by Yuri Barutkin, USMEF St. Petersburg manager
In late December, veterinary officials from Lithuania announced the discovery of two wild boar corpses near the Lithuania-Belarus border. A few weeks later they confirmed that the animals had died due to African Swine Fever (ASF). Because these were the first-ever cases of ASF within the boundaries of the European Union (except for the Italian island of Sardinia, and cases in Spain that predated the EU), this announcement had an enormous impact on the pork trade in the Baltic region and is already starting to impact global pork trade.
Almost immediately after Lithuania’s OIE notification, the EU enacted zoning control measures effectively blocking the movement of pork from the six most-affected regions of Lithuania. But a few days later, Russian veterinary officials stopped trucks carrying EU pork at the border between the EU and the Customs Union of Russia, Belarus and Kazakhstan. Russia took the position that exporting EU pork into the Customs Union would violate current provisions in the EU-Russia veterinary pork certificate related to ASF. In doing so, Russian vets noted that because the certificate says that ASF does not exist in the EU, except on Sardinia, EU officials could no longer sign pork veterinary certificates after the discovery of ASF in Lithuania.
Almost immediately, EU veterinary officials stated that the EU had undertaken sufficient measures to ensure that pork from the affected regions in Lithuania could not be exported to Russia, and that Russia should recognize these regionalization efforts. In addition, several EU member states appealed to Russia to open the market to their imports, but Russia’s position is that more negotiations are needed, so EU pork shipments to Russia have remained suspended for about three weeks. Meanwhile additional cases of ASF have been discovered in Poland, which is also an EU member state and a significant pork producer and exporter to Russia.
Impact of the EU pork ban on Russia’s meat market
The implications of this impasse are substantial. Despite recent success in growing its domestic production, Russia remains a significant importer of pork. Last year Russia imported 972,000 metric tons (mt) of pork muscle cuts, 99,000 mt of pork offal and 262,700 mt of pork fat. EU pork accounted for 53 percent of Russia’s total pork imports, including 90 percent of the offal and 94 percent of the fat.
Most processing facilities operating in Russia today are dependent on imported pork for a significant share of their raw material. Although Russia’s domestic pork production has posted double-digit growth in the past few years, it primarily produces half-carcasses with very little product cut and boxed. If EU pork is excluded from the market for an extended period of time, Russian processors will need to adapt to the limited availability of raw material in any form other than the half carcasses produced by the domestic industry. This could spur investment in expanded Russian cutting and boxing capacity, thus addressing one of the structural deficiencies in the Russian industry.
Brazil was the second-largest supplier of imported pork to Russia (behind the EU), but has struggled with a limited number of approved plants for the past few years, in addition to beta agonist restrictions. Brazil’s 2013 exports to Russia were up 6 percent from 2012 but still down 49 percent from the 2009 peak. Canada’s 2013 exports were down 55 percent, with just a few plants approved plants for beta agonist-free production. With shipments from the U.S. suspended, if EU pork does not return to Russia soon its meat processors will have to go through the painful process of trying to adjust to domestic product. For some this would mean significant investment in deboning and cutting operations, and for others it would require adjustments to the product line. For all involved, it will result in rising production costs.
For some processors, the situation could even result in closure. Already we have seen some plants facing this situation in Kaliningrad (a Russian free trade zone that lies inside the EU, between Poland and Lithuania) where the plants are almost totally dependent on EU pork. But the situation also does not look good for plants located on the Russian mainland.
For quite some time, Russian meat processors have discussed the danger posed by current import restrictions (whether tariff-related or veterinary) on imported raw materials. In the past, meat processors enjoyed thick layers of customs duty protection from foreign competitors, which led to total domination of the domestic sausage market by Russian producers. With Russia’s accession to the WTO, however, this is no longer the case. Through Russia’s WTO accession agreement, duties on sausages were reduced to 20 percent, but not less than 0.25 euros/kg. Today nearly 99 percent of processed meat is of local origin, with only the high end of the market attracting a foreign presence. But the recent trend does not bode well for Russian meat processors, as more and more imported processed products are entering Russia. The biggest threat may be from meat processors in Poland and the Baltics, which enjoy geographic proximity and familiarity with Russian taste in sausages. The volume of imported sausages entering Russia reached 18,742 mt last year, up 2 percent but imports from Poland hit 3,520 mt, nearly four times larger than 2012.
The main threat facing Russian meat processors today is the high cost of raw materials. A large portion of their raw material needs consists of pork trimming, almost all of which came from the EU. Today these processors are left to seek a cost-effective substitute for pork trimming from the EU.
None of Russia’s alternative suppliers – such as Canada, Brazil or the United States – have shown much interest in Russia’s trimming market. U.S. processors either directly incorporate trim and fat into processed meats or sell them in combos to other processors. Shipping to Russia would involve additional costs, such as boxing and freezing, and obstacles such as credit risk.
Another factor that could extend the impasse with the EU is that over the past few months, pork prices in Russia fell (peaking at almost 128 rubles/kg in September, but down to 112 rubles/kg at the end of January). Prices are still about 15 percent below the peak reached in August 2012, and these low prices have eroded the profitability of domestic producers so that very little new investment is being made in the production sector. Low pork prices add to the already-high risk presented by ASF’s presence in Russia, discouraging new investors, and existing investment in domestic production is not paying back at a favorable rate.
Last year, ractopamine restrictions placed on the U.S., Brazil and Canada helped ease the downward pressure on Russia’s prices, which showed improvement in the first half of 2013. But that trend reversed in August 2013 and continued to decline until the ban on EU pork. Even with an 18 percent reduction in 2013 pork imports, prices had not rebounded to levels that Russian producers were accustomed to and which are necessary for them to achieve positive returns on their investments. A sign of demand for imported pork was that the tariff rate quota (TRQ) was still fully utilized in 2013.
In the short term, restrictions on imports combined with the effect of a 15 percent devaluation of the Russian ruble against both the U.S. dollar and the euro (compared to last year) have made domestic producers more competitive. It is everyone’s expectation that prices for Russian pork will begin to rise — in the week following enactment of the EU pork embargo, prices for pork fat increased nearly 30 percent. At the same time, higher prices for domestic product will soften the impact of the ruble devaluation and allow imported product to remain competitive.
Implications for U.S. pork exports
Recognizing the dependence of the Russian processing market on imported pork, Russian veterinary officials have already indicated that they are prepared to ease restrictions currently in place for Brazilian and U.S. pork. This does not mean a compromise on the issue of ractopamine residues, but it suggests a willingness to be more flexible in reopening the market to ractopamine-free product from U.S. and Brazilian plants.
A long-term absence of EU pork from the market suggests that Russia will need to diversify its pork suppliers, and this could improve the prospects for U.S. pork plants – at least for those able to offer ractopamine-free programs. U.S. hams were already popular with Russian buyers, and some exporters might also be interested in shipping trimmings and other cuts.