Over the past five years, the poultry industry, particularly its meat segment, has undergone significant changes. The establishment of large broiler-rearing complexes using modern technologies has substantially increased total output. However, a number of difficulties remain in this sector.
One important challenge is organizing hatching-egg production at the regional level and finding the methods and resources needed to establish this process. Some experts believe an important step could be to reduce the cost of hatching eggs at the first production stage, and of finished products overall, by attracting investment to build modern enterprises.
Moving away from imports
In the Republic of Mari El, poultry farming is rightly considered one of the most important branches of the agro-industrial complex. It is characterized by rapid flock reproduction, high efficiency and the lowest production costs compared with other livestock sectors. However, regional enterprises specializing in this segment do not fully meet their hatching-egg requirements: locally produced breeding material accounts for only 25% of the total volume of this commodity. Domestic production will benefit from moving away from imports, which substantially increase expenditure and the cost of rearing poultry, as a comparison of prices for such material from Russian and foreign agricultural companies clearly demonstrates. Moreover, these eggs often spend a long time in transit, impairing their quality, and may become subject to sanctions at any time.
The development of environmentally friendly production is a pressing issue in various regions of the Russian Federation, including the Republic of Mari El. The global market for eco-products grows by 20% annually, while sales of such goods in our country are only beginning to increase rapidly. Entry into this market is relatively unrestricted, and there are virtually no limits on production scale. Companies can build a relatively stable customer base without much effort, making this market attractive.
A closed production cycle
Enterprises in the Republic of Mari El currently require 158.7 million breeding eggs per year. The total flock held at any one time is around 15 million birds. To develop this agricultural segment in the region, a project for environmentally friendly hatching-egg production is already being implemented. In time, the new complex will be able to meet almost all local enterprises’ requirements for this product. Opening the hatchery also entails establishing a dedicated veterinary and breeding centre, enabling a closed cycle for rearing parent stock within first- and second-tier breeding farms. The innovative feature of this project is its focus on environmentally friendly production, involving new poultry-breeding methods and dispensing with chicken vaccination and antibiotic use. The birds will be kept in conditions that strengthen natural immunity through floor housing, outdoor access and the use of feed manufactured on site. The modern enterprise’s main competitive advantages will be excellent flavour, achieved through environmentally clean production, and low production costs.
The innovative project therefore provides for hatching-egg production in the Republic of Mari El from December 2019. Establishment of the full parent flock is scheduled for 2020. The project’s social purpose also deserves particular attention: it will reduce unemployment in the region, creating at least 1,000 new jobs when implemented.
Clear benefits
According to Russian agro-industrial information resources, a standard complex of the planned capacity is valued at RUB 18 billion. Such an enterprise should include incubators accommodating 10 million eggs, or 170 million eggs per year; 160 poultry houses; a slaughter department with a capacity of four thousand birds per hour; a grain elevator holding 150,000 tonnes; a feed mill designed to produce 300,000 tonnes of feed per year; meat-and-bone meal and meat-processing facilities; and wastewater treatment facilities and logistics infrastructure. To meet the entire demand for breeding eggs, the new complex in the Republic of Mari El plans to maintain a parent flock of 0.47 million birds, enabling production of 169.2 million hatching eggs per year. Once the flock has been fully established, annual slaughter of commercial poultry reared on site will amount to 141,670 tonnes. Feed expenditure will increase in proportion to the number of live birds, reaching RUB 362.64 million by 2020.
For any project, it is important to assess the level of investment expenditure, covering the full range of resources used. The analysis must account for all direct and indirect expenditure of own and borrowed funds, tangible and intangible assets, labour and other resources. The analysis found that the precise one-off cost of building this complex would be RUB 18,003.6 million. Another decisive factor in assessing an investment project’s efficiency is the cost of its output. Developing hatching-egg production in the Republic of Mari El will substantially reduce the cost of breeding material used to expand the region’s poultry flock. This, in turn, will increase the sector’s profitability and reduce retail prices for eggs and chicken meat. Moreover, annual increases in production will benefit the enterprise itself: by 2021, cash inflows will rise to RUB 9,421.06 million, with annual meat output of 141,670 tonnes in live weight. This will also promote the development of the sector and the region, since the financial results of local investment initiatives are the main source of revenue for the regional budget.
Implementation in figures
An investment project’s effectiveness means meeting the objectives and interests of all its participants. The enterprise’s success depends largely on how accurately the economic effect of the entire initiative is calculated. The analysis should therefore determine the discount rate using a method based on alternative returns, equating this indicator to the refinancing rate of the Central Bank of the Russian Federation while also accounting for inflation. Discounted values provide more information because their calculation brings economic parameters from different periods to the present. The average risk associated with project implementation should also be set within a range of 13–15%. One of the key tasks in assessing cash flows is calculating the discount rate used to convert them into a single present value. For the project under consideration in the Republic of Mari El, the discount rate is 15.21%. Calculations indicate that the enterprise’s net present value will reach RUB 3,692.78 million in 2021, meaning that the investment will be efficient at this discount rate. This figure also indicates a safety margin intended to compensate for possible cash-flow forecasting errors. The project can therefore be considered financially viable.
For accurate results, the project’s discounted payback period, profitability index and internal rate of return should be calculated. The first indicator, Tpayback, equals formula 1, where t is the project duration, PV is the discounted cash flow, and NPV is the cumulative value of the preceding parameter. The profitability index PI is the ratio of the net present benefit from constructing the facility, VP, to the discounted value of investment expenditure, NVP. The internal rate of return is the interest rate at which the entire investment is repaid in full over the operating period. It can be interpreted as the threshold return on investment, serving as a criterion for deciding whether additional capital investment in the project is worthwhile. This indicator is calculated using the formula n = IC, where P (n) is the net cash flow in a given year, IRR is the internal rate of return, and IC is investment expenditure. All calculations performed by specialists in accordance with these principles showed that the environmentally friendly hatching-egg production project now being implemented will establish a full production cycle for import-substituting products in the region.
Improving the situation
To assess the proposed project’s effectiveness for the economy of the Republic of Mari El, it is important to evaluate how the enterprise’s results will affect regional budget revenues and expenditure. Benefits are also calculated in terms of the ability to influence GDP and support its growth. The macroeconomic effects accompanying the investment initiative mean the profit generated in the economy through the enterprise’s direct and indirect influence on income formation in the constituent region of the Russian Federation. The analysis showed that implementing the proposed innovative agricultural development project will benefit the region’s socioeconomic situation. In particular, annual increases in regional budget receipts are planned, raising them by RUB 1,052.31 million over the five forecast years, including RUB 414.98 million in corporate profit taxes, RUB 444.65 million in social insurance contributions and RUB 192.68 million in income tax on employees’ wages. Increased regional budget revenues will benefit all sectors of the agro-industrial complex. Another indicator of successful project implementation is gross regional product, which is expected to increase by RUB 47,509.61 million over the five forecast years, including RUB 47,502.81 million in agriculture and RUB 6.8 million in utilities. Gross regional product is expected to rise by RUB 18,002.8 million in the enterprise’s very first year of operation, owing to the substantial investment in innovative production.
Implementation of the environmentally friendly hatching-egg production project will therefore have a positive effect on socioeconomic progress in the Republic of Mari El. Opening an efficient, technologically advanced enterprise will increase agricultural organizations’ competitiveness and create favourable conditions for entrepreneurship in the region. Fully meeting the republic’s hatching-egg needs will eliminate reliance on imported breeding eggs, enabling annual growth in gross output, particularly in the agro-industrial complex. Establishing the new complex will increase employment, average monthly wages and tax contributions to the region’s consolidated budget. Developing the regional innovation system as a whole will encourage organizations to operate effectively, making this experience relevant to other regions of our country.