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Review of the Russian Mutton Market

Research of the Company IndexBox
In October 2016, IndexBox conducted a marketing research on the Russian market of mutton. The research examined the dynamics of mutton production in the Russian Federation as well as its import and export dynamics. The market size was assessed, and its current conditions were identified. Special attention was paid to factors having a significant impact on the state of the Russian mutton market. Based on a macroeconomic forecast and an expert survey of market participants, a forecast for its development in the medium term was created.
In 20112015, production of mutton in Russia was growing at an average annual rate of 2.1%, reaching 204.5 thousand tons. During the 5 years, negative growth rates in the industry were only observed once, in 2013 (-0.2%). As explained by the National Union of Sheep Breeders, market growth was contributed to by state support in a form of subsidies to increase the sheep breeding stock and develop livestock breeding.
For instance, subsidies for the compensation for expenses on the sheep and goat breeding stock increase in Kabardino-Balkaria exceeded 26 million rubles in 20152016. In turn, in Krasnodar Krai 2 million rubles were allocated for subsidies for fine and semi-fine wool production last year. The investment attractiveness of the industry also contributes to market growth sheep breeding does not require huge capital investments but is, at the same time, highly profitable.
Despite the positive dynamics in the development of the domestic mutton market, a number of problems have not been letting it reach higher growth rates. According to the National Union of Sheep Breeders, these issues include a shortage of companies processing mutton, wool and sheepskins sheep breeding farms simply have nowhere to sell raw materials, which makes it impossible to establish production on an industrial scale.
It is mainly small farms that are engaged in sheep breeding in Russia. Since large agro-industrial companies do not consider sheep breeding to be promising, the industry lacks full-cycle enterprises that operate in sheep growing and slaughtering as well as production of finished meat products. Therefore farmers pass their grown sheep over to other members of the production chain, which then slaughter the animals, process wool and skin, and produce semi-finished meat products. The large number of intermediaries in the production chain leads to high prices for mutton in stores. This, in turn, decreases consumer interest: more and more often preference is given to more affordable types of meat, such as chicken or pork. At the same time, the sheep breeders situation is negatively affected by the lack of long-term contracts with meat-processing enterprises.
Dynamic growth of the industry is also hindered by the fact that wool growing is primarily developed in Russia. Meat sheep farming traditions are still rather weak, even though recently huge work has been carried out on the popularization of domestic breeds, such as Romanov, Meat Saryarka, coarse-woolen light Katum, Meat Merino and others.
Whereas in physical terms production of mutton in 2015 increased by 0.3% (to 204.5 thousand tons), in monetary terms it decreased by 13% (to 38.2 million rubles). As noted by the National Union of Sheep Breeders, prices for mutton are determined by the demand, and as long as demand is lower than supply, prices will keep decreasing.
Fresh mutton is dominating in the structure of production: in the period from the third quarter of 2015 to the second quarter of 2016 the share of frozen products was no higher than 4%. A slight increase in production in the fourth quarter of 2015 was caused by the seasonal factor in October-November sheep breeders traditionally sell their sheep for slaughtering to avoid feeding them during the winter season. Meat processors make stocks of frozen meat out of product excesses.
As stated in the National Union of Sheep Breeders, there are no large processing farms in Russia today. However, recently mutton-processing companies have started to appear in a number of Russian regions, including Dagestan (Boztorgay LLC), Kalmykia (Individual Entrepreneur Ivanova V.M.) and Stavropol Krai (Avangard LLC, slaughtering animals and supplying carcasses to Moscow).
In the second quarter of 2016 the region leading in mutton production was the North Caucasian Federal District, the share of which in the overall Russian output amounted to 65.7%. It was followed by the Central and Southern Federal Districts with the shares of 19.1 and 9.4% respectively. In total, the three federal districts accounted for 94.2% of mutton production in the Russian Federation in the second quarter almost the same share as in the first quarter (91.8%).
According to the forecast by the National Union of Sheep Breeders, in the next few years the share of farms and private sheep breeding companies, for which sheep breeding is the core business, will be growing as opposed to collective farms with elected leaders; at the same time the ratio of small and large farms will become approximately even. Since domestic mutton is produced from Merino and coarse-woolen sheep meat, it is difficult to introduce to the global markets: for exports to increase, a sub-program for development of meat sheep farming in Russia would be required.
According to analysts at IndexBox, the state could support the development of the industry by providing subsidies to industrial producers of mutton. They are currently mainly received by sheep breeding farms, which, as has been stated above, are experiencing difficulties selling their products, and therefore the state support is barely efficient.
Meat sheep farming can also be supported with preferential loans and partial compensation for capital costs to companies investing in the creation of full-cycle production. Stimulation of consumer demand would also help the industry. Demand is consistently high in Russian regions with a predominantly Muslim population (around 14% of the Russian population). However, Russian culinary traditions do not involve mutton consumption. Therefore, in order to increase consumer interest, mutton producers would need a special marketing campaign.

Elena Koltykova