Report Highlights: 

FAS/Moscow forecasts annual domestic milk production to decline two percent in CY 2015 (to 29.3 MMT). In turn, imported fluid milk is forecast to remain flat (375,000 MT) as dairy processors continue to take advantage of the market opportunities for high-value dairy products. Production estimates for cheese (460,000 MT), butter (240,000 MT), and NFDM (85,000 MT) are expected to marginally increase next year, while WMP production is forecast to fall slightly from increased production levels in 2014. Imports of dairy products are expected to remain flat or increase slightly when compared to reduced 2014 import levels which have been impacted, in part, by Russia’s decision to ban imports from several foreign suppliers.

Production 

Cow Inventories 

FAS/Moscow forecasts 2015 Russian cows-in-milk to fall by approximately 2.5 percent from revised 2014 estimates (to 7,850 head). Unlike in the pork and poultry sectors, and despite industry modernization and improved per-cow yields at large agricultural holdings, most of the dairy cattle in Russia are located on small-scale, less efficient farms. Although Russia is forecast to import nearly 100,000 head of live purebred cattle in 2014 (both dairy and beef cattle) to improve the quality of the pre-existing herd – nearly the same volume imported in 2013 – these purebred animals are being imported by large-scale agricultural establishments (which account for less than half of Russia’s fluid milk production). Due to this reason, the long term decline of the Russian dairy cattle herd is expected to continue in 2014 and 2015. 

FAS/Moscow has also lowered the 2014 cows-in-milk forecast given the anticipated fluid milk production declines this year, and has slightly lowered 2013 estimates based on the availability of year-end milk production statistics. 

Fluid Milk 

FAS/Moscow forecasts 2015 fluid milk production to fall approximately two percent (to 29.3 MMT) from revised 2014 forecasted levels (i.e., 29.9 MMT). As previously noted in past reports, Russian domestic milk production still continues to fall even as facility modernization and improved farm management practices are being instituted at large-scale agricultural establishments. 

FAS/Moscow has also decreased the 2014 forecast for milk production (by almost two percent to 29.9 MMT) as industry analysts are predicting a small decline in overall milk production in Russia this year. In addition, 2013 production levels have also been decreased by less than one-half percent to correlate with year-end statistics published by Rosstat.

According to Rosstat, from January through June of this year, agricultural establishments accounted for less than half (i.e., 48.6 percent) of Russian fluid milk production (and less than one percent more than they accounted for during the first six months of 2013).

According to Rosstat, from January through June of this year, agricultural establishments accounted for less than half (i.e., 48.6 percent) of Russian fluid milk production (and less than one percent more than they accounted for during the first six months of 2013).

NOTE: The Russian regions accounting for the largest share of production, through September 2014, were the Republic of Tatarstan, Krasnodar Kray, Moscow Oblast, the Republic of Udmurtia, Altai Kray, and the Republic of Bashkortostan. 

Most of the small-scale farms, which collectively account for slightly more than 50 percent of the fluid milk in Russia, use less intensive production methods, are excluded from efficient distribution channels, and are more vulnerable to economic factors, such as fluctuations in prices. According to industry analysts, high interest rates for long-term loans (e.g., 8-15 years at 14-15 percent), delays in receiving state subsidies (from 3 to 6 months), and currency depreciation1 negatively impacted the economic strength of Russian dairy producers (particularly small-scale producers). The increased cost of doing business has had a direct effect on the volume of fluid milk production. According to the Russian National Union of Milk Producers (Soyuzmoloko) sectoral profitability (including for agricultural establishments) will not be reached without continued subsidies due to high production costs in Russia. 

Even though some state support measures offered to milk producers (e.g., per-liter subsidies, interest rate subsides for investment loans, grants for farmers, etc.) are available to both large and small-scale famers, most of these support programs aim to further consolidate the industry and were designed for the benefit of large-scale agricultural establishments. Rosstat reports that slightly more than 60 percent of all of the raw milk produced by all types of agricultural producers in Russia was sold for further industrial processing. However, Rosstat also reports that 92 percent of raw fluid milk produced by large-scale agricultural establishments was sold for further processing. 

Given that industry sources believe a substantial portion of raw milk produced by household farms is consumed on-farm, these farmers are often unable to collect subsidies, earn income on sales, etc. As such, small-scale Russian dairy farmers have limited access to financial resources required for herd maintenance, enhancing productivity, and modernizing operations, and cannot compete on the same economy-of-scale with agricultural establishments.

Cheese 

FAS/Moscow forecasts 2015 Russian cheese production to increase by slightly more than two percent (compared to revised 2014 production forecasts), to 460,000 MT. Dairy processors are expected to continue to take advantage of the market opportunities for high-valued dairy products given, in part, the reduced availability of foreign cheeses because of a myriad of restrictions placed on traditional foreign suppliers. 

Given the forecasted decrease in domestic milk production in 2014, FAS/Moscow has decreased the 2014 cheese production forecast by nearly two percent, to 450,000 MT (however, based on full year data, this still amounts to a nearly five percent increase in production over revised 2013 levels). As previously noted, some traditional foreign cheese suppliers (e.g., the European Union and, to a lesser extent, Australia and Norway) have been restricted from the market as a result of an August 2014 ban on imports, while others (e.g., Ukraine) have been restricted due to residue detections and labeling concerns. This has resulted in improved market opportunities for Russian cheese. As was the case in 2013, Russian cheese manufacturers are expected to continue to make use of imported fluid milk (e.g., from Belarus), as needed, to partially supplement for reduced domestic supplies. 

Overall 2013 cheese production levels have been decreased by nearly 6.5 percent to correlate with year-end statistics published by Rosstat.

Butter 

FAS/Moscow anticipated 2015 butter production to increase slightly over revised 2014 levels (by two percent to 240,000 MT). FAS/Moscow has increased the forecast for 2014 Russian butter production by almost 4.5 percent, to 235,000 MT. According to industry sources and government statistics, 2014 Russian butter production was 17 percent higher through June 2014 than it was during the same period in 2013. Russian processors reportedly increased production of dried milk powder this year (particularly NFDM) and directed more fats to butter production. 

Additionally, 2013 production levels have been decreased by nearly 2.5 percent to correlate with year-end statistics published by Rosstat.

Whole Milk Powder (WMP) and Non-Fat Dry Milk (NFDM) 

FAS/Moscow anticipates Russian production of WMP to decrease in 2015 (down 5,000 MT to 65,000 MT) while production of NFDM will continue to increase (up nearly six percent to 85,000 MT) when compared to revised 2014 production forecasts. NFDM is being used, in part, as an ingredient to reduce the fat content of some domestically produced dairy products. This trend is expected to continue in 2015 as consumers (namely processors) do not report the same quality concerns with domestically produced NFDM as they do for WMP. Industry analysts report that Russia has few producers which specialize in high quality WMP production. The majority of domestic WMP production in Russia is reportedly a by-product of other processing activities and, as a result, is reportedly less pure than production from specialized producers. 

Total 2014 Russian production of NFDM and WMP is forecast to increase in 2014 as a result of incentivized production in the summer which resulted from processors drying more milk given a reported surplus of available raw milk at the mid-year point. This production increase is also possibly attributable, in part, to increased wholesale prices in Russia during the latter half of 2013 and spring of 2014.

As previously reported, despite having well-equipped production facilities with modern technologies and sufficient experience to be able to produce high quality dried whole milk, major Russian WMP consumers (namely confectionary manufacturers) reportedly continue to prefer higher quality imported WMP over what is produced domestically. 

Overall 2013 WMP and NFDM production levels have also been revised slightly to account for industry analyst comments that NFDM accounted for a larger share of production than previously believed. In fact, industry sources report, given demand, that NFDM is accounting for a larger share of domestic dried milk production.

Consumption 

FAS/Moscow forecasts fluid milk domestic consumption in 2015 to fall nearly two percent as fluid milk production is expected to fall by nearly the same percentage, and as total supplies are forecast to be marginally lower than they were in 2014. According to © Euromonitor International (Euromonitor), almost 100 percent of drinking milk products in Russia are sold in retail stores. Euromonitor reports that slightly more than half of these products are sold in modern grocery retailers (e.g., hypermarkets and supermarkets), followed by traditional grocery retailers which account for slightly less than half. Non -grocery retailers and internet retailers account for a very small percentage of sales (e.g., slightly more than two percent). 

Cheese consumption levels in 2015 are expected to grow, but to remain well below 2013 levels (i.e., still down nearly 11 percent) -- when many of the current trade restrictions were not in effect. Meanwhile, while butter and dried milk imports have recently declined, production increases are forecast to marginally increase consumption of butter and NFDM. Consumption levels for WMP are anticipated to decline slightly in 2015 as a result of a forecasted decrease in production. 

In general, milk consumption is expected to fall again in 2014 as domestic production slowed and consumer prices for many dairy products, including cheese, sour cream (smetana), butter, and fluid milk (2.5-3.2 percent fat) have continued to increase. FAS/Moscow’s 2014 cheese consumption forecast is revised downward because of an anticipated decrease in imports as a result of trade restrictions placed on several foreign suppliers. These trade restrictions should, to some extent, benefit domestic cheese producers. FAS/Moscow’s 2014 butter consumption forecast remains flat when compared to revised 2013 levels. Consumption of WMP is expected to increase slightly because of forecasted production increases. However, for NFDM, despite forecasted production increases, consumption is still expected to decline as a result of anticipated reductions in imports. 

The consumer price for fluid milk (2.5-3.2 percent fat) increased by nearly 7.5 percent, through September 2014 (from 39.25 rubles per liter in January to 42.18 in September). Likewise, the price for several traditional dairy products has also increased over the course of the year (e.g., 5.4 percent for hard and soft cheese – to 351.33 rubles/kg in September 2014, 8.4 percent for sour cream (smetana) – to 150.07 rubles/kg, and nearly 9 percent for butter – to 343.95 rubles/kg).

Trade 

FAS/Moscow forecasts 2015 fluid milk imports to remain flat when compared to revised 2014 estimates (i.e., 375,000 MT). If the Russian ruble further weakens, however, it could yield reduced market opportunities for foreign products, both milk and further processed dairy products. 

In August 2014, the Russian Government instituted a one-year ban on the supply of many milk and dairy products (i.e., HS codes 0401, 0402, 0403, 0404, 0405, 0406 – with the exception of lactose-free milk and lactose-free dairy products), among other products, from the United States, the European Union, Canada, Australia, and Norway in response to sanctions placed on Russia (see, e.g., RS1455). Despite this, FAS/Moscow has increased the 2014 fluid milk import forecast by nearly 14 percent (to 375,000 MT). Nearly 12 percent of the fluid milk Russia imported in 2013 and during the first seven months of 2014 was supplied by the now restricted countries. However, milk and cream exports from Belarus, which accounted for almost 80 percent of all Russian imports through July 2014, were nearly 7.5 percent higher than they were at the same point in 2013, and were 11 percent higher year-on-year through August.

In addition, Russian trade data shows milk and cream imports from Kazakhstan up 260 percent through July, and, while much smaller in volume, increases in trade from both Uruguay and Serbia. 

As has been the case in recent years, the majority of Russia’s dairy imports continue to originate from Belarus. During the first seven months of 2014, Belarusian exports accounted for 77 percent of the volume of Russian fluid milk imports (down from 85 percent during the same period in 2013), 30 percent of cheese (up from 28 percent), 31 percent of butter (down from 35 percent), 81 percent of Russian WMP (down from 96 percent), and 79 percent of NFDM (down from 78 percent).

While FAS/Moscow has forecast a nearly four percent increase in cheese imports in 2015 (over a revised 2014 estimate) as new suppliers (e.g., Turkey) reportedly intend to enter the market and existing suppliers (e.g., Argentina, Uruguay, and Switzerland) reportedly intend to increase shipments, FAS/Moscow has decreased its 2014 forecast for Russian cheese imports by nearly 35 percent as a result of the imposition of trade restrictions on many traditional foreign cheese suppliers (e.g., EU, Australia, Norway, and Ukraine). The recently restricted countries accounted for 67 percent of the volume of imports during the first seven months of the year, and total year-on-year imports of cheese through July were already down roughly 12 percent. Despite the stated intent of some South American countries, as well as others, to increase dairy supplies to Russia in the near future, it is unlikely these countries will be fully capable of backfilling the deficit in cheese supplies from the restricted foreign suppliers. 

With regard to butter, FAS/Moscow forecasts imports to remain flat in 2015 (i.e., 120,000 MT), but has decreased the 2014 import forecast, by slightly more than 20 percent (from 155,000 MT to 120,000 MT). Restrictions on foreign suppliers have eliminated product from countries which accounted for nearly 40 percent of the volume of butter imports during the first seven months of the year. Although three of the top four foreign suppliers, by volume (i.e., Belarus, New Zealand, and Uruguay), continue to have market access, it appears unlikely they will be able to fully backfill absent supplies as all three shipped lower volumes through July than they did during the same period last year. Domestic production increases are also anticipated, to some extent, to dampen demand for foreign product. 

FAS/Moscow forecasts WMP imports to remain flat in 2015. However, through July 2014, Russian WMP imports were nearly six percent lower than they were during the same period in 2013, and restrictions have eliminated nearly nine percent of what was supplied during this period. Accordingly, FAS/Moscow has reduced its import estimates for WMP (to 40,000 MT). 

Meanwhile, NFDM imports are forecast to remain flat in 2015 after a significant decrease in imports in 2014, in part, as a result of increased domestic production. NFDM imports, through July, were nearly 30 percent lower than they were through July 2013, and restrictions eliminated nearly 15 percent of what was imported through July of this year. FAS/Moscow has therefore reduced its NFDM import forecast by approximately 35 percent (to 85,000 MT) for 2014. 

Policy 

The Russian National Union of Milk producers (Soyuzmoloko) has developed and submitted to the Russian Ministry of Agriculture a draft proposal for State support for the Russian dairy industry through 2020. The draft program defines the long-term goals of the dairy industry’s transformation along with what it argues are economically proven measures of state support. The program sets fluid milk production goals in accordance with the Food Security Doctrine of the Russian Federation (see, e.g., RS1008), and outlines the following operational performance goals: 

• growth of total fluid milk produced by all agricultural establishments for further industrial processing to 23.6 million MT in 2020; 

• domestic production will account from 78 percent of the share of domestically available dairy products (up from 66.5 percent); 

• beginning in 2016, increasing the dairy cow herd at all agricultural establishments across Russia by an additional 363 thousand head (to be accomplished by 2020); and,  

• growth of annual per-cow milk production at agricultural establishments of up to 6.5 MT per year. 

Soyuzmoloko has put forward several different proposals depending on how much money the government is able/willing to dedicate to the industry’s development. Soyuzmoloko reports that without government support for the industry, some existing operations will close due to delays in subsidy payments, prices will remain volatile (leading to increasing imports), and fluid milk production will continue to fall on an annual basis. If government support levels keep pace with recent trends (e.g., 12.7 billion rubles for per-liter milk production support in 2013, etc.), Soyuzmoloko forecasts some existing operations will close due to delays in subsidy payments, imports will increase at a rate of 5 percent per year, and fluid milk production will remain flat. 

Soyuzmoloko posits that with 427 billion rubles (slightly more than $10 billion) of state support dedicated to the industry from 2015-2020 (its preferred option), the industry will be able to reach the goals referenced above (with only some small-scale enterprises closing during the period). However, it remains unclear, at present, how the government will fully fund the proposal, and, if it does not, at what level the industry will be supported