2 October 2008

10 minute read

Report Highlights

Following Ukraine’s accession to the WTO red meat imports increased significantly, but only enough to satisfy a small portion of domestic consumption. A significant product deficit led to extremely high domestic prices for red meat and consumption shifted to less expensive poultry products. In 2008 Ukraine’s red meat market opened up to exports from the U.S.

Executive Summary

Domestic production of beef and pork in Ukraine is declining and is expected to continue this trend in the near future. Concentrated predominately in households, production is very inefficient. Not even the combined effects of abundant, cheap fodder, state support programs and technical barriers to imports were able to turn the situation around in 2008. The number of both pigs and cattle continued to decline in 2008, thus any stabilization or temporary increase in meat production is expected to be short-lived. High red meat prices that resulted in the Ukrainian market made a good incentive for investments in the sector, however a relatively small number of projects in the swine-breeding sector are under way and there are no major ones in the beef sector.

State policies in 2007-08 ranged from severe import restrictions to state import of meats including pork and later beef products. Ukraine’s accession to the WTO has somewhat liberalized the market of red meats, but a fully transparent and predictable market environment is not yet here. Thus could develop in 2009. Complete closure of the Free Economic Zones (FEZs), previously serving as duty-free import loopholes took place in late 2007. FEZs are not expected to be a trade-affecting factor in the rest of 2008 or at any time in the future.

Imports of red meat are expected to grow in both 2008 and 2009. After a long break U.S. suppliers resumed pork exports to Ukraine in late 2008. All supplies were purchased by the State Reserve of Ukraine, the state-appointed official trader. The commercial import market in 2008 will remain far below its potential volume, restricted by technical barriers to trade. Commercial imports are expected to resume in 2009.

Production

Beef and pork production rely heavily on inefficient households (i.e. subsistent farming) with little or no use of modern production methods. Ukrainian households will continue to be the major producers of pork and beef in 2009. Due to significant import barriers, production of beef and pork in Ukraine remains largely isolated from world market competition. The major side effect of this protectionist policy is low competitiveness of both enterprises. The only free-market signal received by producers is the price of feeds, but even that cost factor was limited due to grains export quotas that remained in place until June of 2008. Producers of red meat have insignificant political lobbying power, when compared to poultry producers. At the same time they benefit from the same GOU decisions such as limitation of feed grains exports (See UP8005 GAIN Report for more information on grain export quotas).

The cumulative effect of turbulent GOU domestic policies on red meat production is negative. The policies were very uneven both on the production side and on the trade side (see trade section of this report). In many cases the GOU was not able to secure a smooth subsidy flow (particularly in January-February of 2008), making business planning difficult. Producers of beef and pork also continue to face relatively high loan rates despite GOU programs , such as partial compensating of loan rates.

In an attempt to cushion consumers from rising prices for major food products, the government imposed a 15% trade margin ceiling on retail chains. The law #2292 adopted May, 2008, established the maximum margin for beef, pork and sausage products (with the exception of smoked sausages). Retail chains reacted by passing the price control back up to processors and producers, limiting production incentives even further.

Cattle

In 2008 Ukraine's beef industry continues to be in crisis with no sign of recovery. This is true for industrial agricultural enterprises which increased slaughter significantly, accounting for a 15.2% drop in cattle numbers as of July 1^st, since January 1^st. The number of animals is on the decline and the quality of those remaining is not good, especially if expected to be used to develop an efficient industry.

Beef production remains a derivative of the dairy industry and is highly dependent on milk prices. Beef animals constitute an insignificant portion of the Ukrainian livestock herd. Bovine animals are concentrated mainly in households, responsible for 69% of cattle herd, while industrial enterprises are responsible for the remaining 31%. At the same time industrial enterprises are responsible for a significantly higher share (45%) of male calves on feedlots. This explains significant herd decrease: it came in reaction to high feed prices exaggerated by the generally low efficiency of dairy animal feeding.

Industrial production of beef from dairy animals remains inefficient. It is poorly managed and uses more inputs than necessary. Ukrainian dairy farms lack good genetics although growing import of animals may improve the situation over time. A few investment projects in the Ukrainian dairy sector have lacked preparation and have been overly expensive. Businesses have not yet invested in the Ukrainian beef/dairy industry and continue to target the poultry and swine sectors because of higher and faster rates of return.

There are government support programs designed to increase production. They suffer from uneven and irregular payments and volatile import policies making business planning impossible, the same problems seen in the swine industry.

Similarly to pork, the PSD production numbers have been changed to reflect official changes in the Ukrainian State Statistics Committee year-end statistics. The 2007 numbers were close to predicted. At the same time slaughter and beef/veal supply numbers for 2008 were increased for the same reason as pork. Expensive feeds have driven inefficient production away in 2008.

Consumption

As reflected in the PSD, the consumption of red meat in 2008 is expected to grow in response to growing incomes of low-paid workers and pensioners. Disposable incomes in Ukraine increased by 30.3% in 2007, so many low-income consumers increased their red meat consumption. Note: the disposable monthly salary in Ukraine remains quite low at UAH 1647 ($354) as of May 2008. Due to import restrictions (explained in details in the trade section of the report) high quality beef is not available on the market. Ukrainian consumers may choose between expensive veal, male calves culled from the dairy herd population and slaughtered at 1-1.5 years of age and low-quality beef derived from the dairy cows.

Growth will continue in consumption at both retail (fresh meat from domestic producers) and for further processing segments (both imported frozen product and domestically produced meat). When consumers made a decision between red meat and poultry products, the large price difference shifted their choice to poultry. At the same time in red meat – poultry consumption trade of, red meat significantly worsened its position due to higher price growth. Significant technical barriers to trade kept red meat imports on a relatively low level, leading to chilled pork price growth to the range of $10-$12 /kilogram in open-air markets in early 2008. Concurrently, poultry prices grew considerably less, remaining at $4 -$6 / kilogram level in retail outlets. Thus in 2008, red meat consumption was significantly undermined by price growth.

Unlike poultry, imported red meat is restricted to further processing by industry. Although illegal from the WTO standpoint, technical barriers to trade remain in place in 2008. The stamp “for further processing” is affixed by the Veterinary Service on every imported shipment of beef or pork.

Trade

In 2008 Ukraine’s red meat market became accessible for US beef and pork. Despite remaining problems between the veterinary services of two countries, some trade is taking place. The vast majority of pork imports is coming from state trade, but 700 tons of commercial shipments will arrive to Ukraine in early fall.

In late 2007 the GOU was successful in the long term fight aimed at elimination of import loopholes. They closed the Free Economic Zones (FEZs) and got rid of other grey import schemes. Together with prohibitively high import duties and inefficient domestic production, this policy resulted in significant supply decrease, putting Ukrainian meat-processing industry on the edge of survival and setting retail meat prices at exceptionally high levels. The steep increase in food prices in turn led to significant inflation growth (projected to reach annually 15%-25%) threatening the overall economic stability of the country. Popularity of the GOU started to decline following criticism in the mass-media and by political opposition. These developments finally attracted attention of government officials and they decided to take action by increasing the red meat supply.

At the same time, in early 2008, Ukraine concluded its WTO accession negotiations. As a result of 14 years of long negotiations, the Parliament ratified Ukraine’s Accession Protocol on April 10, 2008. However, the Ukrainian Parliament failed to adopt multilaterally agreed import duty rates. After a long discussion in Parliament and active lobbing against the lowering of import duties for agricultural products, the Parliament rejected the WTOcompliant Customs Tariff. It also failed at attempts to approve alternative partially compliant drafts. In order to avoid negative international reaction, the GOU forced Ukraine’s Custom Service to implement new custom duties by an internal order. Order # 14/655-EP introducing WTO-agreed import duties was adopted by the Customs Service on May 16th of 2008. The document is currently in force and import duties are being charged accordingly. New import duties are listed in Section II below. Nevertheless the “old” Customs Tariff technically remains a valid official document, a contradiction that foretells a legal collision unresolved by Parliament.

The most notable change in the new Customs Tariff was the abolition of the fixed rate import duties, which previously were translated into extremely high ad valorem equivalents. The remedy eliminated a situation, in which imported red meat products had been subject to 50%-140% import duty while declared ad valorem rate was only 10% or 30%. Adoption of the new import duty rates finally opened a road for formation of a transparent import market not limited to preferential zones or preferential importers. In anticipation of market reopening, many importers had earlier signed import contracts. Thus import revival was observed somewhat earlier, when Parliament ratified the WTO accession protocol.

As mentioned before, the GOU was sharply criticized for high meat prices and high inflation. Technically in early 2008 the red meat market remained open for suppliers from Latin America, but technical barriers to trade undermined supplies significantly. After some unsuccessful attempts to adopt a 50,000 ton pork import quota (before the WTO accession) the GOU decided to go further and initiate state purchased imports of red meat, initially only pork, using State Reserve1 as a GOU-appointed buyer. The first country to supply pork to State Reserve was Poland with a 15,000 tons a month contract. Many of the processors were unsatisfied with the price and quality of pork offered, so the GOU started imports from other countries. Some commercial imports also started, including insignificant import from the U.S. All red meat imports both State Reserve and commercial were destined for further processing. Arrival of early shipments is expected in September.

The import forecasts in the PSD tables were changed for 2008 to accommodate for the new developments. The trade forecast for 2009 remains subject to trade policy changes. By the time this report was drafted it was not clear whether the state-initiated shipments are going to continue in 2009 or whether state imports of beef are going to start with significant volumes. Current policy in place envisages imports only until the end of 2008. A consequence of state purchase may be that private commerce follows. Significant production cuts in 2008 will not allow the GOU to close down the market in 2009 without a sharp supply decrease and another price surge. Thus imports for 2009 are projected at a relatively high rate.

Insignificant beef exports outlined in the PSD table are the results of increased animal slaughter and are not from the previous year animal production increase. Technical barriers to beef exports, imposed by the Russian Veterinary Services, were reduced in 2008, opening the Russian market for limited supplies by selected Ukrainian slaughterhouses.

Further Reading

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September 2008