Pork wars

By bne IntelliNews March 8, 2012

Ben Aris in Moscow -

A low intensity meat war is raging between Europe and Russia.

With the world population topping 7bn last year, food is rapidly becoming a strategic product on a par with oil and countries are rushing to shore up their production of this most basic product. Russia could be an agricultural powerhouse, but still imports 40% of its food, according to the Federal State Statistics Service. However, a state-backed investment drive meant it became self-sufficient in chicken meat in 2009 and this year it hopes to do the same with pork.

The importance of meat imports was highlighted in the 1990s when a trade spat with the US led to Russia blocking the imports of "Bush's Legs", as frozen American chicken legs were dubbed by stall holders in Russia's open air markets, after the then-president George W Bush.

The state has poured money into the sector via loans to farmers from Rosselkhozbank (Russian Agricultural Bank), which is now one of the five biggest lenders in the country. The agricultural sector is growing fast and Russia leapt up the rankings to become the fourth largest grain exporter in the world in 2008. But meat production has been lagging behind. Chicken production has followed grain as the simplest meat product to develop. Pork is next and beef production will follow as a few state-financed mega-ranches come online in a few years time.

In the meantime, most pork imports have come from Europe and pork became a bone of contention during the recent WTO negotiations, which culminated in Russia's accession to the global trade bloc in December. Russia's domestic pork producers will inevitably suffer as trade restrictions on European imports are removed. "[WTO accession] is likely leave the poultry segment unaffected, while profitability will decline in the pork segment, though the most efficient players should retain some of the highest margins on a global scale," reckons Mikhail Krasnoperov, an analyst with Troika Dialog.

To counter the competition from European pork exporters, the Russian government has allocated RUB6bn ($200m) of investment to help the domestic pork industry boost production and maintain their market share in 2012. Agriculture Minister Yelena Skrynnik said at the end of January that the state wants to end the import of some 500,000 to 600,000 tones of pork products annually, or about a fifth of the total consumption.

The shortage already sent pork prices up to record levels in 2011 and now the uncertainty over the WTO accession has been resolved, the increasingly attractive market has spurred several big domestic pork producers into launching investment programmes.

Currently, Russia supports local producers with a system of quotas and high duties on pork imports, but after Russia acceded to the WTO in December the new more open trade regime will make imports by European pork producers even easier. "During the last five years, Russian and foreign investors invested more than $7bn in the Russian pork industry," says Sergei Yushin, the head of the Russian National Meat Association, who warns that more foreign investment is under threat following the start of WTO membership without strong support by the state.

Pork imports to Russia could triple under the new trade regime, the National Pig Breeders' Union told Bloomberg in January, to reach 1.8m tonnes in 2020, which should meet almost half of Russia's total demand. Farmers are afraid that the rise of cheap high-quality imports will kill off investment into Russia's pig farms, which tend to be smaller and less efficient than the large-scale factory farms in the West. Domestic production will go into decline from 2014, the Pig Breeders Union warns. "The industry's investment attractiveness will drop sharply after Russia's accession to the WTO," Nikolai Birulin, the union's chief expert, said at a conference in January organised by the Moscow Institute for Agricultural Market Studies. "Only those farm projects that are being constructed now have a chance to be commissioned."

Russia's pig-breeding industry could face losses of at least RUB20bn ($662m) under the terms of the country's WTO membership, he calculated.

The government is well aware of the problem, Deputy Agriculture Minister Ilya Shestakov said on the sidelines of the conference in January, and it's planning to support domestic production with administrative measures and credits until the sector can stand on its own trotters in the face of competition from cheaper imports.

In the meantime, Russia's leading pork producers are accelerating their investments to grab as much market share as they can before the competition arrives.

At the start of February, Russia's leading meat processor, Cherkizovo Group, announced it will increase pork production at its 10 pig farms by 80% over the next two years to 180,000 tonnes a year, CEO Sergei Mikhailov said at 2012 Russia Forum in Moscow.

And rival firm Rusagro has also said it will extent is pork plant in the Tambov region by investing an addition RUB3bn in 2012 to bring the plant to an annual capacity of about 100,000 tonnes, according to the company's CEO Maxim Basov. The company has already invested RUB2.5bn last year and extension will be co-financed by the government, Basov said, which has allocated RUB6bn from the budget to develop deep processing of pork in the country.

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