Report Highlights

Ukraine will remain a net importer of red meat and products in 2007 despite a slight rebound in the domestic pork industry and stable beef production. Importers will attempt to satisfy the growing demand of Ukrainian consumers and will offer pork as a substitutable product for chicken. Ukraine will not longer be a transshipment point for South American beef carcasses destined for Russia, due to the Russian ban on meat exports from Ukraine. The signing of a U.S.-Ukraine protocol for beef and pork could open the Ukrainian market for U.S. meat exporters in 2007.

Section I. Narrative: Executive Summary

In 2007, Ukraine’s pork industry will continue to recover. Substantial foreign and domestic investments in pork production will lead to expanded production capability and industry efficiency. This trend is especially relevant for production in large industrial farms. Production in the household sector will remain substantial but relatively inefficient. The number of animals and productivity in households is expected to decrease slightly. Imports of pork into Ukraine are expected to remain significant (assuming no political changes). The trend is being fueled by three factors: increased purchasing power of the average consumer, slow domestic production growth and decreased poultry imports.

Beef production in both the household and industrial sectors will remain highly inefficient in Ukraine. The stabilization of beef production was achieved at the expense of the reduced number of head. No significant investments have taken place in the industry and none are expected in the short to medium term. Ukraine can no longer export beef to Russia due to the Russian ban on Ukrainian products of animal products. Ukraine will however remain a net importer of beef. The U.S. and Ukraine signed a bilateral protocol for both pork and beef in March 2006, however U.S. exports are still unable to enter the Ukrainian market due to unresolved technical reasons.

Production: Swine

Industrial production of pork continues to attract both foreign and Ukrainian investors. Small to mid-sized international companies have invested in industrial operations of 10,000 – 40,000 head. FAS Kiev is aware of approximately a dozen projects in Southern, Central and Western Ukraine. Please note that the industry growth rate is much higher than the numbers in the PSD table suggest, where both industrial farms and household production is aggregated. Household production in the first half of 2006 contracted by 0.2%, while industrial production grew by 23%. Investments were fueled by high pork prices. Despite some reduction in pork prices in the beginning of 2006, Ukraine’s domestic price for pork remains well above the price of beef. Because the growing cycle is much shorter in the swine industry relative to the beef industry, investors are more willing to invest in pork production facilities to take advantage of the much faster return on investment.

A significant increase in imports from Slovakia and Denmark of pedigree pigs and piglets for further fattening also reveal significant production changes in the swine industry. Emerging commercial hog operations prefer to use productive nucleuses from Western-European selections. Availability of cheap feed grain in marketing year 2006/07 in addition to the availability of cheap labor in rural Ukraine gives the Ukrainian industry a significant competitive advantage.

Ukraine’s weak ecological requirements also help to ensure that producers maintain a healthy profit margin. Development of the swine industry was promoted heavily by the Ministry of Agricultural Policy throughout 2006, but only a few investment projects materialized from the well-advertised “Ukrainian swine production” campaign.

Consumption

Continued economic growth in Ukraine and an increase in consumers’ disposable income are the major factors fueling the consumption increase recorded in 2005-2006. Traditionally, many low-income consumers chose not to consume large amounts of red meat because of excessively high prices for beef and pork. Presently, many of them are now in a position to increase spending levels for food. (Note: the average monthly disposable income in Ukraine remains quite low at UAH 495 ($98) as of May 2006.)

The Ukrainian meat market remains extremely price sensitive and 2007 consumption patterns will greatly depend on availability of cheap product. Given recent developments in the beef and pork industry, consumption in 2007 will largely depend on the availability of imported product. In the submitted PSD table, consumption is forecast to remain stable in 2006 due to uncertainties associated with the Ukrainian government’s import policies.

Large-scale imports of high-quality beef and pork (as understood in Western countries) is unlikely in Ukraine for the near to medium term because of traditional consumption preferences. Ukrainian consumers traditionally prefer veal and fatty pork from 140-150 kilogram hogs. The majority of Ukrainians are not ready to pay a premium price for beef derived from beef cattle. Consumers also have a preference for fresh meat (animals slaughtered the day before sale) that they purchase in open-air markets and chilled beef that is sold in supermarkets. No frozen meet is available for sale in retail chains.

Imported frozen beef and pork (mostly meat trimmings) are generally used by meat processors to produce sausages, bolognas, canned meat and smoked meat products. Consumption of processed red meat products in Ukraine is on the rise and expected to grow in 2007. Semi-prepared meat products (dumplings, meat cutlets, etc.) are also gaining popularity among hi-income consumers in towns and cities. The urban lifestyle and a trend for more family members to be employed have significantly changed consumption patterns in recent years.

The traditional Ukrainian diet contained significantly less poultry then beef and pork. Throughout the 1990-s, most consumers switched to poultry because of the decrease in their relative incomes. However, with incomes once again growing in 2003-2006, some elderly consumers have switched back to more traditional red meat products. Concomitantly, many low-income consumers will continue to purchase poultry in 2007 even at somewhat higher prices.

Marketing

The increased growth of red meat imports in recent years has formed two distinctive market segments in Ukraine. Domestically produced chilled or fresh beef, and pork are usually sold through the network of open-air outlets, butcher shops and supermarkets. Imported frozen meat products are sold to meat processing facilities for further processing. For this reason, Ukraine imports mostly cheap meats and meat cuts.

Ukrainian meat producers do not brand, advertise or promote their products (FAS is aware of one exception, when a single producer targeted high-income consumers). This lack of advertising is a result of a large share of production coming from households. These household operations do not have an adequate level of funding to conduct marketing activities and individually produce an insignificant amount of product when compared to industrial farms. Processing companies do not advertise or promote frozen imported products because of concern of being targeted by the government, however they often do promote their end products. Low prices continue to be the major selling point for imported red meats.

Trade

The Russian ban on all Ukrainian products of animal origin had a tremendous negative affect on the Ukrainian beef and pork sectors. The ban included all dairy, red meat and poultry products exported to Russia or transshipped through the Ukrainian territory. It was imposed on January 20, 2006, although the ban on transshipped red meats was introduced in late December 2005. The Russian veterinary authority claimed the ban was introduced because Ukraine failed to implement sufficient veterinary controls over imported meat products (and including transshipped products) and the generally low quality of Ukrainian dairy products.

The ban resulted in a collapse in the price of Ukrainian raw milk and facilitated an increase in the slaughter of dairy cattle for beef production. The ban completely altered red meat trade patterns in Ukraine. Ukraine became an importer of red meats and exports of meat practically ceased. Ukrainian companies that used to import beef that was subsequently transshipment to Russia under the existing Free Trade Agreement stopped their activities.

The marginal decreased in August 2005 of import duties had a positive impact on red meat imports (Refer to report number UP5014 for the new meat tariff schedule). The level of red meat imports continued to increase despite numerous attempts by the Ministry of Agricultural Policy of Ukraine to stop trade. The import pattern recorded in late 2005 and first half of 2006 was unique because of the massive amount of hogs imported from Poland into Ukraine for slaughter.

Due to the low 5% import duty for live pigs used for slaughter, many Ukrainian meat packers began importing live pigs to avoid the excessive duty rates applied to pork meat. The GOU responded with veterinary measures designed to stop all imports from Poland. Imports of breeding pigs from Denmark were not affected by these actions. Import of live pigs for slaughter decreased sharply in February 2006. The forecast for imports in 2007 assumes no resumption in imports.

In the past, the Ukrainian veterinary authority insisted that beef and pork be imported only in carcass form, however recent trends suggest that this requirement is not strictly enforced. Another important justification for importing carcasses and halves was because Russia also had a similar import requirement. Some of the imported beef carcasses were re-exported to Russia but with Ukrainian seals. With the introduction of the Russian import ban in January 2006, the demand for imported beef carcasses and halves disappeared. Imports of boneless beef and pork are increasing in 2006 and will continue to grow in 2007.

Ukraine’s WTO accession will lead to a significant reduction in tariffs and simplification of red meat import requirements. Despite numerous GOU declarations of Ukraine’s intention to accede to the WTO as rapidly as possible, many in the new government appear more resistant to WTO accession so the timeframe remains unclear. In March 2006, the United States and Ukraine signed bilateral protocols for U.S. beef and pork, however official imports have not yet begun due to unresolved bilateral issues. FAS/Washington, FAS Kiev and USTR continue to work with the GOU (specifically with the Ukrainian veterinary authority) in an attempt to open the market for U.S. products.

Since October 2004, exports of all kinds of red meat remains subject to export licensing; although the significant reduction in Ukrainian meat exports made this trade-regulating tool redundant.

Policy: Russian Import Ban

The government of Ukraine’s regulatory policy throughout 2006 was designed to combat illegally imported red meat and to limit the amount of legal meat imports. These policies were designed to block imports of meat through the use of veterinary measures and to secure a minimal level of revenue for domestic agricultural producers. The Ukrainian veterinary authority also attempted to overturn the Russian meat ban with little success. Some of these goals were partially achieved, but most of them were not. Despite the formation of a new government in early August 2006, major changes in Ukraine’s agricultural policy are not expected in 2007.

The significant effort made by the GOU in 2006 to stop the inflow of smuggled meat and meat products was partially inspired by the allegations made by the Russian veterinary service (Rosselhoznador) about Ukraine not controlling the volume of illegal meat that is transshipped through Ukraine to Russia and partially by domestic producers who wanted to eliminate foreign competition.

Veterinary and sanitary border controls were tightened significantly and an anticorruption campaign was implemented by Ukraine’s State Customs Service. The campaign had only limited success and was disregarded by the Russian veterinarians. The Russian meat import ban remained in place at the time this report was drafted. Some analysts believe that the ban was politically motivated and also condoned by the agricultural lobby in Russia.

Inspired by the effectiveness of the measures used by the Russian veterinarians to stop trade, the GOU decided to mirror their actions by introducing similar import bans for meat from Poland, Belarus and Moldova. Later limited imports from Belarus were allowed, while Poland and Moldova continue to suffer significant losses. A separate ban was introduced for live hog imports from Poland. The GOU stated the ban was imposed because of veterinary concerns. Multiple meetings between Polish and Ukrainian officials have not resolved the problem.

Price Control and Budget Support

In an attempt to reduce livestock slaughter, the GOU introduced some price control measures. Introduction of minimal prices for milk in June 2006 met significant resistance from dairy processors. Due to the lack of an effective enforcement mechanism, the GOU’s policy is completely ignored by the industry. An announced by the government to establish minimal meat procurement prices in 2007 is expected to fail as well. The GOU plans to force meat slaughterhouses to pay 8.77 UAH ($ 1.74) per kilogram of beef animal (LWE) and 9.46 UAH ($ 1.97) per kilogram of hog (LWE). Since these prices are, in most cases, above the market price level (please refer to the price table at the end of the report) the industry is likely to ignore them or retreat into the shadow economy.

The GOU continued its support programs for producers in 2006 and proposed new ones for the 2007. In 2006, direct payments were paid to slaughterhouses and constituted 1.30 UAH ($ 0.27) per kilogram of cattle slaughtered and 1.05 UAH ($ 0.21) per kilogram of hog. In order to prevent slaughter of young animals, a minimum weight requirement was introduced.

For industrial farms, the minimal weight of a beef animal at slaughter should be 390 kilograms; for hogs 95-130 kilograms. The government was concerned that the support program could lead to “encouragement of slaughter”, so the GOU proposed a new program that featured per head direct payments. State support in 2007 may range from 1,000 UAH ($198) to 2,500 UAH ($495) per head for dairy cows and 600 UAH ($119) per beef cow. At this point it is unclear if the Parliament will endorse such a large agricultural support fund, since proposals are calling for total increase of 194%. It is highly unlikely that these measures will be approved by the parliament in it’s proposed form, but even a more modest proposal could increase beef and pork production as well as the numbers of animals in the country.

Other Measures

In February 2006, the Ministry for Agricultural Policy attempted to adopt a new Law of Ukraine “On Meat and Meat Products”. The Law contained controversial measures such as meat and meat products price controls, trade margin limits, regulating the use of additives in meat products, packaging and technical provisions. The Law was adopted by the Parliament but subsequently vetoed by the President after meat processors and agricultural lobbing groups criticized the measures outlined in the law.

In 2003, the Ministry of Agricultural Policies launched an animal identification (tracebility) campaign that was supposed to cover all live animals by 2006. Although the program worked for the larger industrial producers, household producers never complied mostly due to resource issues. Effective July 1, 2006, the program requires that no animal slaughter or milk procurement take place without proof of registration and a veterinary card. State support is also unavailable for unidentified animals. The majority of Ukraine’s livestock herds in large farms were identified, but identification in most private households remains elusive. Household animal owners generally try to avoid expenses associated with the program since little or no state support is available for their cattle.

GOU procurement programs in 2006 were highly ineffective and had no market influence. The State Reserve Committee (SRC) was not able to procure significant amounts of beef and pork. In 2007, the GOU is likely to continue in its attempt to influence the market through the SRC, however expectations that this approach will result in the desired effect remain minuscule.

Further Information

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September 2006