Recovery In Sight For Producer Margins
BMI V iew: We have revised our poultry production forecast for Russia in 2012/13 as livestock producers have been affected more than anticipated by high local feed prices. This will leave production costs at a high in a context of stagnating farmgate prices and slow meat consumer price inflation. In this context, only large poultry processors will be able to cope and we continue to favour Cherkizovo in that regard. Over the rest of our forecast period, we forecast poultry production to recover strongly as we expect grain prices to moderate and local meat retail prices to grow more decisively.
We have revised our poultry production forecast for Russia in 2012/13 as livestock producers have been affected more than anticipated by high local feed prices. In fact, we now forecast poultry production to increase by 7.0% year-on-year (y-o-y) in 2012/13 to reach 3.0mn tonnes (compared to 3.2mn tonnes previously). This is linked to the drop in grain production the 2012/13 season, which resulted in a surge in domestic prices in a context of subdued grain crops in other major producers. In fact, we estimate wheat production in the country to have fallen by 23.8% y-o-y in 2012/13 (which started in June 2012), creating a trough on the domestic market from November 2012 onwards.
|Reducing Dependence On Imports|
|Russia - Poultry Production & Imports ('000 tonnes)|
We believe tightness in the domestic feed market was exacerbated by the refusal from the Russian grain authorities to limit exports in order to restore credibility, and avoid a similar situation to that in 2010/11 when Russia was pushed to export more than it was able to, even at higher prices, and forced it to re-import part of the wheat it needed to supply domestic consumption and put a lid on local prices. At the end of 2012, Russian wheat export prices had become very uncompetitive on the global market and the country failed to win several tenders from traditional buyers, such as Egypt, which indicated tensions in local supply.
|Cherkizovo - Share Price (US$, weekly)|
In this context, we expect production costs for major poultry producers in Russia to remain high in the coming months, stagnating from their 2012 level. In 2012, production costs rose to RUB56/kg (US$1.84/kg), compared to RUB53/kg (US$1.75/kg) in 2011, while farmgate prices remained constant. Also, according to the Russian Union of Poultry Producers (RUPP), the average industry profitability in the country decreased from 17% in 2005, to 11% in 2011 and 4% in 2012. This had a negative impact in the investment attractiveness of the industry and could prevent growth in 2013 as well. This, combined with heavy debt loads for most of the sector's producers, could force some facilities to file for bankruptcy in the coming months, leaving only the largest and most efficient producers on the market for a recovery. Among these, we still favour Cherkizovo, which posted strong sales growth of 23% in its poultry division in FY2012 thanks to the recent acquisition of smaller and less efficient facilities.
In spite of this bleak outlook for production, we have revised up our forecasts for poultry consumption in the country in 2012/13 because increased supply from previous seasons as well as strong imports ensured high stock levels at the start of the current season. As a result, we forecast consumption to increase by 5.0% y-o-y to 3.3mn tonnes in 2012/13. This will push for further imports that year, with the USDA's local attaché forecasting imports to rise by 3.6% y-o-y in 2012/13. These should come mainly from the US, Belarus and Brazil.
|S&P GSCI Grain Index (weekly) & RSI (Below)|
Over the rest of our forecast period, we forecast poultry production to recover strongly as we expect grain production to rebound in the coming years, while accelerating domestic demand growth will help poultry retail prices eventually higher, helping producers' margins. In the coming months, we expect the government to comply with the industry's demand to release 500 tonnes to 1,000 tonnes of feed grain per day from State reserves for use by large poultry producers. In our view, the release of grain, combined with a 55mn tonne wheat harvest in 2013/14, will help domestic grain prices down in the medium term. Similarly, the USDA reports that poultry retail prices have remained relatively constant over the past months and we expect more gains to be seen in the coming years, as demand remains steady in a context of subdued domestic production growth.
|Notes: e BMI estimates. f BMI forecasts. Sources: 1 USDA|
|Poultry Production, '000 tonnes 1||2,800.0||3,000.0||3,378.0||3,790.1||4,199.4||4,608.8|
|Poultry Consumption, '000 tonnes 1||3,161.5||3,319.6||3,503.6||3,699.8||3,909.2||4,132.8|