Pork Prices Rally

October 8, 2013

After Russia joined the WTO a year ago, pork prices started to decrease dramatically (see RBC daily of 12.10.2012), and meat prices dropped 40% by May 2013. However, Alexander Kostikov, Head of Communications and Investor Relations of Cherkizovo Group, recently reassured shareholders that meat prices have returned to the level of the previous year. Livestock producers benefited from both government restrictions on imports of meat containing ractopamine and the African Swine Fever virus, which was responsible for reduced meat production from small private holdings.

Mr. Kostikov told RBC daily that last week, Cherkizovo Group was selling live pigs at 86 roubles per kg, including VAT. Current prices are close to those of the previous year.

“A year ago we told our investors that the price reduction was due to seasonality, aggravated by an increase in imports beyond the quotas and increased production,” Mr. Kostikov said.

A spokesman for Miratorg Agribusiness Holding, Russia’s largest pork producer, said that the live-weight pork price ceiling in August 2013 was 86 roubles per kg, or 10% lower than in August 2012. Prices for category 1 pork sides show a similar trend. The price ceiling for this product in August 2013 was 141 roubles per kg vs. 145 roubles per kg, including VAT, in 2012.

Meat was much cheaper at the beginning of the year. Cherkizovo and Rusagro sold pork at an average of 61 roubles per kg, including VAT, in Q1 vs. 72 roubles per kg and 68.5 roubles per kg, respectively, including VAT, in Q4 2012. In early October 2012, the average live-weight pork price in Russia was 75-80 roubles per kg, including VAT, as Yury Kovalev, Director General of the National Pig Farmers Union, said a year ago.

“Investors were extremely concerned in spring. However, we promised them the market would recover, because we anticipated that inefficient holdings would be closed, livestock on small private holdings would be reduced owing to ASF” Mr. Kostikov said. “Last week we met with investors again and eased their concerns with our rising rates.”

A year ago pork producers were caught up in dramatic events when Russia cut customs duties from 40% to 5% on live pig imports, and from 15% to 0% on imports under quotas in compliance with WTO terms. As a result, importers who had held back supplies until custom duties were cut went ahead with meat imports.

According to Nikolay Birulin, chief expert of the National Pig Farmers Union, there were a number of reasons for the current price recovery. On the one hand, in December 2012, Rosselkhoznadzor restricted imports of meat containing ractopamine. On another hand, in April 2013, the Board of the Eurasian Economic Commission (EEC) removed pork and poultry meat from the list of tariff preferences for developing and least developed countries. Prior to this decision, most out-of-quota pork imports came from Brazil within these tariff preferences, added Sergey Yushin, Head of the Executive Committee of the National Meat Association.

National Pig Farmers Union members say that reduced import quotas for Belarus on pork supplies to Russia within the Customs Union contributed to the pork price recovery. ASF was another factor in maintaining prices, as the virus quickly reduced pig stocks on farms and small private holdings in the country.

“There had to be a price adjustment; otherwise, at such low prices Russian pork producers would been ruined”, Mr. Yushin says. In the opinion of Daria Snitko, the leading analyst at the Centre for Economic Forecasting of Gazprombank, pork producers lost nearly 30 billion roubles of year-end revenue because of the drop in pork prices when Russia joined the WTO.

Ms. Snitko insists that the rise in pork prices is a global trend. “In most countries, pork and poultry prices are almost at the same level. Despite last year’s price slide caused by entry to the WTO, Russian markets were not adjusted. Poultry is still 30—40% cheaper than pork, and these price levels will not converge in the near future.”

Pork producers are showing improved profitability compared to the beginning of 2013, but they are concerned about the news of lowered yields and problems with autumn sowing, Mr. Yushin says.

Insufficient sowing this year may have a significant influence on yields in 2014, said Oleg Sukhanov, an analyst at the Institute for Agricultural Market Studies (IKAR). Specialists agree that this will definitely have an impact on pork producers’ income. Following the “perfect storm” in the pork sector (the drop in pork prices coincided with a sharp rise in grain prices), producers will probably stop building new production capacity after 2013 in the absence of long-term support, Mr. Kostikov believes.