Russian President Vladimir Putin recently announced at the St. Petersburg International Economic Forum that further efforts would be made by the government to increase domestic livestock production as a substitute for meat imports. He said this would be done without violating international trade rules or adding import barriers. This policy is a general policy that does not apply just to livestock products and would be implemented before the end of this year.
The Forum was a strange venue to make such an announcement since it’s the premier annual international trade event for the country and chaired by Russia’s Minister of Economic Development. President Putin may have been trying to show that Russia would follow international trade rules when encouraging domestic development. For 2013, Global Trade Alert, an independent trade monitoring service, named Russia as adding more protectionist policies during the year than any other country and accounting for almost a third of the protectionism imposed during the year by the G20 group of leading economies.
Some in the audience probably chuckled when President Putin said the products would be competitive in world markets. If the products were competitive in world markets, they would not have an import problem. They are not competitive and government subsidized credit programs and direct subsidies are meant to help them modernize and close the competitiveness gap. When they are still not competitive, import restrictions will then be imposed to create an artificial market. Every developed and developing country has tried this repeatedly in industrial policies with little success.
In recent years Russia has encouraged import substitution and imposed trade barriers on meat and dairy products. Despite the general dismal track record for import substitution in general, Russia has had some success in creating larger enterprises that can achieve some economies of scale with newer technology. The U.S. Agricultural Attaché in Moscow cites estimates that over 90 percent of the young chicken meat (broilers) is produced on modern farms. Broilers had the advantage of being a ‘new’ industry, with models of concentrated production in other countries. This process has taken 20 years to develop, with domestic production now accounting for 85 percent of consumption.
Chicken meat imports for 2014 under a tariff rate quota are expected to be unchanged at 530,000 metric tons (MT). The U.S. Ag Attaché reports that the domestic market is saturated, production will increase only 3 percent in 2014 (compared to a 10 percent annual growth rates a few years ago and 15-20 percent before that) and producers are looking for export markets where returns will be better. The 2013 production year was one of low profitability due to high feed costs. Under the Putin policies outlined in St. Petersburg, the market should remain open.
At the opposite end of the spectrum is the dairy industry. It is old, with only 40 percent of the dairy cows on larger, modern farms. The smaller farms are more sensitive to feed supplies and prices. Russia has been importing higher producing cows from Europe and the U.S., but most of those are going to the larger farms. For 2014, cow numbers are expected to be down 2.5 percent and milk production down 3.0 percent. Producers continue to push for long-term interest rate subsidies to build modern dairy farms. Some fluid milk is imported from Belarus, its neighbor to the west. Imports provide for 72 percent of consumption for nonfat dried milk, 41 percent for whole milk powder, 45 percent for cheese and 38 percent for butter.
Russia does not have a beef industry like the U.S. It follows more the European model build on the dairy herd. The U.S. Ag Attaché does show 460,000 beef cows in his inventory estimates as of the beginning of 2014. Russia has been importing over 100,000 breeding cattle annually, both dairy and beef, though imports were down some in 2013 because government support payments were delayed. Payments are expected to be on time in 2014 and imports should increase. In 2013, imports were 97,000 head with 89 percent coming from Australia and the U.S. Russia is building a beef industry from the ground up which will likely take decades to complete. Russia imports about 1.0 MMT of beef on a carcass weight basis and that is likely to continue for the foreseeable future.
According to information from the U.S. Ag Attaché, the pork industry is in the midst of transition. Small scale producers accounted for over 70 percent of pork production in 2005 and are expected to decline to less than 20 percent by 2020. Swine inventories on the small farms declined by 10 percent in 2012 and 14 percent in 2013 and are expected to be down by a similar amount in 2014. Many of the farms have suffered losses from African swine fever. Total swine inventories were up 2 percent at the end of 2013 from 2012 levels and total pork production in 2013 was up 10 percent. Production should be up again in 2014, aided by $2 billion in government payments to large farms. Russia’s largest pork producer accounted for almost 10 percent of national production in 2013. The number two producer increased production by almost 40 percent.
Per capita pork consumption increased from 54 pounds in 2012 to 57 pounds in 2013, with increased production offsetting lower imports. Russia is still well short of the U.S. per capita consumption of 68 pounds and even further behind the EU at 96 pounds. That should allow for market growth if personal income grows, but there will likely be increasing tensions between imports and subsidized domestic production.
Russia instituted a ban in February 2013 on imports of U.S. beef and pork and products until the U.S. government provided guarantees the meat is ractopamine-free. Ractopamine is a growth stimulant used to make meat leaner. In March 2014, market access was restored for some U.S. pork suppliers which guarantee they do not use ractopamine. Imports to Russia were down from parts of the EU due to African swine fever.
Meat trade issues were common for the U.S. and other exporting countries before Russia joined the WTO two years ago. In joining, Russia agreed to abide by the WTO Agreement on Sanitary and Phytosanitary (SPS) Measures. In the last two years, all the old problems have continued. This latest announcement by President Putin promising more subsidized production means more of the same in the years immediately ahead.