Food Industry Value Chains in Leningrad Oblast and Krasnodar Krai FOOD INDUSTRY VALUE CHAINS in LENINGRAD OBLAST and KRASNODAR KRAI Executive Summary
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Food Industry Value Chains in Leningrad Oblast and Krasnodar Krai FOOD INDUSTRY VALUE CHAINS IN LENINGRAD OBLAST AND KRASNODAR KRAI Executive Summary EXECUTIVE SUMMARY Background: The report provides a close look at two regions of the Russian Federation, namely the Leningrad oblast and Krasnodar krai, in terms of the agribusiness value chain. The focus sectors of the research efforts were the value chains for dairy (milk), pork and poultry. The project, of which this report is the end result, took place in a six month time period from October 2005 to March 2005. Structure: In this report we first provide an overview of the agribusiness operational environment in Russia, and specifically the target regions. By the means of SWOT analysis attention is drawn to the key issues. Second, an analysis of the regional value chains is provided. Third, we present forecasts in connection to Russian agribusiness. The findings are complemented with a comparison of the focus value chains in terms of investment attractiveness. The set•up in the assessment integrates the views of Finnish industrialists as well as the project team, with the goal of supporting the formation of comparative perception at a strategic level. In the following we summarise the main findings and conclusions. National operational environment The Russian agricultural industry as a whole, as well as the three focus sectors for this study: dairy, pork and poultry, are on the verge of long required (and in some cases delayed) modernisation induced by three main forces: (1) the emergence of vertically integrated agricultural conglomerates financed by the private sector, and (2) a massive extension of state financing (loan interest subsidies and loans) to agriculture•related projects, (3) the emergence of a modern food retail sector, expanding rapidly from mostly metropolitan areas to small towns and rural communities. These forces shape the transition path of the agricultural industry from mostly fragmented business players possessing a decaying infrastructure, to modern mostly large•scale industrial facilities. However, primary producers and processors need to implement a system to coordinate production with demand signals along the supply chain and to arrange for coordination with the suppliers of raw materials (feed, vitamins, etc.). The Russian agricultural sector enjoys an abundant level of support from the federal government in the form of subsidies, support programs aimed at the development of productivity and the implementation of new technology, as well as protective import quotas. On the other hand, the state’s and especially the regional authorities’ interests in developing a viable agricultural sector with efficient supply chains, able to satisfy consumer demand, are also evident. Processing industries are forced to utilise either contractual or ownership•related methods in the process of securing an adequate supply base. The most salient phenomenon of this is the seemingly common way of vertically integrating upstream companies, i.e. suppliers under the holding company umbrella. The driving force behind the development of these value chains is the emerging middle•class in the urban centres of Russia. With rising incomes, they are increasingly brand and quality conscious, and increasingly demand products with more value added content. In general terms, the consumption of many meat products is still below potential standards, and thus opportunities for business exist. The rise in the price of oil and the relatively high level of federal budget expenditure in the form of priority development projects and social transfers will have an effect on the Russian consumer, through indirect ripple effects in the economy. The effect of WTO agreements are mainly considered at a political level and, in our opinion, players at regional and company levels do not consider WTO issues as a top priority in their list. There is a general belief that the Russian federal government will keep subsidies available to the agro•industrial sector. The WTO entry may have a positive effect, since the industry participants consider any new opportunities related to, but not limited to exporting opportunities in general. 1 FOOD INDUSTRY VALUE CHAINS IN LENINGRAD OBLAST AND KRASNODAR KRAI Executive Summary Avian flu significantly affected the Krasnodar krai poultry industry at the end of 2005 – beginning of 2006 (currently, the situation is recovering) with less impact on the Leningrad oblast for several reasons: the more severe climate in the Leningrad oblast provided natural protection from the avian flu endemic; the poultry industry in the Leningrad region is more concentrated in comparison to Krasnodar krai, and possesses state•of•art technology. These facts help to implement protective measures more effectively and with lower costs. In addition, poultry meat is a more traditional nutrient for the Leningrad region, in comparison to any other regions. Regional operational environment – the Leningrad oblast The performance of the agricultural industry and its future development in the Leningrad oblast is affected by the close vicinity of the metropolitan area of St. Petersburg. This influence has a positive as well as a negative impact. Short•haulage to a major market and transportation hub creates cost savings for input suppliers, agricultural producers and food processors, on the one hand, and makes it costly to retain a professional workforce, on the other hand. Based only on 0.33% of the country’s arable land, the Leningrad oblast agricultural sector‘s production (in nominal prices) represents about 2% of the Russian agro•industrial production as a whole (about RUR 30.9 billion, or about EUR 896 million in 2005: 67% growth since 2001). The territory of the Leningrad oblast is 83 900 sq. km, of which non•agricultural land occupies 90%, including 60% of forests. Agricultural and food processing economic activities are concentrated around the St. Petersburg area, with the main processing and supply facilities situated within a 100 – 150 km distance from St. Petersburg. As of January 2006, there were 217 agricultural companies (about 11% of the North•Western Federal District, less than 1 % of the Russian Federation), 10 fisheries, 5 fish breeding plants, 6 314 farmers (34% of the North•Western Federal District, 2.2% of the Russian Federation), 214,000 private backyards, 20 processing plants (12 milk processing plants, 6 meat processing plants, 2 canned food plants), 39 servicing companies, 29 veterinarian firms, 18 state seed inspectorates. The Leningrad oblast and St. Petersburg host a developed research and science base with more than 20 scientific institutions, including Vavilov’s Plant Cultivation Research Institute, the State Research Institute of Plant Protection, the State Poultry Breeding Research Institute, and the State Academy of Veterinarian Sciences. Out of three sectors which were the subject of this study, poultry has the most advanced facilities and distribution network, representing a world•class level of production and processing. The poultry sector in the Leningrad oblast recently attracted a lot of investments and will most probably follow that path under the import substitution tendency. The milk (dairy) sector has its notable champions (fluid milk suppliers and processors) but requires, in our opinion, additional investments in maintaining milk cow herds, mostly in the area of forage and feed production. The undersupply of fluid milk causes the processors (mostly in St. Petersburg) to work below capacity (at about 60%) and use dry milk as a substitute for fluid milk. The pork sector survived a dramatic decline in the number of pigs (from 650,000 to 50,000) and its further development, even if economically feasible, requires substantial investment in the infrastructure. The food supply chain in the Leningrad oblast is at a very early stage of development; however, very notable changes in almost all directions toward a modern chain format are occurring. One could mention vertical integration and long•term direct contracting in dairy and poultry sectors, product coordination in dairy sector, and branding in poultry sector. The retail sector in the Leningrad oblast stretches out to villages with up to 1000 inhabitants and is adding 570 new retail outlets and repairing 265 in 2005. Major grocery chains increase its presence in the Leningrad oblast (and St. Petersburg) with Pyaterochka Holdings as a regional leader with 167 of their own shops and more than 50 franchise shops. The development of the grocery retail sector led to the 2 FOOD INDUSTRY VALUE CHAINS IN LENINGRAD OBLAST AND KRASNODAR KRAI Executive Summary creation of modern warehousing and logistics facilities to support wholesale distribution (Pyaterochka commenced on the second phase of its distribution facility, with 6 400 sq.m. of storage area). Regional operational environment – Krasnodar krai Abundant natural resources, fertile soil, good climatic conditions are the fundamentals which build the base for the agricultural sector and rural community in Krasnodar krai. Land ownership, a crop•sharing land rent scheme, the influence of private backyards, the seasonality of consumption due to tourists and visitors attracted by the local recreational industry and the available wholesale and retail infrastructure influence the strategies pursued by federal and local actors in respect of value chain development. Overall, Krasnodar krai’s regional territory is 83.6 thousand sq.km, with 4,515 thousand hectares assigned