Report Highlights:

Production of dairy products is expected to decrease in 2016 due to reductions in fluid milk supply. Significant currency devaluation negatively impacted domestic consumption and imports. Exports of dairy products increased with exception of cheese. Exports of cheese to Russia stopped in 2014 and are not expected to recover in 2016. Processors were not able to develop new markets. Domestic demand shifted toward the cheapest products and is expected to stabilize in 2016.

Executive Summary:

After some stabilization in 2012-13, milk production is expected to drop to 10,700 thousand MT in 2015, the lowest number since Ukrainian Independence. The decrease is driven by low milk prices, making household producers unprofitable. Industrial milk production will remain stable (100.5 percent production as of September of 2015 as compared to the same period in 2014.), but is only responsible for a little more than 20 percent of total production.

Milk prices are depressed by low domestic demand for processed dairy products, lack of foreign markets for Ukrainian cheese, and low world price for dried milk. It is expected that 2016 will not bring major shocks as the political and economic situation appears to be stabilizing. However, any significant recovery in demand is not expected.

Once significant, the Russian cheese market remains closed for Ukrainian products since August 2014. Unfortunately, no new export markets were discovered for Ukrainian product. Ukrainian cheese quality often needs improvement, and the type and taste of the product limits its distribution mainly to Former Soviet Union (FSU) countries.

Unable to produce and export cheese, many processors had no choice but to switch to butter and NFDM production. Exports of NFDM are expected to grow to 30 thousand MT and butter to 11 thousand MT. However low export margins did not help to increase domestic milk price significantly. Ukraine returned to some traditional old (2004-2007) markets for dried milk, trying to offer the cheapest product to gain a share.

The number of animals will continue to decline in the remaining months of 2015. Exports of beef to Russia in 2015 continued with a significant premium price paid for meat due to the lack of competition with EU and US. Small households were pushed by low milk price and pulled by premium beef price. The situation is likely to change in 2016 as Russia introduces additional trade barriers for all Ukrainian agricultural products, canceling the few remaining trade preferences.

Production:

Raw Milk

Milk production in Ukraine is expected to decrease in 2015-16. The decrease is caused by cheese export ban that was officially introduced by Russian Federation in August of 2014, although some trade restrictions started as early as April of 2014.

The political and economic crisis in Ukraine caused a significant currency devaluation that brought milk prices to an all-time low. An especially strong shock was experienced by producers in February of 2015 after a short-term currency drop of 200 percent that brought real milk prices down to 9 US cents/kg for a couple of days.

The currency devaluation further undermined domestic demand creating a significant barrier to imports. Production costs also dropped and producers were able to export their products despite price drops in worldwide dairy products. The currency devaluation is expected to influence markets in the remaining months of 2015.

Households are responsible for almost 80 percent of fluid milk production. Much milk is processed into basic, cheap dairy products and sold on open-air markets without any statistical record. Households were not able to benefit from the devaluation despite the demand shift into the low price – low quality category of dairy products. The quality of milk procured from households remained quite low. However, even industrial farms have a lot of room for improvement as production of "Extra Grade" milk (matching respective EU standard) is still quite low.

Due to the differing quality standards, the price gap between the price industrial farms received and households received in 2015 widened. This put already inefficient 1-2 cow households into financial difficulty and forced a reduction in the number of head. Milk prices for industrial producers were strong enough maintain current production levels.

Ukrainian processors try not to procure low quality milk. The result is that they procure over half of their milk from industrial producers that occupy only 20 percent fluid milk production share.

Butter

Butter production is expected to decrease in 2015 due to a drop in domestic consumption. Increased exports did not help due to low world market prices. Production may moderately increase in the remaining months of 2015 due to an expected price rebound, and that may stimulate exports. Ukrainian domestic market butter prices started to rise reaching 2,300 USD/MT in early autumn.

Production in 2016 is expected to decline further following the milk production decrease. Exports are expected to drop again as domestic demand recovers.

NFDM / WDM

Production of NFDM is expected to follow the pattern as butter. Production decreases caused by lower fluid milk supply will not prevent increased exports in 2015.

In 2016, domestic consumption and exports are expected to stabilize close to the 2015 level. Because of the lack of foreign cheese markets, more fluid milk will have no other option than to be diverted into NFDM. Production of NFDM continues to be tied to the world market situation for dried milk as a significant share of the product is exported. Producers remained dissatisfied with the domestic market price that reached 1,600- 1,800 USD/MT in the late summer of 2015. At the same time international traders were ready to buy Ukrainian NFDM only with a significant quality discount close to 1550-1600 USD/MT.

Production of WDM in 2105 will remain insignificant. Domestic demand for this product comes from processors, which have decreased their demand for the product due to processed product consumption drop. Situation in 2016 is expected to remain the same.

Cheese

Production of cheese decreased significantly following closure of Russian market. Domestic consumers were not able to increase or even sustain the same consumption level. No new export markets were developed in 2014-15 to support production. The currency devaluation that helped to boost butter and NFDM foreign sales had little impact on cheese. Ukrainian cheese is different from the widely traded Edam-type European hard cheese with little demand outside of Ukraine and other FSU countries.

Being a high-margin product, cheese remains attractive for Ukrainian processors. However, a lack of foreign markets has led to a carryover stock increase.

Consumption:

Consumption was negatively impacted by political and economic crisis that Ukraine entered in the early 2014. The IMF projects Ukraine's GDP will grow 2 percent in 2016 after a 9 percent decrease in 2015. The IMF also projects that inflation as measured by the Consumer Price Index (CPI) for Ukraine will slow to 20 percent in 2016 after reaching whopping 46 percent in 2015. Devaluation of the Ukrainian Hryvnia (UAH) continued in 2015 with the UAH/USD ratio fluctuating between 16 and 33. The unofficial exchange rate exhibited even larger swings. As a result of these devaluations, disposable incomes took a deep dive in 2014, and then plummeted even more in 2015.

The separatist movement in Eastern Ukraine negatively impacted domestic consumption. It is difficult to evaluate number of people that live in the districts that are not controlled by central government. Estimates range from 3.5 to 4 million people within the two regions. This number does not include 1.9 million population of Crimea which also has restricted access to Ukrainian dairy products. As such, large Ukrainian dairy processors were not able to supply dairy-deficient Crimea. Some trade was taking place in 2014/15, although stopped completely in late September of 2015.

Dairy products remain staple food in Ukraine and consumption remains stable despite the economic turmoil. However consumption structure changed considerably in 2014. A significant share of low-income consumers stopped buying processed dairy products in official stores switching to basic traditional dairy products from open-air markets. This includes soft cottage cheese to replace hard cheese, sour cream and fluid milk.

The PSD numbers were changed to match official production and trade statistics. The new PSD includes carry-over stocks officially reported by producers of the State Statistics Service on a monthly basis. This carry-over stock does not include trade stocks and products procured for the State Reserve of Ukraine. Official ending stocks will be used in PSD's tables in the future as their impact on consumption and trade can be significant.

Trade:

Political turmoil did not allow for the signing of the Association Agreement with the European Union (EU) in November 2013. However, the EU unilaterally opened its market under the terms and conditions outlined in the Deep and Comprehensive Free Trade Agreement (part of the Association Agreement). So far, Ukraine was not able to benefit from liberalized trade due to its lack of proper legislative framework and the inability of many dairy processors to match EU sanitary requirements. However, the Directorate-General for Health and Consumers (DG SANCO) audits were recently completed and the EU market can potentially be opened for selected Ukrainian companies.

Dairy exports to Russia in 2015 remained under 2 thousand MT with buttermilk/kefir responsible for the vast majority of this number. Although 11 Ukrainian dairy processors, including cheese producers, are eligible for exports to Russia, trade in dairy products in 2015 remained insignificant and is not expected to grow in 2016. On January 1st 2016, when the full-scale Association Agreement between Ukraine and EU will be implemented, Russia plans to cancel all remaining trade preferences. This still grants Ukraine a standard "most favorite nation" status, but cancels all existing Ukraine-Russia FTA benefits. However, given the current trade situation, this is not expected to have any impact.

Continued currency devaluation had significant positive impact on some exportable dairy products. Historically exports of dried milk and butter were restricted by high fluid milk prices. Cheese production for the Russian market was always preferred by the processors and other products were unable to compete for limited supply of fluid milk. The situation changed in 2014 when cheese lost its role as the dominate export commodity. Ukrainian dairy processors were forced to diversify their product lines, search for new markets for Ukrainian dried milk, and restore traditional export markets.

Ukrainian exports now goes into 2 groups of countries: Former Soviet Union countries that import predominately cheese, butter and whole dairy products, and importers of Ukrainian dried milk from Asia and Arica.

Ukraine's Major Export Destinations for Dairy Products (HS 04, 21, 17, 35) Jan-June 2015, MT

Partner Country

Quantity

% Share

% Change

2013

2014

2015

2013

2014

2015

2015/2014

World

80747

77327

74118

100

100

100

-4.15

Moldova

8078

8330

9226

10.0

10.8

12.5

10.76

Kazakhstan

5585

8313

4878

6.9

10.8

6.6

-41.32

Bangladesh

250

1950

4352

0.3

2.5

5.9

123.2

Georgia

1977

2770

4350

2.5

3.6

5.9

57.05

Turkmenistan

4948

3220

4217

6.1

4.2

5.7

30.96

Egypt

323

1246

4178

0.4

1.6

5.6

235.3

Uzbekistan

1076

1288

3912

1.3

1.7

5.3

203.75

Pakistan

702

1286

3629

0.9

1.7

4.9

182.19

Azerbaijan

3060

2135

2962

3.8

2.8

4.0

38.7

Armenia

1052

2083

2238

1.3

2.7

3.0

7.48

Poland

922

1016

1952

1.1

1.3

2.6

92.05

Russia

39398

23666

1621

48.8

30.6

2.2

-93

Others

13374

20022

26600

16.52

25.86

35.84

n/a

Cheese

Exports of cheese in 2015 dropped to insignificant levels as the majority of export markets are in the Former Soviet Union countries. No markets were found to replace Russia as a major consumer of Ukrainian cheese. Imports of cheese from Poland for the middle income market segment, and Germany, Netherlands and Italy for upper income consumers reached 2,000 MT.

Ukraine's Major Export Destinations for Cheese* (Jan-Jul 2015, MT)

Partner Country

Quantity

% Share

% Change

2013

2014

2015

2013

2014

2015

2015/2014

World

33566

16393

3128

100.00

100.00

100.00

- 80.92

Kazakhstan

3377

2408

1748

10.06

14.69

55.88

- 27.42

Moldova

663

558

735

1.97

3.40

23.51

31.82

Azerbaijan

126

135

209

0.38

0.82

6.68

54.58

Russia

29311

11716

0

87.32

71.47

0

- 100.00

Others

88

1576

434

0.26

9.61

13.87

n/a

Source: Global Trade Atlas

*FAS Definition for the product group is used

NFDM

Export of NFDM remains diversified with over 50 percent of sales distributed among 25 destination markets. The low quality of Ukrainian milk pushes it into price-sensitive markets mostly in Asia and North Africa. Exports of NFDM in 2015-16 are expected to stay high as no other exportable product can be used to utilize shrinking fluid milk supplies.

Ukraine's Major Export Destinations for NFDM* (Jan-Jul 2015, MT)

Partner Country

Quantity

% Share

% Change

2013

2014

2015

2013

2014

2015

2015/2014

World

5036

18077

20181

100.00

100.00

100.00

11.64

Bangladesh

100

1925

3752

1.99

10.65

18.59

94.93

Georgia

386

1013

1807

7.67

5.60

8.95

78.42

Kazakhstan

150

3019

1451

2.98

16.70

7.19

- 51.95

Egypt

25

881

1361

0.50

4.87

6.75

54.53

Pakistan

0

381

1300

0.00

2.11

6.44

241.21

Russia

1723

1848

0

34.22

10.22

0.00

- 100.00

Others

2652

9011

10509

52.66

49.85

52.07

n/a

Source: Global Trade Atlas

*HS040210

Butter

Ukrainian producers were quite successful finding new markets for butter, especially Morocco and Egypt. These new export destinations accompany traditional FSU markets. Exports of butter are expected to increase in 2015 and decrease in 2016 as domestic demand recovers.

Ukraine's Major Export Destinations for Butter* (Jan-Jul 2015, MT)

Partner Country

Quantity

% Share

% Change

2013

2014

2015

2013

2014

2015

2015/2014

World

600

2241

6022

100.00

100.00

100.00

168.72

Morocco

0

0

1808

0.00

0.00

30.02

0.00

Egypt

0

0

1267

0.00

0.00

21.04

0.00

Azerbaijan

71

71

561

11.79

3.18

9.32

688.05

Kazakhstan

5

40

519

0.84

1.79

8.63

1198.21

Turkey

0

22

508

0.02

0.99

8.44

2196.96

Armenia

0

191

338

0.00

8.51

5.61

77.14

Georgia

16

107

241

2.60

4.77

4.00

125.37

Moldova

125

170

197

20.79

7.58

3.28

16.13

Russia

310

1460

0

51.70

65.16

0.00

- 100.00

Others

73

179

582

12.17

7.99

9.66

n/a

Statistical Tables

Fluid Milk PSD Table

Dairy, Milk, Fluid

2014

2015

2016

Market Year Begin: Jan 2014

Market Year Begin: Jan 2015

Market Year Begin: Jan 2016

USDA Official

New Post

USDA Official

New Post

New Post

Cows In Milk

2,554

2,509

2,545

2,323

2,200

Cows Milk Production

11,200

11,152

11,200

10,700

10,100

Other Milk Production

310

274

310

250

230

Total Production

11,510

11,426

11,510

10,950

10,330

Other Imports

6

2

6

6

2

Total Imports

6

2

6

6

2

Total Supply

11,516

11,428

11,516

10,956

10,332

Other Exports

8

7

8

9

8

Total Exports

8

7

8

9

8

Fluid Use Dom. Consum.

5,580

5,538

5,908

5,497

5,124

Factory Use Consum.

4,728

4,730

4,400

4,450

4,250

Feed Use Dom. Consum.

1,200

1,153

1,200

1,000

950

Total Dom. Consumption

11,508

11,421

11,508

10,947

10,324

Total Distribution

11,516

11,428

11,516

10,956

10,332

Cheese PSD Table

Dairy, Cheese

2014

2015

2016

Market Year Begin: Jan 2014

Market Year Begin: Jan 2015

Market Year Begin: Jan 2016

USDA Official

New Post

USDA Official

New Post

New Post

Beginning Stocks

9

9

10

8

12

Production

100

104

90

100

100

Other Imports

9

9

6

4

6

Total Imports

9

9

6

4

6

Total Supply

118

122

106

112

118

Other Exports

20

18

10

6

8

Total Exports

20

18

10

6

8

Human Dom. Consum.

88

96

88

94

100

Other Use, Losses

0

0

0

0

0

Total Dom. Consumption

88

96

88

94

100

Total Use

108

114

98

100

108

Ending Stocks

10

8

8

12

10

Total Distribution

118

122

106

112

118

Butter PSD Table

Dairy, Butter

2014

2015

2016

Market Year Begin: Jan 2014

Market Year Begin: Jan 2015

Market Year Begin: Jan 2016

USDA Official

New Post

USDA Official

New Post

New Post

Beginning Stocks

4

4

14

8

11

Production

115

115

110

105

100

Other Imports

10

10

3

0

1

Total Imports

10

10

3

0

1

Total Supply

129

129

127

113

112

Other Exports

4

5

6

11

7

Total Exports

4

5

6

11

7

Domestic Consumpt.

111

116

111

91

95

Total Use

115

121

117

102

102

Ending Stocks

14

8

10

11

10

Total Distribution

129

129

127

113

112

Nonfat Dry Milk PSD Table

Dairy, Milk, Nonfat Dry

2014

2015

2016

Market Year Begin: Jan 2014

Market Year Begin: Jan 2015

Market Year Begin: Jan 2016

USDA Official

New Post

USDA Official

New Post

New Post

Beginning Stocks

2

2

2

5

8

Production

55

55

55

50

45

Other Imports

2

1

2

0

1

Total Imports

2

1

2

0

1

Total Supply

59

58

59

55

54

Other Exports

30

27

30

30

30

Total Exports

30

27

30

30

30

Human Dom. Consumpt

27

26

27

17

22

Other Use, Losses

0

0

0

0

0

Total Dom. Consumption

27

26

27

17

22

Total Use

57

53

57

47

52

Ending Stocks

2

5

2

8

2

Total Distribution

59

58

59

55

54

Dry Whole Milk Powder PSD Table

Dairy, Dry Whole Milk Powder Ukraine

2013

2014

2015

Market Year Begin: Jan 2013

Market Year Begin: Jan 2014

Market Year Begin: Jan 2015

USDA Official

New Post

USDA Official

New Post

New Post

Beginning Stocks

0

0

0

0

0

Production

12

11

12

8

9

Other Imports

0

0

0

0

0

Total Imports

0

0

0

0

0

Total Supply

12

11

12

8

9

Other Exports

2

2

2

2

2

Total Exports

2

2

2

2

2

Human Dom. Consum

10

9

10

6

7

Other Use, Losses

0

0

0

0

0

Total Dom. Consumption

10

9

10

6

7

Total Use

12

11

12

8

9

Ending Stocks

0

0

0

0

0

Total Distribution

12

11

12

8

9