Russia. Dairy and Products Semi-annual. Jun 2014 June 26, 2014
FAS/Moscow has decreased the 2014 forecast for Russian dairy cow inventories as the industry continues to remain vulnerable to fluctuations in feed prices and feed supplies. Given the continued reduction in cow inventories, FAS/Moscow has reduced 2014 forecasts for domestically produced fluid milk (to 30.5 MMT). In turn, imported fluid milk is forecast to increase as dairy processors continue to take advantage of the market opportunities for high-value dairy products. Production estimates for cheese (460,000 MT) and butter (220,000 MT) have been increased, while forecasts for dried milk production remain unchanged. While cheese imports are forecast lower as a result of trade restrictions, market opportunities remain for other products.
FAS/Moscow has decreased the 2014 Russian cows-in-milk forecast by approximately 3 percent from the previous estimate (to 8,200 head, a 2.5 percent decrease from revised 2013 numbers). Unlike the situation for pork and poultry in Russia, only slightly more than 40 percent of Russia’s cows in 2013 were located at large-scale agricultural establishments (compared to 77 and 80 percent of inventories for swine and poultry, respectively). With the majority of cows on small-scale farms, the industry remains vulnerable to fluctuations in feed prices and feed supplies. Russia imported nearly 100,000 head of live purebred cattle in 2013 (both dairy and beef cattle), to improve the quality of the pre-existing herd, but these purebred animals are largely being imported by large agricultural establishments.
FAS/Moscow has also slightly lowered its 2013 estimate for Russian cows-in-milk based on the availability of year-end domestic milk production data.
FAS/Moscow decreased the 2014 fluid milk production forecast by approximately 3 percent. Annual domestic milk production still continues to fall even as facility modernization and improved farm management practices are being instituted at large-scale agricultural establishments.
According to the National Union of Milk Producers (NUMP), milk production in the first quarter of 2014 was reportedly down slightly more than one percent year-on-year. As mentioned, the majority of Russia’s dairy cattle are still located at less modern, small-scale establishments which continues to constrain production. While production should increase in the summer months, further reductions in cow inventories are expected to lead to an annual decrease in fluid milk production.
In 2014, the federal budget allocation for subsidies to support livestock producers, including milk producers, is lower than it was in 2013. The government has allocated 8.42 billion rubles (approximately $240 million) for subsidies on a per-liter basis (liter per milk produced), 35 percent less than in 2013. The total interest rate subsidy for short-term loans in 2014 is valued at 3.74 billion rubles (roughly $107 million), or nearly 8 percent less than in 2013, and the total interest rate subsidy for long-term loans is valued at 30.44 billion rubles (almost $870 million), nearly 6 percent more than in 2013.
Milk producers in 2014, as was the case last year, also can participate in the federal/provincial programs for support of small-scale farming, individual entrepreneurs, and other social and economic programs for agricultural producers and for the development of rural territories. However, federal subsidies for these programs remain limited.
At the end of 2013, the Russian government acknowledged that despite support funds being made available for domestic milk producers, Russian milk production was still lagging behind the government’s production goals (i.e., 38 MMT per year by 2020). Milk producers complained that interest rate subsidies did not allow for long–term investments to develop and modernize dairy farms, and asked the federal government to increase the rate of subsidies from 80 percent to 100 percent of the interest that could be supported, as well as an extension of the terms of covered loans from eight to a maximum of 15 years. In early 2014, the government promised to increase support for Russian milk producers and for the domestic dairy industry, and by April 2014 adopted some resolutions which the industry had been lobbying for:
• Resolution of the Russian Government No. 256 of April 2, 2014, increased the period of subsidized investment loans from 8 to 15 years, and increased the level of subsidized interest rates from 80 percent to 100 percent; and,
• Government Resolution No. 115 of February 17, 2014, expanded the list of agricultural equipment for which equipment producers can receive federal subsidies (15 percent of the cost of production and sales price of equipment). In addition, milking equipment, storage and transportation equipment for milk were added to the list of eligible equipment.
However, the government has, thus far, not increased federal funds to cover the additional subsidies for interest rates or for the cost of production/price of equipment. The increased support may possibly be made by re-distributing already approved federal funds. In addition, funding for all federal programs from the federal budget, including diary industry support programs, are linked to regional programs (i.e., financing begins only if and when the relevant provincial “matching” program is adopted). This mandatory co-financing rule is aimed at increasing investments and increasing the responsibility of regional authorities for implementation of the programs. However, those provinces that do not have sufficient funds in their budgets for co-financing will be left without federal support.
For 2013, FAS/Moscow has revised its fluid milk production estimate based on year-end statistics published by the Russian statistics service (Rosstat). Russia produced 30.7 MMT of fluid milk in 2013 (nearly four percent less than what was produced in 2012). According to Rosstat, households still accounted for 48.3 percent of Russian fluid milk production in 2013 (the same as in 2012), while agricultural establishments accounted for 45.8 percent (down from 46.3 percent in 2012), and private farms accounted for 5.9 percent (up from 5.4 percent last year). The largest producing regions in Russia in 2013 remained the Republic of Tatarstan, the Republic of Bashkortostan, Altay Kray, and Krasnodar Kray.
Despite a forecasted decrease in domestic milk production, FAS/Moscow has increased the 2014 cheese production forecast by nearly eight percent, to 460,000 MT (flat from revised 2013 production estimates), as dairy processors continue to take advantage of the market opportunities for high valued dairy products. Some traditional foreign cheese suppliers (e.g., Ukraine and Lithuania) have been largely restricted from the market, increasing domestic market opportunities for Russian cheese. Furthermore, as was the case in 2013, Russian cheese manufacturers are expected to continue to make use of imported fluid milk to partially supplement for reduced domestic supplies.
FAS/Moscow has revised 2013 production data for Russian domestic cheese upwards by nearly one percent based on information collected from industry sources.
FAS/Moscow has increased the forecast for 2014 Russian butter production by 12.5 percent, to 225,000 MT (flat from revised 2013 production estimates). According to industry sources, 2013 Russian butter production was higher than previous FAS/Moscow estimates (220,000 MT from January-November 2013). Given the continued availability of imported milk, FAS/Moscow believes it is not unrealistic for 2014 production levels to match levels in 2013.
Whole Milk Powder (WMP) and Non-Fat Dry Milk (NFDM)
Total 2014 Russian production of NFDM and WMP is forecast to remain flat (as a result of reduced domestic milk production and, in the case of WMP, a forecasted increase in imports). As previously reported, despite having well-equipped production facilities with modern technologies and sufficient experience to be able to produce high quality dried whole and skim milk, Russian producers of ice cream, yogurt, cottage cheese, and infant formula reportedly prefer higher quality imported milk powder over those that are produced domestically.
FAS/Moscow has left its 2013 production estimates for WMP and NFDM unchanged.
FAS/Moscow has decreased the 2014 forecasts for fluid milk domestic consumption as a result of an anticipated reduction in fluid milk production and slightly higher prices (0.5 percent less than revised consumption data for 2013). However, consumption for processed dairy products (e.g., flavored milk drinks, dairy-based deserts, certain yogurt, and certain cheeses) is expected to remain relatively strong as an expanding middle class leads to a greater diversity of tastes and preferences. Price increases are expected to continue with increased demand for fluid milk for processing into high-valued products on top of continued declines in domestic milk production. While imports should offset some of the production declines, total supplies are still forecast to be marginally lower than they were in 2013.
In general, milk consumption fell slightly in 2013 as domestic production slowed and consumer prices for many products, including cheese, sour cream (smetana), butter, and fluid milk (2.5-3.2 percent fat), increased. The consumer price for fluid milk (2.5-3.2 percent fat) increased by nearly 8 percent, to an average of 35.39 rubles per liter in 2013. Likewise, the price for several traditional dairy products also increased (e.g., 7.5 percent for hard and soft cheese – to 289.73 rubles/kg, 7.2 percent for sour cream (smetana) – to 126 rubles/kg, and nearly 9 percent for butter – to 277.33 rubles/kg).
FAS/Moscow’s 2014 cheese consumption forecast is revised slightly downward because of an anticipated decrease in imports as a result of trade restrictions placed on several foreign suppliers (nearly two percent less than revised consumption figures for 2013). These trade restrictions should, however, benefit domestic cheese producers. According to Euromonitor, Valio St. Petersburg ZAO (Valio) accounted for the largest percentage of cheese sold in Russia in 2013 (slightly more than 8 percent). Valio was followed by Hochland Russland OOO (nearly 3.5 percent of sales), Wimm-Bill-Dann Produkty Pitania OAO (more than two percent), and Laktalis Vostok OOO (also slightly more than two percent of sales).
FAS/Moscow forecasts 2014 fluid milk imports to decrease slightly (nearly 1.5 percent) from previous estimates. However, compared to the revised 2013 import figures, FAS/Moscow forecasts an increase in 2014 fluid milk import volumes in the coming year (slightly more than four percent) as a result of a reduction in anticipated domestic milk production.
FAS/Moscow has decreased 2013 fluid milk import volumes by nearly four percent (to 315,570 MT) based on available year-end trade statistics. Russia imported nearly 2.5 percent less non-concentrated milk and cream in 2013 than it did in 2012, with the majority (nearly 87 percent, by volume) coming from Belarus. Despite still accounting for the lion’s share of Russian milk imports, the recent trend of month-on-month import growth from Belarus came to an end as milk production in Belarus fell slightly (approximately 2.5 percent according to Belstat) during the first half of 2013 (rebounding somewhat in the latter half of the year).
As was the case in 2012, the majority of Russia’s dairy imports continue to originate from Belarus. In 2013, Belarusian exports accounted for 87 percent of Russian fluid milk imports (down from 90 percent in 2012), 92 percent of Russian WMP imports (same as in 2012), and 70 percent of Russian NFDM imports (down from 72 percent in 2012).
FAS/Moscow has decreased its 2014 forecast for Russian cheese imports by nearly eight percent as a result of the imposition of trade restrictions on several foreign establishments approved to supply cheese to Russia (e.g., several establishments in the Netherlands, Ukraine, Germany, and other countries). Despite restrictions on several establishments in some of the largest exporting countries, trade from other countries -- which were not typically major suppliers of cheese to Russia in recent years -- was significantly higher in the first quarter of 2014 than in 2013 (e.g., Denmark – exports up 233 percent, and Argentina - exports up 486 percent).
For 2013, FAS/Moscow has finalized cheese import volumes (to 364,120 MT) based on now available year-end trade statistics. The majority of Russian imported cheese came from Belarus (26 percent), the Netherlands (14.5 percent), and Ukraine (13.6 percent).
With regard to butter, FAS/Moscow has decreased the 2014 import forecast, albeit only slightly, but still forecasts a year-on-year increase in imports (i.e., nearly 6.5 percent). Overall 2013 production levels were higher than previously anticipated, and it is not unreasonable to assume that 2014 production levels should be slightly less given the anticipated reduction in domestic fluid milk output. In addition to the increase in production, butter imports were up nearly 14 percent in the first quarter of 2014, compared to the same period last year, with exports from Argentina and Australia notably higher than they were during the same period last year.
For 2013, FAS/Moscow has reduced import volumes by nearly six percent (to 135,779 MT) based on now available year-end trade statistics. The majority of Russian imported butter came from Belarus (34 percent), New Zealand (18 percent), and Uruguay (12 percent).
FAS/Moscow has raised the WMP import forecasts for 2014 while leaving the NFDM forecast unchanged. In the first quarter of 2014, WMP imports were up significantly when compared to the same period in 2013 (industry analysts report some is being reconstituted), while imports of NFDM were lower than they were at the same time last year. In 2013, Russia imported 43,591 MT of WMP (nearly 60 percent more than was imported in 2012) and 130,555 MT of NFDM (36 percent more than was imported in 2012) of which, as noted above, Belarus accounted for 92 and 70 percent, respectively.
The NUMP is reportedly developing a draft federal support program through the year 2020 for the development of the Russian dairy industry. The program, as it is envisioned, will propose three support scenarios for the industry, and will be submitted for public comment and sent to the government for its consideration sometime this summer. The program could touch on ways to improve the investment attractiveness of the industry, propose ways to modify state support for the industry, and, among other things, propose ways to address price volatility