Russian pig breeding goes on the export offensive: forecasts of expert Kovalev

At the annual meeting of the Union of Pig Breeders, Yuri Kovalev spoke about the current state of affairs in the industry, the challenges facing the industry and ways to overcome them.

The official website of the National Union of Meat Processors published an article on the report of the head of the Union of Pig Breeders of the Russian Federation with the current assessment of the market and forecasts for the future.

“Export of pig products in 2020 increased by 90%, exceeding 206 thousand tons ($344 million). 

At the same time, the export of pork meat increased most significantly (+118%), the share of which in total exports reached 65%. Pork offal exports increased (+45%) due to recovery in exports to Hong Kong and Vietnam. In the first half of 2021 meat exports from the Russian Federation continued to grow, although the growth rate fell several times compared to 2020.

An increase in exports by 98 thousand tons, combined with a decrease in imports by 80 thousand tons, “removed” almost 180 thousand tons of pork from the market. At the same time, pork consumption in 2020 increased by almost 4.4% to the level of 27.9 kg/person per year (from 26.7 kg/person per year), that is, by almost 173 thousand tons. Consumption of all types of meat reached the level of 76.5 kg/person per year.

Global food prices hit their highest level since 2014. The causes of food inflation in world markets were the reduction in the supply of food from Latin American countries, while at the same time growing demand in China (production in China is recovering, but imports will remain at a high level in the coming years, supporting world prices), poor harvests last year and disruption of supply chains due to the coronavirus pandemic.

Another not entirely obvious, but extremely important factor is the policy of low - up to zero - interest rates, which is followed by the world's major central banks. Money is now available more than ever, during the pandemic, the volume of liquidity has risen sharply as part of the “quantitative easing” programs (+$10 trillion).

Analysts believe that free liquidity goes into various assets, including agricultural raw materials. As a result, the prices of standardized commodities such as wheat, corn, beef, pork, soybeans, sugar, etc. are skyrocketing. Since the beginning of this year alone, prices for pork in world markets have increased by 80%, for soybeans by 60% , sugar prices rose by 100% in a year.

The reasons for the stability (absence of a traditional collapse) of prices for live pigs in the first quarter of 2021 were also announced. This is a high level of domestic consumption of pork against the backdrop of a series of ASF outbreaks in November-December 2020 and January 2021 in the Central Federal District ( resulting in the destruction of almost 600 thousand heads of pigs, and the total increase in pork production in the first half of 2021 amounted to only +2.1%, becoming one of the lowest in the last 10 years), reduced supply of poultry (as a result - partial shift in demand for pork), high prices on the world pork market due to ASF in Southeast Asian countries, a significant increase in production costs due to the aggregate inflationary factor.

Conceptual changes in the basic conditions for the development of the pig industry after 2020 for the medium term until 2025, according to the NSS, are as follows.

Due to the achievement of 100% self-sufficiency in pork and the continued growth of domestic production, internal competition is sharply increasing, which is why wholesale prices for pigs will systematically decrease or at least not grow in the face of inflation in the coming years.

At the same time, the explosive growth in the cost of grain and currency-dependent components can lead to new price realities, since the accelerated development of the grain export infrastructure in the last 2-3 years creates conditions for the growth of its export volumes, exceeding the growth rates of its production, which practically guarantees the formation of high level of grain prices in the domestic market in the medium term (more than 15 thousand rubles/ton with VAT) even taking into account the measures of customs and tariff regulation. So what is in store for us in the end? - rising or falling commodity prices?

The transition from import substitution to the export strategy of domestic pig breeding means the onset of a new period of direct fierce competition with world giants in the export of pork, not only in the protected domestic market of the Russian Federation (25% duty), but primarily in the markets of Southeast Asia. Which indicates the need to improve the efficiency and competitiveness of enterprises by all available methods (cost reduction, genetics, feed, veterinary drugs, etc.).

In this regard, an increase in the level of vertical integration is inevitable (provision of own grain ≥50%, own slaughter and deep butchering up to 100% of grown animals). The players will actively develop export sales channels (study target markets, train new personnel for new tasks, invest in freezing and storage facilities, etc.) and invest in marketing, advertising and branding of products in order to increase the stability and profitability of sales.

At the same time, for the most “soft” exit from the business of “weak” players, it is possible to conclude an M&A deal*. Market consolidation and business scaling are identified as inevitable prospects for further development: at the end of 2020, the share of the TOP-20 exceeded 70%, and the TOP-50 has already approached 90% of industrial pork production.

* Mergers and acquisitions, or M&A transactions, are referred to as business acquisition transactions. “M&A transaction” is a fairly broad term and can include both the acquisition of ownership of a business and a change of control, reorganization, additional issue, creation of a joint venture (JV) or a “project company” (SPV).
And this fact will be taken into account when preparing the monthly analytical report Meatinfo.ru