Required Report - public distribution

**Date:** 8/29/2006

**GAIN Report Number:** UP6015

UP6014

**Ukraine**

**Poultry and Products**

**Country Report**

**2006**

**Approved by:**

![](media/image1.wmf)Garth Thorburn, Agricultural Attaché

Office of Agricultural Affairs

**Prepared by:**

Oleksandr Tarassevych, Agricultural Specialist

**Report Highlights:**

The rapid expansion of Ukraine's poultry industry is expected to
continue in 2007. The impressive growth is being fueled by substantial
large-scale investments and high domestic demand for poultry meat. The
significant drop in poultry consumption that occurred following the AI
outbreaks in late 2005 and early 2006 is now just a faint memory. U.S.
poultry will continue to be demanded by Ukrainian meat processors, but
imports of legal shipments will remain very limited. Prohibitive import
duties effectively block potential imports, thus shipments will be
limited to selected enterprises that continue to operate in the former
Free Economic Zones. The market will continue to be subject to sporadic
and unpredictable changes in government policies, but the anticipated
accession of Ukraine to the WTO may significantly improve market access
for U.S. poultry meat.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Annual Report

Kiev \[UP1\]

\[UP\]

***The data included in this report is not official USDA Data. Official
USDA data is available at* <http://www.fas.usda.gov/psd>**

# Executive Summary

The elimination of the Free Economic Zones (FEZs) in March 2005 through
which most imports of poultry entered Ukraine and the prohibitively high
import duties continue to restrict imports of U.S. poultry products into
Ukraine. The import market situation is expected to remain constant
until Ukraine accedes to the WTO. A small number of official shipments
continue to be imported by companies that are situated in the former
FEZ. These companies challenged the government's policy that abolished
the FEZs in Ukraine's commercial court and managed to secure a favorable
ruling that reestablished their FEZ privileges. Ukrainian poultry
producers continue to benefit from high domestic poultry prices and
limited imports. Large vertically integrated companies continue to
expand rapidly and are opening new facilities, attracting investors and
consolidating shares from small shareholders. State policies will
continue to be aimed at limiting imports and supporting the domestic
poultry industry. Importers continue to be a target and attempts to
close them down will probably continue.

# Section I. Narrative

## Production

The ambitious expansion plans announced by some domestic producers two
years ago are now materializing. In 2007, the industry is expected to
grow at almost the same rate as in 2006. Poultry production was driven
by continued income growth of consumers and relatively high prices for
substitutable red meat products.

Production of poultry meat will continue to be concentrated in large
vertically integrated holdings. These companies have established the
entire production chain from parental flocks and hatcheries, to selling
the chilled chicken to the end consumer through their own outlets or
franchised networks. The largest poultry producers have made significant
investments to expand production facilities throughout 2006 which
include production of semi-finished products. Significant investments
were also made in marketing and promotion campaigns for these new
products, and some created advertisements designed to exposed their
trademarks to consumers through television and other public media.

Much of the projected 30% increase in production will be produced from
the top 10 largest companies that are responsible for over 97% of
Ukrainian poultry production. The largest Ukrainian poultry producer -
Myronivsky Khleboproduct LLC. (Nasha Riaba brand) - is planning to
invest an estimated \$110 million into facilities for semi-finished
products by the end of 2006. Semi-finished products have yet to
establish themselves in the Ukrainian market, which traditionally
consumes raw poultry meat. Myronivsky Khleboproduct LLC announced that
another large-scale poultry production facility would start production
in the middle of 2007 with an expected capacity of 160,000 tones
(ready-to-cook equivalent) of meat per year. Other important industry
players from the "top 10" group (Ruby Rose Agricole Co, Ltd., Agromars
Complex, Ptahocombinat Dniprovsky and Kurgansky Broiler) are also
continuing to upgrade their facilities and to increase production. Most
are expected to increase production by 3,000 -- 10,000 tones each by the
end of 2006.

The industry continues to focus their expansion efforts on poultry meat,
but increased attention is being paid to geese, turkey and duck meat
programs as more consumers are beginning to consume these products.
Domestic poultry industry representatives also made numerous statements
about their future expansion plans to supply Central Asia and
neighboring Russian and Belarusian markets. However, they acknowledge
that demand in the Ukrainian domestic market exceeds supply and their
primary goal is to be able to supply local needs.

## Marketing

Ukraine's poultry market continues to be split into two distinctive
segments: chilled poultry for retail and frozen products for further
processing. The semi-finished poultry products segment began to emerge
in early 2006. Through intensive marketing campaigns in 2003-2005,
Ukrainian poultry producers have been able to convince consumers to buy
chilled poultry products thus squeezing demand for imported frozen
poultry generally used in the "further processing" niche (for more
information on market segmentation see GAIN report UP 4015).

Domestic poultry producers market their products through franchising
networks (the largest is comprised of over 1,000 outlets), supermarket
chains, grocery stores and open-air markets. Quickly growing poultry
consumption makes massive promotion campaigns unnecessary, but poultry
producers continue to support their branded products through one-time
marketing events. Only one big promotional campaign (for new to market
semi-finished products) was conducted during 2006.

Elimination of the FEZs in March 2005 increased the real applied import
duty rate resulting in a significant price surge in the \"further
processed\" segment, which heavily relies on imported product. Official
importers use very limited (if any) marketing tools to promote their
products. Low prices of imported products remains the strong selling
point. This creates additional risks for importers, since the "as cheap
as possible" product segment is expected to shrink as population incomes
increase and domestic production expands.

## Consumption

The consumption of poultry is expected to continue to grow in 2007. This
expansion is being fueled by the increase of retirees' and low-paid
workers' disposable incomes. Consumers who traditionally had to limit
their poultry consumption in the past can now afford to purchase these
products. (Note: the average monthly disposable income in Ukraine
remains quite low at UAH 495 (\$98) as of May 2006.) Ukrainians are
gradually switching to poultry products from traditional pork and beef.
This trend is expected to continue in 2007 due to increasing red meat
prices, the inefficiency of Ukrainian beef and swine production and
prohibitively high import duties for red meat.

The poultry market survived and overcame the significant decrease in
consumption from January -- March 2006 which was caused by multiple AI
outbreaks in Southern Ukraine. The domestic industry attempted to use
the AI outbreak to fight illegally imported poultry, which is sold in
open-air markets with no veterinary or sanitary control. According to
independent estimates, consumption decreased as much as 15%-20% and
producers had to switch from chilled to frozen poultry production.
Following the last AI outbreak, it took one month for consumption
patterns to bounce back to normal. By early fall 2006 the public
interest in AI decreased significantly. A single outbreak in Sumy oblast
(central Ukraine) in June 2006 had no effect on poultry consumption. It
is expected that possible future AI outbreaks will have little impact on
poultry sales, unless one of the bigger vertically integrated poultry
producers suffers from an outbreak or if human cases begin to be
recorded.

Unfortunately, poultry products that are imported unofficially cannot be
incorporated into the analysis due to lack of reliable data, but some
anecdotal evidence suggests that smuggling decreased in 2006. The
government took big steps to address border control, customs corruption,
veterinary and sanitary problems. Contrary to what was expected, the
decreased supply of smuggled products did not lead to domestic poultry
price increases. Poultry product prices were on the decline throughout
the second half of 2005 and 2006 resulting in low-income consumers
increasing consumption. Decreasing poultry prices suggest that
consumption should stabilization in the next two to three years.

## Trade

Due to the recent appointment of the new Cabinet of Ministers on August
4, 2006 and the extremely volatile political situation, it is very
difficult to predict with certainty trade levels for the remaining
months of 2006 as well as for 2007. The PSD table was changed to reflect
official import numbers and broiler production for 2005. New government
officials have already made some statements suggesting they support
reestablishing the free economic zones. Nevertheless, the trade forecast
is based on the current legislative situation.

Following the significant drop in imports of poultry in April 2005 due
to the elimination of tax privileges associated with the FEZs, imports
of poultry stabilized and remains constant at approximately 5-7,000
tones a month. Some companies situated in the former FEZs managed,
through court challenges, to get their privileges reinstated. These
companies argued that they followed the legal framework outlined by the
previous government necessary to construct meat processing facilities in
the FEZs and that legally they should still have the right to operate in
the zone. Specifically, companies argued that the government gave them
assurances to operate in the FEZs for a fixed amount of time. Statistics
show that former FEZ-situated companies remain responsible for over 97%
of poultry imports in 2006 and will likely continue to be major
importers in 2007.

Import tariffs remain at prohibitively high rates and the slight tariff
decrease in August 2005 had no impact on trade in 2006. The slight
increase in imports of whole chickens relative to parts is likely
attributed to market fluctuations rather than to import tariff
decreases.

Government of Ukraine attempts to force domestic meat processors to rely
on domestically produced poultry resulted in decreases in raw poultry
meat supplies and an increase in prices for processed products. These
factors resulted in a significant increase in imports of processed
poultry products (HS 160232). Ukraine maintains prohibitively high
import tariffs for these products for all countries except Commonwealth
of Independent States (CIS) countries with which Ukraine has signed a
free trade agreement. This led to growth of imports from Russia, Belarus
and Moldova, which are importers of poultry products.

Despite the fact that imported poultry is procured for a different
market segment (processors) then locally produced (retailers) product,
growing domestic production will have a negative impact on poultry
imports; although cheep imported poultry cuts will continue to be
demanded from the Ukrainian meat processing industry. In 2007, domestic
poultry producers are not expected to satisfy demand for poultry
products used for further processing because of higher prices for
Ukrainian poultry cuts. The United States is expected to remain the
major supplier of imported poultry products unless more favorable prices
in the European Union make importers switch to poultry from Germany or
the United Kingdom.

Exports of processed poultry products (HS 160232) are not expected
because of a meat ban imposed by Russia on Ukrainian products (imposed
on January 20, 2006) and relatively high prices for Ukrainian product.

## Policy

Ukraine's government policy for the poultry sector continues to focus on
promotion of domestic production and reduction of imports (both official
and unofficial). Ukraine's government officials continue to make public
statements about the low quality and negative aspects of imported
poultry products. The elimination of the Free Economic Zones where the
majority of poultry imports entered Ukraine duty free made legal trade
in poultry products almost impossible. The slight decrease in import
duty rates (see GAIN UP5015 for duty rates) in August 2005 had no
positive impact on trade. Poultry import tariffs will be decreased upon
Ukraine's accession to the WTO, but recent political developments
suggest that accession might take longer than previously expected.

During 2006, the Minister of Agriculture attempted to battle smuggling
of meat through improved border control in the west and fighting
corruption in state institutions. The campaign had mixed results, but
many experts did notice a reduction in smuggling activity that was
followed by an increase in costs associated with illegal activities.
Conversely, many argued that the decrease in smuggling was a result of
increased domestic production and the drop in poultry prices, makes
"shadow" imports much less attractive.

The Ukrainian government continues to subsidize the domestic poultry
industry thought a system of direct payments per kilogram of chicken
slaughtered, despite sizable extra profits gained by producers due to
the prohibitive import tariffs and market closure. Ukrainian poultry
producers and their association continue to gain political influence in
both legislative and executive branches of government. In 2006,
Ukrainian vertically integrated poultry producers/processors received
0.25 UAH/kg (\$0.05/kg) live weight (which is \$0.01 less than in 2005).
These support programs are likely to be continued at the same rate in
2007.

# Section II Statistical Tables 

## 

## Broiler Meat PSD Table

+------------------+--------+-------+-------+------+------+--------+
| Country          | U      |       |       |      |      |        |
|                  | kraine |       |       |      |      |        |
+------------------+--------+-------+-------+------+------+--------+
| Commodity        | Po     |       |       | (    |      |        |
|                  | ultry, |       |       | 1000 |      |        |
|                  | Meat,  |       |       | MT)  |      |        |
|                  | B      |       |       | (MIL |      |        |
|                  | roiler |       |       | H    |      |        |
|                  |        |       |       | EAD) |      |        |
+------------------+--------+-------+-------+------+------+--------+
|                  | 2005   | Re    | 2006  | Esti | 2007 | Fo     |
|                  |        | vised |       | mate |      | recast |
+------------------+--------+-------+-------+------+------+--------+
|                  | USDA   | Post  | USDA  | Post | USDA | Post   |
|                  | Of     | Est   | Off   | Esti | Offi | Es     |
|                  | ficial | imate | icial | mate | cial | timate |
|                  | \      | \[    | \[    | \[N  | \[O  | \      |
|                  | [Old\] | New\] | Old\] | ew\] | ld\] | [New\] |
+------------------+--------+-------+-------+------+------+--------+
| ###### M         |        | 01    |       | 01.  |      | 0      |
| arket Year Begin |        | .2005 |       | 2006 |      | 1.2007 |
+------------------+--------+-------+-------+------+------+--------+
| Inventory        | 0      | 0     | 0     | 0    | 0    | 0      |
| (Reference)      |        |       |       |      |      |        |
+------------------+--------+-------+-------+------+------+--------+
| Slaughter        | 0      | 0     | 0     | 0    | 0    | 0      |
| (Reference)      |        |       |       |      |      |        |
+------------------+--------+-------+-------+------+------+--------+
| Beginning Stocks | 0      | 0     | 0     | 0    | 0    | 0      |
+------------------+--------+-------+-------+------+------+--------+
| Production       | 280    | 289   | 370   | 375  | 0    | 490    |
+------------------+--------+-------+-------+------+------+--------+
| Whole, Imports   | 10     | 4     | 20    | 3    | 0    | 3      |
+------------------+--------+-------+-------+------+------+--------+
| Parts, Imports   | 105    | 133   | 25    | 73   | 0    | 55     |
+------------------+--------+-------+-------+------+------+--------+
| Intra EC Imports | 0      | 0     | 0     | 0    | 0    | 0      |
+------------------+--------+-------+-------+------+------+--------+
| Other Imports    | 0      | 11    | 0     | 10   | 0    | 10     |
+------------------+--------+-------+-------+------+------+--------+
| TOTAL Imports    | 115    | 137   | 45    | 76   | 0    | 58     |
+------------------+--------+-------+-------+------+------+--------+
| TOTAL SUPPLY     | 395    | 426   | 415   | 451  | 0    | 548    |
+------------------+--------+-------+-------+------+------+--------+
| Whole, Exports   | 0      | 0     | 0     | 0    | 0    | 0      |
+------------------+--------+-------+-------+------+------+--------+
| Parts, Exports   | 0      | 0     | 0     | 0    | 0    | 0      |
+------------------+--------+-------+-------+------+------+--------+
| Intra EC Exports | 0      | 0     | 0     | 0    | 0    | 0      |
+------------------+--------+-------+-------+------+------+--------+
| Other Exports    | 5      | 9     | 0     | 1    | 0    | 3      |
+------------------+--------+-------+-------+------+------+--------+
| TOTAL Exports    | 0      | 0     | 0     | 0    | 0    | 0      |
+------------------+--------+-------+-------+------+------+--------+
| Human            | 395    | 426   | 415   | 451  | 0    | 548    |
| Consumption      |        |       |       |      |      |        |
+------------------+--------+-------+-------+------+------+--------+
| Other Use,       | 0      | 0     | 0     | 0    | 0    | 0      |
| Losses           |        |       |       |      |      |        |
+------------------+--------+-------+-------+------+------+--------+
| Total Dom.       | 395    | 426   | 415   | 451  | 0    | 548    |
| Consumption      |        |       |       |      |      |        |
+------------------+--------+-------+-------+------+------+--------+
| TOTAL Use        | 395    | 426   | 415   | 451  | 0    | 548    |
+------------------+--------+-------+-------+------+------+--------+
| Ending Stocks    | 0      | 0     | 0     | 0    | 0    | 0      |
+------------------+--------+-------+-------+------+------+--------+
| TOTAL            | 395    | 426   | 415   | 451  | 0    | 548    |
| DISTRIBUTION     |        |       |       |      |      |        |
+------------------+--------+-------+-------+------+------+--------+
| Calendar Yr.     | 55     | 65    | 5     | 44   | 0    | 40     |
| Imp. from U.S.   |        |       |       |      |      |        |
+------------------+--------+-------+-------+------+------+--------+

Not Official USDA Data

## 

## Imports of Poultry Meat into Ukraine (RTC equivalent basis) 

## (Whole birds and poultry cuts HS 0207 )

  ------------------ ------------------- ------------------- --------------
  Country            Ukraine                                 

  Commodity          Poultry, Meat,                          
                     Broiler                                 

  Time Period                            Units:              1000 MT

  Imports for:       2004                                    2005

  U.S.               125                 U.S.                65

  Others                                 Others              

  Brazil             50                  Germany             20

  United Kingdom     37                  United Kingdom      15

  Germany            14                  Poland              7

  Belgium            15                  Hungary             7

  Hungary            12                  Brazil              6

  Netherlands        5                   Belgium             4

  Poland             2                   Netherlands         2

  Total for Others   135                                     61

  Others not Listed  16                                      11

  Grand Total        276                                     137
  ------------------ ------------------- ------------------- --------------

Source: Ukraine's State Statistics Committee

## Imports of Processed Poultry Products into Ukraine 

## (HS 16023)

  ------------------ --------------- ----------- ------------------------
  Country            Ukraine                     

  Commodity          Poultry, Meat,              
                     Broiler                     

  Time Period                        Units:      1,000 MT

  Exports for:       2004                        2005

  U.S.               0               U.S.        0

  Russia             0               Russia      7

  Belarus            0               Belarus     3

  Poland             1               Poland      1

  Moldova            0               Moldova     0

  Others not Listed  0                           0

  Grand Total        1                           11
  ------------------ --------------- ----------- ------------------------

Source: Ukraine's State Statistics Committee

## Imported Broiler Leg Quarter Wholesale Price

+-----------------+---------------+----------------------+-----------+
| ###### Count    | Ukraine       |                      |           |
| ry {#country-1} |               |                      |           |
+-----------------+---------------+----------------------+-----------+
| Commodity       | Poultry,      |                      |           |
|                 | Meat, Broiler |                      |           |
+-----------------+---------------+----------------------+-----------+
| Prices in       | UAH           | per uom              | 1         |
|                 |               |                      | kilogram  |
+-----------------+---------------+----------------------+-----------+
| Year            | 2005          | 2006                 | \% Change |
+-----------------+---------------+----------------------+-----------+
| Jan             | 7,9           | 11                   | 39%       |
+-----------------+---------------+----------------------+-----------+
| Feb             | 8,8           | 9,8                  | 11%       |
+-----------------+---------------+----------------------+-----------+
| Mar             | 10            | 9,2                  | -8%       |
+-----------------+---------------+----------------------+-----------+
| Apr             | 10,3          | 8,7                  | -16%      |
+-----------------+---------------+----------------------+-----------+
| May             | 11            | 8,4                  | -24%      |
+-----------------+---------------+----------------------+-----------+
| Jun             | 12,4          | 8,4                  | -32%      |
+-----------------+---------------+----------------------+-----------+
| Jul             | 14,5          | 8,4                  | -42%      |
+-----------------+---------------+----------------------+-----------+
| Aug             | 9,3           |                      |           |
+-----------------+---------------+----------------------+-----------+
| Sep             | 9,4           |                      |           |
+-----------------+---------------+----------------------+-----------+
| Oct             | 10,2          |                      |           |
+-----------------+---------------+----------------------+-----------+
| Nov             | 10,4          |                      |           |
+-----------------+---------------+----------------------+-----------+
| Dec             | 10,8          |                      |           |
+-----------------+---------------+----------------------+-----------+
|                 |               |                      |           |
+-----------------+---------------+----------------------+-----------+
| Date of Quote   | 08/10/2006    | MM/DD/YYYY           |           |
+-----------------+---------------+----------------------+-----------+

Source: Ukrainian Importing Companies

# (Exchange Rate: \$1= UAH 5.05)