Manufacture

Meat and sausage industry like other industries of agribusiness bore a blow last year. Domestic enterprises have produced about 259 tonnes of sausages in 2014 which is just 5-6% less than in 2013. Operators say that manufacture and the market started to shrink during the second half of last year after Crimea annexation and the war in Donbass.

Official statistics has lost some of the domestic and local manufacturers (from Crimea and Donbass mainly). Although products of other manufacturers managed to compensate the loss partially, it still has affected the activities of the industry.

“Enterprises of neighbouring regions (Dnipropetrovska, Mykolaivska, Zaporizka Oblast) attempted to replace the market volumes of these producers. But they managed to put on the market just about half the amount of product produced by enterprises of Crimea and Donbass before,” says Oleh Dmytruk, Director General of “Dmytruk” company (Lutsk, meat and sausage products manufacture since 2007).

Hryvnia crash in March last year was one of the most severe factors of manufacturing volume reduction. It has provoked the increase of prices for meat raw material, secondary materials (spices, casings, additives), readymade products.

The price for all components increased in 2014 - price for a basic raw material is 50% bigger; indirect materials - 2 times larger. As the result prices for ready-made products rose by 20-35% during a year,” says the director of large sausage manufacture enterprise who asked not to be named.

The decrease of Ukrainians purchasing power affected the demand as well which was one more reason for some companies to stop production.

“Some of the meat processing companies in different Ukraine regions (not just on the East) temporarily stopped functioning because of the high cost of meat raw material and low customers demand on meat products,” says Alina Zharko, agricultural markets expert of  "Ukrainian Agribusiness Club" (Kyiv,  agribusiness public association since 2007, 25 workers). Manufacturers claim the possibilities to keep manufacture and consumption from further reductions are depleted, but they still exist.

Assortment games

Most of the major manufacturers have introduced similar products in their product portfolios to meet consumer trends -  the growth of interest in lowest price product categories (some of the cooked sausages, sausages and link sausages). Some manufacturers try to decrease the cost of readymade products using raw material stuffing modification.

Since it is impossible to replace ingredients in traditional products (for example sausage Likarska) as state standards regulate the ingredients, manufacturers can still replace expensive raw materials with cheaper ones.

For products manufactured under the technical specifications (TU)  "substitutes" are allowed - for example mechanically deboned meat. But not all manufacturers are ready for that.

Many companies claim that they don’t replace materials as it affects the quality and they don’t want to spoil their reputation, so they work without profit. But companies still make some amendments to products range. Perhaps it is the only tool able to support consumption today.

According to Alina Zharko estimations, the structure of sausage products manufacture haven’t fundamentally changed in 2014 (See “Market structure according to kinds...”). Percent of liver sausages increased from 2% to 3% last year and the percent of smoked -roasted sausages, on the contrary, decreased from 3% to 2%.

Experts believe that part of cheap products (cooked sausage, liver sausage, link sausages) is going to increase in 2015. Oleh Dmytruk says that limits of price segments changed due to prices increase.

Price range for “lower than average” products used to be UAH 20-35/ 1 kg, “average” - UAH 35-50/ 1 kg, “higher than average” - UAH 50-70/ 1 kg. Today the situation is different - “average” - UAH 50-70/ 1 kg,  “higher than average” - UAH 70-110/ 1 kg (see “Structure of products assortment according to price ...” at page 16).

Raw material opportunities

According to Alina Zharko, 188,3 thousand tonnes of meat raw material were used for sausage products manufacture in 2014 which is 12% less than in 2013. More than a half of the amount was imported in 2013.

About a third part of meat raw material for sausages held the pork, half of which was imported. Import of pork decreased five times to 30,8 thousand tonnes in 2014 due to hryvnia devaluation. It opened a green signal to Ukrainian raw materials.

“Domestic meat manufacturers took the unoccupied niche,” says Viktor Maslov, Commercial Director of "Agroprime Holding" (Ismail, Odessa oblast; crop farming, animal farming since 2010, 570 workers). Poultry meat import decreased as well.

Ukraine has purchased almost 61 thousand tonnes of poultry meat and by-products in 2014 which is 14,5% less than in 2013 according to statistics. Despite the reduction of import in this segment, import amounts are still high.

“Ukraine can meet the domestic demand for poultry meat. The country has sold poultry meat and by-products at an average price of $ 1.58 per 1 kg, has imported - at $ 0.95 per 1 kg to foreign markets,” says Alina Zharko.

Prices for commercial pigs are lower in Ukraine than in Europe now. “Domestic producers were selling pigs for about EUR 2 per 1 kg of body weight while average European price was EUR 1.6 per kg in 2013. Today the price for pigs is EUR 1-1,2 per kg while European countries price is EUR 1,25 which makes the import nonrational economically,” says Mr Maslov.

“1 kg of pork costs less than $1 (UAH 21-25 depending on the region) today,” says Iryna Palamar, agricultural expert, managing partner of “Agrovet Atlantik”. At the same time, there is a lack of solid fat used in the production of sausages.

“It’s import increased by 60% (70.4 thousand tonnes) in 2014 compared to 2013,” says Alina Zharko. Consequently, reserves remain even though domestic products actively replaced imported meat raw material.

Technological niches

As it has already been said the original cost of additional materials like flavourings and spices, casings, other materials manufactured abroad affect the original cost of ready made product. And the price depends on the currency rate.

According to manufacturers, the part of such materials depends on the price segment. For example, the manufacturer who asked not to be named estimates that part of spices, flavourings and casings can be 25-30% in the average section of sausage products.

He believes that use of domestic products could reduce the cost of sausages. For example, Poly-Pack products of Lugansk manufacturer of increased flexibility heat shrinkable polyamide skins were in demand for both domestic and foreign markets.

But the company stopped its manufacture, and the offer for such products was cut because of the war on Donbass. Although two more companies producing artificial protein and polyamide casings continue their work in Ukraine - “PentoPak” (Boryspil, Kyiv oblast) and “Pryluky factory “Belkozyn”” (Pryluky, Chernihiv Oblast)

They can compete with foreign manufacturers in domestic market a local sausage casing is cheaper than imported due to the current dollar exchange rate.

Meat and sausage industry manufacturers prefer imported spices and flavourings.

Ukrainian analogues are cheaper than imported ones because they contain part of domestic ingredients even though they are partially produced from imported raw materials. BUSINESS respondent who asks not to be named claims that part of spices and flavourings in sausage products original cost is larger than sausage casings part.

Especially in low-grade sausages in the so-called meat and cereal sausage. 2-3% falls on the part of casing original cost while 30-40% falls on spices and flavourings. It makes us think about the possibility to broaden the manufacture of these ingredients in Ukraine.

Export prospectives

The development of export direction could be a support for domestic sausages manufacture. But our manufacturers couldn’t manage to reach some significant success in this field yet. Just 894 tonnes of sausage products were exported in 2014 which is 30% less than in 2013.

“The main market for export was Russia - 71%. 27% were exported to Moldova. Small quantities were exported to Georgia,” says Alina Zharko. Ukrainian sausages are not exported to EU yet despite Association Agreement with the EU signing.

But Never say never. The manufacturers of milk products can be the example for meat and sausage producers as some experts say that EU market was closed for milk because of low-quality raw material.

Nevertheless, companies work on improvement of the raw material base and obtaining of export permission. The situation in meat and sausage industry is similar. Manufacturers say that almost all of large producers of the country have certified their productions under ISO 9001:2008 and ISO 22000:2005 products safety and quality management system standards and HACCP (Hazard Analysis and Critical Control Points - Hazard control system that may affect the safety of the product).

These are the main indicators of preparedness of the companies to enter foreign markets.

One of the manufacturers said that possible EU mission visit with meat processing industry inspection to be included in the EU list of suppliers was discussed last summer.

State veterinary and phytosanitary service of Ukraine organised the pre-audit of some companies for compliance with EU regulations. The inspection has revealed that processors preparedness is 85-90%. Raw material which is considered as the part of processing causes the biggest problems for processors. In the meantime, just poultry meat got “visa” for EU countries.

Now it is necessary to get the permission for pork and beef meat export. Then meat processing companies will get the chance to pass the inspection and start supplies to EU successfully.

It has to be mentioned that sausages producers have no doubt:  they will have something to offer after they remove barriers to EU market. “Raw smoked and cooked products are manufactured in Europe.

It means that semismoked, cooked and smoked sausages market is vacant there. That is why high-quality Ukrainian products have good chances and can become the locomotive to enter the international sausage market,” said Oleh Dmytruk.

See infographic and the article original here