World meat industry news

All news / Import substitution in animal husbandry and agro-industrial complex - a fairy tale or an opportunity?

  • 26 Oct 2022, 10:29

In the course of import substitution, the technological dependence of the Russian economy on imports of intermediate products can, contrary to goals, only increase. Analysts of the Center for Macroeconomic Analysis and Short-Term Forecasting came to this conclusion.Semyon Zhavoronkov, Executive Director of the Association of Veterinary Pharmaceutical Manufacturers (AVPHARM), commented on the situation on the veterinary drug market:  - We have yet to explore the state and prospects of import substitution in terms of the production of veterinary drugs. It is known that the logistical difficulties that we have been talking about since at least the spring of this year have affected not only the supply of finished veterinary medicinal products, but also pharmaceutical substances and other components for domestic production, and affected the shipment of equipment. Now, apparently, the situation has improved, but mainly due to the diversification of imports, and not the expansion of domestic production, the expert notes.  Semyon Zhavoronkov added that in the dairy industry, on average, up to 50% of the used veterinary drugs are supplied from abroad. This segment became a humanitarian exception and was not subject to sanctions. However, problems with access to drugs exist, which, in the context of current geopolitical challenges, is explained by the consequences of general logistical difficulties, as well as the lack of necessary flexibility on the part of regulatory authorities. At the moment, there is no possibility of 100% import substitution.  The head of the Continental Group of Companies, Sergei Bluma, expressed his point of view on the state of Russian livestock breeding:  — There is no reality of import substitution by seed in Russian livestock breeding. For the most part, the best that is presented by domestic producers is obtained from imported bulls. A sort of "screwdriver" assembly as in the automotive industry.  Therefore, in the event of a ban on imports, the expert is sure, we can talk about a big blow to the Russian breeding business and a rollback.  The problem of non-competitiveness of domestic producers, Sergey Bluma continued, is deep, this is the result of both an archaic regulatory framework, and illegal genomic evaluation, and the presence of breeding animals on a par with "pedigree walls" - breeding farms, and the lack of real rights for breed associations, and low reliability of data on phenotypes.  The problem of the so-called "import substitution", in the paradigm that is being imposed on us all, does not exist in the production of feed additives, Dmitry Grachev, Ph.D. biol. Sci., Vice-President of the Russian Grain Union (RGU):  - Even in the correct understanding of this process, import substitution is clearly not a priority for the state today. The primitive “import displacement” observed today, as Semyon Zhavoronkov, president of the AVFARM association, aptly described the current trend and the substitution of the thesis, is really dangerous for the feed industry and animal husbandry.  In evaluating import substitution projects, first of all, we must proceed from the interests of domestic animal husbandry and its “clients”, namely: will meat, eggs, cottage cheese, etc. become cheaper in our stores, the expert continued. At the same time, the first experience of “import substitution from above”, organized in 2019 in relation to the amino acid lysine, ended in complete failure: as a result, the range of feed additives in the working arsenal of Russian livestock specialists was reduced to a fifth of the available zootechnical portfolio available to the professional community around the world.  In addition, Dmitry Grachev drew attention to the fact that even 30 years were not enough for China to implement the import substitution program for feed additives, despite unlimited investments, including Western know-how, intellectual resources from around the world, and state guarantees to businesses. Today, China feeds the whole world, but all know-how and feed technologies come there, as they do to us, from the West.  “Without completely restoring, practically from scratch, the domestic zootechnics, without rebuilding the system of feed R&D centers and research institutes, without expanding international scientific communications in the field of feeding and fodder production, there are practically no chances for a normal result,” the expert summed up.

The Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF) recently updated its monthly analysis of macroeconomic trends. The center's specialists note that now the economy is experiencing steady stabilization: the negative effect of the "sanction shock" (albeit in the short term) has been overcome, but the impulse for primary recovery growth has turned out to be rather weak. We are talking about stabilization both on the production side and on the demand side.

Analysts note that consumption has recently been affected by two opposite processes: the fall in real incomes and, at the same time, periods of rush demand. As a result, household consumption fell moderately, CMASF analysts say.

In the Russian economy, the inflation impulse has reappeared: since September 20, consumer prices have been rising very moderately, but constantly. In just three weeks, the increase in prices amounted to 0.18%; a broader acceleration is hampered by a shortage of demand in the economy. Apparently, by the end of October, the consumer price index will be 0.2-0.3%, in annual terms - 12.5-13.0%, calculated in the CMASF.

Analysts of the center note that in recent years, Russia's economic growth was based on several factors. In particular, on the leading (in relation to the general economic dynamics) growth of household consumption, as well as on the high contribution of exports and the determining role of imports of goods in filling the economy.

As a result, experts noted the special role of imports in the functioning of the Russian economy. It remains the leader for export-oriented industries. In particular, the success of the same agriculture was due to the import of modern (biotechnological) seed material, young breeding stock, eggs, etc. For new, rapidly developing industries, it is imports that have become a tool for entering foreign markets, including participation in international cooperation relations.

Actually, of the export-oriented industries, more or less independently, and only in terms of current costs, excluding equipment imports (where the share of imports was very large), only oil production and oil refining developed, analysts concluded.

The role of imports in balancing consumer demand is also extremely important, notes CMASF. For middle-income groups of the population, the import of quality products ensured acceptable consumption standards, including the provision of cars, household appliances, and wardrobe items. For low-income groups, the influx of imported wardrobe items and certain types of food allowed maintaining the level of consumption of a number of types of food products.

Discussing import substitution in 2010-2021, CMASF analysts in the review “Characteristics of economic development: before and during the “sanctions crisis” note that during this period it was carried out in several modalities. These modalities are so different that it seems that one can speak of qualitatively different, albeit identically named, processes. This, in particular, is “simple import substitution”, which does not require significant investment. First of all, we are talking about the production of certain types of agricultural products and foodstuffs, certain types of clothing.

The second direction is “import substitution for the sake of security”. According to open data, it was possible to replace a number of previously imported critical technologies with analogues. This category also includes import substitution in the pharmaceutical industry. In particular, we can note the successful experience in the production of insulins and vaccines. But in the production of other drugs, the result was very different, depending on the specifics of a particular market.

The third direction is “import substitution for the sake of competitiveness”. This direction is a consistent progress from the import of finished products to the use and subsequent export of products manufactured on the basis of the widespread use of imported components, components and raw materials. At the same time, large-scale imports, which guaranteed “understandability” for consumers of the main properties (including maintainability) and characteristics of Russian products, were the basis for both exports and use in any demanding domestic markets. As a result, in the course of import substitution, the technological dependence of the Russian economy — moreover, its most successful industries in the domestic and foreign markets — on the import of intermediate products has even increased, paradoxically, analysts of the CMASF conclude.

In more detail, the conclusions of the CMASF were commented on by its leading analyst Andrey Gnidchenko. “In order to maintain a high level of competitiveness, it is necessary to use imported components and equipment. So far, we have achieved import substitution in relatively simple segments (primarily in the food industry), but this is import substitution of final products. And in order to produce this final product, we need, among other things, imported intermediate products and equipment,” he explains.

“Therefore, a situation is possible when import substitution in some sectors requires an increase in import dependence in others (moreover, technological dependence - that is, dependence on imports of materials, components, equipment). This is the natural behavior of companies: for example, if they see that a niche has been vacated in the domestic market for some food products, they want to increase production; accordingly, they need more components and equipment; in the domestic market, they cannot quickly find the necessary components and equipment, so it is easier for them to order them by import,” the expert comments.

Import substitution: seeds, genetics, feed, preparations and equipment

The head of the Russian Grain Union, Arkady Zlochevsky, notes that if import substitution is understood as the displacement of imported analogues by domestic products, then we can assume that it actually took place a long time ago, and the weakening of the ruble played a decisive role here. As a result, domestic products became cheaper than imported ones and were able to partially displace the latter. “The devaluation factor began to work in 2014 and by 2018 it had practically exhausted itself. Nevertheless, Russian products, which have pressed imports, will remain on the market and will not give up their positions. These are, for example, cheeses and some other food products,” the expert commented.

As for crop production, the transition to Russian seeds is possible, despite the fact that they have a lower yield than foreign counterparts. At the same time, one of the problems remains the fact that it is still more profitable for companies to engage in the sale of seeds, rather than selection, the reason lies in the imperfect regulation of the market:

“Our breeders are not able to collect copyright fees, and in the end, selection does not pay off,” Arkady Zlochevsky explained.

— The current situation with import substitution is different, depending on the categories of equipment imported from abroad. We have no problems with the supply of equipment for filling into aseptic carton packages, like Tetra Pak, since such equipment is imported as used, and then undergoes a comprehensive renovation at our site. Yes, logistics has become more complicated, delivery times have increased, but deliveries are ongoing,” Artem Berezutsky, Commercial Director of TDNT Engineering, commented on the situation on the equipment market.

Regarding the supply of new equipment, I would like to note that there were great difficulties with the import of separation equipment (separators, decanters) from the world's leading manufacturers. While we are developing schemes for their import.

It has also become more difficult with the supply of world brands of technological equipment, but parallel imports more or less close these issues. I will add that we have begun to work more with the component base of analogues that China and Turkey offer us.

To summarize, the situation in our industry is quite stable and our customers do not stop their modernization projects.

Semyon Zhavoronkov, Executive Director of the Association of Veterinary Pharmaceutical Manufacturers (AVPHARM), commented on the situation on the veterinary drug market:

- We have yet to explore the state and prospects of import substitution in terms of the production of veterinary drugs. It is known that the logistical difficulties that we have been talking about since at least the spring of this year have affected not only the supply of finished veterinary medicinal products, but also pharmaceutical substances and other components for domestic production, and affected the shipment of equipment. Now, apparently, the situation has improved, but mainly due to the diversification of imports, and not the expansion of domestic production, the expert notes.

Semyon Zhavoronkov added that in the dairy industry, on average, up to 50% of the used veterinary drugs are supplied from abroad. This segment became a humanitarian exception and was not subject to sanctions. However, problems with access to drugs exist, which, in the context of current geopolitical challenges, is explained by the consequences of general logistical difficulties, as well as the lack of necessary flexibility on the part of regulatory authorities. At the moment, there is no possibility of 100% import substitution.

The head of the Continental Group of Companies, Sergei Bluma, expressed his point of view on the state of Russian livestock breeding:

— There is no reality of import substitution by seed in Russian livestock breeding. For the most part, the best that is presented by domestic producers is obtained from imported bulls. A sort of "screwdriver" assembly as in the automotive industry.

Therefore, in the event of a ban on imports, the expert is sure, we can talk about a big blow to the Russian breeding business and a rollback.

The problem of non-competitiveness of domestic producers, Sergey Bluma continued, is deep, this is the result of both an archaic regulatory framework, and illegal genomic evaluation, and the presence of breeding animals on a par with "pedigree walls" - breeding farms, and the lack of real rights for breed associations, and low reliability of data on phenotypes.

The problem of the so-called "import substitution", in the paradigm that is being imposed on us all, does not exist in the production of feed additives, Dmitry Grachev, Ph.D. biol. Sci., Vice-President of the Russian Grain Union (RGU):

- Even in the correct understanding of this process, import substitution is clearly not a priority for the state today. The primitive “import displacement” observed today, as Semyon Zhavoronkov, president of the AVFARM association, aptly described the current trend and the substitution of the thesis, is really dangerous for the feed industry and animal husbandry.

In evaluating import substitution projects, first of all, we must proceed from the interests of domestic animal husbandry and its “clients”, namely: will meat, eggs, cottage cheese, etc. become cheaper in our stores, the expert continued. At the same time, the first experience of “import substitution from above”, organized in 2019 in relation to the amino acid lysine, ended in complete failure: as a result, the range of feed additives in the working arsenal of Russian livestock specialists was reduced to a fifth of the available zootechnical portfolio available to the professional community around the world.

In addition, Dmitry Grachev drew attention to the fact that even 30 years were not enough for China to implement the import substitution program for feed additives, despite unlimited investments, including Western know-how, intellectual resources from around the world, and state guarantees to businesses. Today, China feeds the whole world, but all know-how and feed technologies come there, as they do to us, from the West.

“Without completely restoring, practically from scratch, the domestic zootechnics, without rebuilding the system of feed R&D centers and research institutes, without expanding international scientific communications in the field of feeding and fodder production, there are practically no chances for a normal result,” the expert summed up.