Russian poultry industry in the eye of the storm
Poultry farmers in Russia are struggling with a multitude of problems, including expensive loans, a serious labour shortage, and soaring costs of imported feed additives and technologies, to name a few. Strong demand currently helps maintain average business profitability, but the industry’s long-term future may be more uncertain than it looks at first glance.
In 2023, Russian poultry farms produced 6.43 million tonnes of poultry meat, which was 0.1% down compared with the previous year, Rosstat, the Russian state statistical service, calculated. The output declined for the first time following nearly 15 years of consistent growth. According to Rosstat, broiler meat production declined by another 0.3% in the first quarter of 2024.
Several factors affect Russian broiler meat production. First, the poultry industry in the Russian southwest near Ukraine suffers from cross-border shelling, said Lyubov Savkina, general director of Emeat, a Moscow-based think tank. She pointed out that broiler meat production in the Belgorod region dropped by 5.6% last year. Belgorod is the key agricultural region and a part of the Black Earth Belt – a particularly fertile part of the country commonly considered the backbone of national agriculture. Some other regions comprising the Black Earth Belt, Kursk and Voronezh, also suffer from hostilities, though to a lesser extent. In addition to destruction on poultry farms, a missile strike hit Premix Plant #1 mid 2023, a prominent Russian feed additive manufacturer. The scale of the damage remains unknown.
The Russian poultry industry also suffers from several systemic issues. Due to Russian currency exchange rate fluctuations, the cost of imported equipment, technologies and spare parts used at Russian farms last year spiked by 30%, Savkina said. High key interest rates, which were raised in several rounds by Russia’s Central Bank, most recently from 16% to 18% on 26 July 2024, has also taken a toll on business, Savkina added.
Since early 2024, trade between Russia and even politically friendly countries has been further burdened by problems with sending and collecting payments. Banks in China, Turkey, and the UAE have put all transactions involving Russian clients under the microscope following the December 2023 threat by US President Joe Biden to impose secondary sanctions against banks and financial institutions facilitating trade with Russia.
To a degree, the measure hit its mark, as in the first quarter of 2024, Russian imports of machines, equipment and technologies – a broad category involving equipment for poultry farms – from China plunged by 20% compared with the previous year, following nearly 2 years of consistent growth. Since trade with Europe was crippled by Western sanctions imposed in relation to the Ukraine conflict, China has become a major source for several sectors of the Russian economy. For instance, China now accounts for nearly 90% of feed additive imports to the country.
The list of the challenges goes on. Persistent labour shortage prompted Russian poultry farms to increase wages to lure more workers, Savkina said. Last but not least, she said, farmers are affected by the bird flu epidemic, with 75 outbreaks registered in 29 Russian regions last year by the Russian veterinary watchdog Rosselhoznadzor.
Crisis time
All these factors are believed to have driven Russia to the egg crisis in the second half of 2023, which was marked by temporary supply disruptions, empty shelves and a 40% price hike for consumers. Similar dynamics were observed in the broiler meat segment, though the issue was not so pressing there. The Russian egg industry’s poor financial health was primarily blamed for the crisis.
Over the previous 2 years, Russian egg farms have been silently suffering, having to maintain operations with ‘negative profitability’, Vladimir Mkhitaryan, director of the Krasnodar-based poultry farm Novorosiisk, reported at the time. The farm ended 2022 with a marginality level of -3.6%. During the first 9 months of 2023, it reached -17%. Complaints about dwindling profitability in the Russian poultry industry were common before 2023. However, the 2023 egg shortage has changed the tide as the industry had the opportunity to demand higher prices.
Booming profits
In 2023, the combined revenues of 9 of Russia’s largest egg manufacturers jumped by 150%, Russian Forbes calculated. In total, they earned Rub 15.5 billion (US$179 million) against Rub 6.1 billion (US$71 million), enjoying record-breaking business marginality. This outstanding result was achieved thanks to soaring retail prices which, as Forbes calculated, shot up by an unprecedented 62% last year.
As an example of how the shortage in supply impacted the Russian farms, Forbes mentions PostPositiveImpulse, a prominent egg manufacturer, which saw its revenue skyrocket by a factor of 13 times to Rub 1.24 billion (US$14.4 million). The company posted a net marginality of 25.7% – an outstanding level that could be compared with the profitability of gold mining.
In the broiler meat segment, profitability has more than doubled as retail prices have steadily followed the upward trend. At the end of 2023, the average figure was close to 10%, estimated Vladimir Fisinin, president of the Russian Poultry Union. This was still not enough for comfortable development. In the present economic conditions, poultry farms need at least 15% of profitability “for a sustainable future” rather than “struggling to make ends meet”, he stated.
Nevertheless, the current profitability ratio is a great improvement from what the farmers faced a few years ago. For instance, at the end of 2020, the average profitability ranged between 3% and 5%, Galyna Bobyleva, general director of the Russian Union of Poultry Farmers, another major business organisation, reported. In 2024, business profitability is expected to be further bolstered by state aid the Russian government promised to expand. For instance, the authorities promised to reimburse 25% of capital costs associated with building new hatcheries against 20% in previous years.
Soaring consumption
Russian economists primarily attribute the existing price dynamics to surging population incomes, which “untied hands” for market players to regularly rewrite price tags on their products. For example, Nikolay Kulbaka, an economist with the Russian Presidential Academy of National Economy and Public Administration, said that the lion’s share of state expenses, including huge payments to the families of Russian servicemen fighting in Ukraine, are going to the less wealthy part of the Russian population. As a result, a significant stratum of the Russian population has started eating better and consuming more, which drives food prices up, Kulbaka noted.
Against this background, the poverty level in Russia hit a record low – only 9.8% in 2023, as estimated by the Russian state statistical service Rosstat. This is the lowest level since 1992. During the last few years, the number of poor people in the country shrank by 1.7 million.
Rising consumption has compensated for the mass emigration from Russia in the last 2 years. Alfa-Bank, one of the Russian largest commercial banks, estimated that 1.1 million people emigrated from the country in 2022, equivalent to 1.5% of the entire workforce. In 2023, however, Bloomberg reported that between 40% and 45% of emigrants returned to the country. Price and consumption dynamics on the Russian broiler meat and egg market are likely to determine the future of the poultry industry.
Limited resources
Local analysts doubt that the Russian authorities can keep up with its pace of expenditure for much longer. During the last few years, the authorities largely relied on the money from the National Welfare Fund, where the volume of liquid assets as a result dropped from US$113.5 billion in January 2022 to US$55.9 billion in January 2024. Kulbaka said that the Russian authorities have consumed the rainy-day fund and it is a big question what will happen when it is exhausted. He assumed that it would either entail a sharp reduction in budget expenditures or a sharp increase in inflation. Either way, he said, the Russian population’s purchasing power will plummet, putting the poultry industry’s long-term prospects into question.
