One French entrepreneur has combined Danish technology with government subsidies to create a high-tech pig breeding farm in central Russia. RBTH spoke to Hoffman and found out how he took advantage of a state program aimed at developing Russia’s agricultural sector.
According to Hoffmann, Russia will become one of the world's largest pork exporters in just five years. Source: David Maddison/Flickr.com
In 2005, Patrick Hoffmann, an investment banker from France, decided to start a pig farm in Russia. Hoffmann had moved to the country in 2001 at the invitation of the French company Belgogen, which was engaged in breeding pigs in central Russia’s Belgorod Region, but left the company two years later due to disagreements with the shareholders.
The next year, the Russian government launched a state program to develop the country’s agro-industrial complex, and Hoffmann saw an opportunity. Over the next 10 years, Hoffmann’s company, Otrada Gen, experienced the highs and lows of the Russian market, but today he still considers the country a good investment.
"In 2005, I realized that this was the perfect moment to start an agricultural business in Russia," said Hoffmann.
From subsidies to sanctions
As part of the state program, called the National Priority Project for Agriculture, federal and regional authorities subsidized long-term loans for agricultural enterprises and introduced import quotas and duties that restricted meat supplies to Russia. The subsidies were available to any investors in the sector, regardless of nationality.
“The Russian authorities looked and continue to look at both the local farmers and foreigners with the same interest – they do not make any difference," said Hoffmann.
Hoffman created Otrada Gen in cooperation with the French company Sucden, one of the world's largest sugar traders, which already had a sugar production facility in the Lipetsk Region and a good relationship with the regional authorities at that time.
The start-up capital was 6 million euros ($6.8 million), 25 percent of which invested by the founders, and the remaining 75 percent borrowed from Russian banks, according to the magazine Agroinvestor.
"We started well," said Hoffman. "All the conditions were conducive for this – a low rate of interest, the state-protected market, high import duties and the banks disposed to make loans."
Photo credit: Otrada Gen
In 2008-2009, Otrada Gen, as well as all Russian farmers, suffered financial difficulties due to the global financial crisis and the subsequent fall of the ruble.
"We had borrowed a loan in dollars, and it became very expensive," said Hoffman.
Even as the Russian economy struggled to recover from the crisis, conditions for agricultural enterprises in particular worsened in 2012 when Russia joined the World Trade Organization.
Many of the protectionist barriers that had been put in place under the National Priority Project were gradually removed. Imported pork flowed into Russia again, which led to a significant drop in domestic prices.
Russians now spending half of their income on food
"The Russian authorities reacted to this,” Hoffmann said. “In early 2014, they introduced sanitary barriers to the import of pork from the European Union following cases of African plague in Lithuania and Poland.”
As a result, the price of pork rose again.
Then, in August 2014, the Russian government banned the import of fresh foods from the U.S., most of Europe and a number of other countries in response to sanctions imposed by them on Russia over its role in the crisis in Ukraine.
According to the Russian Ministry of Agriculture, the countries subject to the ban provided 13.2 percent of the pork in Russia. The move boosted domestic industry almost immediately. According to government forecasts, as of 2016, local Russian producers will be able to fully meet the domestic demand for meat.
Otrada Gen was well positioned to take advantage of this increase in domestic consumption. Although it is significantly smaller than the leaders in Russian meat production (Miratorg, RosAgro and Cherkizovo), Otrada Gen uses the latest technology to maximize its resources.
"Our main product is breeding sows, which we sell to other farms,” Hoffmann said. The company uses genetic multiplication technology, acquired from Denmark.
"When you invest your own money, you do not want to blow it," said Hoffman. "So when I analyzed the suppliers market, I saw that the world champion in the effectiveness of the organization of large pig breeding facilities is Denmark."
In early 2012, Otrada Gen bought the first pure-bred animals from the Danish company DanAvl, the world leader in swine genetics. Otrada Gen's top management also includes expats from Denmark. Today, the company breeds 200,000 pigs per year, including 60,000 sows, and plans to triple this result in the next three or four years.
There are only a few genetic breeding farms in Russia.
"Currently, we are building a farm, which will begin work this year – and it will be the largest genetic farm in Russia," Hoffman said.
Photo credit: Otrada Gen
The company and its methods have won praise from Russian experts.
"Otrada Gen is an interesting example of how a company established itself in Russia, bringing the best international practices to a local level, how it developed its niche and so on," said Anastasia Belostotskaya, a sustainable development analyst at the Skolkovo Research Institute of Developing Markets.
According to Belostotskaya, the Moscow School of Management Skolkovo uses Otrada Gen as a case study for entrepreneurship, teaching students about its founder and his strategy.
Otrada Gen’s model would be harder to replicate in today’s environment, however. The dramatic fall in the value of the ruble has led to a constant increase in costs, including expenses on veterinary drugs and feed enzymes as well as breeding animals bought abroad.
"The exchange rates and the ruble's volatility impede planning the organic development of the business," said Musheg Mamikonyan, head of the Russian Meat Union.
In Mamikonyan’s opinion, Russia is now producing an appropriate level of meat and should not aim to decrease the level of imports to zero.
"Countries that export meat today also import it. This is safer from the perspective of business stability. We need to redirect government funds from problems of increasing final volumes to the localization of intermediate products," he said.
Otrada Gen is focusing on just that. Last year, the company opened its own butcher shop in Lipetsk under the brand name of Moyalino ("piglet " in Italian) and plans to open a few more by the end of the year. This move will be followed by trade outlets in Voronezh and Moscow.
"In order not to lose profits at the stage of traders, we decided to become a fully vertically integrated company," said Hoffman, adding that the profitability of the first butcher shop has surpassed all his expectations.
At the same time, Hoffman is carefully working on plans for entering the foreign market.
"We do not look at Europe, because the market there is full. We're looking primarily at large importers of meat – and this is traditionally Southeast Asia, this is South Korea and Japan [the world's largest pork importer],” he said.
“Of course, we are interested in China, since its population consumes more than half the world's pork."
According to Hoffmann, Russia will become one of the world's largest pork exporters in just five years.