Russian poultry industry ushers in new era with WTO accession
Poultry producers will gain greater access to overseas market but face stiffer competition at home.
Russia’s poultry industry is on the verge of major change due to the country’s accession to the World Trade Organization.
Despite the unquestionable benefits of membership, the long-awaited accession may have unpredictable consequences for the agriculture sector and in particular its poultry production, say some Russian analysts.
Quotas and support
Under the agreement between the WTO and Russia, the country will not have to reduce its existing quotas on poultry imports, which will continue to be termless, but which cannot be further reduced.
For 2012, the quota on poultry imports is set at 330,000 metric tons, of which 80,000 metric tons is mechanically separated meat, and most of which will be supplied by the US. The rate of import duty under the quota is set at 25% and will be gradually reduced over subsequent years. The quotas for the following years have not yet been approved.
As part of the agreement, the permitted level of state support for Russian agriculture will remain at a maximum of US$9 billion per annum, (more than twice as high as in other WTO countries), of which at least US$1.5 billion will be invested in domestic poultry production. This will last until 2018, after which Russia will reduce the volume of its state support for agriculture by up to US$4 billion, in compliance with currently accepted WTO levels.
The government is confident that Russia’s entry into the WTO will benefit the domestic poultry industry, as it will be able to start exporting, in particular to the EU, which for a long time had been a closed market.
Maxim Medvedkov, director of the Department of Trade Negotiations of the Russian Ministry of Economic Development and head of the Russian delegation at the WTO negotiations, comments: "The Russian agricultural industry, and in particular its poultry sector, will get the biggest benefits from Russia's WTO accession. The global poultry industry has traditionally been closed, especially to Russia, due to strict veterinary and phytosanitary regulations applied to Russian poultry primarily by the EU."
Russian analysts believe that WTO membership may offer Russia strong opportunities to become one of the world's leading exporters of poultry in the coming years.
According to Alexei Lystsov, CEO of Neofors company, one of the largest suppliers of equipment for Russian poultry farms, Russia will soon be ready to start exports of its poultry meat to the EU, thanks to a significant increase of the volume and quality of domestic poultry production.
He believes that, due to the EU poultry industry’s relatively low growth rates, Russian poultry could definitely find a niche in the global market, particularly supplying the EU, thanks to the relative low cost of Russian production.
In addition to cheap energy, among the other advantages enjoyed by the country’s poultry producers over their European and the US competitors is cheap labor.
The industry is one of the most developed sectors within Russian agriculture, with growth rates exceeding those of beef and pork producers.
Currently, domestic production meets 85% of local demand for poultry. According to estimates by Galina Bobyleva, CEO of the Russian Poultry Union, in 2011 poultry production in the country was expected to grow by 10.3%, compared with 2010, to 3.2 million metric tons. Annual consumption is estimated at 3.45 million metric tons, and is relatively stable.
Despite the enthusiasm of the Russian government and numerous producers, some local analysts have opposed joining the WTO, warning that it could negatively impact the industry in the medium- and long-term.
The Russian government’s decision to reduce the level of financial support to domestic poultry farming, (a requirement for WTO entry), has attracted the greatest criticism.
According to Nikolai Kolomeitsev, a member of the Russian Communist Party and an expert in the field of agriculture, current Russian legislation and economic policies are simply not designed to regulate the economy in the competitive environment of the WTO.
He notes that, currently, the EU invests up to 24% of its consolidated revenue on agricultural support, while in the US the amount of hidden subsidies reaches 33%. In the case of Russia, the level of state support for agriculture and the poultry industry has been less than 1% of the country’s budget expenditure.
This opinion is shared by Dmitry Lisovski, a politician and one of the main opponents of Russia's WTO accession. He argues that Russian producers, in any case, will not be able to compete with imports on an equal basis because of the unfair protectionist policies used by Western countries and the absence of prohibitive duties on the imports of subsidized poultry products in Russia.
The inevitable increase in poultry imports over the coming years may also lead to a sharp decline in prices for domestic producers, as occurred a few months ago following the resumption of US poultry imports to the country, which led to a glut and a decline in demand for locally produced poultry meat.
However, the Russian government has said that it will not offer further support or concessions to the industry. It also has no plans to further restrict imports and most importantly, imports of chicken legs, a product that enjoys great popularity with local consumers, but is practically not produced domestically.
Need to modernize, lack of competition
The fears of some Russian poultry producers with regard to WTO membership can also be explained by the fact that, at present, only a few of them are able to compete with imports. There are thought to be some 600 companies active in poultry production, but to date, only Russia's largest chicken producers have upgraded production to international standards, while the rest still remain uncompetitive.
One of the distinguishing features of the local industry is high levels of consolidation, whereby the five largest players account for one-third of the total market. Moscow-based Cherkizovo remains Russia's largest producer, while among the other major producers are Prioskolye and Prodo.
This high level of consolidation, according to most analysts, hinders rapid development, resulting in a certain conservatism and bureaucratization as well as a lack of full-scale competition in the market. Among other major problems are poor management, a lack of innovation and high levels of depreciation of equipment.
Additionally, Russia currently has no stable domestic suppliers of hatching eggs, while many industry enterprises do not have effective slaughter and packaging equipment. Labour productivity in the Russian industry is several times lower than that of the EU, the US and Brazil.
There is the possibility that WTO membership may result in greater competition and a gradual resolution of the majority of the sector’s problems, as well as creating condition for growing per capita consumption of poultry meat. Currently, average per capita consumption of poultry in Russia is estimated at 20 kg, significantly lower than in the EU and US.
However, taking into account the generally low level of consumption of all meats in Russia, this figure could be considered high, with poultry accounting for 40% of all meat consumed by Russians. Local analysts predict that over coming years, poultry consumption in Russia will continue to grow, and by 2020, poultry could account for up to 45% of total meat consumption.
The global economic crisis has had a mixed effect on the Russian poultry market. On one hand, it resulted in a massive consumer shift to poultry meat; on the other, the poor (who constitute a very large percentage of consumers), found almost all meat including chicken out of reach.