European Union

Executive Summary

The EU is on the verge of possibly seeing significant changes in the livestock sector resulting from 4 main factors.

First, farmer’s outlook for the 2004/2005 marketing year as they begin to react to the Midterm Review Agreement reached in July of this year. Reform includes changes in decoupling of payments, use of set-a-side land, and special premium that will all impact the livestock sector.

Secondly, EU farmers will have to find ways to compensate for the January 2003 announcement by Russia of its tariff rate quota, which is expected to limit imports of beef, pork and poultry. The Russian TRQ announcement could also impact EU exports to Russia and Japan.

Thirdly, EU farmers will have to deal with the drought caused by this summer’s heat wave. The EU does not currently have statistics on the effects the drought has had on the livestock sector, however the French, German, Austrian, and Italian governments have requested drought assistance from the Commission.

EU Agriculture Commissioner Fischler indicated 2 measures have already been taken to assist member states affected by the drought: (1). Allowing animals in the areas effected by the drought to graze on set a side land and (2). A new tender for the sale in Germany and France to be used as animal feed in Italy.

Other options open to the Commission could ultimately contribute to the cost of transport from the place of storage to the place of need for intervention and some form of advance of the CAP direct aid payments in order to ease cash flow problems. Finally, the accession of 10 new member states in 2004 will transform previous extra-EU trade figures into intra-EU trade figures.

Swine

In 2002 and 2003 sow beginning stocks continue the decreasing trend. The decline in sow numbers in recent years is expected to stop as the environmental and animal welfare adjustment programs (primarily in the Netherlands and Belgium) are ending. The termination of these programs should result in the stabilization of sow numbers, although in 2004, sow beginning stocks are forecast to show a slight decline. Despite the decrease in sow stocks, pig crop production increased as a result of improved sow productivity. A slight increase in pig crop is expected in 2004 due to improved sow productivity. This is in line with the natural trend of improved sow productivity.

Overall EU production is expected to decline, reflecting the lower sow crop. The decline is, however, relatively small in relation to the decline in sow stocks. This is explained by improved sow productivity in the UK and Spain. In 2002, pig crop production in the UK was negatively affected by Postweaning Multisystemic Wasting Syndrome (PMWS). PMWS causes wasting in piglets, however the UK is showing sow productivity returning to normal levels.

Swine imports were low in 2002. EU swine exports also remained at low levels, and are expected to remain low in 2003 on into 2004. Most EU swine exports are sent to Eastern Europe. The total slaughter figure in 2003 is expected to be lower due to the lower pig crop. Sow slaughter will likely stabilize in 2004 while total slaughter is forecast to increase marginally due to increased pig crop. No drastic changes in total slaughter are expected over the next few years.

Overall EU ending inventories are forecast to decline, particularly in Germany and the Netherlands. Germany is facing a downward trend in stocks after having reached a peak. The decrease in the Netherlands is explained by the environmental and animal welfare restrictions mentioned above. The Dutch government wants to reduce inventories to 10 million head and continue this trend for a few more years. In 2004 ending inventories are expected to be stable although there are forecast to be regional variations. Expected increases in the UK, Denmark, Spain and Italy are not expected to be enough to compensate for the previously mentioned declines. The expected reduction in inventories is forecast to show a downward trend in the overall EU swine cycle.

Pork

EU pork production during 2003 is expected to increase slightly due to increased slaughter and higher than average slaughter weight. After the 2003 summer heat wave slaughter weights have declined in most of the EU-15 countries by 10%. This trend is expected to continue into 2004. EU imports of pork are expected to increase slightly, remaining in line with previous forecasts. EU exports in 2002 reveal that Denmark, the largest EU-15 exporter of pork, exported 243,000 MT to Japan, 54,000 MT to the U.S., and 65,000 MT to Russia. In January 2003, Russia announced it would impose an import quota of 335,000 MT for fresh and frozen pork for the period from April through December 2003. To counter the safeguard measure imposed by Japan, the EU enforced a private storage scheme (PSA) from December 2002 to April 2003. By the end of 2002 about 30,000 MT of pork were stored under this program, 23,000 MT of which were stored in Denmark.

As a result EU pork exports are currently forecasted to decline by 15%. This decline in EU-15 exports also incorporates an element of increased competition in the Russian market from South American exports. In early 2003, nearly all EU pork exports to Russia were terminated due to competition from Brazilian exports. In order for the EU to compete with Brazilian exports to Russia, export restitutions would need to be high, therefore it is not expected that the EU will impose export restitutions for pork exports to Russia.

The EU pork held under the PSA program, which was imposed to overcome the Safeguard measure, was released in June 2003. At that point, the volume of pork held under the PSA program reached an approximate volume of 112,000 MT. Although the Japanese market is more demand driven than the Russian market, competition in the Japanese market is tightening. In 2003, it is expected that Denmark will maintain its current level of pork exports to Japan, while Spain is expected to attempt to increase overall exports from 10,000 MT (2002), to 12,000 MT (2003). The forecast for 2004 EU pork exports to Russia is predicted to remain under pressure, as EU pork exports to Japan are expected to decline due to decreased Japanese demand and stronger competition from other pork exports.

Total domestic consumption of EU pork is expected to increase as a result of lower prices and ample supply. Domestic use is also expected to increase slightly due to the use of commercial stocks built up in 2003. These commercial stocks of pork will be carried over into 2004.

Further Information

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Russia

Executive Summary

Production of meat in Russia is forecast to remain almost unchanged in 2004. While swine and pork production are forecast to continue to increase solidly, by fo ur percent, cattle numbers and beef production are forecast to fall again in 2004. The introduction of TRQs on beef and pork will cause a decline in consumption of meat in Russia in 2004. Price increases have been minor during the first half of 2003, as the large stocks of meat that arrived prior to the TRQs have provided a solid buffer stock. However, prices are expected to rise in the second half of 2003 and in 2004 as meat stocks are used up.

Production

In the first half of this year, farms of all categories produced 3.1 million tons of livestock and poultry (live weight), a six percent increase over the same period of 2002. Growth occurred in poultry and pork production, while beef production continued to experience significant difficulties and declined for the 14th straight year. The cattle herd is approximately half of the size it was in 1992. Production of meat on small farms maintained its relative production level, accounting for 50 percent or more of production of all meats except poultry.

Pork Production

The Russian swine herd continues to grow at a brisk pace; forecast to increase by five percent in 2004. Significant investment in the industry has increased production efficiency, capacity, and allowed Russian producers to gain market share. This has helped to increase weight gain efficiency and growth rates. In turn, the efficiency gains have allowed producers to plow more resources back into the production side of the business in terms of increasing and improving feed supplies and infrastructure. In contrast, Post estimates for herd size and pork production in 2003 were decreased from the previous forecast as production gains and herd did not grow as fast as expected.

Slaughter is also forecast to increase in 2004, by three percent, and result in a growth in pork production of three percent. Pork production looks very favorable in the medium term due to the significant investments in the industry and the large remaining excess capacity. Due to high investment costs in terms of construction of new facilities, almost all companies prefer to remodel existing production sites. Industrial production sites still exist from the high point of production in 1991 that have either been abandoned or are at a very low intensity of usage at the current time. These sites are much less expensive than new swine raising facilities and they can also be brought into production much quicker than new buildings.

Investment into the fast growing poultry sector has followed the same path. However, poultry production dropped much further than swine production after the break-up of the Soviet Union. Thus, poultry has been able to grow extremely quickly by using existing facilities and the advantage of quick returns on investment. Pork, on the other hand, did not fall so far and has slightly smaller rates of return on investment. Therefore, investments into swine production were slower to begin and there are fewer idled facilities. At the current rate of investment and consolidation in swine production, the next few years will see tougher competition for idle plants and an even greater focus on improving efficiency to get the most from existing facilities.

Trade

Naturally, trade in meat products will become much more constrained due to the introduction of the TRQs. As noted in the policy section, the over-quota tariffs are sufficiently high that very little trade will happen outside of the TRQs. Therefore, there will be quite heavy competition by exporting countries to maintain market share and client relationships.

(Note: Due to the lack of information at the time of this report regarding the intentions of the Russian Government to introduce changes to the system of TRQs in 2004, FAS/Moscow has assumed that the current policy will carry into next year. Thus, the current policy status quo has been taken into account in calculating the 2004 forecast.)

Russian pork imports are expected to decrease by 12 percent in 2004 to 530,000 MT. The TRQ will severely limit pork imports and, unlike beef, there is no significant supplier that is outside of the TRQ coverage. Thus, there will be no safety valve for pork supplies other than domestic production. However, domestic production is constrained in responding to excess demand and will not be able to effectively maintain high growth rates and simultaneously increase pork production.

Though producing the swine at a higher density could increase production somewhat, current production practices suggest that efficiency would suffer more than the increased meat output. Such an act by producers would disrupt the production cycle and be an damaging supply response in the medium term. Lastly, the 2003 Russian import forecast was decreased by five percent, to 600,000 MT, or 25 percent lower than 2002. Though pork imports prior to the quota were significant, they fell short of Post expectations.

There were significant increases of both beef and pork in the months between the announcement of the TRQs and their implementation. Imports of both meats were high in January and February and doubled in March. Naturally, this high level of imports was much greater than average demand and depressed prices for domestic production and imports. The glut caused by the TRQ announcement is expected to make its way through the system and the price rise associated with decreased supply will be felt during the fall and winter.

While difficult to precisely estimate, the TRQs have clearly slowed both imports and consumption. While their effects are less severe in 2003 due to the increase in imports prior to the quota, in 2004 imports of pork will be approximately 100,000 to 150,000 MT and beef 50,000 MT lower than without the quota. As domestic production is not forecast to grow enough to compensate for that reduction, consumption is held down by roughly that same volume. The price rise that accompanies this trend (along with decreasing import competition) is one of the objectives the Government has in terms of assisting local production. Russian policy makers see this price rise as an implicit subsidy to producers that could not otherwise be made due to budget constraints.

Policy - Tariff Rate Quotas (TRQs)

Russia imposed Tariff Rate Quotas on imported frozen beef and pork from April 1 to December 31, 2003. A TRQ for fresh beef was imposed after August 1. The governmental resolution sets the frozen beef quota at 315,000 tons for 2003. Under the TRQ, beef shipments will be subject to a duty of 15 percent of customs value, but no less than 0.15 euros per kilogram, the over-quota duty will be 60 percent, but no less than 0.6 euros/kilo. The pork TRQ was set at 337,500 tons.

Pork under the TRQ will be subject to a duty of 15 percent, but no less than 0.25 euros/kilo, the over-quota duty is 80 percent, but no less than 1.06 euros/kilo. Ten percent of the frozen beef and pork TRQs were set aside for an auction that will take place in September. The chilled beef TRQ amounts to 11,500 tons in 2003. The import duty within the quota is 15 percent, but not less than 0.20 euros per kg and the over-quota duty rate is 60 percent but not less than 0.80 euros per kg.

Further Information

To read the full report please click here (PDF format)

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