Russian roulette

Even as pig flu crisis worsens, Rusagro bets big


Russian pork on the menu

It’s hard to figure out whether Moscow-based Rusagro Group’s latest hog venture in China is more bizarrely or astutely timed – given all the headlines about the growing Chinese pork crisis and the nation’s mass culling of pigs.

In April the Russian agricultural conglomerate unveiled its plan to build a $5 billion hog farm in Qingdao, Shandong’s largest city. Backed by the local government, the project will be developed in three phases. The first stage is set to build a 1,000-hectare complex that can accommodate 3 million livestock and produce 1 million tonnes of feed per annum. It will also feature a slaughterhouse designed to process 600 hogs every hour.

Rusagro’s endeavour – which represents the biggest foreign investment in China’s agricultural sector in the past five years – coincides with an escalation in the African swine fever crisis that has battered the country’s pork industry (we first mentioned the deadly disease in WiC422). Some 1.02 million pigs have been culled since August when the first outbreak was reported in northeastern Liaoning, according to the Ministry of Agriculture (the province borders Russia and it has been speculated that the first diseased pigs were Russian imports – designed to substitute for pork from the US as the trade war worsened).

CNN reported an estimate this week that up to 200 million hogs could be lost to disease or culling this year, dragging down the country’s pork output by 30% in 2019 from last year. “To put it in context, that’s almost as many pigs as in the US and Europe combined,” noted CNN of the losses.

The disruption to hog farming has caused pork prices to jump 14.4% on the year in April. Zhengzhou-based Chuying Agro-Pastoral, a major livestock breeder and distributor, for instance, recorded net losses of Rmb3.86 billion ($559.3 million) for 2018. The financial stress has crimped Chuying’s ability to repay debts and buy food for its pigs. Feed producers such as Beijing Dabeinong Technology also ran up hefty losses.

So what is Rusagro trying to achieve, given there is no end in sight to the swine fever epidemic? One factor is the need for new markets to help offset the negative impact of falling hog prices at home. Economic sanctions by the US and European Union against Russia saw the country ramp up its domestic hog production. Despite the swine fever outbreak, which Russia first reported in 2017, the country’s hog market has paradoxically faced excess supply. As a result, the value of pork sales at Rusagro dropped 6% in the first half of 2018 compared to a year earlier.

“We have come to the point where developing the sector further without significant exports becomes difficult and strategically short-sighted,” Yuri Kovalev, head of Russia’s National Union of Swine Breeders, told Reuters in October. China is the world’s largest pork consumer.

Also a major producer of staple foodstuffs such as sugar and oil, Rusagro hopes that an ability to produce relatively cheap feed grain will give it a competitive advantage over local Chinese rivals.

Rusagro’s other ambition is to become a major feed supplier in China, according to The first step was marked by its shipment of 5,000 tonnes of maize, or corn, to Qingdao in January.

The Global Times considers the Russian firm’s moves into the Chinese market as “perfectly timed” – as it is entering a sector where domestic rivals are at their weakest in recent memory.

Meanwhile the ongoing trade war with Washington also has a pork dimension: it could lessen China’s ability to dramatically increase its buying of US soybeans, simply because it has less pigs to feed. “The sharp decline in its pig population and its resultant lower demand for soybeans could constrain China’s ability to substantially increase soybean imports from the US, a key requirement of the US negotiators in the ongoing US-China talks,” HSBC analysts comment, noting that a 30% decline in China’s pork production will knock its soybean demand down by 4.2%.

That may lead to a short term tactical victory for American hog farmers. “Instead, China may agree to reduce or remove its additional duties on US pork if the [African swine fever] crisis leads to a sustained pork shortage,” HSBC postulated.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.