Russia’s Pork Market: Prospects for the Future
Since early February, the Russian market has been closed to pork imports from the United States and restrictions on imports have been in place for Russia’s other major pork suppliers. To understand why the Russian government took these extraordinary steps it is important to examine recent developments in Russia’s own pork market. Trends in the Russian market also shed useful light on future prospects for U.S. exports.
Russia’s drive for self-sufficiency
The Russian government is pursuing the ambitious goal of high levels of self-sufficiency in food production. For meat and poultry, the targeted level is 85 percent self-sufficiency by 2020. To reach its goal for pork, the government allocated more than $2 billion from 2009-2012 to various programs designed to increase pig production.
The funds were earmarked for purchasing breeding animals, improving genetics of the herd, constructing barns and feed handling systems, training and research. Subsidized credit, tax breaks and infrastructure support were also extended to investors. To shelter its domestic industry from import competition, the Russian government also carefully managed import quotas to limit pork entering the market.
These support measures, as well as increasing consumer purchasing power and growing demand for meat protein, resulted in high levels of profitability for pig producers over an extended period of time. With returns consistently averaging 10-15 percent annually, pig production attracted unprecedented levels of interest among Russian investors.
Measured against Russia’s goal of increasing pork production and achieving self-sufficiency, Russia’s policy has been a success. Since 2007, Russia’s herd has grown nearly 13 percent. Even more impressive has been the transformation that has occurred in the structure of the primary production sector. The ratio of pigs in commercial-scale production units increased from 60 percent in 2007 to 78 percent last year.
One of the effects of this modernization is a sustained growth in productivity. Since 2008, the Russian pig herd has expanded 13 percent while Russian pork production has increased nearly 20 percent. These impressive results for pork productivity and production are mirrored by equally solid and sustained growth in self-sufficiency of roughly one percent per year- from 61 percent in 2008 to 66 percent last year.
Russia would have made even more progress toward its 85 percent self-sufficiency target if pork consumption had not also been growing at a double digit pace (up 11 percent) in this same period. Significant demand in the market could not be met by domestic pork. Notwithstanding the global financial crisis, a weaker ruble and lower oil prices, imports in 2009-2012 still grew nearly five percent per year.
There is still plenty of upside potential for Russian pork consumption, as per capita consumption in the EU is nearly twice that in Russia. Reaching the average EU level would require Russia to produce or import an additional 2.5 million metric tons annually . While it may not be realistic to expect Russia’s per capita consumption to match that of the EU, this comparison points to continued strong growth as Russian consumer incomes rise.
The crisis facing the Russian pork industry
Since the middle of last year, producer margins in Russia have come under the same pressure as in other countries around the world. Live hog prices have dropped more than one-third, and feed prices are up nearly 30 percent. For the past several months, live prices have been below average production costs of even the largest, most modern production units, and many smaller farms reportedly are on the verge of bankruptcy.
A combination of factors has caused the precipitous decline in farm-level prices, beginning with a surge in Russian pig production from new farms that came online early last year. In addition, imports in the second half of 2012 strongly outpaced the first six months of the year because importers postponed making large purchases until Russia joined the WTO in August and the tariff on in-quota pork imports was eliminated. Finally, there has been a marked increase in recent months in the movement of live hogs and pork from Belarus into Russia, putting additional pressure on the Russian price complex.
The recent drop in producer prices has not triggered a similar decline at the retail level, even though there has been a slowdown in per capita pork consumption. This persistent gap between farm and retail prices points to a fundamental structural deficiency in the Russian pork industry. The sizeable investment in primary production in recent years has not been matched by investments in downstream processing (deboning and cutting) or development of a modern cold chain and meat distribution system. As a consequence, there is a glut of pork carcasses in the market, but the processing, foodservice and modern retail sectors face a shortage of cuts that meet their specifications.
Facing sustained losses and with no prospect for near-term improvement, Russian producers have turned to their government for relief. Rather than acknowledging the role their own decisions played, producers have identified imports and Russia’s decision to join the WTO as the primary causes for their problems.
Not only have producers asked for direct payments to cover some of their losses, but they also are appealing to the government to use the options available to it as a member of the WTO to limit imports.
So far the formal response of the Russian government to the industry’s request has been limited to a decision to increase the tariff charged to out-of-quota imports from Brazil. However, steps that have been taken by the Russian Veterinary and Phytosanitary Surveillance Service (VPSS) over the past few months to enforce Russia’s zero tolerance for residues of beta agonists, block all live hog imports from the EU and ban chilled pork imports from several EU countries have further restricted pork imports from primary suppliers. All of these measures, together with the oversupply of pork on the market, have led to a slowdown in imports, but live hog prices have continued to fall.
What does the future hold?
The crisis that is gripping its pork industry is likely to impact Russia’s ability to meet its self-sufficiency target over the longer term. Pig production is expected to continue to expand for the remainder of this year as the most recently built units come online, but since late last year new investment in pig production has completely dried up. The recent travails of the industry, together with the Russian government’s continued failure to bring the spread of African Swine Fever (ASF) under control, have increased the perceived risk associated with investments in pig production and dampened investors’ appetite.
Some factors behind the current shakeout in the Russian industry - notably high grain prices and increased imports in the second half of last year - were short-term in nature. But as recent events demonstrate, Russia faces other, more fundamental impediments to achieving its longer-term self-sufficiency goal. First among these is the need to address the structural deficiencies of the industry. This is an impediment to growth that cannot be overcome in the near term since it will require significant investment in building a modern processing and distribution infrastructure and training the workforce needed to staff it. Similarly, eradicating or at least controlling the spread of ASF poses a very real challenge because Russia lacks a central governmental authority with responsibility for managing animal diseases.
It is too early to predict whether the losses experienced by Russian producers in recent months will result in a fundamental shift away from further investment in pig production. But at the very least, this collective experience has slowed Russia’s march toward self-sufficiency. The Russian government will play the key role in determining how the pork market will evolve going forward. If it implements policies that direct investment toward the industry’s infrastructure needs, the current crisis will prove to be a bump in the road. On the other hand, if the government misdiagnoses the causes of the severe problems that the industry faces today and focuses its response on short-term measures to limit imports, sustained growth in pork production could be postponed indefinitely.
Under either of these scenarios, Russia must import significant volumes of pork to fill the gap between what it can produce and the level of consumer demand. This fact points to longer-term opportunities in Russia for the U.S. pork industry, which justify the effort necessary to regain access to this important market.
Thad Lively is USMEF senior vice president for trade access. Yuri Barutkin is USMEF St. Petersburg manager.