Report Highlights

The pork sector did not grow as fast as predicted in 2005 but production levels are expected to increase in 2006 due to a larger pig crop and a return to normal slaughter weights. The Russian livestock sector experienced yet another decline in beef production with no end in sight to its decade-long implosion.

Meat imports entered Russia with minimal interruptions in 2005 due to better administration of tariff rate quotas. The share of boneless beef cuts as a percentage of total beef imports continue to grow. Russia banned meat imports from Brazil due to foot and mouth disease outbreaks and from Ukraine and Poland due to claims of outof- control smuggling and fraud.

Executive Summary

Pork production in 2005 was less than anticipated due to lower than expected pig crops. However, the sector is expected to grow in 2006 due to a larger pig crop and a return to normal slaughter weights. Beef production continued falling in 2005 and is expected to decrease even further in 2006 as investors look elsewhere. Tariff rate quotas (TRQs) that were initially developed to cover 2003-2006 were extended until 2009. The Russian government issued a resolution that will simplify the process of reallocating quotas from country to country when animal disease outbreaks occur.

Russia banned all meat imports from Brazil and Poland in the end of 2005 and from Ukraine in early 2006. More investments are expected in Russia’s livestock industry since the inclusion of agriculture in the list of four National Priority Projects announced by President Putin in September 2005. Quota administrators interfered less with pork and beef shipments in 2005 than in previous years.

Production

Swine ending stocks in 2005 were revised down from the previous report due to lower than expected pig crops. High pork prices encouraged early slaughter in 2005 at lower than normal weights. The downward revision in the swine herd is reflected in the 2005 and 2006 production forecasts. However, pork production in 2006 is expected to increase by five percent compared to the previous year as pig crops rebound and return to normal slaughter weights. The beef industry will continue its decade long implosion, as investments prove more attractive in other agricultural sectors such as poultry production.

Cattle ending stocks are forecast to decrease by almost six percent in 2006 due to high slaughter rates. Beef production is forecast to decrease by four percent in 2006. Meat production in the Russian Federation is getting a lift from the TRQ system, introduced in 2003 and in effect until 2009, as internal markets are better protected. In addition, the Russian Ministry of Agriculture is, in effect, subsidizing meat production by covering 2/3 of loan interest rates invested in agricultural projects. Even so, industry experts admit that Russia’s livestock sector continues to lag far behind the developed world in production efficiency.

Serious technological upgrading is needed, requiring monumental direct investment before Russia’s livestock sector will become profitable. According to Ministry of Agriculture statistics, profitability of agriculture decreased by 29.7 percent from January– September 2005 in comparison to the same time period in 2004. Russian officials blame this drop on the disparity of prices between agricultural products and inputs (mainly petroleum based). Advantages of modernization do not yet cover the losses associated with outdated technology and equipment, poor management practices, and rising input prices.

Feed supplies

Total feed supplies in 2005 were flat compared to 2004. Feed grain carry-over stocks and a good crop in 2005 have weakened import incentives. However, Russia is expected to increase corn imports in 2006 in order to maintain the growing domestic poultry and livestock industries. A dry autumn and unusually cold winter have led to a 4 percent decrease in total winter grain area sown compared to last year’s level. According to experts, the January-February frost that covered western Russia has caused plant damage. Although it is still too early to estimate the damage done by the frost, experts believe that the yield will be significantly lower than usual.

Consumption

Beef consumption fell by 4 percent in 2005 and is expected to be flat in 2006. Increased quota levels for beef compensated, to some extent, for the fall in domestic beef production. Pork consumption, however, increased by 3 percent in 2005 and is expected to increase by an additional 2 percent in 2006 due to higher domestic production and larger pork TRQ level.

Trade

In addition to country TRQ allocations, meat supplies are now seriously affected by largescale animal disease outbreaks in major exporting countries in addition to retaliatory bans against countries believed to be complacent in stopping illegal beef and pork shipments. Meat bans introduced by the Russia at the end of 2005 (Brazil and Poland) and in the beginning of 2006 (Ukraine) create a state of uncertainty for importers looking to fill their TRQ allocations. If the bans are not removed in the near future, it will be very difficult for importers to find adequate substitution.

Ukraine is becoming a less important exporter, but recent bans on meat transit through Ukraine are only exacerbating the situation. With the bans in place, imports are expected to fall by 10-15 percent in 2006 and already high meat prices will grow substantially. Brazilian meat imports entered Russia for only half a year in 2005. If the ban on Brazilian meat is lifted from two of Brazil’s most important meatproducing regions, as is being considered by Sergey Dankvert, Head of the Veterinary and Phytosanitary Surveillance Service (VPSS), then experts believe that importers will be able to fill their quotas.

Imports of live cattle increased in 2005 while swine imports decreased significantly. From January-September 2005, the biggest cattle exporters to the Russian market were Denmark (3,108 heads), the Netherlands (1,608 heads) and Austria (1,505 heads). The majority of live cattle imports were for genetically superior dairy cows. The biggest swine exporters to Russia were Poland with 18,257 head (down 58 percent in comparison with 2004), United Kingdom with 6,880 head and Denmark with 2,189 head. Pigs were exported to Russia mostly for improved genetics as well as for fattening and slaughter to avoid TRQ limitations. Live animals are not included in Russia’s meat import TRQ.

There were significantly less interruptions by quota administrators to meat imports in 2005 compared to previous years, which explains why imported meat volumes were higher from January-September 2005 in comparison to 2004. The share of high value (boneless) beef cuts increased as a share of total beef imports to compensate for TRQ limitations. Almost 100 percent of beef carcasses were imported from Ukraine.

Stocks

Meat stocks were stable in 2005 due mostly to steady import volumes. 2006 supplies will depend on the length of the ban placed on Brazilian and Ukrainian livestock products. We expect the issues be resolved by April and stocks will not suffer from it. If not prices will go up and meat consumption will decrease as a result.

Policy: Agriculture Becomes A National Project

In September 2005, Russian President Vladimir Putin designated agriculture one of four priorities for national development, and toward the end of November 2005 the Russian parliament appropriated funds for implementing programs under this initiative (See GAIN report #RS5086).

A key element of the agricultural program is the expansion of rural credit. During the next two years, nearly $70 million will be directed to rural credit cooperatives with the government-owned Russian Agricultural Bank (Rosselkhozbank) acting as the agent. Under the plan, Rosselkhozbank will create 1,000 rural credit cooperatives, through which it will funnel funds, and the bank has proposed leveraging an additional $250 million for the program through interest rate buy-downs on commercial loans. Interest rate buy-downs on commercial loans are expected to promote investment and thus, help revitalize Russia’s livestock industry (See GAIN RS5089). Some input costs will be cut, particularly those for imported technology. The program calls for total elimination of import tariffs on machinery and equipment needed by the livestock sector for which there are no Russian-built equivalents.

Russian officials hope that state subsidies will attract private investment to Russia’s agricultural sector. As of today, the Ministry of Agriculture has received more than 2,000 investment projects for animal production from 80 different regions of the Russian Federation. The projects propose participation in construction, renovation and equipment upgrades at animal slaughterhouses and plants. Government officials have reviewed 800 projects, 250 of which were acknowledged as being in compliance with the established criteria for selection.

Meat Imports from Brazil Banned

Russia banned all imports of beef and pork from eight Brazilian regions – Mato Grosso do Sul, Mato Grosso, Goias, Sao Paulo, Minas Gerais, Parana, Santa Catarina and Rio Grande do Sul on December 13, 2005. According to VPSS officials, imports will not resume in the near future due to the dangers posed by FMD outbreaks in those regions. This announcement was made after talks held between the Head of VPSS and the Executive Secretary of the Brazilian Ministry of Agriculture went nowhere. The Brazilian delegation asked that the ban be lifted from the state of Mato Grosso do Sul, one of the country’s largest pork producing regions, but that request was denied. The Brazilian side presented the VPSS with documentation regarding FMD in mid-January and a response from Russian officials is expected in two or three months. In addition, an agreement was reached to create a channel for regular exchanges of information regarding the epizootic situation in both countries.

Meat Imports From Ukraine Banned

The Russian Ministry of Agriculture announced that all meat and dairy products from Ukraine would be banned as of January 20 due to continued violations of Russian veterinary laws. Russia alleges that Ukraine is purchasing large quantities of Polish meat and shipping it to Russia as Ukrainian product. In November 2005, Russian authorities banned all Polish meat products due to claims of falsification of veterinary documentation and out-of-control smuggling of potentially hazardous meat products. Sergey Dankvert said in a press conference that the ban was necessary because Ukraine’s veterinary service apparently has no control over delivery, transfer and the processing of meat that is dangerous from a veterinary standpoint. He added that the ban was necessary because, “Russia was being threatened with imports of animal diseases and low-grade products hazardous to human health.”

Kaliningrad Oblast

The Ministry of Economic Development and Trade (MEDT) has decided to investigate claims by Russia’s meat industry that Kaliningrad and other CIS countries are purchasing large quantities of meat from non-CIS countries, slightly processing it, and then exporting it as their own product to Russia duty free. Officials suggest that meat should not be considered as processed from Kaliningrad and the CIS countries if it has only been salted, peppered, cut up or washed.

By order of the government of the Russian Federation #2362-p and #2360 of December 30, 2005, the government agreed with the administration’s proposals on changing the list of products that can be imported from duty free zone countries from January-April 2006 to the special economic zone of Kaliningrad oblast. For that period the quota for bovine meat, fresh or chilled (HS number 0201) is set at 2,250 metric tons; the quota for bovine meat, frozen (HS number 0202) is set at 6,250 metric tons; the quota for pork, fresh, chilled or frozen (HS number 0203) is set at 4,300 metric tons. From January-April 2006, imports of most other groups of agricultural products from duty free zone countries are banned. However, exceptions are made for many subgroups in the livestock and meat groups of products. This order is currently being reviewed and will be followed by a resolution making it valid.

New Animal Products Control System in the Works

Russia hopes to protect its market by introducing a new control system to animal product imports that would be similar to the system used by the European Union (EU). Privately, Russian authorities have stated that the current control system for food imports from the EU is too liberal even though they publicly state that strict regulations and controls are placed on all European products entering the Russian market.

Marketing

The government resolution on beef, pork and poultry imports from 2006-2009 instructs the Ministry of Economic Development and Trade to allocate all import licenses in accordance with the set quota from December 15 to August 1 of each year. In the past, 85 percent of the quota was set by MEDT and the other 15 percent was sold at auctions.

The quota will be distributed among importers by April 15 of the current year in proportion to the annual volume of beef, pork or poultry they imported from January 1 to December 31 of the previous year, minus 25 percent of the meat distributed in December in proportion to the meat imported from January 1 to September 30 of the previous year. Imports from CIS countries are not included. Beginning September 15, import licenses will be allocated for meat imports that have not been selected as of August 1 on the basis of applications from importers that have licenses until August 1 of the current year in proportion to volumes imported from January 1 to December 31 of the previous year with the exclusion of CIS imports. The licenses will be valid until December 31 of each year with the current year inclusive. Licenses cannot be extended. Frozen beef quotas were set at 435,000 tons in 2006 compared to 430,000 tons in 2005. Frozen pork quotas are set at 476,100 tons this year compared to 467,400 tons in 2005.

Investments: Russia - German Cooperation

According to press reports, government officials from Voronezh oblast and Bavaria signed an agreement during the International Green Week Exhibition held in Berlin, Germany. As a result, a livestock investment production project in Voronezh oblast worth 4 billion Euros has begun. German banks will cover the majority (75 percent) of the cost associated with the project. It is envisioned within the framework of the project that pork, beef, milk, poultry and feed production will be totally reorganized. Dairy production will continue at existing facilities, after receiving substantial makeovers, while new pig and poultry farms will be built. Meat market experts are skeptical about whether such a large investment in only one region of Russia will actually come to fruition.

Meat Importers Invest in Meat Production

Miratorg Company, one of the biggest Russian meat importers, plans to invest $50 million in the Belgorod region to built pork and cattle slaughterhouses and processing facilities in cooperation with German companies Banss and Falkenstein. Two million pigs and 100,000 heads of cattle are expected to be slaughtered there on a yearly basis. Miratorg will invest an additional $200 million in the meat producing agro-holding project in 2006. Earlier, Euroservice and Optifood – other large meat importers – announced that they also plan to invest in meat production. Details are forthcoming. Large meat importers are looking into vertical integration as a method to avoid the limitation and uncertainty associated with Russia’s TRQ system.

Further Information

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