Russian Poultry Production Sector and its Capacities

24.09.2008 meatinrussia

Governmental support for enterprises of poultry production sector is significant but many businessmen don’t believe in complexity of protection measures.

At the end of August of the current year Sergey Lisovsky, Deputy Chairman of the Council of Federation Committee on Agricultural Food Policy and Fishery Sector reported, that 300 thousand tons of non-distributed poultry (including 250 thousand tons produced in Russia) had been stored up in the warehouses within half a year.

Very large imports volume (up to 40% of the market) has become the reason for the market saturation. The volume of sold American chicken legs doesn’t depend on the country’s demand but it is determined in accordance with the agreement signed with the USA within the frames of negotiation process on WTO in 2005. Our producers’ assets have been already frozen by 25−35%, and to observe the conditions of the agreement, the authorities have to continue further retardation of the agricultural sector development.

As early as in 2003 the government put some restrictions on poultry supply to Russia by introduction of quota assignment on imports. This measure helped to attract investments into the industry and provide its profitability; however it didn’t avert the overproduction crisis. “Today, the authorities talk about the priority of food safety strategy and even discuss the introduction of the corresponding law”, – Egor Yakovlev, the Director for development of Poultry Plant “Roskar” (Leningrad Region) specifies.

Russian producers’ current potential is high enough to meet the demand for Russian chicken meat; we need about 1.5 – 3 years to reach this level. “To reach it we need a good program of imports substitution, which would foresee real help to agricultural producers, and agricultural production subsidizing on one hand, and an annual imports reduction on the other hand”, – Lisovsky considers. If we have such a program we will be able to think about exports.
Faster, higher, stronger!

Poultry breeding has been attracting investors since the late 1990−s. First of all, chicken meat demand is growing at a quick pace. Secondly, investment fast pay-back period favors active development of poultry breeding in comparison with other sectors of animal breeding. “Chicken raising period amounts to 40 days (180 days for pigs, and 450 days for calves). One poultry plant pay-back period is about 1.5 years, whereas a pig complex is usually paid back within five years”, – Roman Kipot, the analyst of meat market of Institute for Agricultural Market Studies (IKAR) says.

Even now main production facilities of meat sector are focused on poultry. “During last three-four years production volumes have grown by 15-18% in poultry breeding industry. At present, the industry is at the profitability peak”, – Aleksandr Bosnak, the General Director of Agricultural Holding “Agricultural Complex “Rubeg” (part of Rubeg Group) points out.

Poultry imports regulation additionally encouraged growth of investment attractiveness of domestic poultry breeding. “Many large holdings, which haven’t specialized in poultry production before (for ex. “Prodo”), start acquiring and constructing own poultry plants”, – Kipot confirms.
Food safety line

Such companies – importers as “Rubeg Group”, “Optifood”, and “Bely Fregat” have started poultry plants purchasing and reconstruction as well. “Imports are being reduced now, and it’s clear that we will continue its reduction in future. If importers don’t have the same products of their own production then not any other will appear and they will lose a market share”, – Egor Yakovlev says.

It’s easier for importers to work with familiar market. Moreover, the consumer demand is leaning towards the domestic products as far as the population income grows. Information on poultry diseases and growth of chilled product demand played their role as well (as only meat of domestic producers may be supplied for sale in chilled state).

“The availability of own raw meat will afford us to expand the range of products thanks to chilled meat and to reduce the dependence on imports; such a situation meets the state interests in the field of food safety”, – Aleksandr Bosnak considers. If anything, it was the risk of loss of control under price formation in the internal market which has become the main reason for own production development by the importers.
How to get rid of chicken legs

At present, domestic poultry is more expensive than the imported one. As a result, the rural population still has to consume imported chicken legs. “A notable distinction in price is explained by long-term state subsidies to foreign farmers, – Bosnak adds. – And even if we are able to substitute imports by volumes, there is still an open question, will all Russians be able to pay more for it”.

It’s clear that provision of acceptable prices granting high quality is beyond the strength of a specific company. But it has already become a strategy of the government which met half-way the business. Subsidizing of two thirds of interest rate under credits given for construction and reequipping of poultry plants with a possibility to compensate another third of the rate from regional budget is foreseen within the framework of the national project “Agricultural Complex Development”. “Banks rather willingly give credits on a common basis. However, the rate is financed on the basis of the refinance rate of Central Bank which equals to 11%. Thereat, even Rosselkhozbank gives the credit minimum rate of 15.5%. Thereafter, 4.5% shall be paid by us», – Yakovlev complains.

It must be said that some regions give additional preferences to agricultural producers. “Pursuant the regional law on investment activity of Pskov Region, the investors pay reduced income and property taxes”, – Aleksandr Bosnak says.

At present, a lot of farms are at the stage of reconstruction and reequipment. Thus, a project of complex reequipment is implemented at the Poultry Plant “Pervomayskaya” in Pskov Region (part of Rubeg Group). 876.9 million rubles are to be invested in the enterprise within the framework of the national project.
Reinforcement of strong

Importers use a complex approach. Thus, the aforementioned Rubeg Group has invested 2.24 billion rubles in reconstruction of five poultry plants in Pskov and Nizhny Novgorod Regions with intention to take 6% of Russian market by 2015.

Following the importers, foreign producers started purchasing Russian poultry plants as well. Recently a Dutch Company Agro-Invest Brinky A.V. has integrated its possessed assets of poultry plants “Severnaya” and “Lomonosovskaya”. Thereat, in July Swiss Company Ruhold AG became a new shareholder of “Lomonosovskaya” Poultry Plant. If in 2006 the market was very fragmented, today the trend towards the consolidation of the industry is clearly observed. “In countries where agriculture is well-developed (for example in Brazil), the market is under control of five-ten companies. In my opinion, we are moving to the same business line”, – Roman Kipot is sure.

Holdings which provide complete production cycle become leading producers against the background of the assets concentration. “Vertically integrated structures, which production cycle include all from poultry breeding and feed production to delivery of finished products to stores, have more chances of success. A self-sustaining poultry plant will be able to earn profit, if there is a developed market of intermediary - trading and warehousing services and the corresponding infrastructure, but today there is nothing of the abovementioned”, – Bosnak considers.

Provision of complete production cycle is largely caused by the intention to protect from raw material dependence. Learning through the bad experience of the last unfruitful year, some holdings (for example, Rubeg Group) purchase or construct plant growing complexes, as the wholesale price for chicken providing the high feed costs almost equals to its production cost. This year grain harvest was a record one; however, we still need to protect ourselves from risks.

But not all agree with the strategy on own feed growing. “Grain growing is a separate business. There are traders in the market, who specialize in grain buying and delivery, therewith, the competition between them is rather high, and they can’t be blamed for extra charges. Thus there is no sense to deal with plant growing, all the more in the Northwest. If we work in central part of Russia with corn fields, then it will be another story”, – Egor Yakovlev comments.
Diplomacy Difficulties

Anyway, companies of poultry industry won’t be able to protect themselves from all the difficulties and risks. First of all, feed is only one of all components of necessary raw materials. “Energy resource cost increase turned out to be very significant. We pay 80% of energy resource cost at the rate regulated by the state, and as for another 20% the situation is not clear at all”, – Egor Yakovlev wonders.

Recruitment has become a problem as well. Work at agricultural enterprises is not very attractive, especially for young people, and there is also shortage of the corresponding educational institutions.

And the third significant problem is relations with trade networks. “Generally only Saint Petersburg needs meat in our region. Thereat, Petersburg enterprises don’t pay taxes. The taxes are paid by trade networks, and they, in their turn, put pressure on the producers, competing at our expense”, – Egor Yakovlev says.

With clear rules of the game the interest of investors in poultry breeding is growing. But the system of state support causes lots of arguments. “The Government actions look like reaction to the USA statements. That’s why there are some doubts in what these protection measures will give to the market and whether we need these reforms implementing, or not”, – this opinion is rather popular among poultry breeders.

As a comparison: European Union spends up to 40% of expenditure budget on support of its agricultural producers whereas in Russia this rate amounts only to 1%. Our producers look for both direct subsidies and interventions in the grain market, as well as for complete cover of credit interest rates. And the main thing is provision of further complex policy on support of domestic producers. “Broiler production won’t de developing, if its profitability is less than 10−12%. Risks are too high. We are not Tyson Foods in America, which receives only 3% of the revenue, while the subsidies from the state budget are enormous. We haven’t received direct subsidies in the amount of 21 billion rubles (specified by the Government) yet”, – Yakovlev says.

If all governmental measures are taken, Russia will soon be able to provide itself with poultry. Our poultry breeding industry has a serious potential for exports, and the analysts estimate that we will be able to export poultry and poultry products in three-five years.