Summary
Following its expansion into the EU the Ukrainian poultry producer MHP is looking to expand in Africa and the Middle East. This needs to be seen in the context of a projected 15% expansion of MHPs exports in 2019 and a further planned production expansion of 15% in 2019. This expanded production will need to be exported. Current Ukrainian exports are facing growing criticism from EU poultry producers because of their market effects in the EU. These criticisms are only likely to intensify in the event of a ‘no-deal’ Brexit. This could leave MHP seeking markets elsewhere, including in African countries where acquisitions are being targeted. This could then replicate the MHP practice of using locally acquired poultry processors to channel Ukrainian poultry meat on to the local market. African poultry producers and concerned African governments will need to carefully monitor the evolution of MHPs’ African investment policy.
In March 2019 the Ukrainian poultry processor MHP announced a 21% year on year increase in revenues on the back of a 9% increase in poultry production. This was closely linked to a 30% annual increase in sales in the Middle East, North Africa and the EU.
A key element of the strategy of MHP moving forward is ‘generating export growth – both organically, focusing on distribution routes to market and by targeting acquisition’. This is to be accompanied by a ‘domestic focus on higher value added products’. This will see a substitution on the Ukrainian market of ‘lower margin frozen chicken in favour of higher margin consumer driven meat product sales’ (1). In 2018 MPH sold 60% of its poultry production on the domestic market and 40% on export markets (2)
In April 2019 MHP went further announcing its intention to ‘continue acquiring foreign poultry producers and processors, not only in the European Union (EU), but also in the Middle East and Africa’. This will be supported by planned investment of US$ 420 million from 2018 to 2022, with this coming on top of existing investments of US $ 232 million which has seen MHP become one of the fastest growing poultry producers on the European continent. Recent investments have included the acquisition of a number of EU based poultry companies (2) (see companion epamonitoring.net articles, ‘Ukrainian Poultry Company MHP Secures Third foothold inside the EU’, 22 October 2018).
There are growing accusations that MHP owned subsidiaries are being used to circumvent the EU’s carefully structured poultry trade regime. In 2018 Peter Vesseur, the General Secretary of the Dutch Poultry Processing Association and Lukasz Dominiak, the Director General of Poland’s’ National Poultry Council, both raised concerns that MHP was using loopholes in the EU regulatory framework to ‘bypass EU import restrictions and pay less import duty than they should’. Specifically it was alleged MHP was ‘exporting in-bone chicken breasts duty free to its European processing facilities, where the bone was sliced out, so the company could obtain product with a higher added value’. Boneless chicken breast imports are subject to more rigorous EU controls (3).
This limited processing in the EU has the additional advantage of allowing Ukrainian raised chickens to claim EU status (4). This is an important issue since under some EU trade agreements this allows Ukrainian produced chicken meat to benefit from tariff preferences negotiated by the EU (e.g. under the EU-SADC EPA).
The issue of the impact of imports of poultry meat from Ukraine on certain markets in the EU was taken up by the Polish Minister of Agriculture at a meeting in Brussels in March 2019. He highlighted how poultry imports from Ukraine were creating ‘an imbalance on the domestic poultry market in Poland’ and that as a consequence ‘Polish farmers were negatively affected’.
Following the meeting where these concerns were raised, EC Agriculture Commissioner Hogan announced ‘some restrictions were planned in relation to Ukraine poultry exports to the EU’. In late March this saw the EC offer to ‘triple the duty-free export quota on boneless chicken breasts for Ukraine poultry companies, bringing it to 70,000 tonnes (t) per year, if Ukraine agrees to some import duties on in-bone chicken breasts’. This needs to be seen in a context where currently ‘there are no limits for duty free exports of in-bone chicken breasts’ (3).
The Ukrainian Ministry of Agriculture, MHP and the Executive Director of the Poultry Union of Ukraine, have all denied any violation of the terms of the Deep and Comprehensive Free Trade Area agreement which governs Ukraine-EU trade (3).
In May 2019 against the background of approval of a €100 million loan from the European Bank for Reconstruction and Development (EBRD) to MHP to acquire a Slovenian poultry processor Perutnina Ptuj, the European Poultry Association (AVEC) continued to urge the ‘EU authorities to revise the trade agreement with Ukraine and close a loophole that allows Ukrainian companies to export the breast cap with a small piece of wing to European duty-free and cut them up into breast fillets in plants in the EU’. While it was acknowledged current practices were ‘completely legal’, action to close the loophole to prevent this trade from undermining the EU poultry market was seen as essential. This needs to be seen in a context where Ukrainian ‘production costs are on average 40% lower than those in the EU’ (4).
This controversy needs to be seen against the background of the ongoing expansion of MHPs poultry production in Ukraine. This includes the establishment of ‘two new rearing sites at its Vinnytsia facility’ (5). This is expected to boost poultry meat production capacity by 15% in 2019. Already in the first quarter of 2019 ‘MHP’s sales of chicken meat to third parties ….increased by 21%’, reaching ‘164,004 tonnes of chicken meat compared to 135,307 tonnes in Q1 2018’. This performance was largely driven by export sales, since ‘domestic sales volumes remained stable year-on-year’ (6). MHP aims to export some 330,000 tonnes of poultry meat in 2019 up from 286,000 tonnes in 2018.
What is increasingly clear according to Sergey Karpenko, chairman of the Ukraine Association of Poultry Producers is that the expansion of production which is underway in the Ukraine will ‘have to be secured almost entirely by exports’ (2). Further expansion of domestic consumption is seen as unlikely since poultry meat already accounts for 48% of all meat consumption in the Ukraine. MHP is also seeing its share of the Ukrainian market shrinking slightly as it comes under strong competitive pressures. This may in part be linked to trends in EU poultry meat exports to the Ukraine.
In 2017 EU poultry meat exports to Ukraine grew 43.2% (+35,685 tonnes) increasing a further 10% (+12,168 tonnes) in 2018 (5). In the first 2 months of 2019 EU poultry meat exports to Ukraine increased 9% according to the EC’s latest market situations report (6).
Since 2016, the year in which South Africa introduced SPS related restrictions on imports from the EU (when South Africa accounted for fully 16.8% of extra-EU poultry meat exports), EU poultry meat exports to Ukraine have showed a dramatic increase (+58%), with EU exports in 2018 being almost double what they were in 2015. In 2018 Ukraine accounted for fully 10% of extra-EU poultry meat exports (6).
EU-Ukraine Poultry Meat Trade (Tonnes)
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | Increase 20213-18 | |
| EU Imports | 210 | 14,062 | 29,258 | 34,857 | 61,354 | 105,173 | +104,963 |
| EU Exports | 54,731 | 57,804 | 66,151 | 82,560 | 118,245 | 130,413 | +75,682 |
Source: EC Market Access Data Base, https://madb.europa.eu/madb/statistical_form.htm
In terms of Ukrainian exports of poultry meat to the EU, in 2018 volumes were up 71.4% compared to 2017 and up from virtually nothing in 2013 (210 tonnes) (6). According to the EC’s latest market situation report, this growth trend continued into 2019 with Ukrainian exports of poultry meat to the EU increasing some 8% in the first two months of 2019 (7). There is thus a growing mutual EU/Ukrainian trade in poultry meat, with in 2018 the main EU poultry meat exporters to Ukraine being Poland (74%), Hungary (9%) and Germany (8.6%) and the main EU poultry meat importers from Ukraine being the Netherlands (53.5%), Poland (21.6%), Slovakia (9.8%) and Germany (7.6%) (6). Significantly fully 63.3% of Ukrainian poultry meat exports go to EU member states where MHP owns subsidiaries, with the expectation that trade into Slovenia will shortly be initiated following MHP’s acquisition of the Slovenian meat processor Perutnina Ptuj.
| Comment and Analysis To date ‘MHP has been using its processing capacities in Europe to export more products duty-free to local markets’ (2). This pattern of local processing of imported Ukrainian raised poultry could well be replicated in relations with Africa.It remains unclear how MHP’s nominal model of ‘vertical integration’ will fit with the sub-Saharan African market context. To date MHP has provided no further information on its investment plans in Africa. Against a background of the lack of clarity in how sub-Saharan Africa fits in MHP’s expansion plans outside of the EU (given its parallel focus on the Middle East and North Africa), care will need to be taken by African governments to ensure local poultry producers in sub-Saharan Africa are not transformed into distribution facilities for imported Ukrainian chicken meat. A nuanced approach to both Ukrainian and EU investment in African poultry sectors will be required to ensure such investment contributes to the structural development of the African poultry sector, in a context where demand for low cost protein is rapidly increasing in sub-Saharan Africa. |
Sources:
(1) globalmeatnews.com, ‘International growth boosts MHP revenues’, 20 March 2019
https://www.globalmeatnews.com/Article/2019/03/20/MHP-revenues-rise-in-2018
(2) globalmeatnews.com, ‘MHP discloses new plans on international expansion’, 15 April 2019
https://www.globalmeatnews.com/Article/2019/04/15/MHP-discloses-new-plans-on-international-expansion
(3) ‘Ukraine poultry exports to the EU jeopardised’, 29 March 2019
https://www.globalmeatnews.com/Article/2019/03/29/Ukraine-poultry-exports-at-risk
(4) globalmeatnews.com, ‘European farmers alarmed over EBRD’s loan to MHP’, 14 May 2019
https://www.globalmeatnews.com/Article/2019/05/14/European-farmers-alarmed-over-EBRD-s-loan-to-MHP
(5) globalmeatnews.com, ‘Site expansion drives MHP production growth’, 18 April 2019
https://www.globalmeatnews.com/Article/2019/04/18/Site-expansion-drives-MHP-production-growth
(6) EC Market Access Data Base
https://madb.europa.eu/madb/statistical_form.htm
(7) EC, ‘EU Market Situation for Poultry, Committee for the Common Organisation of the Agricultural Markets’, 17 April 2019
https://circabc.europa.eu/sd/a/cdd4ea97-73c6-4dce-9b01-ec4fdf4027f9/24.08.2017-Poultry.pptfinal.pdf