Russia. Dairy and Products Annual Report. Nov 2013 Nov. 20, 2013
FAS Moscow forecasts 2014 dairy cow inventories to decrease slightly by 0.6 percent to 8.45 million head due to increased slaughtering of less productive animals and late distribution of government subsidies to dairy producers. The reduction in cow inventories is expected to be compensated by higher per cow milk productivity due to better feed supply in 2014 compared to the previous year. As a result, fluid milk production is expected to remain relatively flat in 2014. Cheese production in 2014 is forecast to grow 1.2 percent due to better utilization of fluid milk while butter production is forecast to decrease 2.4 percent due to a shortage of raw materials. Non-fat dry milk (NFDM) and whole milk powder (WMP) production in 2014 are also forecast to remain flat following a similar trend as in 2013. Imports of all dairy products are expected to grow in 2014 to support domestic consumption needs. Domestic milk production is off slightly in 2013 due to tight feed supplies which resulted in smaller feed rations for productive animals.
Continuing genetic improvements in the Russian dairy herd, particularly large purchases of imported high quality heifers, has improved per cow milk productivity at new and modernized dairy establishments over the last several years. However, equipment and agricultural machinery at most Russian dairy farms are outdated, which has led to disruptions in production technologies, slow growth in milk volume, and inconsistent quality. Some large Russian dairy producers still use “old style” production methods, feeding and management technologies and thus, are lagging in the desired volumes and quality levels demanded by Russian consumers. In addition, after Russia joined the World Trade Organization (WTO), subsidies for fuel and fertilizers were canceled.
In 2012, a drought in many Russian regions led to lower quality fodder and a 25 percent decline in grain production, which caused high forage prices that lingered on into the first half of 2013. All these factors have made milk production at some agricultural enterprises unprofitable. In addition, large dairy producers can receive subsidies to cover interest rates for previous soft loans. However, subsidy payments are arriving late from the federal budget and, in many cases, in smaller amounts than original loan commitments. Yet, farmers must continue to make regular payments to the banks or face stiff penalties. As a result, it is being reported that many producers now in danger of declaring bankruptcy.
FAS Moscow forecasts 2014 dairy cow inventories to decrease slightly by 0.6 percent to 8.45 million head due to increased slaughtering of less productive animals and late distribution of government subsidies to dairy producers. In addition, federal subsidies for the dairy industry decreased following WTO accession, which has negatively affected old and outdated dairy establishments the most. Post expects dairy cow inventories to decrease 1.2 percent in 2013 compared to last year.
In an effort to improve the quality of Russia’s dairy herd and, thus, to increase fluid milk production, Russia subsidizes the imports of breeding cattle. Total live cattle imports from January-August 2013 totaled 53,433, of which slightly more than half were dairy cattle. This number is significantly lower than during the same period in 2012 (80,227 head) resulting from major delays in subsidy transfer to the Russian buyers. Russia was the second largest market for the U.S. breeding cattle exports (30 percent of total U.S. live cattle exports) after Canada during the first 8 months of 2013. According to USDA export data, the U.S. share in total Russian live cattle imports is about 55 percent from January - August of 2013 (59 percent during the same period in 2012). The Russian government plans to continue to subsidize purchases of imported cattle and it has announced plans to eliminate the 10 percent value added tax (VAT) which apply to cattle.
Fluid Milk Production
Post expects the reduction of cow inventories in 2014 will be offset by higher per cow milk productivity due to better feed supply compared to 2013, which will keep fluid milk production relatively flat. Fluid milk production in 2013 is forecast to decrease 0.6 percent compared to Post’s last forecast and by 1.6 percent compared to 2012 due to a reduction of cow inventories and lower per cow milk productivity.
January-July 2013 Fluid Milk Production
According to the Federal Statistic Service (Rosstat), as of July 31, 2013, dairy cow inventories in Russia decreased 1.7 percent to 9 million head compared to the same period in 2012. The share of dairy cattle in private households decreased due to depopulation in the Russian rural areas. Private household farms raised 46.4 percent of the domestic Russian dairy cattle herd during the first 7 months of 2013 (2012 - 46.9 percent). All registered dairy farms in Russia produced 18.6 million metric tons (MMT) of fluid milk from January - July 2013, down 3.4 percent compared to the same period in 2012. Per cow milk production at agricultural enterprises decreased slightly to 3,003 KG in January –July 2013 from 3,039 kilograms (KG) during the same period in 2012. This has led to a 5.5 percent drop in fluid milk production at agricultural enterprises for the first 7 months in 2013 compared to a 2.2 percent increase during the same period in 2012. The volume of marketed fluid milk decreased 5.8 percent compared to the same period of 2012 due to higher farm gate milk prices which has further complicated the problem of fluid milk supply for Russia’s processing industry.
Production of Dairy Products
Lower prices for compound feed and slightly higher stocks of coarse feed will stabilize fluid milk production in 2014. A reduction in dairy cow inventories and a drop in fluid milk production from January - July 2013 has resulted in a drop in domestic dairy products production at the same time. In conjunction with an overall drop in fluid milk production, such fluctuations add volatility to the domestic dairy industry. Dairies must process large volumes of milk into milk powder in the summer for its utilization during the winter season. According to the “Technical Regulations of the Customs Union “On the Safety of Milk and Dairy Products”, approved by Eurasian Economic Commission by its Resolution #67 on October 9, 2013, milk processors have to label fluid milk received from concentrated, condensed milk or milk powder as “reconstituted milk”, rather than “milk drinks” as had been allowed in the last Technical Regulation, “On Milk and Dairy Products”. Prior to the recent resolution, fluid milk consumers preferred not to purchase “milk drinks”. The new term “reconstituted milk” is expected to increase demand for fluid milk in retail and should increase demand for milk powder from dairies. The new resolution was pushed by the Russian government to provide more support to dry milk production factories and, thus, increase available volumes of raw materials for processors.
FAS Moscow forecasts 2014 cheese production to grow 1.2 percent due to better utilization of fluid milk. Cheese production in 2013 is down 7.7 percent compared to the last forecast due to lower availability of fluid milk for processing compared to 2012. Production of cheese and cheese products has fallen by almost 10 percent during the first six months of 2013 compared to the same period in 2012. However, production of a few cheeses did increase during that same time period: soft cheese -- from 10,500 MT to 10,800 MT, and brined cheeses from 9,600 MT to 10,300 MT. Cheese producers frequently complain that most fluid milk is earmarked for pasteurization. Due to frequent fluid milk shortages in Russia, cheese producers have raised concerns that there is limited fluid milk available for cheese production.
FAS Moscow forecasts 2014 butter production to decrease 2.4 percent due predominantly to a lack of raw materials. The butter production forecast for 2013 fell 2.4 percent compared to the last forecast due to lower than expected availability of fluid milk for processing. Production is also limited by lower consumer demand for butter due to the emergence of a large number of substitute spreads containing vegetable oils, which are gaining market share, and due to vegetable oil “margarines” being labeled and sold as cream butter.
Non-Fat Dry Milk (NFDM)
FAS Moscow forecasts 2014 NFDM production to remain flat at 50,000 MT compared to 2013 as a result of flat fluid milk production. Due to growing demand for dairy raw materials from the processing industry, NFDM imports are forecast to grow 9.9 percent in 2014 compared to 2013. NFDM production forecast for 2013 was decreased by 9.1 percent compared to the last forecast due to an unexpected drop in fluid milk availability for processing that was caused by flat dairy cattle inventories.
Whole Milk Powder (WMP)
FAS Moscow forecasts 2014 WMP production to remain flat at 60,000 MT compared to 2013. WMP production forecast for 2013 declined 7.3 percent compared to the last forecast due to drop in fluid milk availability for processing. High feed prices from a lower than expected grain harvest led to lower per cow milk production.
In 2013, Russia restricted imports of milk and dairy products from some German, Lithuanian, Spanish and New Zealand exporters because of perceived violations of Russian veterinary and sanitary requirements detected during routine monitoring. To date, these restrictions remain in place. According to media reports, the Russian Veterinary and Phytosanitary Surveillance Service (VPSS) plans to visit New Zealand in February 2014 to audit the Fonterra Company after which a decision will be taken about lifting a ban on New Zealand exports. From time to time, Belarusian and Ukrainian dairy exporters have been restricted from exporting their products to Russia due to reported violations of Russian veterinary and sanitary regulations.
Fluid Milk and Cream Imports
Fluid milk and cream imports in 2014 are forecast to increase 1.5 percent to 335,000 MT in 2014. Russia imported 2.3 percent more fluid milk from January-July 2013 compared to the same period last year. Belarusian exports to Russia were relatively flat during this period and accounted for 165,359 MT, 88.8 percent of the total Russian imported fluid milk and cream. Other major exporters were Finland (5.1 percent) and Estonia (2.3 percent) by volume.
Cheese imports are forecast to grow 1.2 percent in 2014. In combination with production growth, this will increase overall supply and consumption by 1.2 percent in 2014 compared to the current year. Due to lower than expected domestic cheese production in 2013, Post increased the import forecast 2.8 percent compared to the previous forecast.
During the first 7 months of 2013, Russia increased cheese imports 8.6 percent (totaling 204,283 MT) compared to the same period in 2012. Major cheese exporters to Russia include Belarus (27.7 percent of total), Ukraine (14.2 percent), and the Netherlands (11.8 percent). German cheese exports dropped 39 percent from January-July 2013 due to trade restrictions put in place by Russian government authorities which helped boost Dutch cheese exports by 50 percent.
Due to lower domestic production, butter imports are forecast to grow 3.7 percent in 2014 compared to 2013. The butter import forecast was increased 3.8 percent for 2013 compared to the previous year which should compensate for lower overall domestic production in 2013. During the first half of 2013, Russia imported 79,233 MT of butter, up 32.4 percent compared to the same period in 2012. Belarusian butter exports dropped 8.8 percent, while the other countries increased their exports 76 percent. Belarus was still the largest exporter of butter to Russia during the first half of 2013 (35.5 percent of total Russian imports) followed by New Zealand (24.4 percent), the EU (18.2 percent) and Uruguay (6.2 percent).
The Federal Service on Customers' Rights Protection and Human Well-Being Surveillance (Rospotrebnadzor) strengthened control over Belarusian dairy imports after it announced the detected of “numerous violations of sanitary and epidemiology requirements” by Belarusian dairy exporters (detection of oxytetracycline, mesophilic microorganisms, bacteria and coliforms). The Russian Ministry of Agriculture called for additional measures to be established in order to ensure the safety of dairy products imported from Belarus.
Non-Fat Dry Milk (NFDM)
Due to growing domestic demand, NFDM imports are forecast to grow 9.1 percent in 2014 compared to 2013. The import forecast for 2013 was increased by 10 percent compared to the last forecast based on new import statistics and growing demand by the domestic dairy industry for raw materials due to a deficit in domestic fluid milk.
Whole Milk Powder (WMP)
Due to growing demands for dairy raw materials, WMP imports are forecast to grow 11.1 percent in 2014 compared to 2013 to satisfy the needs of the growing dairy processing industry. The import forecast for 2013 was increased 50 percent compared to the last forecast to satisfy rising demand by the Russian processing industry in response to lower domestic fluid milk production. Russia imported 24,945 MT of WMP from January-July 2013, up 7 percent compared to the same period in 2012. Major exporters include Belarus (96.1 percent) and EU (2.6 percent).
Tariff Rate Quota for Whey
The Council of Eurasian Economic Commission established by Decision #242 of October 29, 2013, a 15,000 MT tariff rate quota for imports of certain types of whey and modified whey, in powder, granules or other solid forms, without added sugar or other sweetening matter, the HS 0404 10 120 1 and 0404 10 160 1).
According to the Russian company “PIR Group” --a major player in the HRI sector-- the average Russian consumes around 140 USD worth of dairy products per year. In volumes, this amounts to 69 KG of whole milk products, 2.5 KG of cream butter and 5.9 KG of cheese. There are several market trends taking place with dairy consumption such as demand driven by increasing per capita income, adoption of healthier lifestyles, interest in natural foods, and promotion of functional and new/innovative dairy products. Baby food consumption is growing in part due to a slightly more positive demographic situation in Russia. Baby food products (along with new marketing campaigns) in Russia are diversifying at a fast pace giving parents more choices. Consumption of “kefir” (traditional Russian drink made from fermented milk and kefir grains) is starting to grow due to a growing healthy lifestyles trend in Russia.
A survey by the PIR Food Company indicated the Russian customers consider the following factors when buying the dairy products:
• good for health -- 43 percent
• taste qualities -- 37 percent
• habit --13 percent
• price -- 8 percent
• convenience -- 4 percent
Prices for Fluid Milk
According to Rosstat, average Russian prices for milk and dairy products in August 2013 increased 8.2 percent on a year-on-year basis. Farm gate prices for fluid milk increased from 14.7 rubles/liter in the beginning of September 2012 to 15.44 rubles/liter in the beginning of September 2013. Market analysts expect further price growth for fluid milk due to competition among milk processors in the near future.
Prices for Dairy Products
Prices for domestic dairy products are rising due to increasing fluid milk farm gate prices. Imported dairy products have became more expensive due to growing U.S. dollar and Euro exchange rates which led to higher prices for cheese, butter and milk powder from the major exporting countries. According to some market analysts, if prices for fluid milk continue to grow, cheese wholesale prices could reach 200 rubles/kg and retail prices more than 300 rubles/kg by the beginning of 2014.
Subsidies to Dairy industry
The Ministry of Agriculture reported that 32.7 billion rubles were allocated in total to a variety of support measures for production of milk and dairy products from the federal budget in 2013. Subsidy loans were issued for a maximum loan term of 8 years which may not be sufficient time for dairy enterprises to pay back the loans. The Ministry of Agriculture may be increasing the terms of subsidized loans for the dairy industry from 8 to 15 years. Dairy cattle production subsidies are from several federal programs including:
• "Federal program of agricultural development and regulation of agricultural production, raw materials and food for 2013-2020". This program provides:
• subsidized loans, beginning in 2013 interest rates on investment credits (over 2 years) for milk producing farmers will be subsidized at 80 percent from the federal budget, and by not less than 20 percent – from the provincial budget.
• state aid for raising pedigree breeding stock (per head of cattle);
• purchase of pedigree cattle; and
• subsidies for a part of insurance premium payments.
• Additionally 3.2 billion rubles are to be allocated to the dairy industry in connection with rising feed prices.
• Decoupled per hectare subsidies.
In addition to these measures, milk producers have advocated to simplify transfer of per liter milk subsidies. According to the Russian Union of Milk Producers (RUMP), there were long delays in the provision of subsidy payments in the first half of 2013. RUMP has called for the lifting of a ban on breeding dairy cattle from the EU which, is prohibited due to Schmallenberg virus