Russia’s meat giants see profits plummet

By Vladislav Vorotnikov

- Last updated on GMT

Devaluation of the Russian ruble has led to a decline in domestic meat consumption
Devaluation of the Russian ruble has led to a decline in domestic meat consumption

Related tags Meat Beef Lamb Packaging equipment & materials Pork Poultry Processing equipment & plant design

Two of Russia’s largest meat companies experienced a sharp drop in profits in the first quarter of 2016, according to official reports. 

RusAgro saw a 12-fold drop in net income from RUB4.3bn in the three months to 31 March to RUB367million (US$5.6m) in the same period this year. Cherkizovo had a net loss of RUB441m (US$6.7m) compared to RUB2.9bn (US$45.8m) in net profit in the first quarter of 2015.

Russia’s largest meat processor, Miratorg, is believed to have been hit by the same negative factors as the other top companies, but the firm’s financial result may have been supported by a 16% rise in meat sales in the first months of the year. So far, the company has not published its financial results.

Companies have complained about the negative state of the domestic market, while analysts have indicated that profitability was hit in the first quarter by a strong ruble and expensive grain.

Prices for all meat types are reducing, while in pork and poultry there has also been a decrease in consumption, due to the crisis and falling purchasing power ​[of the population],” said Sergei Vasin, an analyst from Gazprombank, indicating that, since the beginning of the year, the rouble had risen 20% against hard currency. “Further, the strengthening of the rouble is making imported pork more competitive, which also puts pressure on the price.​”

Low meat consumption

On the contrary, Cherkizovo CEO Sergei Mikhailov, speaking about weak financial results of the first months of 2016, said it had been partly provoked by the devaluation of the ruble.

Low profitability in the reporting period took place due to a decline in consumer demand and the seasonally low level of meat consumption,” ​he explained. “The first quarter is traditionally the weakest quarter of the year. Overproduction of chicken in the country put pressure on the average ​[meat] price. At the same time, due to the devaluation of the ruble, production costs increased. Both factors had a negative impact on the average price and, as a result, poultry showed the worst results in all segments.​”

Meanwhile, Cherkizovo’s losses could have been bigger, but problems with meat production were partly compensated by incomes from the processing segment. Mikhailov is optimistic that, in the second quarter of 2016, the general situation will get better.

High grain costs

Analysts at Sberbank CIB, however, have pointed out that prices are continuing to come under pressure during the second quarter, so profitability is unlikely to be restored until the second half of the year.

In addition, according to Vasin, expensive grain is resulting in an increase in the production costs per kg of meat, so in order for Cherkizovo to regain profitability, an improvement in meat industry prices is needed. RusAgro has diversified its business with a huge sugar division, where the situation is more stable, so profits in this segment can support the company’s general financial results.

Estimates from Gazprombank, in particular, indicate that, for RusAgro, EBITDA profitability fell by 9%, due to the low pork prices. As a result, the profitability of its meat division dropped almost twofold from 30% to 15%, while in comparison, profitability in its sugar division rose from 39% to 46%.

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