Financial Turmoil in Russia Darkens Meat Export Opportunities
|Once one of the world's largest grain importers, Russia is now second only to Japan as a meat importer. Russia's financial instability in mid-1998, however, has slowed, and in many cases, stopped meat shipments into Russia and is darkening the export horizons for U.S. and EU red meat and poultry meat exporters.|
Meat exporters, already concerned about uncertainties stemming from the on-going Asian crisis, are reeling from another blow, the August 1998 devaluation of the Russian ruble. In recent years, Russia has become an increasingly important destination for meat products, importing 2.4 million tons in 1997, of which nearly one million was poultry meat from the United States. In 1997 Russia was the largest global recipient of poultry meat and the second largest importer of pork.
Russian consumers are having difficulties, in the context of the crisis, as extreme currency and price volatility since the ruble devaluation on August 17 have made it very difficult to maintain constant supplies of imported meat products. Russian meat imports, as a share of consumption, have risen from 15 percent in the late 1980's to 34 percent in 1997 which poses the question of food availability during the upcoming months. This is particularly a concern for some of the more vulnerable groups such as the urban elderly and poor, school children, and orphanages.
Image: Meat Situation in Russia
The virtual freeze on meat exports to Russia since the ruble devaluation in mid-August is expected to drop total Russian imports in 1998 by 25 percent from 1997 levels. Unless problems in the banking system are solved, this slide in imports is likely to continue into 1999. This is despite the Russian government's decision in October to abolish a three percent increase in import duties and an extra 10 percent level of value-added tax which had been previously imposed.
Major Meat Exporters Dependent on Access to Russian Markets
Since the currency devaluation, trade has come to a virtual stop for most meat products. While the Russian market accounted for only 2 and 11 percent, respectively, of U.S. and the EU's total agricultural export revenues in 1997, these figures mask the potential impact on their respective meat industries which are reliant on Russia as an export market.
For the U.S. poultry industry, which is heavily dependent on the Russian market, product prices have been pressured downward. U.S. poultry meat shipments to Russia, mainly broiler leg quarters, in 1997 reached almost 1 million tons. While exports through the January-August period totaled nearly 600,000 tons, only 2 percent of lower than last year's level, product movement through the remainder of the year is likely to fall precipitously.
U.S. pork exports will also be affected as Russia, during the first half of 1998, moved into position as the industry's second largest export market. Low U. S. pork prices, particularly for the trimmings, have bolstered exports to this market which through August reached nearly 40,000 tons, a 122 percent gain over last year. U.S. beef variety meats have also benefitted from Russia's growing demand for inexpensive meats. Russia was one of the U.S.'s largest markets in 1998--second only to Japan. While shipments to Russia only represents one-percent of U.S. total beef exports, there will undoubtedly be strong competition in other markets as traditional exporters are forced to find other outlets for their product.
Image: Russia's Meat Imports
The importance of Russia to U.S. meat exports is mirrored in the EU meat sector. In 1997, according to the EU Commission, 41 percent of EU beef exports (354,000 tons) and 34 percent (340,000 tons) of pork were shipped to Russia. Red meat exports from the EU to this market constituted 14 percent of total agricultural export earnings in 1997 of $6.2 billion (5.4 billion ECU). Member states who are particularly affected by the crisis include Denmark, whose pork exports accounted for nearly one-third of the EU total, and Ireland and Germany where Russia ranks as their largest beef export market. The difficulties for the pork sector are compounded by the Asian crisis and strong competition from U.S. product in Japan and South Korea.
The European poultry industry is less severely affected although the Commission reported that nearly 30 percent of European poultry was shipped to Russia in 1997. French poultry companies reportedly have asking producers to slow down production, particularly of turkey meat. Russia used to be a major market for low value turkey meat such as mechanically deboned meat. Broiler exports from the Netherlands are expected to fall sharply since export restitutions are not available for the lower-valued parts, a growing component of Dutch exports.
Loss of the Russian market leads to price and policy changes
The Russian crisis is dealing a heavy blow to the U.S. and EU meat industries which are already struggling from oversupplies, low prices, and a constrained outlook for 1998 and 1999. The severity of the situation for these industries is revealed by looking at price movements in the United States and recent policy decisions taken in Brussels.
With nearly 40 percent of total U.S. poultry meat exports, or 6 percent of total production, shipped to Russia, any policy or market-induced price changes for poultry meat in the Russian market has historically been directly transmitted back to U.S. exporters. This is evidenced by the decline in U.S. leg quarter prices which fell precipitously, from $.36/pound in mid-August to $.20/pound in early October.
Loss of the Russian market for the U.S. pork industry, which is less dependent on this market, should not have as significant an effect on U.S. pork prices, which are already down 34 percent from last year due to abundant U.S. supplies.
Image: Russian Market Access Issues Move U.S. Leg Quarter Prices
Across the Atlantic, however, the high dependency of the EU red meat sector on Russia as an outlet for cheaper cuts has coincided with a period of particularly low domestic prices, especially for pork. Prior to the Russian crisis, the EU pig sector, faced with significant oversupplies, was already looking at the lowest prices in decades, down nearly 30-40 percent from last year.
As the trade repercussions ripple back into the respective domestic industries, both the Commission and the U.S. Department of Agriculture are looking at ways to restart trade through a variety of means. The EU is aggressively increasing export subsidies to promote meat exports with pork refunds now higher than any time in the past five years. Pressure by the EU pork industry resulted in the Commission again raising EU export refunds for bone-in pork carcasses and cuts to $432/ton, and bellies to $270/ton, effective October 15th 1998. More than 50 percent of EU exports of the above pork products move into the Russian market.
To ease the pressure on the pork sector, the Commission, in response to the Russian situation, reinstated private storage aid in October 1998 for a maximum duration of 6 months. This is now available to producers and budgeted for up to 70,000 tons/year. The time limitation on storage, however, implies that the measure is offering the Commission and EU producers only a temporary reprieve for a problem that is likely to extend into 1999.
In October, for the second month in a row, the Commission responded to pressure from the EU beef sector by increasing export refunds for beef exports to all destinations, including Russia, by approximately 8 percent. This increase, the second upward adjustment since February 1998, now puts beef restitutions in the range of $140-$250/ton, depending on the cut. In Europe, one of the immediate consequences of the halt in trade is a build up in stocks and a shortage of cold storage space. This is of concern to the Commission, as more than 500,000 tons of beef are already held in intervention stocks.
Despite market conditions and policy measures that are leading to lower offer prices for meat, the Russians may not be able to buy at any price due to the severity of the banking conditions that restricts importers' access to credit and hard currency. Consequently, on both sides of the Atlantic, policy makers are engaged in reviewing possible program options to resolve the trade impasse, including the possibility of food aid.
Russian Crisis Constrains Meat Trade Outlook in 1998 and 1999
The Russian economy continues to be a subject of debate on both sides of the Atlantic and as each day passes pessimism deepens on the meat export outlook for that market for 1998 and 1999. Credit difficulties for importers, higher meat prices for Russian consumers and inflation-reduced disposable incomes, are taking a toll on trade. Total meat imports by Russia are now projected to plummet from 2.4 million tons in 1997 to 1.8 million tons and 1.5 million tons in 1998 and 1999 respectively. Hardest hit by the Russian crisis will likely be red meat exporters, as beef and pork imports are expected to drop more than 20 percent in 1998 and again in 1999. Total red meat imports in 1999, projected at 670,000 tons are only two-thirds the level of 1997.
Exporters of beef, which is relatively more expensive for consumers, are expected to bear the brunt of this decline. Total beef imports by Russia in 1999 are projected at 350,000 tons, half of the level of imports in 1997 and a 30 percent decline from the dampened estimate of nearly 500,000 tons in 1998. This projected decline in beef imports is expected to hit the EU beef sector the most. This is despite the policy instruments at the disposal of the EU, Russian's major supplier of beef and pork. EU restitutions are limited by the WTO; consequently there is a limit to their effectiveness as a trade promoting tool.
Imported poultry meat, particularly leg quarters, benefitting from being the cheapest source of animal protein, will probably be among the first sources of meat that Russians will buy once product starts moving. The U.S. industry, with its proven ability to move product at low prices, should be able to partially compensate for the ruble devaluation. Nevertheless, poultry meat imports by Russia are now projected down over 30 percent in 1998, to 850,000 tons, sliding another 18 percent in 1999 to 836,000 tons.
Immediate Trade Outlook Hinges on Numerous Uncertainties
The overall outlook for meat trade for the remainder of 1998 and 1999 remains plagued by a complicated morass of uncertainties in Russia, ranging from the political arena to the market place. Commercial trade flows remain hampered by the continuing problems in the Russian banking sector and it is unclear when or how these institutions will resume trade financing. Even once commercial shipments resume, it is unclear how the inflationary effect of the devaluation and its effect on disposable income and consumer buying patterns will affect overall demand in Russia for meat products.
In the longer term, however, Russia is likely to resume its place as one of the world's largest meat importers. While the liquidation of a largely inefficient livestock and poultry meat sector appears to be slowing, a growing middle class combined with relatively low per capita consumption levels is expected to increase demand for both domestically produced and imported meat products.
Image: Russian Consumers Highly Reliant on Imported Meat Products
For further information, contact Nancy Morgan (202) 720-1372.