RUSSIA - Since my last report there has been a drop in price which is today at 91 Rubles or $1.38 per live kg, writes Simon Grey, General Manager Russia, CIS and Europe.
Why the drop. A combination of factors, end of summer and shashlik (barbecue) season, kids going back to school needing clothes books and equipment lowering disposable income for food, the inevitable increase in slaughter weight as the temperature cools down and a general decline in spending due to high inflation following the devaluation of the Ruble. Just a little bit of local supply and demand kicking in!
Of course Russia being Russia there are conspiracy theories of the large producers like Miratorg reducing the price on purpose to put smaller producers out of business! If only pig producers could control the pig price. What a different world it would be for us all if it was possible!
With the current market price of wheat at 11,170 Ruble or $169 / tonne, average cost of production is 86 Rubles or $1.29 per live kg. Average production cost in Russia is slightly misleading and certainly an estimation. Many producers are fully integrated with their own land producing their own grains and proteins to go through their own feed mills. The production cost in this case depends greatly upon what cost is used when transferring grain and protein.
What is interesting to see when prices reduce in Russia is the reaction of the industry as a whole. First response always is to ask government for subsidies or direct support. Historically this has happened. Today the government coffers have limited supplies of money. Russia’s growth over the past decade has been largely on the back of high oil prices.
This is an industry that has seen continual high prices and high profitability for a long time. Humans very quickly get used to the good times and do not adjust well to having less. Even if the less is still very good. People earning $1 million per year struggle to live if reduced to $100,000 per year, despite this being a fortune for the majority of the population. The Russian pig industry certainly has this issue.
For the future of the Russian pig industry, I strongly believe that a period of low or even negative margins would be a good thing in the long run, although without a doubt it would lead to a failure of some businesses. Why is this?
- As everywhere, there are pig businesses in Russia that are poorly managed and with very high costs. These businesses have poor health and poor standards and put poor quality meat onto the market. This is not good for increasing Pork sales and importantly exports. The bad producers can drag the good producers down.
- There are many areas where costs are excessively high that need to be addressed. Cost of building is very high in Russia as is the cost of business administration. The way loans are repaid is unusual. In general there is a 3 year period where no capital repayments are required (investment phase) then all capital needs to be repaid in 5 years. This requires a lot of cash.
- Low prices will get Russian pig business’s to really focus on cost, which is what will turn already very good business into excellent ones. In my past life as a consultant I was the busiest in Russia the last time prices were low (after Russia entered WTO). It was only then that cost was even talked about. Managing cost does not mean simply paying less for inputs. There are much bigger issues!!
- In general Russian businesses want to do everything themselves, like having own nucleus and multiplication. Own maintenance, own transport, own vet labs. In my years in the pig industry, I have seen time and time again the inefficiency and extra cost of this. Internal breeding programs usually do not deliver the same genetic progress as achieved by independent breeding companies. The farms that are the worst maintained are those with their own maintenance people.
There is a very good reason that outsourcing is so common. Specialist suppliers get much better results in their specialist fields and as suppliers, they care about the service they give much more than an internal division of a large company. Specialist suppliers also care about their costs. They are in competition with other suppliers. Internal divisions have no competition or anything to benchmark against!
Outsourcing means better quality at lower costs.
In the medium term government, policy is for more food production in Russia. To encourage investment then government will need to ensure long term profitability and there are several tools that can be used to help this.
In the long term, Russia can be a major global supplier. Pigs will be produced where grain can be produced at low cost. Pigs will also be produced where there are no people to complain about the smell. Russia has both!
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