Overviewof the Russian pork market in 2021
The unfavourable epizootic situation in 2021 dampened the growth of pork production in Russia – it remained almost level with the previous year. Average market prices for livestock went up by 26% year-on-year, spurred by rising poultry prices and higher pig growing costs. Meanwhile, Russian producers achieved a 34% increase in exports to Vietnam, partially offsetting lower demand from Hong Kong.
Key players
In 2021, six largest pork producers accounted for 41% of total production in Russia. The market leader is Miratorg Agribusiness Holding with a share of 10.1% (+0.6 p.p.). As a result of mergers and acquisitions, JCS Sibagro took second place — its share rose from 4.3% to 6.7%, relegating LLC Velikoluksky
Source: Rusagro's calculations based on data from the National Union of Swine Breeders and Cherkizovo
Production
In 2021, pork production stayed at more or less the same level, amounting to 4.3 mn tonnes of pork in slaughter weight
Source: Federal State Statistics Service
Exports and imports
In 2021, exports of pork (half-carcasses, large cuts, industrial cuts and semi-finished products) and pork offal from Russia showed a 7% year-on-year decrease and amounted to 203 ths tonnes (down 14 ths tonnes). This mainly covered the reduced offal deliveries (–24%, or –20 ths tonnes), which was partially compensated for by a 4% increase in pork exports (up 5 ths tonnes). The negative growth in pork offal deliveries was mainly caused by lower deliveries to Hong Kong (–59%, or –23 ths tonnes). Due to high demand on the domestic market, the pork exports experienced just a light decline.
The main export destinations for Russian pork products are Vietnam, Ukraine, Belarus, and Hong Kong, accounting for 90% of the 2021 total. Vietnam was the biggest buyer of Russian pork and pork offal, accounting for 44% of Russian exports (+1 p.p.). In 2021, Russia supplied 89 ths tonnes of pork products thereto, down 5%
Sources: Federal Customs Service of Russia, Customs Union data
Source: Federal State Statistics Service
Pork imports to Russia in 2021 increased by 7% year-on-year and reached 15 ths tonnes (+7%, or up 1 ths tonnes). This situation was attributable to the replacement of the pork tariff quota with a flat scale of 25% in 2020. The main suppliers of pork to Russia are Chile, Brazil, Belarus, and Argentina.
Source: Federal Customs Service of Russia
Prices
In 2021, the average market price for live pigs went up by 26% and reached 110.8 RUB/kg, excl. VAT. The year-on-year increase was due to the epizootic situation in the pork market and a rise in poultry prices on the back of avian influenza, a shortage of hatchery eggs resulting from the reduced supplies from Europe and growth in exports (+11% year-on-year). The price escalation was also influenced by the appreciation of production facilities and fodder resources as a result of the rising cost of cereals and meal. In addition to the above, traditional seasonal factors had a bearing on prices during the year.
Source: Globa lMonitoring
Results of Rusagro’s Meat Business in 2021
In 2021, the Meat Business reported a 22% (up RUB 7.2 bn) increase in revenues as a result of higher market prices for meat products and increased sales volumes (+2%) – despite the difficult epizootic situation in the country, the Company managed to avoid a decline in livestock output. Forced down by higher production costs and expenses for the new pork cluster in the Primorye Territory, the Business profit margin decreased by 5 p.p., leading to smaller EBITDA of RUB 5.9 bn
Operating results
Financial results
Business overview
Rusagro's Meat Business is represented by three vertically integrated clusters: two clusters in Central Russia – in the Tambov and Belgorod Regions, and one in the Russian Far East – in the Primorye Territory. The cluster in the Primorye Territory was launched in 2021. Each cluster comprises in-house breeding farms, livestock breeding sites, a feed mill, a slaughterhouse and meat processing plant, and a slaughterhouse refuse recycling plant.
Livestock breeding
Rusagro operates 23 commercial pig farms and five herd breeding farms (the launch of two more sites in Primorye Territory is scheduled for 2022). In 2023, following completion of the remaining two pig farms and full occupancy of all pig farms in Primorye Territory, the Company’s maximum breeding sow herd size will be approximately 120 ths sows. Depending on production figures, this size of pig stock could produce around 390 ths tonnes of
The Company's pig farms operate to international standards and use the latest science and technology in pig breeding and feeding. These pig farms are modern highly-automated environmentally safe production facilities, giving close attention to the observance of biosecurity requirements and having a manure removal and waste handling system in place.
Compound feed production
The livestock’s feed requirements are fully covered by the Company’s three feed mills with an annual production capacity of approximately 1.4 mn tonnes (+47% year-on-year), including about 1 mn tonnes in Central Russia and 0.4 mn tonnes in the Primorye Territory. The mills have granulated animal feed production lines in place for all processing cycles. The production technology laboratories offer chemical, technical and bacteriological analyses with a high degree of accuracy.
The storage capacity of the elevator in 2021 totalled 280 ths tonnes, including 120 ths tonnes in the Primorye Territory. Moreover, the Meat Business has grain crops storing sleeves with a simultaneous storage capacity of 410 ths tonnes. With in-house storage facilities, the Company can purchase ingredients at the most optimal time during periods of low prices.
Slaughterhouse and meat processing plant
Slaughtering and meat processing plants of the Company cover all stages of processing and production of finished goods: slaughter line, deboning shop, chilled small and large cuts shop, offal production shop, and slaughterhouse refuse recycling shop. In 2021, the slaughtering capacity was 680 heads per hour, including 130 heads per hour at the slaughterhouse in the Primorye Territory, and 440 heads per hour at the deboning shop (the launch of the deboning shop in the Primorye Territory is scheduled
The slaughterhouse refuse recycling shop ensures deep processing of slaughter and deboning waste. Blood is used to produce blood meal; dead animal carcasses, scraps, bones and rejected products are used to produce meat and bone meal and fodder or technical fat. Some of the products are formulated into feed, and some are sold to other companies.
Investments
In 2021, Rusagro's investments in the Meat Business totalled RUB 8.1 bn, down 8% against the previous year. The bulk of the funds (88%) were allocated to business development, mostly related to the launch of the vertically integrated cluster project in the Primorye Territory. Rescheduling this project was the main contributor to the Company's year-on-year increase in capital expenditure in the Meat Business.
The Company spent 12% of its budget to support the current capacities of the Meat Business. Funds were used to overhaul a number of the sites, to restore the integrity of the buildings and improve the safety of the livestock against the outside environment at production sites, as well as to replace the tractor fleet to ensure timely and quality application of the liquid fraction of manure and removal of fallen animals.
Status as of 2021: four pig farms and one breeding farm, elevator complex and feed mill, slaughter and deboning plant, and slaughterhouse refuse recycling plant were launched
Plan for 2022: launch of two pig farms, one deboning line
Where: Primorye Territory, Mikhailovsky territory of priority development
Facilities:
6 pig farms for 18 ths sows
1 breeding farm for three ths purebred sow
1 seed production workshop
1 compound feed mill with an annual capacity of 300 ths tonnes, one elevator with a storage capacity of 120 ths tonne, as well as a capacity to store 200 ths tonnes in "sleeves"
1 slaughterhouse and deboning shop with a capacity of 680 ths heads per year
1 slaughterhouse refuse recycling plant
Production capacity: 75 ths tonnes of pork in live weight
Cost: 37.5 RUB bn, excl. VAT
Construction time: 2016–2022
First production: mid-2021
Time to full production: mid-2023
Brands
The Company has been selling the meat products under own trademark – Slovo Myasnika (Butcher's Word) since 2016. Over the past five years, the Company has achieved high levels of brand recognition and ensured steady growth in market share in its category and consumer loyalty. The brand's extensive product range is regularly reviewed to meet changing market needs. For example, a range of meat products with a high vegetable content and alternative meat without animal ingredients is going to be launched in 2022. The products are sold in major federal retail chains and to non-network retailers.
AUTOMATION AND INNOVATION
Procurements
Automation of procurement processes
Streamlining and ensuring an end-to-end procurement process to improve efficiency
Livestock breeding
Automation of livestock breeding planning processes using video analytics and machine learning tools
Enhanced planning accuracy and improved production performance
Meat processing and slaughterhouse waste utilization
Robotisation of packaging processes
Reduced staff costs
Compound feed production
Automated process control system
Reduced downtime and improved equipment efficiency
Storage and logistics
Multi-agent planning, traffic monitoring and warehouse management systems (WMS)
Reduced logistics costs and upgraded performance of finished goods warehouses
Apart from technology-related projects, Rusagro's Meat Business is also weighing options to generate additional profit from processing by-products generated at different stages of the production chain. Thus, in 2021 the Segment decided to explore the potential of insects and algae in advanced processing of manure and in additional production, for instance, fodder protein, organic fertiliser and chitin. This opportunities may have the additional benefit of reducing methane emissions from lagoon slurry sedimentation.
Operating results
Production
In 2021, Rusagro’s commercial herds grew by 2% and totalled 2.6 mn heads. Commercial pork production was 309 ths tonnes, 0.9 ths tonnes (+0.3%) higher than in the previous year. Despite the high number of African swine fever (ASF) outbreaks, the abnormal summer heat and issues with the quality of feed ingredients, the Company managed to achieve positive results. That was made possible by prompt measures to prevent the introduction of the virus to the sites, increased livestock security and the establishment of a fodder quality control department with the help of international experts. Moreover, the reporting period saw the launch of a project in the Primorye Territory, where the first 5 ths tonnes of livestock were produced, as well as the increased productivity of the main herd at Central Russia’s sites.
In the reporting period, the size of the commercial slaughter livestock rose by 2% (up 51 ths head) due to increased capacity and improved productivity of the slaughterhouse by upgrading the butchers' skills and reducing the downtime. However, new outbreaks of COVID-19, delays in equipment deliveries and a rescheduled launch of the deboning line in the Primorye Territory resulted in a 3% reduction in the size of the deboned livestock (down 50 ths heads).
Compound feed production in 2021 increased by 1% (up 9 ths tonnes) to 895 ths tonnes through the improved labour productivity. In order to enhance the quality of its products, the Company re-equipped its production laboratories and upgraded its equipment.
Sales
Following the slight expansion of production, Rusagro has been racking up the sales of meat products. In 2021, the Meat Business sold 260 ths tonnes of pork products (+2%), including 230 ths tonnes of meat processing products (+4%) and 31 ths tonnes of livestock (—9%). Sales of half-carcasses (+18%, or 9 ths tonnes) and half-finished products (+24%, or 6 ths tonnes) soared due to the rise in prices of half-carcasses and the accomplishment of targets for the development of the half-finished products category. Sales to the refuse recycling shop almost doubled (+91%, or 5 ths tonnes) as a result of reduced shipments of non-commercial livestock to mitigate epizootic risks.
Consumer products
In 2021, 22% of Rusagro’s Meat Business sales and 30% of its revenues came from the consumer segment (excluding export sales). The year-on-year decrease of 3 and 6 p.p., respectively, is attributable to a more favourable pricing environment in the industrial customer channel.
As part of its retail market penetration strategy, Rusagro continued to refine the position of its own brand of meat products, Slovo Myasnika (Butcher’s Word), in the Russian market despite rising market prices. Sales of own-brand products went up by 16% and stood at 23 ths tonnes. According to the retail audit, in the Modern Retail channel conducted by international agency — AC Nielsen, the market share of the Slovo Myasnika (Butcher’s Word) brand grew by 0.5 p.p and stood
Exports
In 2021, Rusagro increased its exports of meat products by 19% to 37 ths tonnes (up 6 ths tonnes), representing 16% (+2 p.p.) of the Company's meat products sales. The key driver of this growth was a vastly improved customer base in 2020, a rapid review of output products and a reorientation of supplies between open markets. Almost half of the exported volume (46%) fell within the "large cuts and industrial cuts" category, which experienced the largest growth (46% (+5 ths tonnes) during the reporting period. The remaining 38% and 16% were exports of half-carcasses and by-products, respectively.
Rusagro accounts for 36% of deliveries to near-abroad countries and 6% of deliveries to far-abroad countries. The main export destinations for Rusagro's meat products are Ukraine and Belarus – 47% and 32% of all exports, respectively. Opening a representative office in Vietnam helped to double its share over the past year, from 8% to 16%. All three destinations showed an increase in supplies, partly due to lower exports to Hong Kong as a result of the port closure.
Financial results
The higher market prices for pork products in 2021 increased Rusagro's meat segment revenues by 22% and reached RUB 39.6 bn (up RUB 7.2 bn). However, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) margin still dropped from 20% to 15% due to increased costs. Thus, expenditure on feed ingredients, such as cereals and meal, amino acids, vitamin and mineral supplements, grew. The costs of the sites launched in 2021 in the Primorye Territory also had a large bearing as the stage of their production cycle had not yet allowed compensating for the costs of raising livestock. As a result, adjusted EBITDA showed a year-on-year decrease of 9%, amounting to RUB 5.9 bn.