissible to consider the dairy herd's continued contraction at 1-2 per cent annually for the next 10 years before leveling out. In beef, these factors, combined with the herd's current low numbers should favor annual growth near 10 per cent for the next 10+ years. However, under such a scenario, the total cattle herd doesn't bottom out until sometime between 2020; and at which time the beef herd would still only comprise 10 per cent of the total number. Certainly, the Ministry's plan of annual 25 per cent growth in beef inventories would presumably turn around the total herd within the next five years, but this scenario is difficult to imagine, since there is no evidence Russia has made such strides since 2007 and given that the GOR plan doesn't appear to account for dual-purpose and commercial stock.

Trade

The tariff-rate quota (TRQ) for meat and poultry was extended through 2012, albeit with tighter access restrictions. The TRQ includes only fresh, chilled, or frozen muscle cuts of Chapter 2. In pork, Russia split out pork trimmings from the larger pork quota. In beef, Russia redefined the high quality beef exemption from beef priced at 3 €/kg to 8 €/kg. In-quota tariffs remain steady for all meat and poultry in-quota rates at 15 per cent. Over-quota tariffs for pork and beef also remained unchanged at 75 per cent and 50 per cent, respectively, while poultry was reduced from 95 to 80 per cent.

However, until the GOR reforms its policies toward maximum residue levels and micro-biological requirements in raw meat to reflect Codex Alimentarius recommendations and/or science-based norms, such restrictions that banned virtually all US pork plants in 2009 are likely to spring up again and again for exporters from many countries to Russia. Unfortunately for traders, the GOR continues to send mixed messages on whether it is committed to governing supply through the unpredictable use of non-science based SPS barriers or if reform is truly somewhere just over the horizon.

Pork Trade

Russia pork imports dropped to $1.9 billion or 649,791 MT (844,728 MT CWE) in 2009, a 16 per cent fall in value but 20 per cent fall in volume. The pork TRQ was only filled with 476,652 MT, and 146,717 MT was delivered over-quota. Brazil was the only significant exporter to increase sales – approximately 10,000 MT – while the European Union, United States, and Canada each sold approximately 50,000 MT less.

In 2010, a smaller pork quota will continue to support a higher imported unit value and bring less fear that SPS barriers might otherwise prevent quota holders from filling quantities. Also considering the quantities traded in 2009, USDA-Moscow now expects it entirely possible for Russia to import another 100,000 MT over-quota in 2010 given suppliers face that the same tariff barriers and higher price expectations. As quota-exempt imports of prepared pork products and offal actually fell in spite of higher prices, we remain pessimistic they will play much of a factor in 2010. However, we recognise the widespread bans on US pork facilities at the end of 2009 likely played some factor contributing to a lower year-end total. USDA-Moscow does not expect the delayed reinstatement of US facilities in 2010 to blemish the chances of filling a significantly lower quota, since most trade traditionally occurs in the second half of the year when consumption is higher. Granted, a more restrictive US veterinary certificate and mandatory export verification programme will certainly reduce the number of eligible US suppliers and raise costs for those that resume exporting.

Beef Trade

Russia beef imports dropped to $2.3 billion or 639,462 MT (895,247 MT CWE) in 2009, a 15 per cent fall in value but 21 per cent fall in volume. While the quota remains underutilised at 67 per cent fill, the drop is associated with lower over-quota trade. Armed with GSP preferences and redistributed EU quota, South American beef continues to dominate the Russian market on price. Brazil, Argentina, Uruguay, and Paraguay ended 2009 accounting for 90 per cent of the total beef imported. US beef lost virtually all the market share it acquired in 2008 and remains buoyed only by liver sales.

As for now, Russia appears content to continue importing large quantities of beef since it continues to short supply its consumers animal protein in the form of pork and poultry. This was most clearly evidenced when the GOR raised the combined beef quota from 478,000 MT (669,200 MT CWE) to 560,000 MT (784,000 MT CWE). However, Russia's controls on beef over the last couple years indicate Russia is concerned about containing the quantities of low-priced beef entering the market. As a result of Russia's redefinition of high-quality, quota-exempt beef, we expect to see a significant shift of high-quality imports moving to fill the underutilised quota in 2010 and trade in high-quality beef falling off in step. South America will again drive the total import figure as Russia has now formally redistributed a significant portion of the former EU quota to “other countries”. Unlike pork and poultry, Russia does not have a strong beef constituency it feels the need to overly protect, but increased tariff protection signals further action to come in the future. Russian consumers' choice to simply consume less animal protein rather than shift back to consuming beef when pork and poultry supplies were restricted animal forced us to revise our earlier beef import estimate downward, reflecting year-end import statistics.

Sanitary/Phytosanitary and Technical Barriers to Trade

On 28 September 2009, Prime Minister Putin signed Resolution #761 “On ensuring the harmonisation of Russian sanitary-epidemiological requirements, veterinary-sanitary and phytosanitary measures with international standards.” Specifically, the Resolution charges the Ministry of Agriculture and Ministry of Health and Social Development to target a review of Russian requirements in reference to the recommendations of the World Health Organisation, World Organisation for Animal Health (OIE), Codex Alimentarius, and National Plant Protection Convention. Where the Russian norms are found to be without a scientific basis, they are subject to be brought in compliance with the international standards.

In February, Minister Skrynnik pledged to remove excessive veterinary barriers that impede the import of agricultural products to Russia by 1 January 2011. The Minister added she decided to reconsider about 50 veterinary and phytosanitary certificates in order to bring them in compliance with international norms.

On 10 March 2010, Dr Onishchenko signed Resolution #86 “On establishing an interagency working group for harmonising hygienic norms.” This group is to conduct the review and submit the developed norms for consideration by 20 May 2010. The harmonisation should be done on the basis of a human risk assessment.

On 9 February 2010, the Russian veterinary service (VPSS) issued an order to optimise the inspection and surveillance activities directed at the reduction of administrative barriers. This includes issuance of veterinary documents within one day of request if no laboratory testing is necessary and same day decisions on whether samples are necessary. The order also noted veterinary and sanitary inspections of establishments should be conducted within 30 days of request and in accordance with VPSS rules governing import, processing, storage, and transportation.

On 26 February 2010, the Commission of the newly established Russia-Belarus-Kazakhstan Customs Union approved draft documents to unify veterinary and sanitary measures, including:

• a unified list of commodities subject to veterinary control;
• unified forms of veterinary certificates;
• a unified order of joint audits of commodities and sampling goods, subject to veterinary control at the territory of Custom Union and third countries;
• a unified order of caring out veterinary control at the border of the Custom Union; and
• unified veterinary requirements to commodities subject to veterinary control.

In May 2010, the working group on “Veterinary and Sanitary Measures” will amend the documents and submit them for consideration at the meeting of the EurAsEC Interstate Council (as the supreme authority of the Customs Union).

Consumption

Meat consumption is on a steady decline, resulting from steep quota cuts to import supplies of animal protein and less than countering gains in production. However, as prices appeared to steady in 2009 compared to 2008, there is sign of a new equilibrium forming. This timing is complimentary to Russia's population recovery, which grew for the first time since 1995, adding 15-25,000 people to steady the total at 141.9 million. Regardless of total numbers, Russia demographics should continue shifting in favor ethnicities and food cultures from Central Asia, the majority of which do not eat pork for religious reasons. Nonetheless, if Russia can sustain this population recovery and recapture some lost discretionary income from the financial crisis, consumption has a chance to stabilise. Unfortunately, higher barriers to trade make supply, consumption, and prices almost entirely in the hands of Russian domestic producers. If production falls off pace, it will be difficult for imports to backfill the short supply, and consumption is most likely to drop as meat prices will again outpace inflation.

Inflation and Meat Prices

Inflation totaled 8.8 per cent in 2009, a record in the post-Soviet era, while the average real income rose only 0.3 per cent. Inflation estimates in 2010 generally range from the GOR's 6.5 per cent to analysts' estimates of 8.4 per cent.

Meat and poultry prices began to stabilise in 2009, but analysts predict they could rise as much as 30 per cent in 2010, if a resolution isn't found between the US and Russia on chlorine treatments in poultry processing. Average 2009 prices significantly climbed over those of 2008 for beef (16.5-17.2 per cent), pork (12.9-14.7 per cent), and poultry (12.3-18.9 per cent). Comparing Moscow, St. Petersburg, and Vladivostok, 2009 beef prices grew just short of 20 per cent in all markets while pork prices escalated near 15 per cent in both Vladivostok and Moscow. While price hike threats remain in the second half of 2010 as historical import demand grows with consumption, prices have been relatively stable to begin the year as stocks and domestic supplies have been enough to satisfy the reduced demand period. A leading meat processor noted pricing trends in the meat market will remain positive as a result of a reduced imports and rising demand for domestic product.

Meat Processing Industry

Meat processors produced more inexpensive meat for consumers in 2009. According to Rosstat, processed pork output in 2009 increased 26 per cent but beef fell 13.5 per cent in comparison with 2008. While total meat processor output increased 14 per cent; value-added products like semi-processed meat and canned meat increased only 1.6 per cent and 3.6 per cent, respectively. Output of the most expensive consumer product – sausage – fell 7.8 per cent.

Development in the Meat Processing Industry

At the 17th annual ProdExpo, an international exhibition of food, beverages and raw materials for their production, in February, Minister of Agriculture Elena Skrynnik said such events are an important component of the domestic production and processing development strategy. She noted more than two thousand companies presented their products at the expo, and more than half were vertically integrated Russian agricultural enterprises. Stressing the importance of such firms, the Minister called for faster development of the meat processing industry.

MARR, an Italian-Brazilian company operating in Russia since 1985, launched its second semi-finished meat production line in February 2010. In total, the company has invested over €100 million since 2005. This complex has a modern production plant and distribution center, including a fleet of 50 refrigerated trucks. While it started from exporting frozen and tinned meats for state organisations, the complex has the current capacity to supply hotels, restaurants and restaurant chains with over 1,500 types of Italian, Russian, and other cuisine's food products. As of now, its products are mainly intended for the fast-food industry, such as McDonalds. Current facilities can produce 80,000 hamburgers per hour (25,000 MT annually) but is able to expand production up to 50,000 MT annually. In 2009, MARR's turnover was €140 million, but the company expects sales revenues to reach €180 million once the plant is running at full capacity. At that point, the company plans to expand investment to building a slaughterhouse in the Orenburg region.

Further Reading

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