Skin and bones of meat-producing Russia
27.12.2011 — Analysis
Russia is steadily sinking into dependence on meat imports. In the last years, the country was able to kick off "Bush legs" through stringent restrictions on importation of chicken; however, is has been threatened by imported beef and pork coming from other front lines. Beef and pork imports are increasing annually, and all the promises made by the federal authorities regarding import substitution are buried in economically inefficient countryside. Agriculture was another time tripped up by Russia's decision to join WTO, which will dump the existing beef import duties. Foreign suppliers are backed up by the latest technologies and powerful government support, while Russian farmers can rely only on growing points in some regions and... hopes for a Russian eternal hit-or-miss chance.
Beef digest, or neither fish nor flesh
Imports account for more than a third of the Russian beef market. A number of experts argue that the import volume reaches 70% - taking into account that Russia imports boneless beef, whereas domestic beef is counted with bones. In the Sverdlovsk Region the total percentage of the imported beef (from other countries and from Russian regions) amounts to 90%.
The quality of domestic beef is out of question. Since Soviet times beef stock farming has been seen as an appendage of the dairy farming. In the USSR, meet breeds accounted for only 2% of the total livestock, now they account for less than 1%. In Europe the ratio of the beef stock farming to the dairy farming is 50% to 50%, while in the USA and South America it is 70% to 30%. In Russia, beef comes from steers born from dairy cows and from these very cows when they are "drained out". In foreign countries, such cattle goes straight to processing factories manufacturing feeding stuff.
The cattle population in Russia is growing thin not only in weight, but also in numbers - decreasing by approximately 3% every year. Now it consists of about 20.6 million heads of livestock.
In January-November 2011, the country imported 561.7 thousand tons of beef - by 4.4% more than during the same period last year. "If beef imports are put on hold today, we will immediately eat up all the livestock population. Farmers will even be at a profit when they get rid of it", meat processing manufacturers state.
The beef prices have gone up by 22% since the beginning of the year; the appreciation of the last year was even 40%. Despite this, the meat market is of low appeal to private investors, as they will have to invest billions in it, while the payback period is about 10 years.
Yet, there are far-sighted businessmen, and they choose the regions where authorities have provided beneficial investment conditions. For example, the Chelyabinsk Region is rolling out the project aimed at breeding of pedigree stock. The investment in it will exceed 3 billion rubles. The regional budget is going to allocate 550 million rubles for the infrastructure utilities channeled to cow barns, which is a hot-button issue for Russian investors. Besides, the regional government will provide allowances for land lease and guarantees for a bank loan of 2.8 billion rubles. In the next five years the livestock is planned to reach 40 thousand, thus moving up the enterprise to the top of the list when it ranks second in Russia in terms of the size. The plans include building of a slaughterhouse with the estimated output reaching 8-10 thousand tons of meat a year. As a result, at the moment the Chelyabinsk Region has 40% of all the pedigree herefords of Russia.
The Tyumen Region also intends to launch a regional breeding nucleus. The regional authorities opted for a system-based approach to development of the meat industry. They set their mind on building a vertically integrated complex that will include all the stages - from a nucleus to a processing factory. There will be work for private subsidiary farms - they are going to take part in fattening of veal calves until the age of six months. The estimates show that the net profit, which farmers will receive from fattening of 30 calves, will exceed 200 thousand rubles, while agricultural enterprises have been promised to get regional subsidies to buy out livestock.
Russian pork is no match for imported pork
At a first glance, the situation in hog farming is more encouraging. The payback period for projects in this sector is twice as short as in cattle farming, and hog farming is less painstaking. About 30% of the Russian pig complexes can be deemed as performing efficiently. The pig population has reached 18.8 million, having increased by 10% over the year.
The soft spot is the slaughter sector, which is in the embryonic state. For example, the Sverdlovsk Region has about 80 certified slaughterhouses, and almost all of them were built in the 50-70s.
Imported pork, which accounts at least for 25% of the Russian market, is stable in quality and is supplied in the dressed form; domestic suppliers generally offer pork sides. "They are delivered for processing with crushed spines - they were battered down with electric current so severely that it looks like that they were dismembered with a tommy-bar. In Germany before hogs are sedated with carbon dioxide gas, they have a warm shower and enjoy classic music", points out Alexander Cherkashin, the co-owner of CHERKASHIN & PARTNER, a Polevskoy sausage factory.
If slaughterhouses and dressing department are organized at meat processing factories, the end price of the products will increase dramatically. Local pork producers already are losing out the price war to imports that now determines the price ceiling.
In addition to import, the Russian hog farming has been severely crippled by African swine fever. The situation aggravated back in 2010; this year a dozen regions got into the impact zone. The situation was caused by reckless disregard of veterinary requirements. In the Kursk Region alone, 80% of the inspected pig farms were punished, together with all the 11 veterinary stations checked by inspectors. African swine fever poses no threat to people, but it is extremely dangerous for animals, as it cannot be cured or prevented by vaccination. The viral shedding can be stopped only by eliminating all the livestock within the effective disease area and within a 20 kilometer radius. The RF Ministry of Agriculture has developed an action program against the fever; according to Minister of Agriculture Elena Skrynnik, without sufficient precautions, Russia can lose all pig population.
Meat with a strong political flavor
Imported meat is supplied to Russia following a strange country-biased pattern. The overall quota is distributed among certain market players. The compelling need in setting quotas was experienced after the Russian market had been flooded by the unrestricted torrent of imported products in the 1990s. The government bestirred itself to support local producers only in 2003. The government authorities estimated the earlier import proportion of meat and, accordingly, fixed quotas. Such a lop-sided approach prevented new prospective players from breaking into the market and did not take into account force majeure. For example, in 2011 most of the enterprises in Brazil (one of the main suppliers of meat to Russia) were suspended from operation for 4 months due to veterinary considerations.
Participants of the meat market do not see any grounds for the country-based splitting - the free selection of suppliers would give an opportunity to find more beneficial offers and to have better tactical flexibility in the event of veterinary bans. Besides, the existing practice results in political lobbying and arm-twisting.
The decision of Russia to join WTO fueled resentment. The agreement has not been ratified yet, and representatives of the agro-industrial sector are trying to evoke a response from the government. Viktor Linnik, president of the Miratorg Agro-Industrial Holding Company, stated that it would be more sensible to bring the agriculture to the competitive level and then, ten years later, join WTO, if it still exists.
The conditions of admission of the country to WTO are not disclosed in full. Judging by piecemeal information it can be assumed that the Russian livestock farming will be pulled up by the roots through imports. Import duties for commercial pig population will decrease from 40% to 5%, which will drive down prices and, consequently, investment attractiveness of pig complexes. Import duties for offals, going down from 25% to 15%, will put an end to already clouded prospects of investment in high-level pork processing. The agreement for importation of the so-called high-quality beef at a 15% duty from the USA, Canada and Argentina under the certificates issued by exporters will allow them to sell regular cuts, by-passing the beef quotas, V. Linnik says. Experts anticipate that Russian annual losses will amount to 5-6 billion dollars.
Having the highest level of technological development, European farmers are shielded by a reliable government support system; the Russian farmer is a warrior in an open field. Subsidies provided to agricultural producers in the European Union countries amount to 45-50% of the cost of their market products, in Japan and Finland - 70%, in Russia - only 3.5%.
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