Highlights

FAS Moscow decreased 2017 forecasts of broiler meat production to 3.75 MMT (0.8 percent growth), imports to 0.20 MMT (7 percent decline), exports to 0.115 MMT (10 percent growth), consumption to 3.835 MMT (flat). The industry has reached the capacity needed to satisfy domestic demand. GOR continues to support large scale producers seeking more independence from imports of feed ingredients and genetics. Slowly growing exports and declining imports encourage the leading producers to slightly increase production as domestic demand stabilizes. HPAI and economic recovery are the new game-changers in the market; successful performance depends on effective response to these challenges.

Executive Summary

FAS/Moscow decreased the 2017 forecast of broiler meat production to 3.75 MMT, which still reflects 0.8 percent annual growth. The industry has reached the capacity needed to satisfy domestic demand. Slowly growing exports and a continued decline of imports will encourage the most efficient producers to slightly increase production.

Despite expected improvements of the economic outlook in Russia in 2017, the financial health of the broiler production sector is questionable. Average net profit margins reportedly have declined from 10 percent in 2015 to 3 percent in 2016. The decline of profitability forced leading companies to lower production targets and focus on operational efficiency and better flexibility to market. Consolidation is anticipated to continue with the possible inflow of foreign investments as access to domestic credit remains limited. The Government of the Russian Federation (GOR) continues to pursue import substitution policies and support large scale integrators, who are reducing dependence on imported components, such as hatching eggs and ingredients of compound feeds.

The GOR has redesigned its agricultural support program in 2017 as the focus of support has shifted from production growth to operational efficiency. The transition to a new distribution system of federal subsidies has increased uncertainty. The most broiler producers, in particular those of small and medium scale, remain excluded from preferential credits for operational needs and development. The companies located in the regions where governors do not consider broiler production as a priority sector will likely be strongest hit by the change.

FAS/Moscow changed its 2017 consumption forecast to 3.835 MMT, from minor annual growth to flat. Consumption of broiler meat was growing while the more expensive red meats lost the place in consumers’ baskets in 2014-2015. Overall consumer demand remains weak after the economic recession, but pork has started regaining market share in the second half of 2016. The competition between pork and poultry will intensify in 2017, as domestic pork production is anticipated to grow and pork prices to decline.

The counter-sanctions food import ban will continue to influence broiler meat trade with a number of western countries until at least the end of 2017. FAS/Moscow forecasts broiler imports to decline to 200,000 MT in 2017. The absence of most competitors allows local companies with average Feed Conversion Ratio (FCR) 1.85-1.87 to win market from non-banned suppliers. In-quota imports of chicken cuts may see some increase in 2017, while out-of-quota imports continue falling. FAS/Moscow revised its 2017 export forecast to 115,000 MT, and its 2016 estimate to 105,000 MT. Restrictions on exports to Hong Kong and Kazakhstan due to a High Pathogenic Avian Influence (HPAI) outbreak in South Russia resulted in broiler exports lower than previously anticipated. The 21 percent appreciation of the ruble to the U.S. dollar in 2016 also constrained the growth of exports. Uncertainty related to animal diseases such as HPAI and African Swine Fever (ASF) is becoming a game-changer in the market and realization of forecasts depends on how effectively the country responds to animal health challenges.

Broiler Meat Production

Production, Supply and Demand Data Statistics

Poultry, Meat, Broiler

Market Begin Year

2015

2016

2017

Jan 2015

Jan 2016

Jan 2017

Mexico

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Inventory (Reference)

0

0

0

0

0

0

Slaughter (Reference)

0

0

0

0

0

0

Beginning Stocks

0

0

0

0

0

0

Production

3175

3175

3270

3285

3335

3384

Total Imports

790

790

820

800

850

840

Total Supply

3965

3965

4090

4085

4185

4224

Total Exports

5

5

3

4

7

6

Human Consumption

3960

3960

4087

4081

4178

4218

Other Use, Losses

0

0

0

0

0

0

Total Dom. Consumption

3960

3960

4087

4081

4178

4218

Total Use

3965

3965

4090

4085

4185

4224

Ending Stocks

0

0

0

0

0

0

Total Distribution

3965

3965

4090

4085

4185

4224

FAS/Moscow slightly decreased the forecast of broiler meat production to 3.75 MMT (Ready-to-cook weight) in 2017, which is still 0.8 percent growth from 3.72 MMT. The 2016 production estimate also decreased by 30,000 MT. Growth of the poultry production sector has slowed in 2016 after two decades of accelerated development, 14 percent per year on average. The industry has reached the capacity needed to satisfy domestic demand. Slowly growing shipments to external markets and a continued decline of imports will encourage the most efficient producers to slightly increase production in 2017. However, the domestic market, which is anticipated to stabilize at 2016 levels, will continue to drive production levels.

Production estimates for both 2016 and 2017 have fallen mostly because the amount of broiler meat shipped to external markets in 2016 was lower than previously anticipated. A stronger ruble reduced price competitiveness in export markets and resulted in an excess supply of chicken meat that pushed down domestic commodity prices. For approximately 18 months starting in January 2015, consumer prices on broiler meat grew more slowly than the inflation rate. This factor, in combination with increased prices for compound feeds in the first half of 2016, pressed producers’ margins to very uncomfortable low points. As a result several leading broiler companies revised down their ambitious production plans for 2016 and the first quarter of 2017. Additionally, some poultry plants decreased output after mergers or changes of ownership. Year-on-year production growth in 2016 was only 2.4 percent compared to 8.5 percent growth in 2015.

Several major broiler producing regions decreased output in 2016 compared to the previous year: Belgorod 2.83 produced percent less; Leningrad region 0.8 percent less, Krasnodar Krai 4.63 percent less, Mari-El 21.9 percent less. Supply has adjusted to the existing demand, and commodity prices increased in the second half of 2016, in particular in the Central and Southern Russia. In December 2016 the wholesale prices for whole broilers were approximately 10 percent higher than in December 2015, and above the annual inflation level of 5.4 percent.

By the beginning of 2017, margins slightly improved due to favorable feed prices after a record grain crop and 21 percent appreciation of the ruble exchange rate between January 2016 and January 2017. The average wholesale price for whole chicken was 1.84 US dollar per kg. in January 2017, an increase of 32.1 percent year-on-year. Despite this recovery in prices, production growth remains constrained by price-sensitive consumer demand, competition from pork and turkey, and limited operational funds for additional hatching eggs or feeds.

Prices for chicken meat in the mid-term will most likely be shaped by currency rates, inflation, and changes in consumer purchasing power. If no unpredicted financial or veterinary shocks occur in 2017, broiler prices are expected to remain relatively stable because the industry now has additional capacity and flexibility to adjust supply to demand.

The veterinary risks associated with spread of Avian Influenza in the Central-European and Southern regions of Russia remain high and may impact production. Since June 2016, Avian Influenza in poultry has been confirmed in Krasnodarsky Krai and in the Tyva, Kalmykia, Astrakhan, Rostov and Voronezh Regions. The commercial egg production farm “Khabarlinskaya” in Astrakhan region culled 642,000 hens after detection of HPAI in December 2016. In January 2017, Russia’s largest producer of turkey meat “Evrodon” culled 220,000 birds at two of its twenty farms in Rostov region.

According to the Veterinary and Phytosanitary Surveillance Service (VPSS) there is a strong risk of further spread of HPAI in South Russia and North Caucasus. Industry experts are mostly concerned about introduction of the AI virus to Belgorod region, where the three major broiler producers are located. Even if veterinary authorities and farms in South Russia coordinate efforts and effectively control further spread of the virus, the disease may increase volatility in the market. Industry contacts believe that any reduction of poultry meat supply would have a positive effect on prices, which would likely motivate producers to fill poultry houses to capacity and quickly oversupply the market again.

As noted above, feed and feed component prices come into play as many Russian companies develop their own feed production units. The Ministry of Agriculture reported that approximately 40 MMT of forage grains (mostly wheat) of Russian origin was used for production of compound feeds for livestock and poultry in 2015 and in 2016. Forage grains harvested in Russia account for approximately 65-70 percent of compound feeds consumed by the broiler industry. A decade ago broiler producers were buying ready to use compound feeds mixed by standard recipes. However, since 2006 leading companies have increasingly invested in modern feed production facilities and have launched production of more sophisticated compound feeds, adjusted to the specific needs of producers and prices for different ingredients. According to Rosstat 14 MMT of compound feeds were produced specifically for poultry industry in 2015, and the lion’s share, approximately 10 MMT, were produced by companies from top-20 broiler producers list (see Table 2 below). In January-November 2016 Russia produced 12.89 MMT of compound feeds for poultry, which is 1.9% growth year-on-year. Favorable weather and soil conditions for winter sowing in the fall 2016 promise another good crop in MY 2016/17. Therefore, the prices for grain components of feeds are expected to be stable in 2017.

Unlike forage grains, the expenses for other ingredients, such as soy, vitamins and minerals, as well as production costs of compound feeds may increase in 2017. After multiple restrictions on imports of soybeans and soybean meal in 2016, the prices for imported proteins increased. However, supplies of soy and soy products from Latin America continued in the second half of 2016 and prices stabilized. The trade remains vulnerable to changes in policy and currency rates, making it difficult to forecast prices on imported proteins.

Leading producers are pursuing import substitution policies to reduce the volatility of compound feed costs resulting from fluctuations of currency rates and world prices. Supported by government incentives, businesses have invested in growing more oilseeds and launching production of feed additives. Preliminary Rosstat data shows 3.1 MMT production of soy in 2016, 14.5 percent growth year-on-year. The production of soy remarkably increased 45.4 percent in the Central Federal district, from 0.839 MMT in 2015 to 1.221 MMT in 2016. With uncertain access to supplies of proteins from the world market, areas planted in soy in the European part of Russia will most likely increase 2017; however, it is too early to make predictions of next year’s crop.

Recently opened lysine plants in Belgorod and Volgograd exemplify the new import substitution projects that the GOR is willing to support. The two new plants have enough capacity to cover the needs of the whole broiler industry. Problems with the quality of lysine from one of the new plants reportedly hurt the performance of its clients in the first half of 2016. Regardless of this hurdle, if production costs of compound feeds grow due to prices of imported ingredients, the expectation for 2017 is that low prices on local grain, oilseeds and other ingredients can improve margins for some poultry producers.

The absence of highly efficient competitors in the market allows local companies to maintain a relatively high ratio of low priced domestic forage grains in feeds, even at the expense of operational efficiency. The average feed conversion ratio (FCR), 1.85-1.87, allows domestic industry to win market share over the current importers. Russian companies continue to benefit from restricted competition as the market remains closed for the most efficient western suppliers. As internal competition becomes more intensive, broiler companies that have a feed production component in their business structure will take the most advantage of the situation in the feeds market. If prices for proteins increase, this will contribute to faster consolidation in the broiler production sector. Experts anticipate “faster and bigger mergers and acquisitions processes, which will mean both vertical and horizontal integration, including potential involvement of foreign investors”.

Poultry producers, who enjoyed good margins and benefited from preferential access to loans and refinancing for the last decade, now have to face the new realities of a mature market. In addition to record low margins, the industry has pessimistic views and expresses concerns about changes of the state support in 2017. In the beginning of the new annual production cycle, most broiler producers have no clear understanding if they will receive preferential credits or any subsidies at all. Many agricultural producers of small and medium scale have no clear understanding of how funds will be distributed by the regional authorities, and what portion will be financed from the regional and what from the federal budget. In regions where governors do not consider broiler production a priority sector, companies will likely suffer from the changes.

The State Program of Agricultural Development in 2013-2020 was drafted in 2012 to create conditions for fast growth of agricultural production in Russia and strengthen competitiveness of Russian food products. As written, GOR planned to spend 300 billion rubles for the program in 2017. However, the government eventually allocated only 214 billion rubles for all expenditures of the Ministry of Agriculture in 2017 (approximately $3.34 billion, less than 1.6 percent of all federal expenditures), and only 184.54 billion for the State Program of Agricultural Development. Following the government meeting on December 13, 2016, when officials discussed the new forecast of agriculture development21, Prime Minister Medvedev requested the Ministry of Agriculture to draft the new agriculture development plan for 2017-2025 “based on science and new technologies”. After years of accelerated growth and preferential support of high-margin sectors including poultry (also pork, sugar, and oilseeds production), the ministry reportedly is reviewing the goals of its Agricultural program and support mechanisms. The Deputy Agricultural Minister Elena Astrakhantseva explained at Gaidar Forum in January 2017 that state funds will be spent to “invest in modern institutions, financially support strategic scientific projects, educate and train highly qualified specialists, develop exports, and modernize infrastructure”. State support remains focused on reduction of the cost of capital and creating incentives for private investments to the sector. After a redesign of agricultural subsidies in the 2017 Federal budget, the most significant difference is that the 54 specific subsidies that the federal center previously distributed to the regions have now been merged to seven major budget lines (enumerated below). Regions will receive funds from the federal budget as “unified agricultural subsidies”, from which their regional agricultural authorities will identify projects to support. The Government of Russia plans to spend 91.7 billion rubles for the sub-program “Encouragement of Investment in Agriculture”, which includes spending of 8.8 billion for investment credits, 11.5 billion CAPEX reimbursement for pre-selected projects, and 21.3 billion for subsidized loans for agricultural producers – the new tool to facilitate access to loans at 5 percent interest rate. The second major sub-program, with 55.31 billion rubles allocated, is the “Development of Sub-Sectors in Agriculture”. The priorities of this sub-program are7.96 billion rubles for dairy cattle farming support, 11.34 billion rubles for production of grain and vegetables, and 36 billion rubles for support of key indicators of the regional agricultural development programs. Finally, the GOR has continued the sub-program “Irrigation and land improvement” and earmarked 11.3 billion rubles for this purpose. In addition to the subsidies to regions, the federal budget allocated 7.1 billion rubles for “Supporting the general conditions of agricultural operations” (state purchases of agricultural products and veterinary medicines), 5 billion rubles for increase the charter capital of Rosselkhozbank (Russia Agricultural Bank), and 74 million for the new sub-program “Priority project Export of agricultural products”.

The consolidation of budget lines aims to improve cooperation between the federal and regional budgets, reduce the administration costs, shorten the time of transactions, and provide more power to the regions in terms of setting the priorities. To ensure the effective use of the funds, the major portion of funds will go to the most developed regions and continue support the most efficient producers. However, as mentioned above, the broiler industry is pessimistic about the change because it increased uncertainty and became an additional hurdle for financial planning.

Broiler Meat Consumption

FAS/Moscow anticipates stable demand for broiler meat, forecasting 3.835 MMT Human Domestic Consumption in 2017, unchanged from the 2016 consumption estimate. The forecast is based on the assumptions that the macroeconomic situation improves, the share of vulnerable groups in the population will stop growing, and competition from other animal proteins (in particular pork and turkey) will intensify while domestic producers continue stable supplies of broilers.

After two years of recession, important economic and financial indicators showed moderate positive dynamics in the second half of 2016: inflation in January-December 2016 was 5.4 percent, far less than the 12.9 percent of 2015. Experts forecast GDP growth at 1.2-1.5 percent in 2017 based on the expectation that oil and gas prices continue recovering. The annual contraction in retail trade slowed to 4.9 percent in 2016 from 14.1 percent in 2015. According to Russia’s Ministry of Economic Development, real wages have stopped declining in all sectors since August 2016. Sustained contraction of real disposable incomes for more than two years in a row has depressed the purchasing power of consumers. However, an annualized food inflation of 4.6 percent in 2016, below the Headline Consumer Price Inflation of 5.4, contributed to stabilization of the falling socio-economic indicators. Despite the continued contraction of disposable incomes by 5.8 percent in 2016, the poverty rate has stopped growing. Multiple independent market research and official statistical data demonstrate that Russian consumers have adjusted to the crisis. Economic stabilization is the key assumption for projected zero growth of the demand for broilers in 2017 as a less expensive substitute for other animal proteins. Broilers (and turkey) were among the few products with sales growing in absolute numbers since the beginning of the crisis in November 2014. Consumption of broiler meat grew from 2014 to the first half of 2016, while the more expensive animal proteins (red meats, fish and seafood, dairy) were losing their place in consumers’ food basket. The market changed in the second half of 2016, when pork sales grew after prices decreased. Pork started regaining market share despite the fact that consumer price of pork remained higher than for chicken meat. Official statistics shows the average consumer price for one kg. of broiler meat in January 2017 at 137.8 rubles, a 4.2 percent increase year-on-year. Meanwhile, the consumer prices for pork (in rubles) have decreased by 1.5 percent year-on-year. The increase of the retail price for chicken meat reportedly resulted in the decline of sales in absolute numbers. For example, GFK Consumer panel data showed that in September 2016 compared to September 2015 total sales of chicken meat in modern retail stores declined 3.1 percent in rubles and 1 percent in absolute numbers (kg.); discounts and “promo sales” did not result in increase of sales. The same data set showed growth in regular and promo sales of turkey meat and pork in September 2016. Total pork sales grew 11.6 percent while sales of pork in modern retail stores grew 6.1 percent. For turkey meat, sales grew 19 percent and in modern retail stores 21.6 percent. GFK research showed that all consumer groups are reducing purchases of chicken meat and increasing purchases of pork.

Price growth in the second half of 2016 is a positive change for broiler meat producers, as they are improving the profitability of sales, but also is a constraint for further growth of consumption, as consumers continue to react to price increases by purchasing less. Producers will not likely pursue “price dumping” strategies and the price of broiler meat will no longer contribute to consumption growth in 2017.

Development of the retail sector has recently had a significant influence on consumption patterns, quality requirements, and producer management practices. The economic crisis of 2014-2016 resulted in intensification of consolidation in the retail sector. The share of top ten largest leading retail chains continued to grow toward 27 percent of the market in 2016 from 24.1 percent in 2015. According to estimates, the share of top-ten leading retailers will continue expansion up to 40 percent of the market. Expansion will continue in 2017: the second largest chain in Russia, X5 Retail Group has announced plans to open 2,000 new grocery stores. Modern retail offers enhanced logistics and storage services, and brings new types of products to new remote locations. It shapes some consumption trends, to include: growing consumption of chilled chicken meat, growing sales of branded products and private labels, growing sales of cuts and semi-cooked chicken products, declining bulk sales of unbranded whole frozen chicken carcasses, and declining poultry and meat distribution via traditional farmers markets and independent sellers. All the above mentioned trends will continue in 2017 as major chains continue expansion. Therefore, FAS/Moscow has revised 2016 and 2017 year end stocks of frozen broiler meat to 30,000 MT based on the available Rosstat data.

Quality and safety of chicken produced in Russia and sold via modern retail chains generally complies with the modern requirements in developed markets. In January 2016 “Roskachestvo” released the results of a quality audit of 21 of the most popular broiler brands sold in retail chains as chilled whole broilers. Producers who wanted to receive the “Supreme Quality Product” mark participated in a voluntary audit in which samples were randomly collected from retail shelves and tested on compliance with 44 indicators that “Roskachestvo” included to its specific standard created for the project. The standard is stricter than the national safety requirements in terms of antibiotic residues, including medicines such as nitrofurans and their metabolites, compounds of sulfanilamide group, streptomycin, quinolones, coccidiostats. According to the test results, 8 out of 21 brands fully correspond to the requirements that are stricter than the national safety standard, and 18 are fully comply with the national safety requirements. 9 out of 21 samples contained the residues of substances not regulated in Russia, but banned in the European Union. Violations of the safety national standard were detected in 4 of 21 samples including 1 sample contained Salmonella, in 2 samples the content of the tetracycline group of antibiotics exceeded the permitted residue limit, and one contained Listeria.

Broiler Meat Trade

FAS/Moscow forecasts 200,000 MT of broiler imports in 2017, 15,000 MT less from the revised 215,000 MT imported in 2016. The counter-sanctions food import ban will continue to influence broiler meat trade33 with a number of western countries. According to Presidential Decree #305, the restrictions were extended for 18 months, through December 31, 2017. Because the restrictions on imports from other significant exporters will continue until the end of 2017, Brazil will remain the main supplier of frozen chicken cuts (HS Code 020714) and Belarus of chilled chicken carcasses (HS Code 020711) and cuts (HS Code 020713). Imports are anticipated to continue to decline as domestic products saturate the market. If Brazilian sellers offer favorable prices, the in-quota imports of chicken cuts may increase in 2017 while out of quota imports decrease. Russia’s WTO commitments allow importers to ship 250,000 MT of HS codes 0207142001 and 0207146001 “Frozen bone-in chicken halves or quarters and frozen bone-in chicken legs and cuts” under 25% in-quota tariff rate (compare to 80% out of quota tariff). In 2016 only 50,200 MT were shipped under TRQs: the utilization of the quota was 14 percent, lower than the 24.3 percent of quota utilized in 2015, when importers shipped 69,000 MT of broiler meat under TRQ. The distribution of quotas within TRQs on poultry (as well as on pork and beef) is based on the 3-year historical shares of the importers. Those importers who got a license and shipped more products in and out of quota in 2014-2016 may receive a bigger in-quota volume in 2017 and 2018. The assumption is that those companies that import products out of quota at 80 percent rate will more likely utilize their quotas the next year.

Exports are expected to grow to 115,000 MT in 2017, not as much as previously forecasted. FAS/Moscow has decreased the previous 2017 export forecast by 35,000 MT, mostly due to ruble appreciation in 2016 and the negative impact of HPAI restrictions on shipments of poultry meat from Russia to Hong Kong and Kazakhstan in Q4 2016, and most likely in the first half of 2017. FAS/Moscow revised its 2016 exports estimate to 105,000 MT to reflect the effect of trade restrictions due to HPAI.

The stronger ruble had a negative effect on Russia’s broiler exports in the competitive 2016 world market. In addition, industry faces the need to adjust production to the varying requirements and tastes of the importers, such as requests of consistent quality and size carcasses. Russian veterinary authorities are learning the ropes in obtaining market access for meat and poultry. Russia needs more time to increase sales in the export market than industry leaders previously anticipated. Domestic per capita consumption of broiler meat is unlikely to increase in 2017, and industry has identified the new strategic goal: to open new markets. Major leading producers continue to expand production as they target new markets. Former Soviet Union countries, Asia, and the Middle East are the key target markets. The Russian Ministry of Agriculture has already shifted its interest to export promotion of Russian poultry and other meats. For the first time in Russia’s modern history, the GOR has begun to support outbound export missions to the potential markets. A large delegation participated in GulFood 2016 in Dubai and plans to continue efforts in the upcoming years.

The Presidential Council for Strategic Development and Priority Projects Approved the Passport for Priority Project 'Export of Agricultural Production' on November 30, 2016: the Project objective is to increase total value of the Russian agriculture export from the current $16.9 billion in 2016 to $19 billion in 2018, to $21.4 billion in 2020 and up to projected $30 billion in 2025. The duration of the Project: November 2016 through December 2020. The total budget for the project in is 2,408.45 million rubles ($40.13 million) with 728.43 million rubles ($12.14 million) in 2017.

In 2015-2016, Rosselkhoznadzor organised and hosted visits of veterinary inspectors from different countries including Azerbaijan, Vietnam, China, UAE, Egypt, Iran, and Tanzania, and started negations with many other potential buyers. As a result of the joint efforts by business and government, some companies from the top producers list were approved to export poultry to the important markets of Egypt and UAE in 2016. Trade with Hong Kong doubled in Jan-Nov 2016 to almost 10,000 MT, which accounted for approximately 9 percent of Russia’s exports of chicken meat. However, on November 24, 2016, Hong Kong banned the import of all poultry meat and products due to H5 Avian Influenza in the Kalmykia Republic.

Approved producers are currently examining demand and the consumer/culinary preferences of their new customers in the Middle East and Africa. According to industry contacts, the average weight of a bird for Russian market is 1,7 kg. but producers who ship to Middle Eastern markets must adjust their production cycle and slaughter houses to 1.2 kg. birds. Trade data proves that industry is learning fast: one of the leading companies, “GAP Resurs” started to develop its export activities in 2012 and today exports to 30 countries. In January-November 2016 Russia exported 32,512 MT broiler exports to two Eastern regions of Ukraine, an increase of 155 percent compared to 2015. The two Ukrainian regions became the major destination of broiler exports from Russia. Kazakhstan and Vietnam, the traditional key exports markets, accounted for 30 and ten percent of the exports, respectively.