While Russia has historically been a country of meat eaters, consumption of meat has declined dramatically in the post-Soviet years, dropping from 172 lb. per capita in 1988, to around 130 lb. today. The downturn in consumption, attributed to price rises following the collapse of the outdated Russian agricultural sector, led to a massive decline in so-called backyard livestock. This caused rapid price inflation for meat, which became unaffordable to the impoverished nation.

More recently, solid economic growth has begun to spur meat consumption and, when combined with meat price increases, has made Russia a very attractive market for pork exporters, especially for lower-value trimmings and offal.

Prices in this market are highly dependent on access, and the Russian government has been known to ban imports from certain countries when the price of some popular cuts gets to levels they believe are too high. However, there are signs that the government may be a little less inclined to use this “trick.” In the current tight protein market, competition with China for U.S. poultry leg quarters in 2007 serves as a very good example.

Russia does not have a pleasant history with being import-dependent for food. The Russian industry is looking to almost double its domestic pork production between now and 2012 (Figure 4). Energy, oil and gas conglomerates have been “encouraged” to diversify into agricultural production. Investment in agriculture is viewed as a sign of patriotism.

According to the Russian Agrarian Marketing Institute, $4.6 billion (US$) has been invested in the Russian pork industry since 2005. Government incentives have included tax incentive schemes, debt compensation and changes to the quota regime, raising the import duties on pork and poultry in excess of quotas to 60%, and lowering the duties on beef imports in excess of quotas to 30%, clearly favoring local beef secondary processors.

There will be significant consolidation and foreign investments in the Russian meat industry in coming years. As was witnessed in Poland and Romania, new entrants are creating completely closed, vertically integrated systems. Export opportunities will remain, but Russia will shift away from being an outlet for lower-quality exports and will likely have less weight when it comes to influencing world prices.

Brazil - A Force to be Reckoned With

While it may be difficult to envision a day when pork production in Brazil becomes more important than beef or poultry, there is little doubt that the Brazilian pork industry is shaking off its “poor cousin” tag.

Significant production and export expansion is expected over the next decade, although growth rates may taper from current levels. Land and feed availability, measurable improvements in transport and infrastructure, an agriculture-friendly government and investment climate and a healthy dose of entrepreneurial spirit are the backbones of the industry's expansion and success in establishing export markets for its product.

Production growth is being supported by significant investments by local meat companies and international agribusiness conglomerates. Many of the major pork processors in Brazil are also poultry processors, which allows them to better utilize the infrastructure, customer relationships and marketing expenditures. The industry is also highly integrated, with approximately 75% of production coming from integrated systems.

Brazil continues to struggle with disease constraints (particularly foot- and-mouth disease), which in turn limit market access, particularly to the highly sought-after markets such as Western Europe and Japan. Brazil remains dependent on Russia for export sales, but the major packers are making a consorted effort to diversify their customer base and export higher valued products. Just as the U.S. pork industry has benefited from the low value of the U.S. dollar, the appreciating Brazilian currency — the real — has had a negative impact on Brazil's export competitiveness.

Established pork-producing nations, such as the United States, ignore the potential of the Brazilian pork industry at their peril. Just ask your cattle-ranching neighbor.

Implications for the North American Hog Industry

There are some obvious countries missing from this discussion, namely the traditional pork-producing nations of western Europe, Poland, Romania and even the emerging producers such as Argentina. All, with the possible exception of those in western Europe, offer significant opportunities in terms of pork production, but continue to battle challenges ranging from government interference to disease.

There is one recurring theme in many of the markets that have been mentioned — cyclicality. Prices go down, producers cut production, prices go up, and producers expand production. It's not rocket science, but it is the telltail signs of a commodity market.

The simple truth is that some producers are better placed to handle it or have the ability to shelter themselves from the severe ups and downs based on their individual business model and their interdependence with others in the value chain. The North American market remains on a solid, if not a little battered, footing in this respect. There are five competitiveness drivers that continue to bode well for the North American pork industry:

1. Proximity to feed

   Remember the first law of international economics — as a net exporter of grain, the United States remains at a competitive advantage to net importing countries. This is in spite of the U.S. biofuel mandate, which effectively acts as a regressive tax on livestock production.

2. Capital availability

   This may seem like a reckless comment to make in light of the current economic conditions. While the cost and availability of financial capital is undoubtedly more constrained than it was just 12 months ago, U.S. agriculture remains well placed to access capital over the long term.

3. Packer efficiency

   U.S. pork packers are at the forefront of technology adoption and product development. They also benefit greatly from economies of scale.

4. Relatively open access to domestic and export demand

   U.S. pork is currently exported to more than 100 countries.

5. An integrated (and consolidated) value chain

   The timely and frictionless matching of supply and demand is the sign of a well-functioning market. A high level of industry integration ensures flexibility, speed and coordination.

But the 64-million-dollar question remains: If not in North America, where would you invest in the hog industry?