Fitch Considers Impact of Russia’s Ban on Food Imports
Russia’s trade ban on many food imports, announced earlier this week, is likely to hurt most its domestic market but the US protein industry is also poised to lose while the Latin American market will see some gains, according to Fitch Ratings.
The credit ratings agency (CRA) not expect the ban to significantly affect European Union (EU) companies in the short term, probably with the exception of exporters of basic dairy products, as most companies with large exposures, such as Nestle, produce many of their goods in Russia.
On 7 August, Russia announced a one-year embargo on meat, dairy and produce imported from the US, EU, Australia, Canada and Norway.
Fitch adds that the import ban will not result in a food deficit in Russia, and the near-term impact will be moderate. However, it is likely to push up food prices, which had already picked up after the rouble (RUB) devaluation during the first half of this year. The fall in imports from EU and the US will gradually be substituted by higher imports from other countries, with meat from Latin America, fish from Asia and fruit, vegetables and other products from Turkey, the rest of the Coomonwealth of Independent States (CIS) and China.
Russian food processing companies are likely to be worst affected so long as they rely on imported food ingredients on the sanctions list. The ban will be beneficial for local meat producers, including Miratorg, which is a pork/poultry producer in Russia (B/Positive) that will benefit from higher prices and continuing government support.
An increased cost base due to banned processed meat imports will cause meat processing companies that deal largely in imported frozen meat, especially beef, to be hardest hit. Poultry, which accounted 42% of total meat consumption in Russia in 2014, is not likely to be significantly affected as imports accounts for less than 15% of consumption. Pork imports have been banned from EU countries since January because of African flu, resulting in a 40% year-on-year (YoY) surge in domestic pork prices in H114.
The operating environment for Russian food retailers is likely to become more difficult because a large part of the food imports sold by retailers are supplied from EU. The likely continued slowdown in the economy and further deterioration in consumer sentiment and purchasing power may also affect sales volumes. These factors combined could hurt working capital management and operating margins.
Outside Russia, LatAm-based producers are likely to benefit the most. In the US the reduced protein demand from Russia will result in a temporary increase in US poultry supply, placing downward pressure on prices in the near term.
However, US broiler shipments to Russia have declined from 1.6bn pounds in 2009 to approximately 600m pounds last year due to the country’s push for self-sufficiency but still represented 8% of total US broiler exports in 2013, according to the US Department of Agriculture. Russia is not a large importer of US beef and pork but is the second largest destination for US chicken.
US producer Tyson Foods expects 10% plus operating margins in chicken for fiscal 2015, after generating a margin of 8.2% during the first nine months of fiscal 2014, as lower grain costs and strong global demand has compensated for flat prices. The 10% margin guidance for chicken is optimistic, especially given the destabilisng nature of Russia’s ban, but diversification in beef, pork, and prepared foods is likely to minimise the potential impact of lower margins in chicken on the firm’s consolidated results.
Brazilian companies are likely to benefit but to maintain their cautious international approach about reliance on a single country, due to recurring sanitary bans imposed in the past, notably by Russia. Russia is the primary destination for Brazilian fresh beef and pork. In Q214, the country represented 40% and 23% of total pork and fresh beef exports, respectively. The Russian ban will reinforce Brazilian pricing power in the profitable Russian food market.
Fitch believes that Minerva will benefit the most from the recent announcement. Minerva’s beef exports represent 68% of its sales, of which 19% goes to CIS countries. BRF SA is the largest Brazilian exporter of poultry but most of its export sales are directed to the Middle East, Asia, Europe and Latin America, limiting any gains from the Russian ban. The impact for JBS will be mixed given the company’s ownership of Pilgrim’s and exposure to the US local market where pricing will be under pressure.