The meat industry switches to long contracts
This year's record rise in prices for all types of MEAT is forcing meat processors to think about abandoning small-scale purchases of raw materials in favor of long-term contracts at an average annual price.
As Expert learned, this week at Sberbank, creditors of the agricultural industry and pig farmers will discuss with representatives of 17 meat processing plants the transition to long-term annual contracts. Unlike existing short-term ones, they will allow meat processing plants to receive raw meat at stable prices and schedules.
Market participants were prompted to this idea by the situation with a record increase in the cost of meat this year. So, back in May - for the first time in recent history - chicken in the wholesale market was equal to pork, and that, in turn, in August also updated an eight-year price record. Last month, a historical maximum in the cost of beef, lamb and turkey was recorded. As a result, meat processing plants announced that already in September they were forced to increase prices for their products by 5–10%.
Long contracts benefit everyone
An invitation to pork producers and bankers to take part in a working meeting on September 6 at Sberbank to discuss the transition to long-term contracts was sent by the National Union of Meat Processors (NUM) after a recent government meeting on controlling prices in the meat industry. In August, consumer prices reached 205 rubles per kilogram of broiler. The cost of live pigs in primary wholesale reached eight-year highs, amounting to 148–151 rubles per kilogram, which is 7–9% higher than in July, and 25–30% higher than a year earlier. Pork on the bone for the period from the beginning of May to the end of July rose in price from 308 to 315 rubles per kilogram, and by mid-August it reached 318. Although in the
wholesale segment the cost of chicken and pork has been declining for the second week, many meat processing plants have purchased meatat the peak and are now saying they need to raise prices for their products by 5-10% in September, when they run out of their previous cheap supplies. Such an increase, by the way, already the third in a year, will be very sensitive for citizens and will lead to a more noticeable decrease in demand than usually happens at the end of the “kebab season.” The current situation worried government members, and on August 22 they held an expanded meeting with representatives of ministries and market participants. Based on its results, the FAS and the prosecutor's office were recommended to check pricing in the meat industry. And at the same time they decided to seat him at the tablenegotiations between suppliers of meat raw materials, mainly representatives of large industrial farms, creditors of the agricultural sector: Rosselkhozbank, Sberbank, VTB and Gazprombank - and meat processors: Myasnitsky Ryad, Tsaritsyno, Dmitrovskie Sausages, Rublevsky, AIC Kamsky and more 12 large companies.
In the invitations sent out, meat producers and bankers note that long-term contracts for the supply of products are already being successfully used in many sub-sectors of the agro-industrial complex - in particular, in crop production (forward contracts for grain), SUGAR, dairy and feed sectors. “The meat industry is currently the only one in which these tools, for one reason or another, have not been implemented or do not work,” the NSM letter says. “As a result, we annually observe volatility in the meat markets, which negatively affects both the economy of poultry and pig farmers and our production. Moreover, the universal attention of the federal authorities is a negative factor both when prices rise (as it creates risks of social tension) and when they fall (as it creates the risk of bankruptcy of enterprises).”
Several meat processing companies unofficially informed Expert that they were not yet ready to disclose their requirements for long-term contracts. But it is known that market participants are interested in concluding agreements at minimum seasonal prices. Typically, the cost of production declines in February-March: people eat up during the New Year holidays, many then hold Lent . Pricesalso decrease noticeably in the fall, when the holiday and picnic season ends, and grown pigs are slaughtered en masse on private farmsteads and medium-sized farms. “We, from pork producers, will offer long-term contracts of a year or more at a fair and free from fluctuations average annual price, which will allow maintaining the average annual profitability of all market participants, from pig farmers and processors to retail,” explains executive DIRECTOR of the National Union of Pig Breeders Yuri Kovalev .
Pig farmers have diverted demand from themselves
It all started with chicken, which processors have been using for many years to produce semi-finished products and meat products - due to its cheapness and similarity in consistency to pork, it took up on average two-thirds of the total volume of raw materials. Before the pandemic, chicken production grew at a rate faster than demand, so in 2016–2020 it was the only type of meat that regularly fell in price. It was in chicken meat that RUSSIA achieved self-sufficiency first of all, by 2017, and exportspoultry to non-CIS countries has been actively developing since 2015. Unfortunately, the sub-industry was crippled by the pandemic: profitability in chicken farming is traditionally the lowest, and in 2020, with a decrease in demand, it dropped to two percent or less. Poultry production began to decline slightly, and producer overhead costs began to rise due to logistical problems. As a result, chicken farmers were not ready for the restoration of demand from consumers and processors, and in the summer of 2021 there was an unprecedented increase in broiler prices - up to 163 rubles.
After the start of the SVO last March, chicken prices began to rise again. Demand was fueled by orders from the Ministry of Defense, as well as payments to low-income families and the military, which led to an overall increase in meat consumption. Production decreased from month to month due to a reduction in the number of livestock, and its cost increased sharply: the costs of chicken farmers for the delivery of spare parts for equipment, premixes, vitamins and other things increased. In addition, Russian grain and, as a result, feed have become more expensive, and the costs for them amount to about 60% of the cost. Enterprises that operated last year with a profitability of zero to several percent increased the price to 190 rubles.
By the end of last year, the demand for chicken dropped noticeably: processors, due to a temporary shortage of poultry, were forced to urgently replace it with pork, but consumers really liked that pork costs almost as much as chicken , and they preferred to buy meat. The price of the bird began to fall.
But prices for pork went up: wholesale (in slaughter weight) after the start of the SVO rose from 110 to 145 rubles per kilogram. However, active growth in production (by 7% in 2022, to 5.3 million tons) interrupted this trend in May, and the figures gradually returned to winter levels, 110–115 rubles per kilogram.
Although pig farmers’ production costs also increased by 10–15% at the beginning of 2022, they, unlike poultry farms, did not sharply increase selling prices so as not to frighten off consumers. Profitability of 25–30% allowed them to compensate for the increase in costs through their own profitability, without passing on costs to retail customers. As a result, average annual prices even decreased. “The population began to switch from increasingly expensive chicken to pork, as a result we received a record increase in the consumption of this type of meat - 240 thousand tons more, that is, almost all of the additional volumes produced,” notes Yuri Kovalev.
High demand for meat continues this year. The reasons are the same: a reduction in chicken consumption by processors and the population, growing purchases from the Ministry of Defense, new regions and preferential categories of citizens. Replacing poultry with pork became even more urgent after broiler carcass prices rose at retail from March to August from 125 rubles to a record 200 rubles per kilogram (by almost 7% year-on-year). The next increase in price is explained by an increase in production costs associated with a complete ban on the supply of European veterinary drugs, rising prices for grain and feed, and the weakening of the ruble. The trend was accelerated by increased demand this year. Therefore, although chicken production in the first half of the year, according to Rosstat, increased by 271.6 thousand tons (up to 2 million tons), or by 1.8% compared to the same period last year, in August, prices again reached a historical peak - 205 rubles per kilogram. “Many citizens chose domestic tourism for their summer holidays, which increased the demand for all types of meat more than last year. But with the end of the holiday season, we are seeing a slow decline in prices, and this trend will continue in the fall,” comments Galina Bobyleva, director of the Russian Poultry Union. — The main thing is that there is no shortage of poultry meat and is not expected. And where can you find meat for 200 rubles now? Only chicken can cost that much.” — The main thing is that there is no shortage of poultry meat and is not expected. And where can you find meat for 200 rubles now? Only chicken can cost that much.” — The main thing is that there is no shortage of poultry meat and is not expected. And where can you find meat for 200 rubles now? Only chicken can cost that much.”
Pork has also risen in price - and for the same reasons. By mid-August, producer prices reached an eight-year high - 150 rubles per kilogram. However, the cost of live pigs in August in annual terms rose only by 1.3% - still less than in 2021. “This is a systemic drop in prices, which has continued for the second year,” says Yuri Kovalev. — In terms of currency, after the depreciation of the ruble, Russian pork generally became one of the cheapest in the world. And if we talk about the eight-year anti-record, then we must understand that retail prices for pork during this period increased by only 15%, while consumer inflation amounted to 57%, beefthe price has risen by 50%, poultry by 45%.” According to him, the slow increase in prices for pork and the approaching cost of chicken led to a record increase in pork consumption in the history of the country - from 23 to 30 kilograms per person per year (plus 30%) with a total consumption of all types of meat of 79 kilograms - growth of 11% over the same period.
By the way, the price of beef did not rise so rapidly; by mid-August its average price on the consumer market rose to 497 rubles per kilogram, which is also a record. Turkey also reached a historical maximum in August, adding 15% over the year (up to 450 rubles per kilogram), as well as lamb, which was sold for 590 rubles (plus 20% per year). Here, among the main reasons for the trend are the increase in cost and general demand against the backdrop of an increase in the income of some citizens.
Chicken meat has become the driving force behind rising meat prices
Market stability will retain employees
Thus, the most popular types of meat rose in price more noticeably than others throughout the year. And although by the end of August prices for all types of products (except beef) expectedly began to decline, some meat processors announced a likely increase in prices. “To even out the imbalance of supply and demand in the future, processing enterprises must stock up on raw materials for future use under long-term contracts, as large vertically integrated agricultural holdings do: they purchase pigs from their farms for processing at their own enterprises in the first quarter and freeze the carcasses for the summer, keeping a surge in demand for meat without increasing selling prices,” Yuri Kovalev is sure. “And now meat processing plants have a maximum supply of raw materials for a week or two.”
According to his forecasts, prices will decrease in the fall, but are unlikely to reach the level of last fall. The fact is that the high DOLLAR exchange rate not only increased the cost of industrial imports , but also aggravated the traditional problem of personnel shortages in the meat industry, including due to the departure of migrants, whose salaries, due to the weakening of the ruble, depreciated by a third. “The outflow of migrants only aggravates the overall deplorable personnel situation,” says Sergei Yushin, president of the National Meat Association. —Currently, on average in the industry, 15–25 percent of positions remain vacant. Even indexing wages by 15–20 percent per year does not solve the problem.” According to the expert, those enterprises that are no longer able to increase wages are now forced to reduce their assortment and partially curtail production.