The shortage of meat inputs has resulted in a rise in prices for finished meat products. It can only be stopped by revising the current system of import quotas allocation

Maxim Borisov

Sausage and other meat products are becoming more expensive in Russia. Early in October, several of the largest Moscow-based meat-processing plants simultaneously announced an abrupt increase in prices. As the companies explain, the reason for this jump is the shortage of meat and the continuous rise in meat prices. However, there is another version – the largest producers want to influence debates over conditions of quota allocation.

The historical and regional principle

The current system of allocating meat import quotas was introduced in January 2003 to protect Russian agricultural products manufacturers from steadily growing but absolutely unregulated food imports, especially as Western governments substantially subsidized their farmers. Today, the volume of food imports is restricted by quotas allocated each year by the Economic Development Ministry among Russian importers and supplying countries under so-called historical and regional principles. Russian importers are selected by “historical” principle: 90% of quotas are allocated among buyers in proportion to the volumes they imported in the previous years. This is why major meat importers, traders, and large manufacturers of finished products gain priority access to raw materials. The remaining 10% is sold at open auction where small and medium-size producers as well as newcomers to the market can gain direct access to raw materials without intermediaries. The “regional” principle implies strict quota allocation among export countries. Today, the US has the biggest quota with 74% of total meat imports followed by EU countries with 18%.
Everyone agrees that the introduction of quotas has stabilized the meat market. The number of importers fell from several thousands to 300 companies. The problem of shady imports and smuggling has become less acute. However, the shortcomings of the quota system are also evident. Because of the “historical” principle, a limited number of players gain access to imported meat, which is clearly not conducive to the development of robust price competition. The “regional” principle has a negative impact as well. The current prices for meat in the EU and the US –with the lion’s share of quotas– are very high. At the same time, Russian companies are not allowed to purchase cheaper meat, for example, from Latin American countries that are becoming leading suppliers of meat worldwide. No wonder that each year quota allocation is accompanied by scandals. Also, there is no way to quickly replace a meat supplier country if the Veterinary Supervision Agency has a problem with its products. The market immediately experiences the shortage of supplies.
Importantly, the main objective of the quota allocation system—to protect domestic farmers and encourage their growth—has not been achieved. Following the reduction in meat product imports in 2003, the number of domestic cattle suddenly began to decline. As experts explain, given the expensive price of fodder, slaughtering was the only way out for many farmers. Considerable improvements were only made in poultry production. “Poultry implies a small amount of investment, although it takes long time to get them back. Therefore, this sector is growing at good rates,” explains Dmitry Rylko, General Director of Institute for Agricultural Market Conditions. “As for beef and pork production, it’s a long-term business with even longer periods of payback. It’s a big question whether this business is appropriate in a country with very unclear investment climate.”

Five years of expensive pork

The situation with raw materials is aggravated by the fact prices are going up in supplier countries as well. There are also global factors. For example, the pork market is cyclical: five years of high prices are followed by low prices. Today, the five years of expensive pork are in full swing. Russia is a part of the global economy, and that’s why we feel these fluctuations here at home. As a result, according to the Meat Association of Russia, over the last 18 months pork and beef prices have risen by 194% and 126%, respectively.  The problem has become especially acute in early autumn when the expected seasonal decline in prices for imported meat didn’t happen. On the contrary, meat became even more expensive with the increase in different items varying from 50 to 100%. As a result, the largest Russian meat-processing plants, which use both domestic and imported meat in production, have to raise prices, since a share of raw materials in the production price amounts to 70%. Since October 1, prices for finished meat products have risen by 5-10% and this process will continue to the end of this year. As Musheg Mamikonyan, President of the Meat Association of Russia, points out, prices for raw materials have increased by 50% on average since the beginning of the year, while domestic processing plants have raised prices for their finished products by a mere 8% for the same period.

WTO hostages

Everybody says that the situation with meat imports must change. First of all, the matter concerns changes to the rules of quota allocation. As early as at the moment of quotas imposition, analysts foretold the rise in prices for domestic meat and the shortage of imported meat. The rise in prices for finished meat products didn’t come as a surprise either – it didn’t happen earlier only due to tough competition on meat products market.
So, what should be done with quotas? There are players, who suggest that quotas allocation should be applied only to imported meat for retail sale and the meat meant for industrial processing should be regulated via duties. The option of replacing quotas with higher customs duties is also under discussion. However, duties have to be treated with great caution, since few can forecast what the tariff policy will be and what impact it will have on domestic production.
The authorities propose their own options for reforming quota allocation. The Ministry of Agriculture is still trying to protect the Russian countryside. Using quotas, the Economic Development Ministry is trying to win US favor at negotiations on Russia’s admission to WTO. The Duma proposes that small producers should gain access to imported meat. Each party pursues its own goals. Thus, for example, in late September, the Economic Development and Trade Ministry put forward its own proposal regarding changes in quotas. It provides for the increase in the share of meat imported from the US and for the transfer of the right to allocate quotas to Western suppliers themselves. According to the Economic Development Ministry’ cover letter, the necessity to revise quota conditions is connected to the fact that “the US continues to link renewal of WTO negotiations with Russia with the signature of the said agreement.” In response, Alexei Gordeyev, Minister of Agriculture, stated that the current allocation method for meat quotas would remain unchanged for at least two years.
The Duma has released its own draft of meat imports regulation. It proposes that authorization for pork and beef imports within quota should be sold only at auctions. According to its authors, the changes are required to eliminate the monopoly of a number of importers and traders, who “are sitting on their quotas,” and to create easier access to raw materials for small producers. The Duma deputies believe that these measures will result in the increase in profitability of meat-processing enterprises, which are currently forced to purchase raw materials exclusively through intermediaries.
President Vladimir Putin voiced his view on quotas as well. According to Putin, it’s wrong to close Russia’s markets. Quotas may be kept or even new quotas introduced on some poultry and dairy products. But on the whole, it is necessary to think not about protective mechanisms but about “what could replace extensive inefficient production models” and what should be done “to secure a decent place on the world market.”
Analysts and businessmen see negative aspects in all the proposed variants of the reform. Thus, for example, experts believe that the Duma’s meat auctions will inevitably lead to a rise in market prices. Experts recollect that raw sugar import quotas were allocated at auctions for several years. Yet, sugar market players raised prices so high that raw sugar imports became unprofitable. This year, the government declared the system inefficient and abolished both sugar quotas and auctions. Today, the market is regulated by means of flexible import duties – the cheaper raw sugar at exchanges the higher the duty and vice versa.
However, the draft proposed by the Economic Development Ministry provoked the most negative responses from meat producers and importers. Market players fear that in six months US suppliers will set up their own subsidiaries through which all imports will pass. “In its draft, the Economic Development and Trade Ministry plans to farm out the only successful industry - poultry - to the US. A blatant tradeoff is under way. They will come to Russia and will sell below cost for five years, and when our enterprises fail, the Americans will raise prices to the required level of profitability. There is no common sense whatsoever in the measures proposed by the Economic Development Ministry,” Naum Babayev is indignant. However, given the aim is “Russian admission to WTO,” specialists consider adoption of this draft as quite probable.
Business, on the contrary, proposes to abandon the “regional” principle of meat quota allocation in order to gain the opportunity to purchase cheaper meat from Latin America. Incidentally, the wider circle of suppliers, the easier “veterinary problems” can arise. “In the short term, the state is unable to do anything about the rise in prices. In the long term, it is necessary to apply a systematic approach and consider issues related to import quotas and the situation in domestic cattle breeding. Meanwhile, imports are booming and there is still no clear investment horizon for domestic meat production,” Dmitry Rylko points out. The situation is heating up - and sausages are getting more expensive. 
 
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