Soaring grain prices have highlighted the benefit to former
Soviet Union meat companies of growing their own feed, Credit Suisse said,
upgrading its forecast for MHP shares, but downgrading Cherkizovo.
The region's meat producers face "downside risks" to
profitability from the rise in wheat prices, which in Russia are some 25%
higher than in early June, the bank said.
Indeed, for Russian and Ukrainian protein groups, fodder bills
represent some 70-80% of their costs of goods sold.
While the immediate hit from elevated grain prices, which should
"stay high for the remainder of the year", may be limited by forward hedging,
they are important for 2013 forecasts.
A "decline in margins of the Russian pork producers is
inevitable", Credit Suisse said.
"We prefer vertically integrated and efficient companies
that could benefit from grain price growth, and are hedged by own fodder
The assessment left the bank preferring shares in meat
producers, such as MHP and RosAgro, which have substantial arable operations "as
they are hedged by their own fodder and benefit from higher grain prices".
While keeping depositary receipts in Ukraine's MHP as "top
pick", if with a target price trimmed by $3 to $20 to account for currency
risks, Credit Suisse slashed its target price for receipts in Cherkizovo by $6
to $14 "due to significantly lower profitability".
Cherkizovo, the biggest Russian protein company, last month
took steps towards securing its grain supplies with the $137m purchase of land in the country's fertile black earth region.
The bank also flagged the potential hit to Russian meat
groups from the country's accession to the World Trade Organization, as of this
month, heralding a cut to 5%, from 40%, in import duties on live pigs from
'New heat wave'
The comments came amid forecasts for a return of the hot
weather which has sapped Black Sea harvest hopes, prompting expectations of
Russian grains production of some 80m tonnes, down from last year's 94.2m tonnes.
"A new heat wave should settle down on Ukraine, starting
from tomorrow, as well as on the Western part of Russia," consultancy Agritel
"Temperatures will overtake the 30°C threshold on most of the
production areas of the former Soviet Union," although the weather will at this
time of year speed harvesting, if threatening fresh damage to later-reaped
crops such as corn.
Credit Suisse also flagged the benefit to RosAgro, a major
sugar beet grower and cane processor, of rebounding Russian prices of the
sweetener, which have recovered to a one-year high of 26.20 roubles per
kilogramme, from 24.50 roubles per kilogramme two months ago.
The revival, in line with a recovery in international prices
fostered by poor weather in Brazil and India, looks set to continue, given the
prospect that Russia's beet harvest this year will not match 2011's bumper
"The current price dynamics is favourable for RosAgro and could
help to keep or slightly improve the profitability we saw in the first quarter
of 2012," the bank said, restating a "neutral" rating on RosAgro depositary
receipts, with a target price of $7.00.