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Poultry Processing & Slaughter
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on September 2, 2010
GLOBAL POULTRY TRADE

Should Russia import and export poultry?

Is self-sufficiency in poultry production or two-way trade in the best interest of Russia’s producers and consumers?

From comments made over the years, it is apparent that many Russians have a strong preference for self-sufficiency in poultry production. Should Russia strive to be self-sufficient? At the risk of offering advice where none is sought, this author submits the proposition that self sufficiency is not the optimum solution for Russia. Instead, two-way chicken trade including both imports and exports would appear to be the better bet.

Why is trade a better bet? To answer that question it is important to go back to first principles. Why trade at all? Shouldn’t each country strive to be self-sufficient in everything? Economics is full of paradoxes and one of them is that the seemingly virtuous goal of self-sufficiency is most often a path to poverty. It is trade that makes a country richer, not lack of trade. This fact is well known and most people agree in principle with trade. However, it can get complicated when a particular industry is affected.

Closed market little help to Russian producers  

This year, Russia reduced imports of chicken meat, and in particular, U.S. leg quarters. It might be expected that a reduction in imports would increase the price of local chicken. However, in practice that effect was minimal. As leg quarters ran out of stock, their price increased, but the price of more highly-prized and higher-priced fresh, local chicken increased relatively little. Total consumption of chicken declined as low-income consumers were priced out of the market. As a result, chicken meat consumption declined without significantly helping the profitability of the local Russian chicken industry.

To understand the benefit to Russia of imports, it is helpful to consider the effects of the opposite – not importing. By not importing chicken, the price of leg quarters in Russia was artificially high while the price of leg quarters in the U.S. was artificially low. The temporary beneficiaries of this situation are low-income consumers in the U.S., while the victims are low-income consumers in Russia. In effect, low-income consumers in Russia were subsidizing low-income consumers in the U.S.

Why Russia should continue U.S. imports  

Therefore, from a strictly economic perspective, it would make sense for Russia to import U.S. leg quarters to take advantage of their low price and lower the cost of chicken to low-income consumers without significantly affecting the local Russian poultry industry. This situation was created by the existence of a rising middle class in Russia that can absorb the increased premium production of the local chicken industry combined with a lower-income population that can still take advantage of low-cost imports.

Beyond the merits of the self-sufficiency argument is an even more interesting question – should Russia become an exporter of chicken meat? Thanks to a normally abundant supply of inexpensive grain (this year could be the exception to the rule), Russia is a relatively low-cost producer of chicken. As a low-cost producer, it is likely to be a competitive exporter particularly to nearby countries. Rather than emphasizing self-sufficiency as a strategic goal, a more profitable strategic goal might be a trading goal seeking both exports and imports. This, by the way, is a goal that may be valuable for several growing countries with relatively low grain costs, not just Russia.

The case for two-way trade  

It may seem odd to suggest importing and exporting chicken simultaneously. However, there are many examples of countries that import and export the same agricultural product.

China imports and exports chicken meat, as does the European Union. The U.S. both imports and exports huge quantities of beef and pork. In non-agricultural areas the practice is common. Automobiles, for example are often imported and exported from the same country.

It is the economic principle of arbitrage that informs this process; taking advantage of a price difference between two or more markets. Given the various parts of the chicken, the difference in cultural preference for chicken parts, the difference between fresh and frozen and a patchwork of trade rules, chicken meat is rich with arbitrage potential particularly in a continent sized country.

 

 Poultry trade not a zero-sum game  

Russian policy makers with the single-minded goal of self-sufficiency have been frustrated lately by a surge in chicken consumption. Rather than the expected zero-sum game of increasing production and reducing imports, the chicken story in Russia has been one of rapidly rising domestic production accompanied by continued high levels of imports. While Russian production increased by an impressive million metric tons in the last five years, domestic consumption increased by an even more impressive 700,000 tons. As a result, imports declined slowly.

In the next five years, production could increase by another million metric tons and imports could theoretically be squeezed out. But is it worth it economically? An alternative scenario is one where production increases by more than a million metric tons but lucrative export markets are developed at the same time as Russia continues to opportunistically take advantage of chicken bargains that can be found on the world market. By 2015, the two alternative scenarios shown in Table 2 can be envisioned.

Under the trading scenario, leg quarters (or any other cheap chicken found on the world market) continue to be available to lower income Russians thereby increasing total consumption and a lucrative export market is developed to take advantage of premium market opportunities in the near-abroad.

Two-way trade in Russia’s interest  

Under which scenario would the Russian chicken industry be more profitable? The knee-jerk answer is that it would be more profitable under the closed-market scenario. However, is this really the case? Paradoxically, the industry might be more profitable, larger and more sustainable under a trading scenario even though the price of some chicken parts would be lower. The reality of striving to compete in the world market for chicken meat would reduce the cost of production of the Russian chicken industry over the closed-market scenario where prices might be higher but efficiency lower. Closed markets have a well documented tendency to result in less efficient industries.

The Russian poultry industry is likely to grow over the next several years to become the fourth-largest chicken industry in the world after the U.S., China and Brazil. The natural advantages of Russian low-cost grain are destined to drive that process. A trading goal is more likely to accelerate that process than a closed-market goal.

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