Report Highlights:

Growth in consumer demand for meat products continues to outpace production and import growth. Swine numbers are forecast to increase 8 percent in 2008 while cattle numbers are expected to decrease 3 percent. During the first 6 months of 2007 beef and pork prices grew 3.2 percent and 2.6 percent - substantially lower than during the same period in 2006 where beef and pork prices grew 9.7 and 7.4 percent. Rising feed costs are expected to push meat prices up even higher by the end of 2007 and into 2008. Imports of beef and pork into Russia totaled 632,000 metric tons (product weight) from January to June 2007, up 26 percent compared to the previous year. Russian officials plan to introduce a new mechanism for distributing meat tariff rate quotas for 2008 and 2009. Russian veterinary specialists recently concluded inspections of U.S. beef facilities. A list of approved U.S. beef establishments for export to Russia will be made available soon.

Data included in this report are not official USDA data. Official USDA data are available at http://www.fas.usda.gov/psdonlineonline.

Executive Summary

Beef production is forecast to decrease 3 percent in 2008 as poor cattle husbandry and generally negative financial returns continue to scare off potential investors. By contrast, pork production is expected to increase 8 percent in 2008, largely due to growing investments in swine production, better reproductive yields and availability of investment credit subsidies. Livestock policies under the National Priority Project for Agriculture (NPP), active since 2005, and the recently approved State Program for Development of Agriculture and Regulation of Food and Agricultural Markets in 2008-2012, encourage swine production and attempt to address Russia’s declining cattle numbers. Russia and the United States agreed on new veterinary certificates for beef and beef products and for pork and pork products in late 2006. Russian veterinary specialists recently completed inspections of U.S. slaughter and processing facilities. Demand for livestock genetics continues to be strong. A list of approved facilities for export to Russia is expected by the end of October 2007 with a resumption of trade shortly thereafter.

Overview

The Russian government is taking active measures to develop the livestock industry. The three-year National Priority Project for Agriculture (NPP) began in 2005 and calls for the construction, renovation and modernization of large, commercial livestock farms as well as for extension of credit to smallholders and private plot producers who generate approximately half of total livestock products. The Russian government recently approved a new program that will succeed the NPP titled, “The State Program for Development of Agriculture and Regulation of Food and Agricultural Markets in 2008-2012” that encourages pork and beef production and attempts to address Russia’s declining cattle numbers. This program includes import-substitution policies designed to stimulate domestic livestock production and to protect local producers.

From January to June 2007, 623,000 metric tons of red meat was imported. A decade-long decline in beef production resulted in limited beef availability in the Russian market. In response, the Russian government was forced to take steps to increase the availability of beef by lifting beef bans on major trading partners, and by reallocating the majority of the European Union’s beef tariff-rate quota (TRQ) to developing countries (mainly Brazil).

Swine production increased in 2007, but remains below the Ministry of Agriculture’s expectations. The Russian Statistics Agency (Rosstat) reported that as of August 1, 2007, the swine herd was 9.9 percent larger than in 2006, totaling 17.6 million head. Russian government officials are worried that rising grain prices will force smaller farmers to slaughter their pigs sooner and depress herd growth potential. The effect of rising input prices on small producers in Russia is significant, as private households account for roughly 50 percent of livestock production in Russia, but have limited ability to pass on higher costs to consumers.

Russia hopes to increase domestic meat production 42.6 percent over 2006 figures by 2012. Under the new program, Russia will extend its TRQ regime on imported meat beyond 2009, remove the country allocations currently within the TRQ regime, and increase its out-ofquota tariff rates (see GAIN report RS7051). Despite these efforts, Russian livestock breeders are struggling to satisfy rising per capita meat consumption growth that fell sharply during the economic reform efforts of the 1990’s.

Production

Cattle beginning stocks are forecast to decrease 3.7 percent in 2008, continuing the decadeand- a-half decline in this sector due to low productivity and reproductive efficiency. As a result, beef production is expected to fall 1.1 percent. The commercial beef cattle industry in Russia is in its infancy, and has far to go before it will become profitable. Dairy cattle remain the primary source of domestic beef (bull calves and spent dairy cows). Converting dairy cattle into beef will continue to depress the recovery of Russia’s beef cattle industry. The challenge remains in making beef an attractive area for investment as poor animal husbandry and general negative returns continue to scare investors away.

Consumption

Strong economic growth in Russia is increasing demand for beef and pork products. Pork consumption is expected to grow 6.5 percent in 2008. Beef consumption in 2008 is forecast to remain unchanged from 2007, assuming beef imports can compensate for declining domestic production. Russian consumers spend about half of their salaries on food, on average, and small increases in red meat prices, without additional real wage growth, can reduce consumption of red meat.

Trade

According to the Federal Customs Service, Russia imported 636,600 metric tons of frozen/fresh beef from January to July 2007 valued at $1.6 billion, up 24 percent from 2006. During the same time period in 2006, Russia imported 511,400 metric tons of frozen/fresh beef valued at $933 million.

Earlier this year, the European Union (EU) agreed to reallocate 270,000 metric tons (77.6 percent) of their 2007 frozen beef quota to developing countries, as EU domestic supplies were at low levels. The vast majority of their quota went to Brazil.

Several government agencies, including the Ministry of Economic Trade and Development, criticized the Ministry of Agriculture for failing to control increasing meat prices. In response, the Russian veterinary service removed beef import restrictions from several previously banned countries, and lowered out-of-quota import duties for numerous beef categories in early 2007.

Ukraine benefited from the easing of restrictions and shipped 48,200 metric tons of beef to Russia during the first seven months of 2007, thus tripling their exports to Russia compared to 2006 levels. Russia allowed beef imports from Ukraine in 2007 after Russian veterinary specialists inspected dozens of its meat establishments. Currently 14 Ukrainian meat processing facilities are licensed to export to Russia although that number is expected to grow as inspections continue.

Bulgaria may join Ukraine in shipping meat products to Russia soon, according to representatives of Russia’s veterinary service. Russian specialists traveled to Bulgaria for two weeks and inspected safety and quality control procedures. Russian specialists plan to return to Bulgaria and visit central, regional and border veterinary services, customs warehouses, cattle farms, slaughterhouses, processing plants, checkpoints and sea ports.

Demand for imported livestock genetics is strong. Live cattle and hogs imported under the National Priority Project and financed by the government agricultural leasing agency, Rosagroleasing (http://eng.rosagroleasing.ru/), as well as semen and embryos, are being imported from distant Australia and Canada since supplies of live animals in western Europe have been largely exhausted. Much of the demand for swine genetics is spurred by recognition that outdated Russian swine genetics offering 4:1 feed conversion ratios and fat hogs unfit for processing cannot compete with western feed conversion ratios and leaner hogs. Beef genetics demand is rooted in a realization that higher dairy yields and beef daily gains can only be achieved through specialized breeds. This has resulted in imports of specialized beef and dairy brood cattle from Europe, Canada and Australia. Imports of live cattle and embryos from the United States remain in abeyance pending agreement on veterinary protocols.

VPSS Introduces New Electronic System for Meat Imports

The Russian veterinary service plans to expand the list of countries whose meat and poultry imports will be subject to electronic verification. The system is designed to detect counterfeit veterinary certificates, and support efforts to reduce smuggling of illegal livestock products into Russia. The new system was launched in early 2007 for Australian imports of red meats. The new electronic system will soon be applied to beef, pork and poultry imports from the United States, Canada and Denmark, and eventually to all countries, according to representatives from the Russian veterinary service. Russian veterinary officials have publicly stated that because of an “increasing number of cases where accompanying documentation was filled with errors,” they are specifically targeting U.S.-origin meat and poultry products.

Prices

Beef and pork price growth in the Moscow retail meat market slowed from January to June 2007 compared to the same period in 2006. In 2007, beef and pork prices grew 3.2 percent and 2.6 percent, respectively, while in 2006 beef and pork prices grew 9.7 and 7.4 percent, respectively. Pork wholesale prices decreased for imported and domestic pork products, while the growth of beef prices reflected market shortages. The slower price growth of meat products helped stabilize inflation for most of 2007. During the first eight months of 2007, inflation was maintained at around 7.0 percent - a decrease from the same period in 2006 when inflation reached 7.2 percent.

However, rising feed costs are expected to increase meat prices by the end of 2007 and into 2008. Feed prices almost doubled over the summer, according to reports from the Ministry of Agriculture, although grain yields were at 2006 levels. In an effort to reduce inflationary pressures on the Russian economy, on October 10, 2007, Minister of Agriculture Aleksey Gordeyev announced a 30-percent export tariff on barley and 10-percent export tariff on wheat would be imposed in November, 30 days after official publication (which followed the next day). For further details please see GAIN reports RS7065 and RS7068.

Prices of imported live cattle have risen sharply over the last year due to strong demand under the NPP, with bred Dutch Frisian heifers reportedly selling for 2,200 Euro per head, delivered.

Stocks

A stable flow of pork and beef imports in 2007 kept meat stocks adequate for retail trade and processing facilities. Stocks were excessive at the start of 2007, however, as importers exceeded their quota limits in efforts to raise their import averages, before the new tariffrate quota allocation system took effect.

Policy

The Russian government distributed all tariff rate quotas for beef, pork and poultry in late March 2007, in accordance with Russian legislation (see GAIN Report RS7039). However, Russian officials plan to introduce a new mechanism for distributing meat and poultry import quotas. In August 2007, members of the Consultative Council on the Monitoring of Chicken, Beef, and Pork Imports, considered a draft measure that would change the methodology used to determine tariff rate quotas for 2008 and 2009. According to Russian officials, the draft measure reflects ongoing market changes exemplified by the successful implementation of the NPP. Officials claim the estimated volume of required meat imports is correct, but that the current system creates incentives for importers to exceed quota limits in order to keep their future quotas intact. Under the new proposal, the share of a tariff rate quota an importer would receive in 2008-2009 would be based on the average share that importer received in 2005-2006. The draft proposal was sent to several Russian ministries for comment, and market analysts expect its approval by November 2007.

Change in Customs Tariff Code for Pork Trimmings

Russia introduced changes to the customs tariff code and to resolution No. 732 by including sub-categories for pork trimmings¹ (0203 29 550 2 and 0203 29 900 2) and increased the tariff rate quota by 26,500 metric tons above the previously set amount for 2007-09 (see GAIN report RS7041). This action increased the U.S. share of the pork quota by 2,700 metric tons for 2007, 2008 and 2009.

The Ministry of Economic Development and Trade will issue licenses from June 10 to December 31, 2007 to importers who purchased pork during the previous year. Importers will only be issued licenses for pork trimmings, however, after they fulfill their tariff rate quota allocations.

National Priority Project

The Ministry of Agriculture continues to track Russia’s progress on achieving the goals outlined in the National Priority Project (NPP) for Agriculture. Minister Gordeyev said, “An increase in meat production due the Priority Project has doubled from the planed number. ” 1 The term "trimmings" denotes minor pieces of boneless, skinless meat with fat tissue not exceeding 70 percent. Import duties for pork trimmings are set at 15 percent, but not less than 0.25 Euros/kg. Over 1,700 facilities participate in construction and reconstruction programs to modernize livestock farms , currently, with over 90 percent of those facilities signing credit agreements totaling RUR131 billion. Since implementation of the NPP, 62,100 head of pedigree cattle (62 percent of plan), and equipment purchases totaling RUR1.1 billion for 124,600 cattle head equivalent (95.8 percent of plan) were purchased to revitalize the domestic livestock sector. See also GAIN reports RS5086 and RS7020.

New Prime Minister Intends to Cut Imports of Agricultural Products

Recently appointed Prime Minister Viktor Zubkov stated that the money allocated from the state budget for agricultural development (including money for the NPP), is substantial but not effective. “We need a technological modernization in the agriculture industry; we need to elaborate a strategy of developing agriculture to make the money work. The money is given, but milk production this year increased only 2 percent,” Zubkov noted in a recent press conference. Zubkov added that additional funds should be earmarked to improve rural infrastructure, while at the same time a strong government effort must be made to reduce imports of agriculture products.

Results of Agriculture Census

The Ministry of Agriculture is correcting several agribusiness indicators, as a result of the July 2006 census of agriculture. The census revealed numerous discrepancies (upwards of 30 percent in some cases) in the current statistics, including discrepancies in livestock data. For example, the cattle inventory is actually 3.4 percent higher than current statistics indicate. Additionally, the number of hogs is 12 percent higher, and the number of sheep and goats is 7 percent higher, according to the census². Results from the recent agricultural census are included in the State Program on Agricultural Development that was approved by the government on July 12, 2007 (see GAIN report RS7051).

Food Dye Additive E128 Is Prohibited For Use in Processed Foods

The Russian government recently banned food dye additive E128 (Red 2G) for use in processed foods after a European Union report linked possible health risks to humans from consuming processed meats treated with the food dye (see GAIN Report RS7062). Food imports that contain this additive will be turned away upon reaching Russian ports. Prior to the ban, the food colorant could be added to hot dogs (wieners) with grain and legume content greater than 6 percent and to products prepared from ground meat containing more than 4 percent grain, legumes, and vegetables with a maximum content of 20Mg/Kg.

Halal Livestock Products

The network of shops and meat processing plants specializing in Halal livestock products is expanding in Moscow. The Mufti Council created The Halal Center of Standardization and Certification to coordinate activities between the shops and over 100 Halal-certified livestock processing plants in Russia. The Chairmen of the Mufti Council of Russia successfully advocated the concept to the Moscow Duma, in response to increasing demand among Muslims for meat products prepared according to Islamic law and tradition. Countries such as Germany, France, and Brazil currently export Halal-certified meat to Russia, in coordination with the Mufti Council.


¹ The term "trimmings" denotes minor pieces of boneless, skinless meat with fat tissue not exceeding 70 percent. Import duties for pork trimmings are set at 15 percent, but not less than 0.25 Euros/kg.

² The census revealed sheep and goat populations are each seven percent higher than indicated in official statistics.

Further Reading

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October 2007