Russian companies are becoming increasingly reluctant about investing in new feed production capacities due to unprecedented volatility in the domestic grain market and uncertain payback prospects.
The Russian feed industry grew with a 6.7% CAGR between 2007 and 2017, the Russian state statistical service Rosstat estimated. To some extent, this growth has been fueled by the 2014 food embargo and the government-run import-replacement campaign on the domestic food market, which gave the Russian livestock industry a powerful impetus to expand production capacities.
Between 2014 and 2020, the investments into Russian agriculture have ranged between 400 billion rubles ($5.3 billion) and 600 billion rubles ($8 billion) per year, Rosstat said. It is believed that the investment inflow will shrink in the coming years.
Since 2017, Russia’s feed industry CAGR has been limited to 2.8% per year, Rosstat said. Nevertheless, by 2025, the domestic production is expected to climb to 40 million tonnes, compared to about 32 million tonnes in 2020, the Russian Union of Feed Producers (RUFP) forecasted. The upcoming growth is likely to be driven by soaring exports, as Russia is set to strengthen its position in the global food market.
Despite that development, a number of feed mills have found themselves on the edge of bankruptcy during the past year, and some new projects reportedly have been delayed.
“Tough times have come, and everyone (in the Russian feed industry) sees its financial models put under question,” said Sergey Mikhnyuk, chairman of the Russian National Feed Union, explaining that launching a feed mill in Russia now is not the same as launching it a few years ago.
“The payback prospects on building a new feed mill in Russia are poorly predictable,” he said. “It is likely that the project could generate profit only when the feed mill is incorporated into a sophisticated production chain.”
According to Mikhnyuk, currently, there is only one new feed mill under construction in Russia. In this regard, he said, the RUFP’s forecast on the industry growth looks optimistic.
Some Russian analysts are confident, however, despite the recent challenges, that Russian feed production has a good chance to reach 40 million tonnes in 2025.
“The forecast is quite feasible for the only reason that the capacity of the Russian meat production is underestimated,” said Albert Davleyev, president of the Russian analytical agency Agrifood Strategies. “Despite challenges related to the local currency depreciation, the country has huge water and land resources, along with a substantial population, which provides for further growth of poultry, pork and beef production, along with industrial fish farming.
“Russia meat exports are growing, covering a wider area and offering an increasing variety of meat products. Besides, the share of backyard farms, especially in the swine sector, is being taken by industrial enterprises. Therefore, the demand for high-quality feeds will be growing even if we see considerable improvements of feed conversion rates across the board.”
Independent mills dying out
One way or another, it is clear that not all segments of the Russian feed industry have room for growth. The share of independent feed mills in Russia has been decreasing during the past few decades. As explained by Mikhnyuk, they currently account for around 10% of the Russian feed production. This figure is likely to decrease further as independent feed mills are facing a truly dark time now.
“Differently from many countries of the world, Russia has very few purely independent feed mills, as most of them are being either built from scratch or reconstructed from the existing facilities by big livestock producers,” Davleyev said.
“Feed mills that do not make part of agricultural holdings — multi-business vertical integrators — usually specialize in specific types of feeds or value-added recipes,” he added.
Independent feed mills are frequently going bankrupt or being put up for sale.
In May 2020, Cargill sold its feed mill in Leningrad Oblast to CBS Commodities. Russian newspaper Kommersant, citing its sources close to the deal, reported that Cargill initially tried to sell the feed mill for 160 million rubles ($2.1 million) but then had to cut the price, so at the end, it was limited to 60 million rubles ($850,000) since the economic prospects of running the asset were rather unclear.
The feed mill produced 95,700 tonnes of feed in 2018 and less than 20,000 tonnes in the first half of 2019 when the production was halted.
In 2018, RUFP forecasted that the share of independent feed mills in Russia would drop to 5% to 7% in the next several years. This decline primarily is associated with the ongoing crisis of independent and backyard farms in Russia. Small-scale poultry farmers cannot withstand competition with big agricultural holdings, while pig farmers fall victim to African swine fever.
During the past few years, no new independent feed mills have been launched in Russia, and local market participants are confident this niche will keep shrinking.
Expensive raw materials
The COVID-19 pandemic has exposed a long-standing problem of excessive grain use in the Russian feed industry. It is estimated that the share of grain, on average, in the Russian feed industry amounts to 68%. This factor has driven production costs in the Russian food industry to record heights during the pandemic.
“The poultry feed costs are soaring,” said Dmitry Ivanov, general director of local poultry producer Saratov Poultry. “By 60%, it consists of wheat, the price of which almost doubled compared to the last year from 8,000 rubles ($105) to 15,000 rubles ($200) per tonne. Plus, the Russian ruble’s exchange rate has changed. There are things like vitamins, amino acids, veterinary drugs, which are not manufactured in Russia.”
Since the beginning of the pandemic, food prices have become a hot-button issue in Russia, amid falling living standards. In December 2020, the government introduced price caps for some staples, followed by tax hikes on exported grain in February 2021.
“These measures let us slow down the rise in prices for grain and feed,” said Russian Agricultural Minister Dmitry Patrushev during a press conference in early March. “Their ultimate stabilization is anticipated in the coming two months. In order to support livestock companies and processors, the soft loan program has been expanded. In 2021, the borrowed funds could be used to purchase meal, premixes and feed.”
In a bid to constrain the price rally on the domestic market, the government also has called producers and supermarkets not to rewrite price tags too often, threatening those who disagree with penalties from the Russian Antimonopoly Service.
As explained by Dmitry Vostrikov, director of the Russian Food Producers and Suppliers Association, “The producers feel like being caught between the hammer of expensive raw materials and the anvil of the state price regulation.”
“Food producers are in the grip of tight price regulation and expensive feed,” said a source in the Russian food industry who wished not to be named. “Everyone wants to raise prices, but not everyone dares to do that. As a result, the higher costs are more or less equally spread across the supply chain — from feed mills to supermarkets.”
Some market participants believe that with no immediate price relief on the grain market, Russian feed producers eventually would have to begin looking for ways to decrease grain share in feed composition.
Ukraine’s struggling livestock industry
In the meantime, a sharp increase in grain prices drove almost the entire livestock industry in neighboring Ukraine below the breakeven point, according to research conducted by the Ukraine Institute of Agrarian Economy.
Sergey Karpenko, executive director of the Ukraine Association of Poultry Producers, estimated that the average profitability ratio in the industry is minus 12% to 15%. Huge losses already caused a 10% drop in the country’s poultry population in the fourth quarter of 2020.
The picture is unusual since Ukraine’s poultry population has shrunk for the first time in two decades.
The price for feed grain on the domestic market jumped by 90%, and it is believed that poultry and pork farmers, not operating feed mills, suffer the highest losses.
Local market participants warned that the current crisis is likely to drag down the demand for feed on the domestic market. Both poultry and pork farmers opted to cut their production in 2021 to avoid huge losses.
Oleg Osipenko, a technical consultant on livestock of the Ukraine company Agrotradehim, said a price swing during the past year occurred on the local market.
“Everyone relaxed after the first wave of the COVID-19 pandemic,” Osipenko said. “Some even thought about investing in increasing the livestock and opening new poultry and pig houses. And what did we encounter in the fall? A sharp rise in raw material prices, as grain prices jumped by 40% to 60%, and soybean and sunflower processed products by more than 40% to 50%.
“This led to an increase in the cost of feed by 40% to 50%. All this now negatively affects the production economy, as many farmers simply do not begin growing poultry; neither put pigs for fattening but reduced their livestock population instead.”
Nearly 60% of feed in Ukraine is produced by big agricultural holdings. In the past few decades, these companies have been accounting for most expansion projects in the industry. This segment has not been bypassed by problems, as the second-largest broiler meat producer in Ukraine, Agromars, completely stopped operations and is trying to sell off its farm assets and other production assets.
Until 2020, the company was supplying 30% of all broiler meat on the Ukrainian market. Agromars primarily was focused on the domestic market, selling broiler meat under the quite popular Gavrilovskyeye Kurchata brand.
The company operated several feed mills, and its future remains rather vague. With the falling poultry and pork population, local analysts warned that it might not be easy to find investors willing to purchase and run these assets.
Vladislav Vortonikov is a correspondent from Voronezh, Russia. He may be reached at Vorotnikov.email@example.com.