Russia has responded strongly to the widening of sanctions by the EU and US. The country has banned a wide range of food items, ranging from fruits and vegetables to meat and poultry. While, Europe is expected to bear the brunt of these measures, these sanctions will also impact U.S. food exporters.
US, EU Expand Sanctions
Last week, the U.S. and the European Union expanded economic sanctions against Russia. President Obama said last Tuesday that the U.S. is extending its economic sanctions on Russia. Additional sanctions will hit Russia’s energy, defense and finance sectors. New sanctions will also target Russia’s three state-controlled banks and its shipping firms. Some of the entities which will be affected are VTB Group, Bank of Moscow and Russian Agricultural bank.
The European Union also announced a new round of sanctions against Russia. New sanctions restrict Russia’s largest banks from raising finances in European Union and place a trade bar on arms. It will also restrict export of military sensitive goods and equipment used in unconventional oil production to Russia.
Further, the European Union added at least five individuals and two entities to its Ukraine sanctions list. For the first time, Russian oligarchs have been targeted since they are believed to have supported and benefited from the violence in Ukraine.
Russia’s Aggressive Response
Russian President Vladimir Putin responded aggressively to U.S. and European sanctions. According to a state news agency, Russia will restrict all food imports from the U.S. and ban the import of all fruit and vegetables from Europe.
This ban will hurt European fruit and vegetables markets heavily. This is because Russia is the biggest importer of European fruits and vegetables. Currently, European fruit and vegetable exports to Russia re valued at €2bn a year. The U.S. poultry market will also suffer due to restrictions imposed by Russia.
Impact on U.S. Poultry Exports
Russia is the second largest importer of U.S. poultry after Mexico. Additionally, poultry also contributes the biggest chunk of U.S. agriculture exports to Russia. Last year, the U.S. exported $310 million of poultry to Russia.
Tyson Foods, Inc. (TSN) is the largest producer of poultry in terms of sales. A spokesman for the poultry producer has said Tyson was "disappointed about the loss of the Russian market." At the same time, the company said exports to other countries could make up for the loss in sales. "We have customers in 130 countries," the spokesman said.
On the other hand, chief financial officer of Sanderson Farms, Inc. (SAFM) said the impact on U.S. poultry producers would be limited. This is because Russia has taken steps to increase domestic poultry production over the last ten years. As a result, exports from the U.S. to Russia have declined from the high achieved in the mid-1990s.
During this period, a Russian economic crisis had caused the country to become the largest buyer of U.S. poultry, accounting for 40% of export volume. Currently, the share of exports has declined to merely 7%. The National Chicken Council said the impact of Russian sanctions on U.S. poultry would be limited.
Our Choices
It is clear that the impact on the U.S. poultry sector will be almost negligible. Below we present three stocks from this sector which possess the potential to grow appreciably, each of which also has a good Zacks Rank.
Pilgrim's Pride Corporation (PPC) is one of the largest chicken companies in the US, Mexico and Puerto Rico. The company's fresh chicken retail line is sold throughout the US, throughout Puerto Rico, and in the northern and central regions of Mexico. Its prepared chicken products meet the needs of some of the largest customers in the food service industry across the US.
Pilgrim's Pride holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 11.6%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 11.95.
Sanderson Farms, Inc. is a fully-integrated poultry processing company engaged in the production, processing, marketing and distribution of fresh and frozen chicken products. The company sells ice pack, chill pack and frozen chicken, in whole, cut-up and boneless form.
Currently the company holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 92.3%. It has a P/E (F1) of 8.32.
Hormel Foods Corp. (HRL) is a leading manufacturer and marketer of various meat and food products in the U.S. and international markets. It offers meat products, including fresh, frozen, cured, smoked, cooked and canned meat. The company provides perishable meat products, which include fresh meats, sausages, hams, wieners and bacon.
Apart from a Zacks Rank #2 (Buy), Hormel Foods has expected earnings growth of 12.1%. It has a P/E (F1) of 21.13.
Other U.S. food exporters such as nut growers have also been targeted by Russia’s actions. However, since nuts have a longer shelf life, exporters will have time to look for other export destinations. Clearly, the impact of Russian sanctions on the U.S. is limited. In fact, most market watchers believe that such measures will have an adverse impact on the Russian economy instead by pushing up inflation.
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