Author: Elena Tyurina, Director General of Agricultural Marketing Institute
Russian pork market continues to develop dynamically. The increase in domestic production indicates both the growth of pork consumption and the restored people's purchasing power. Russian pig-breeding moves onto an industrial basis. During the past five years, there has been a steady production growth in agricultural enterprises, which include pig-breeding complexes, and a fall in rates of peasant farm enterprises and private subsistence farms of the population.
According to the preliminary data from the Institute of Agricultural Marketing (hereinafter, “the IAM”), in 2010, Russia produced 2.37 million tons of pork and imported 1.25 million tons while consuming about 3.6 million tons. Having said that, we can talk about the changing structure of the market: over the past years, the number of livestock in pig farms has been increasing (in 2009, an increase accounted for 206 thousand tons, in 2010 - 950,000 tons). Meanwhile in private subsistence farms, this indicator is rapidly dropping (from October 2009 till October 2010, the livestock declined by 7.5% to 6,700 thousand). In peasant farm enterprises, the number of livestock has reduced by 6% to 854 thousand heads.
In the 4th quarter of last year, slaughter was carried out more extensively than in the previous period, resulting in a lower annual growth of population than expected - 2.5% versus 5% a year earlier. Also, acute African Swine Fever (hereinafter, “ASF”) outbreaks dramatized the reduction in the number of pigs in the southern part of the country.
The critical time, which proved to be a starting point for this trend was the period 2009-2010, when the modern pig-breeding farms, built as a part of a national project, implemented the planned capacity and started to increase the production volume. According to the IAM forecasts, the rates will keep on growing in the near future. For instance, the Rusagro Group and the authorities of the Chelyabinsk region have recently signed an agreement on the construction of a pig-breeding complex with a capacity of 90 thousand tons of meat per year. The project timeline is 2011-2018. By 2018, the complex should reach full capacity. Over the past six months, it is the second new pig-breeding project of the Rusagro Group. In August 2010, the company announced the construction of the complex in the Tambov region with the planned capacity of approximately 90 thousand tons of pork in live weight per year. The first stage of construction is expected to be started in 2012.
The Rusagro Group’s competitors keep on building capacity just as much. For instance, the Miratorg Company has built 10 pig-breeding complexes in the Belgorod region with a capacity of 130 thousand tons of pork meat in live weight, and by 2012, the company plans to introduce 13 additional complexes, increasing the production capacity up to 300 thousand tons. The Cherkizovo Company has seven major pig-breeding complexes with the total capacity of 115 thousand tons and three more projects are currently underway. Thus, by 2012, the total capacity should reach 153 thousand tons. By 2012, the Agro-Belogorye Group of Companies plans to increase production of pork by a half – up to 155 thousand tons of meat in live weight due to five new pig-breeding complexes. Four of them will emerge in the western part of the Belgorod region and the other one - in the east. Each complex will produce 11-12 thousand tons of pork annually.
Pig Stock Change 2004-2015 (thousand heads)
· Pig stock numbers in agricultural enterprises
· Pig stock numbers in the private sector
· Pig stock numbers in all kinds of enterprises
As the share of imports in the domestic market accounts for 27.9%, even if all the announced projects are implemented, there is still room for growth.
The Russian market is characterized by a low supply of processed products. In the structure of supply, the largest share belongs to the live cattle in the private sector: it accounts for about 60%. The supply of live cattle from the pig-breeding complexes amounts to 780 tons. The share of half-carcass is merely 8%, while the share of the split products is 11%. At the same time, a new trend has emerged in the market – the increase in supply of the split products. Meanwhile in 2009, its volume amounted to 183 thousand tons, in 2010, this rate reached 257 thousand tons. In five years time, i.e. by 2015, we expect a reduction in supply from the private subsistence farmings to about 1 million tons, due to the lack of slaughterhouses. At the same time, we will experience the increased supply of live cattle from the pig-breeding complexes up to 1.2 million tons versus current 780 thousand tons.
Pork Production in Live Weight 2004-2015 (thousand tons)
· Production in agricultural enterprises
· Production in the private sector
· Production in all kinds of enterprises
An important factor in the development of the trend is the increasing supply of the pig half-carcass on the part of the pig-breeding complexes, which will occur as the large companies implement the plans for construction of slaughterhouses and processing plants. According to the
IAM estimates, by 2015 pig-breeding complexes will increase the production of half-carcass and split products 2-fold and 2.5-fold respectively.Thus, we expect significant structural change in pork production, which are largely associated with the development plans of Russian companies, as well as with the increased competition in the segments of the split products and half-carcass.
According to the IAM, the large share of live cattle remains one of the main problems in the Russian market. Despite the increase in production of split products and half-carcass, 70% of pork will continue to be sold on a live weight basis. At the same time, the supply will increase on the part of pig-breeding complexes and decrease on the part of private subsistence farms. This points to the fact that the market expects the growth of competition in this segment. As the Russian pig-breeding moves onto an industrial basis and the competition in the domestic market increases, in the medium term, even if the domestic producers’ prices for live pigs and pork do not come close to the world ones, they will at least substantially fall.
Let us see to what extent the pork market demand is met. Today, the consumption of pork accounts for 23 kg per person per year and, if taking into account only the meat produced in Russia – 16.5 kg per capita. Thus, about 6 kg falls within imported goods. According to the IAM forecasts, by 2015, the consumption of domestic pork will increase substantially and reach 22.8 kg per person annually with 25 kg per year being the upper limit for a Russian. A further increase in production can lead to excesses in the market. In this case, the question of the products export will arise. This issue is hard enough to solve, since it is difficult for Russia to compete with European manufacturers in the global pork market. Besides, foreign buyers do not have complete confidence in the quality of Russian meat, particularly because of the ASF propagation on the country’s territory.
According to a preliminary estimate, the volume of imported pork in 2010 remained at the level of the previous year - 906 thousand tons, including suet (in 2009 this figure was 916 thousand tons). The leader in the import structure proves to be suet with the import volume of 256 thousand tons, followed by ham with the 21% share of imports (214 tons), then shoulder blade - 13,4% (135 tons), and half-carcass having a 13.8% share (100 tons).
In general, the share of imports in the Russian pork market amounts to 27.9% including suet and about 19% discounting it. The top three importing countries are Brazil, Germany, and Denmark. In 2010, there was a substantial increase in the supplies of pork from the EU countries and Canada. At the same time, a significant reduction was experienced by the export of this type of meat from the United States.
Today, one of the most complex issues appears to be restrictions on imports and cutting down quotas for imports of pork. In 2011, the quota is maintained at last year's level - 472.1 thousand tons, among which the European Union accounts for 225,000 tons, the USA – 57.5 thousand tons, and all the others - 189.6 thousand tons. In 2012, it is planned to be cut down to 425 tons. According to the IAM estimates, the volume of imports should reach not more than 300 thousandmarketable tons by 2015. Exceeding this rate would lead to increased competition.
Thus, plans of domestic companies to increase production should be based on understanding what they will be doing in five years, when the market becomes overly surplus.
Both a major issue and growth potential at the same time are represented by a high level of dependence on imported natural pork half-finished products. A large share of imported products belongs to shoulder blade, the domestic production of which has a total of merely 14 thousand tons. The consumption share of shoulder blade in Russia today amounts to 90%, that of neck - 85%, rib - 60%, and ham - 80%.
Dependence on Imported Natural Half-Finished Pork Products
· Imported natural half-finished products (thousand tons)
· Production of natural half-finished products (thousand tons)
Pork half-finished products manufactured by the domestic companies are primarily oriented toward retail sales, meanwhile the segment of products for industrial processing remains vacant. Since, according to forecasts, by 2015, the production volume of pig-breeding complexes will amount to about 2.2 million tons versus the current 1.2 million tons (an increase of production in slaughter weight - approximately 1 million tons), it is high time to define the allocation of the 1 million tons in question. Pig-breeding complexes alone will supply the retail market with 550 thousand tons of the product. In addition, it is essential to take into account the pork coming from slaughterhouses and processing plants. Today, the competition in the retail market is quite high, and there is still more to come. In the light of the situation, that will be prevailing in the market in three or four years, its players should consider how to present a product demanded by the industry.
Market participants should know, who their competitors are, where the imported pork comes from, where it can be supplied, and which sales channels to use. For example, a promising sales market appears to be the Kaluga region, as well as the regions of Siberian Federal District, expecting increased consumption of the final product in the near future. Growth potential is presented by the Perm Territory, Nizhny Novgorod region, and Krasnoyarsk Territory. The main deficiency is observed in the Volga Federal District, the Urals and the Far East. However, the Central Federal District, which accounts for about one third of domestically produced pork, experiences oversupply. Leader in the production of this type of meat per capita remains the Southern Federal District. By 2015, the number of surplus regions, which are concentrated in the center and in the south of the country, will grow. A troubling sign is presented by the increasing number of companies planning to build facilities in the areas, where there are already quite a lot of them. This only leads to exacerbating competition among them. Making the choice, they go by such factors as proximity to Moscow and the major sales markets, seeking to minimize transportation costs and logistics costs. However, as I see it, choosing a place for the implementation of a new project, you need to focus on the development potential of the pig market in the region.
According to the IAM forecasts, 2011 will be largely similar to the past year. The main threat to domestic pig-breeding could be a further rise in the feed prices, as well as renewed outbreaks of ASF in the Southern Federal District and the danger of the spread of epizootic diseases in other regions of the country.
Due to the introduction of new capacities, this year’s pork production will increase by approximately 15%. Russian manufacturers will be able to maintain the positive trends of last year and, thus, weaken the country's dependence on imports even more.