Highlights

Despite a 1.5 percent decline in milk production to 30.1 MMT, low commodity milk prices are anticipated as weak demand balances with reduced milk supplies. Local producers are no longer benefitting from reduced competition resulting from the import embargo because consumer purchasing power continues to fall. Cheese production is forecasted flat, at 0.860 MMT, and butter production will decline 3.8 percent to 0.25 MMT. Belarus, as the supplier of nearly all projected dairy product imports, exerts strong pressure on the dairy market.

Executive Summary

Production

FAS/Moscow decreased its previous 2016 estimate of cows in milk inventories to a 2.6 percent decline year-on-year because of high interest rates for loans and inconsistent payments of subsidies to buy new cattle. At the same time, the 2016 milk production forecast shows only a 1.52 percent decline year-on-year. Commercial dairies will continue to gain better yields from smaller numbers of cows as herds with improved genetics start to perform at their full capacity. Modernized commercial dairies will partially offset the declining milk production at household farms.

FAS/Moscow anticipates flat cheese and curd production in 2016. In 2015 domestic producers increased production by 13.3 percent because of reduced competition due to the import embargo. However, further production growth is constrained by weak consumer demand, strong competition from Belarus, increased quantities of year-end stocks, limited sources for additional supplies of raw milk for cheese production, and continued use of palm oil as a dairy fat substitute.

The forecast for 2016 butter production has also decreased. Production expenses have grown while retail prices stagnate below the inflation level. The current market struggles to cope with the problems of excessive 2014 butter supplies and increased use of dairy fat substitutes.

Whole Milk Powder (WMP) commodity prices have being rising since the beginning of the year and domestic producers are motivated to increase output due to a promising market outlook. Given the anticipated decline of butter production in 2016 and the reported decline of Nonfat Dry Milk (NFDM) output in the first quarter of 2016, FAS/Moscow increased its 2016 WMP forecast while decreasing NFDM production forecast. The milk powders production forecasts depend on the implementation of the state intervention purchases plans and Belarus pricing policies.

Trade

Fluid milk, and dairy products are on the list of banned foods and trade will be affected by the current restrictions at least until August 2016. Despite that fact, FAS/Moscow forecasts 5 percent annual growth in 2016 cheese and curd imports. Butter imports will also increase in 2016, while NFDM and WMP import forecasts have changed to indicate flat trade between 2015 and 2016. The increase in imports is anticipated due to constrained growth of domestic cheese production, projected decline of butter production, and favorable export prices offered by non-restricted suppliers.

Belarus continues to influence the Russian dairy market as the primary supplier raw milk and dairy imports in 2016. The Government of Belarus controls most of the dairy production and trade and regularly reviews dairy prices based on market conditions for its “minimum recommended export prices". Belarus price strategies will likely maintain or increase the volume of dairy exports to Russia.

Consumption

FAS/Moscow forecasts a 1.4 percent decline in total domestic consumption of fluid milk in 2016, mostly due to decreasing on-farm consumption of fluid milk. At the same time, FAS/Moscow forecasts a moderate increase of factory use consumption as commercial dairies are anticipated to increase output of milk suitable for industrial processing.

In 2016 the Government of Russia (GOR) continues dairy support programs in accordance with the State Program of Development of Agriculture in 2013-2020. GOR has recently officially announced plans to support milk farmers by purchasing up to 10,000 MT of dry milk powders and 4,000 MT of dairy butter in nine pilot regions. The declared goal of the dairy intervention is to reduce commodity price volatility for raw milk resulting from major seasonal fluctuations in milk production. If implemented successfully, the program would create additional demand for approximately 170,000 MT of raw milk.

FAS/Moscow anticipates a slight recovery of domestic cheese and curd consumption in 2016 due to stable supplies of traditional low-priced curd products (e.g. “tvorog") and reasonably priced domestic and Belarusian cheeses. 2016 butter consumption will likely stabilize at 2015 levels – 6.8 percent less than those in 2014.The final year-end market data and the revised stocks, FAS/Moscow projects WMP consumption in 2016 will grow 2.6 percent while demand for NFDM is anticipated to stabilize.

The Average Nominal Exchange Rate in the first Quarter of 2016 is 1 USD = 74.59 Rubles; the current exchange rate (May 13, 2016) is 1 USD = 64.96 Rubles.

Russia: Fluid Milk Supply and Distribution, 1,000 MT

Dairy, Milk, Fluid

Dairy, Fluid

2014

2015

2016

Market begin year

Jan 2015

Jan 216

Jan 2017

Russia

USDA Official

New Post

USDA Official

Brazil

USDA Official

New Post

Cows In Milk

8,050

8,050

7,750

7,750

7,585

7,550

Cows Milk Prod

30,499

30,499

30,025

30,550

29,980

30,085

Other Milk Prod

0

0

0

0

0

0

Total Production

30,499

30,499

30,025

30,550

29,980

30,085

Other Imports

383

383

290

328

260

320

Total Imports

383

383

290

328

260

320

Total Supply

30,882

30,882

30,315

30,878

30,240

30,405

Other Exports

20

20

25

42

20

20

Total Exports

20

20

25

42

20

20

Fluid Use Dom. Cons.

9,859

9,859

9,310

9,500

9,080

9,185

Factory Use

18,735

18,735

18,930

19,140

19,130

19,200

Feed Use Dom.

2,268

2,268

2,050

2,196

2,010

2,000

Total Dom. Cons.

30,862

30,862

30,290

30,836

30,220

30,385

Total Distribution

30,882

30,882

30,315

30,878

30,240

30,405

Cows in Milk inventories

FAS/Moscow estimates 2016 cows-in-milk inventories at 7.55 million head, which is 2.6 percent less than 2015 numbers and a downgrade of the previous forecast. The country's cow inventories have being shrinking for two decades, as the dairy sector has struggled with low profitability and lack of investments since 1990's. The financial state of dairy farms has further deteriorated as a result of the ongoing economic crisis, and as a long-term trend of declining cows-in-milk inventories continues. High interest rates and inconsistent payments of subsidies due to problems with federal and regional budgets implementation impact the performance of the dairy sector and constrain new cattle purchases.

Rosstat reports the total cow herd at 8.319 million head as of January 1, 2016, which is a 1.8 percent decline year-on-year. As cow inventories declined at household farms (132,000 heads less) and agricultural enterprises (54,000 heads less), the share of commercial farms increased 0.7 percent during 2015 to 54.1 percent of nation's cow herd. The small commercial peasant (private) farms and individual entrepreneurs increased their cow herds by 34,000 heads during 2015, mainly because local authorities encouraged household farms to have their operations registered as legal entities subject to taxes.

After the drop in world oil prices and changes in domestic monetary policies, the ruble sharply depreciated and has been volatile since the end of 2014, resulting in annual consumer price inflation of 12.9 percent in 2015. As a response to accelerated inflation, the Central Bank of Russia (CBR) has changed the key interest rate eight times between November 2014 and August 2015. The key rate peaked at 17 percent in December 2014, and has been kept at 11 percent since August 2015. Despite some positive signs, CBR kept the key rate at 11 percent in March 2016. Russian fiscal and monetary authorities consolidated their efforts in pursuing the mid-term goal of 4 percent annual inflation in 2017. Also, the Government of Russia (GOR) has struggled to keep the 2016 budget deficit within the target of 3 percent of GDP. The GOR is currently reviewing the fiscal plan, which was based on projected revenues from oil exports at a price of 50 US dollars per barrel. According to the Finance Ministry the nation's main export blend averaged 31.99 US dollars in the first three months of 2016.

In April 2016, Minister of Finance Anton Siluanov pointed out the lack of balance in the budget as a major determinant of the key rate, and highlighted the failure to lower the budget deficit as a constraint for cuts in the key rate. Most analysts, including private sector, international (the World Bank) and Russian official (CBR) forecast further GDP contraction between 1.3 and 1.7 percent in 2016, mostly due to continuing vulnerability in the financial sector.

State subsidies remain among the key factors supporting profitable operations of dairy farms in 2016. This year GOR continued to support programs for dairy farmers and committed to partially compensate bank interest payments associated with long-term loans for construction or modernization of dairy farms (Rub 5.32 billion), to partially subsidize interest rates for short-term loans (Rub 1.375 billion); to pay“per liter of sold milk" subsidies (Rub 11.4 billion); to reimburse up to 35% of capital expenditures in pre-approved dairy projects (Rub 6.0 billion); to pay subsidies for pure-bred breeding dairy cattle, and insurance programs. In the 2016 budget the GOR had initially allocated approximately RUB 30 billion for dairy sector support. However, multiple sources indicate that authorities have difficulty making subsidy payments to final recipients due to problems with regional budget revenues. Media sources write about massive delays of payments citing major agricultural producers, who claim that they have not received subsidies since October 2015.

The problem of significant time lags between the dates when the funds for subsidies had been transferred from the federal budget accounts to regional budgets and the dates when farmers actually received the money. The Audit Chamber reported that regions varied, but in some cases delays were 6 to 7 months.

According to the Russian Ministry of Agriculture, the share of non-performing loans in total borrowings of agricultural companies grew from 7.8 to 11.4 percent between January and November 2015, and reached Rub 220 billion as of November 1, 2015. The volume of non-performing loans in the dairy sector may increase by the end of 2016 because, in addition to subsidy payment delays, interest rates for new loans in the milk production sector remain at restrictive levels, over 20-25 percent. Moreover, internal financial resources of dairy producers have weakened because operational expenses increasewhile reduced consumer demand and competition from Belarusian imports kept milk prices low. Considering current financial challenges, few new investments in cattle purchases are expected in 2016. In 2015, Russia imported approximately 32,000 head of breeding dairy cattle. Major suppliers were the Netherlands (9,564 head); Germany (8,476 head), United States (3,427 head), Denmark (3,017 head), Hungary (2,556 head), France (1,794 head). In January-February 2016 the country imported only approximately 2,600 head of dairy breeding cattle from European suppliers and none from the U.S.

The Ministry of Agriculture recognized the existing constraints for milking herd growth and drafted Amendments to the State Program of Development of Agriculture revising the strategic goal of additional cows-in-milk from 560,000 to 473,000 heads in 2020. The Ministry also suggested excluding milk produced at household farms from consideration in the state program, which may reduce the 2020 milk production goal from total 38.2 MMT to 19.8 MMT – the amount produced by commercial farms.

Fluid Milk Production

FAS/Moscow increased its 2016 milk production forecast to 30.085 MMT, which is still a 1.52 percent decline year-on-year. Milk production at household farms in 2016 will likely decline by approximately 465,000 MT. Commercial dairies (large and medium agricultural enterprises, peasant (private) farms, and individual entrepreneurs), on the contrary, are anticipated to increase fluid milk output, which will partially replace the reduced supplies from household farms. The total supply of raw milk to processing plants is expected to grow by approximately 60,000 MT to 19,200 MMT. Commercial dairies will continue to gain better yields from smaller numbers of cows as herds with improved genetics start to perform at their full capacity.

Leading commercial dairies invested in improved herd genetics in the past, also purchasing equipment and implementing intensive farming methods. Some of these projects are reaching their planned capacity as farm managers have gained experience working with highly productive dairy cattle and improved feeding and reproductive techniques. Rosstat reports that in January and February 2016 large agricultural enterprises managed to increase milk production by 4.3 percent compared to the same months of 2015. However, in 2016, commercial dairies often lack the financial resources to keep production growth at the same pace as in 2015. Milk producers currently have limited funds for further modernization or efficiency improvements. Companies have needed to cut operational expenses, which can impact the quality of feeds and veterinary services. Thus, economizing practices may have a negative effect on animal welfare and result in lower yields. Also, according to industry contacts, implementation of the import substitution policy in the field of dairy cattle genetics may jeopardize further improvement of the nation's milking herd. Commercial dairies have been gradually increasing their share in production, and in 2015 they accounted for approximately 53 percent of the total milk output. However, the number of modernized farms and the level of consolidation in the sector remain low, which results in major seasonal fluctuations of production volumes. Milk output is expected grow during the 2nd and 3rd quarters of 2016, reflecting the traditional seasonal increase of production at smaller dairy farms and households.

According to Rosstat, total fluid milk production in 2015 was 30.550 MMT, which is a 525,000 MT improvement over the previous forecast and a minor 0.01 percent growth year-on-year. The total production at non-commercial farms continued shrinking: household farms reduced their output by 413,000 MT in 2015. On the other hand, commercial farms increased output and as a result, the total supplies of raw milk for industrial processing grew by 405,000 MT.

In terms of total fluid milk production volume in 2015, the leading regions were the Republic of Bashkortostan10 (1.812 MMT); the Republic of Tatarstan (1.750 MMT); Altaisky Krai (1.414 MMT); Krasnodarsky Krai (1.328 MMT); Rostov Oblast (1.080 MMT); Dagestan (0.820 MMT); Voronezh Oblast (0.805 MMT); Orenburg Oblast (0.797 MMT); Krasnoyarsky Krai (0.730 MMT); Udmurtia Republic (0.729 MMT); and Saratov Oblast (0.728 MMT).

Performance indicators reported by Rosstat (production of milk appropriate for industrial processing and cow productivity data 11) show that industrial milk production clusters are developing in several regions of the Northwestern and Central Federal Districts, which are located near the largest milk processing plants of Moscow and St. Petersburg. Agricultural Enterprises account for 84 percent of raw milk output in the Northwest and for 71 percent in the Central Federal District. Average annual per cow yields exceed 5 MT in these districts, which can be compared with other areas where agricultural enterprises produce from 12 percent (North Caucasian FD) to approximately 50 percent (Ural and Volga) with average annual per cow yields varying from 2.5 to 4.7 MT.

Fluid Milk Consumption

FAS/Moscow forecasts total domestic consumption of fluid milk in 2016 at 30.385 MMT, which is a decline of approximately 1.4 percent compared to 2015, mostly due to projected decrease of on-farm consumption of fluid milk, which is projected to fall by approximately 315,000 MT to 9.185 MMT. At the same time, FAS forecasts a moderate increase of factory use consumption in 2016 as commercial dairies are anticipated to slightly increase output of milk suitable for industrial processing. Industrial dairy plants are expected to process approximately 19.2 MMT (18.88 MMT will be supplied by domestic producers and 0.32 MMT imported, mostly from Belarus).

GOR recently officially announced plans to support milk farmers by purchasing up to 10,000 MT of dry milk powder and 4,000 MT of dairy butter in nine regions.

The Ministry of Agriculture is currently drafting the legislative framework for the dairy interventions and planning to publish the required regulations before June 1, 2016. In March 2016 the ministry issued an order defining the minimum allowable prices as 195,000 Rub per MT of NFDM, 238,000 Rub per MT of WMP and 308,000 Rub per MT of dairy butter. The draft also defined a commodity price of 20,210 Rub per MT of raw milk, which shall be used for the purposes of interventions contracts.

Russia imports milk proteins and fats due to insufficient domestic supplies of these commodities. Some representatives of the dairy business community and regional authorities are not supportive of plans to spend additional state funds to reduce the raw milk supply in the market, which already suffers from a deficit of quality milk. If milk prices increase as a result of interventions, price-sensitive consumer demand may further shift to less expensive dairy substitutes. Considering conflicting views on possible effects on consumer prices and the current challenges with state budget revenues, it's unclear if dairy interventions will start in 2016 as planned.

Producers of quality cheese, butter, and branded dairy products have to compete directly with businesses that use inexpensive vegetable fat substitutes for dairy (e.g. palm oil) but do not list these ingredients on their labels. Consumers generally cannot differentiate between quality and counterfeit products marketed as dairy, and simply choose less expensive products. Authorities responsible for food safety and quality control (Rosselkhoznadzor, Rospotrebnadzor) recognize the problem, confirming that approximately 10 percent of dairy products are falsely labeled. Unfair competition coupled with weak consumer demand pushes dairy prices down and creates a market situation in which higher quality products garner almost no premium price.

Authorities and business launched multiple initiatives to address the quality concerns and the issue of the increased use of palm oil and other cheap substitutes of milk fat. For example the National Union of

Milk Producers “Souzmoloko" in partnership with the Retail Companies Association “ACORT" started regular tests of dairy products; samples are collected at the “ACORT" member stores. If discrepancies between the ingredients printed on labels and the results of the laboratory tests are detected for the first time, the associations notify the producer with a request to enhance the quality control. If multiple violations detected, information becomes public.

The current economic crisis has lasted longer and hit the Russian households more strongly than the previous crisis of 2008-2009. The previous downturn did not have the same negative impact on the consumers' purchasing power. Real disposable incomes grew by 2.4 percent in 2008, by 3 percent in 2009, and 5.9 in 2010; compare with the reduction of the real disposable income by 1 percent in 2014, 4 percent in 2015, and continued decline during the first months in 2016. Real disposable income fell by 6.9% year-on-year in February, after falling by 6.3% in January 2016. Retail turnover fell by 9.9 percent in 2015 and consumer expenditures continued declining in February 2016, 5.9% less compared to February of 2015. Poverty rates in Russia have grown; the population with income below the minimum subsistence level12 grew from 15.9 million in 2013 to 19.2 million people in 2015.

Total domestic consumption of fluid milk in 2015 was 30.836 MMT and remained stable during the crisis due to relatively low prices for milk and dairy products. Commodity prices for raw milk were on average 5.2 percent higher in 2015 than in 2014; however, the average farm gate price for raw milk in March 2016 is only 0.9 percent higher than in March 2015 at Rub. 21,920 per MT. Growth of milk prices remains below inflation levels (CPI 12.9% in 2015; 7.3% in March 2016), and this weak growth of commodity prices for milk and dairy have a negative effect on producers' margins, but became an incentive for relatively stable consumption.

Fluid Milk Trade

In 2016 fluid milk imports are projected at 320,000 MT, which is a significant improvement over the previous forecast by approximately 60,000 MT (23 percent), but a minor decrease from the 328,000 MT imported in 2015. The share of imported milk in total raw milk processed by Russian dairy plants in 2016 is projected at 1.66 percent. Imports accounted for 1.7 percent of industrially processed milk in 2015.

Trade restrictions continue to influence dairy trade with Russia in 2016. In 2015, the GOR extended a ban on a variety of agricultural products including milk and dairy HS codes 0401, 0402, and 0403, 0404, 0405, 0406 (except for specialized lactose-free milk and dairy products for therapeutic dietary nutrition) from the United States, Canada, the European Union, Australia, and Norway until August 6, 2016. In August 2015 Prime Minister Medvedev also signed a decree that expanded the list of countries that fall under restrictions to include Albania, Montenegro, Iceland and Liechtenstein.

On January 1, 2016, Ukraine implemented the full-scale Deep and Comprehensive Free Trade Agreement (DCFTA); effective the same date, Russia cancelled its Free Trade Agreement with Ukraine and banned imports of a number agricultural products, including milk and dairy Belarus accounted for 96.6 percent of fluid milk imports to Russia in 2015, and will likely be the only major exporter of raw milk to Russia in 2016. If exporters continue offering lower prices, dairy processors may increase purchases of dry milk powders and butter from Belarus, but an increase in demand for fluid milk from Belarus is doubtful. Despite the long term declining trend of domestic raw milk supplies, the current market looks balanced in terms of supply and demand of raw cows' milk. The production of cheese in 2016 is not anticipated to grow and butter production is expected to decline by 3.8 percent; thus will Russian commercial dairies likely be able to maintain sufficient supplies to cheese and butter producers.

Belarus shipped 320,082 MT of fluid milk and cream (HS Code 0401), valued at 185.162 million US dollars in 2015. Although the volume of raw milk shipments grew by 0.5 percent, the value of these exports dropped by 29.73 percent last year compared to 2014. The average price per MT of fluid milk dropped from 827.21 USD in 2014 to 528.93 USD in 2015. In February 2016 prices fell by additional 22.73 percent to 495.65 USD per MT of milk. Dollar prices declined under the influence of declining world market prices and, especially, the devaluation of the Russian and Belarus ruble.

In 2010-2015 Belarus implemented a state program to develop the milk production sector. Total investments in modernization of dairy farms under the program were Rub 6,587.9 billion that allowed increasing milk production by 1.152 MMT in 5 years. According to the Belarus Ministry of Agriculture and Food, the country produced 7.0 MMT of raw cow's milk in 2015, and large agricultural enterprises produced 94.7 percent of total output or 6.635 MMT of milk. The highly industrialized and modernized milk production sector of Belarus is more cost efficient than the Russian dairy industry, which has become a strong competitive advantage that allows Belarusian exporters to offer very attractive prices in the Russian market.

FAS/Moscow projects 2016 milk exports at 20,000 MT, considering the uncertain prospects of Russian trade with Ukraine. Kazakhstan likely remains the main destination of raw milk shipments from Russia. The Federal Customs Service of Russia reported a significant increase of milk exports to Ukraine in 201516 to 17,872 MT from just 13 MT shipped in 2014. Post believes that these are exports from Russia to parts of the Donetsk and Luhansk regions of eastern Ukraine. Export to Ukraine accounts for the most of the unexpected 110 percent increase of total Russian raw milk exports, which reached 42,000 MT in 2015. The trade continued to grow in January-February 2016, milk exports to Ukraine reached 5,708 MT or 65.8 percent of all milk exports from Russia. However, continued growth of bilateral trade between these countries in 2016 is vulnerable because of changes in the trade regime due to political instability.

Russia: Cheese and Curd Supply and Distribution, 1,000 MT

Dairy, Cheese

Dairy, Cheese

2014

2015

2016

Market begin year

Jan 2015

Jan 216

Jan 2017

Russia

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Beginning Stocks

8

22

30

30

10

35

Production

760

760

850

861

860

860

Other Imports

349

349

205

214

220

225

Total Imports

349

349

205

214

220

225

Total Supply

1,117

1,131

1,085

1,105

1,090

1,120

Other Exports

29

29

25

23

25

25

Total Exports

29

29

25

23

25

25

Human Dom.

1,058

1,072

1,050

1,047

1,055

1,065

Other Use, Losses

0

0

0

0

0

0

Total Dom.

1,058

1,072

1,050

1,047

1,055

1,065

Total Use

1,087

1,101

1,075

1,070

1,080

1,090

Ending Stocks

30

30

10

35

10

30

Total Distribution

1,117

1,131

1,085

1,105

1,090

1,120

FAS/Moscow continues to forecast cheese and curd production in 2016 at 860,000 MT. In 2015 domestic producers increased cheese and curd production by 13.3 percent as they continued to benefit from the reduced competition in the market due to trade restrictions imposed on several western suppliers. However, multiple factors constrain further production growth in 2016, including weak consumer demand, strong competition from Belarus in the market, increased quantities of year-end stocks, limited sources for additional supplies of high quality raw milk suitable for cheese production, and continued use of palm oil as a dairy fat substitute.

Market conditions were favorable for domestic cheese producers in the second part of 2014 and in early 2015: production grew by approximately 20 percent (148,000 MT) in two years. But then in January 2016 Rosstat reported a 16 percent increase of cheese and curd stocks compared to January 2015. Average consumer prices for hard cheeses in February and March 2016 were 1.4 and 0.99 percent lower, respectively, than prices during the same months of 2015. At the same time, average consumer prices for 'tvorog', a less expensive traditional fermented milk product , were 5.5 and 4.99 percent higher in February and March 2016 than a year ago. Evidently, the cheese market is coming to saturation, and manufacturers have difficulties with sales as more consumers have switched to less expensive cheese substitutes.

Industry experts and authorities at the highest level are concerned about continued increases in use of non-dairy fat substitutes that may have a harmful long-term effect on the cheese making industry. The dynamics of palm oil imports reflect its increased consumption by Russian food industry; however, it's not clear how much palm oil is used as a fat substitute in the dairy products because of inconsistent labeling. According to various estimates, dairy producers utilize approximately 25-30 percent of imported palm oil, which is also a popular ingredient in other industries such as confectionary, bakery, and cosmetics. According to the Federal Customs Service of Russia, the country imported 886,000 MT of palm oil (HS Code 151190) in 2015. The imports increased by 25 percent (approximately 182,506 MT) in 2015 compared to 2014. The trend continued during the first months of 2016: imports of this commodity grew by 20 percent compared to the same months of the previous year to 150,337 MT in January-February 2016. The National Union of Milk Producers “Souzmoloko" analyzed the issue by comparing the fat content of raw milk available in the market for processing and the fat content of the dairy products produced in 2015. Souzmoloko experts concluded that there is a 9-10 percent gap of milk fat amount in two data sets. These estimates are in line with the results of laboratory tests performed by official organizations responsible for food safety and quality control (Rospotrebnazor and Rosselkhoznadzor).

The precise share of falsifications and improper labeling of goods in each dairy product group is difficult to determine due to the illegal nature of these activities. Presumably, most violations are associated with cheese, a product with a long shelf live promising the best margins for producers. Lawmakers and authorities are considering several initiatives to enhance the control of palm oil use and improve the differentiation of the products in retail, but the increased use of milk fat substitutes will most likely continue its downward pressure on prices and influence the cheese market in 2016.

Locally produced, well-recognized brands have begun to capture greater shares of the current cheese market. According to “Souzmoloko" there are approximately 600 large- and medium-size cheese plants in Russia, and the top 40 producers now account for approximately 30-40 percent of the market. Consolidation trends are the strongest in mid-priced cheese production as producers of well-recognized branded products19 , who are capable to offer consistent quality, gradually increase their market shares. Producers of popular international brands, which used to export most of their branded cheese before the embargo, have needed to adjust to a new market reality. Effective trade restrictions forced them to localize or expand their existing production operations in Russia. For example, Pepsico successfully implemented a Rub 300 million investment project to increase production of company's brand cheese “Lamber" by 40 percent to 24,000 MT at the “Rubtsovsky" plant in Altayskiy Krai. Valio increased production of processed cheese “Viola" from 4,000 to 10,000 MT at its “Ershovo" plant in Moscow region and launched production of “Valio" curd (tvorog) at the facilities of its German partner company

Ehrmann in Moscow region in 2015. Arla Foods in partnership with Russian company Molvest invested over Rub 800 million in production of branded yellow cheese, total capacity of the project is 7,400 MT; a new production line for Arla processed cream cheese with a capacity of 9,000 MT was opened in November 2015. Danone remains a leader in the market of traditional dairy, including tvorog.

Cheese and Curd Consumption

FAS/Moscow anticipates a 1.7 percent increase in domestic cheese and curd consumption in 2016 to 1.065 MMT (approximately 7.48 kg. per capita) after a 2.3 percent decrease in 2015. The declining cheese consumption trend is anticipated to reverse in the second part of 2016 due to stable supplies of traditional low-priced curd products (e.g. “tvorog") and reasonably priced domestic and Belarusian cheeses. Also, the surplus stocks of 2015 will most likely force consumer prices down and stimulate the recovery of consumption.

Consumers in 2015 largely switched to the less expensive grocery items within product groups. Cheese is a popular product in Russia; according to multiple market researches approximately 80 percent of Russian households purchase cheese every week. Consumers were not willing to completely cut out cheese consumption; therefore, they substituted expensive hard cheeses with soft or processed varieties or spreads. Romir Scan Panel identified almost 10 percent reduction of hard cheese and 12 percent growth of processed cheese and spreads consumption in 2015. Consumer prices in the premium segment have been more volatile, reflecting the dramatic fluctuations of supply and demand for quality cheeses that started in August 2014. Prices for economy (low-priced) cheese brands and “tvorog" have been more stable and became a reason for only a 2.3 percent reduction of total domestic consumption of cheese and curd in the falling market of 2015 (compare to 14 percent decline of beef consumption, and fish consumption in 2015). Cheese prices in the economy and middle segments are anticipated to remain stable in the course of 2016 due to stabilized supplies of branded, reasonably priced products of consistent quality from the leading companies.

At the end of 2015, Romir conducted a market survey focused on consumer satisfaction by the quality of food products. The biggest group, 33 percent of the responders, complained about the deteriorating quality of cheese. In response to empty cheese shelves, numerous new local brands have emerged in 2015. However, consumers have not demonstrated loyalty to these brands because they were not satisfied with the price-to-quality ratio of the new products. The situation became favorable for expansion of non-banned, well-known imported brands and private labels. According to a recent Nielsen market research study, 83 percent of Russian consumers buy private-label products, 53 percent noticed the increase of private-label goods, and 34 percent noticed improved quality in these products. Leading retailers announced their plans to further expand private label sales, which may improve consumer loyalty and encourage more cheese purchases.

The increase of supplies of recognizable branded cheeses and further expansion of private labels, along with the reintroduction of popular brands to the market, e.g.,“Valio tvorog," will contribute to the anticipated recovery of consumption in 2016.

The research company Ipsos-Comcon examined consumer preferences in hard and semi-hard cheeses in the middle price range. “Rossiysky", “Gollandsky", “Poshekhonsky", and “Adygeisky" all increased their share in the market. “Rossiysky" is the most popular variety of cheese, with 61 percent share of total consumption. Low price, national branding and local production were named among the product's attractive features. Purchases of “Gauda" and “Maasdam" declined because consumers have not adjusted to the new local taste of cheeses that had been mostly supplied by imports prior to the embargo.

Cheese and Curd Trade

FAS/Moscow raised its cheese and curd import forecast to 225,000 MT in 2016 anticipating a moderate 5 percent (11,000 MT) increase. Stabilization of cheese prices promises some recovery of consumer demand. The Russian cheese industry managed to accelerate production in terms of quantity and likely is able to maintain supplies in 2016. However, domestic industry still needs to address quality concerns when raw milk supplies and financial resources are rather limited. Assuming the current restrictions remain unchanged until at least August 2016, Belarus cheese exporters will continue as the primary supplier and will likely increase shipments. Unlike Russia, Belarus has a sufficient supply of raw milk of the quality grades suitable for cheese production. As a result, cheese makers in Belarus benefit from lower commodity prices for raw milk compared to those in Russia. Russian consumers also appreciate the taste of cheeses from Belarus, which are usually made by traditional “soviet" recipes. “Made in Belarus" is becoming a sign of quality in the Russian dairy market. However, stronger growth of cheese imports from Belarus may be constrained due to quality concerns expressed by the Russian official food safety services The final 2015 cheese import estimate is changed to 214,000 MT based on available year-end trade statistics. Imports of HS Code 0406 dropped by 38.6 percent from 2014 because of ruble depreciation, weak consumer demand, and the import embargo. Cheese and curd export forecast for 2016 is unchanged at 25,000 MT; which is 3,000 MT more than cheese exports in 2015. The quantity of cheese exports from Russia likely will grow, although the value of these shipments may decline. Large stocks from 2015 may encourage exporters to offer discounts to trade partners from the Eurasian Economic Union (mostly in Kazakhstan and Kyrgyzstan).

Butter and Anhydrous Milkfat (HS Codes 040510, 040590)

Russia: Butter and Anhydrous Milkfat Supply and Distribution, 1,000 MT

Dairy, Butter

Dairy, Butter

2014

2015

2016

Market Begin Year

Jan 2014

Jan 2015

Jan 2016

Russia

USDA

New

USDA

New

USDA

New

Official

Post

Official

Post

Official

Post

Beginning Stocks

10

10

30

19

12

14

Production

252

252

265

260

265

250

Other Imports

137

137

85

88

100

100

Total Imports

137

137

85

88

100

100

Total Supply

399

399

380

367

377

364

Other Exports

4

4

3

3

5

3

Total Exports

4

4

3

3

5

3

Domestic Cons.

365

376

365

350

362

351

Total Use

369

380

368

353

367

354

Ending Stocks

30

19

12

14

10

10

Total Distribution

399

399

380

368

377

364

Butter and Anhydrous Milkfat Production

FAS/Moscow has decreased the forecast for 2016 butter production to 250,000 MT, a 3.8 percent decline. Expenses for production and storage have grown, while the weakened consumer demand constrains retail price growth below the inflation level. Currently, the butter market is still struggling to balance the excessive supplies of 2014 and cope with the increased use of dairy fat substitutes. According to Rosstat, butter stocks in January 2016 declined compared to January 2015, but still remain by approximately 40 percent higher than 5-years average. Milkfat products at competitive prices from non-restricted exporters are strengthening downward pressure on butter prices, and encourage domestic milk processors to use available milk for the products offering better profit margins.

Butter and Anhydrous Milkfat Consumption

In 2016 total domestic butter consumption will likely stabilize at the previous year's level – 351,000 MT or 2.46 kg. per capita. FAS/Moscow revised 2014 and 2015 per capita butter consumption to 2.63 and 2.46 kg respectively, based on availability of the year-end stock inventory data from Rosstat. The spike in butter consumption in 2014 (5.3 percent annual increase) resulted from increased purchases of butter during the time when cheese shelves in the stores were almost empty due to the embargo. In 2015 cheese supplies stabilized, butter supplies remained flat, but overall consumer demand weakened and butter consumption has fallen by 6.8 percent.

Butter and Anhydrous Milkfat Trade

HS Codes 040510 and 040590 are on the list of banned food products and trade will be affected by the current restrictions at least until August 2016. Despite that fact, FAS/Moscow continues to forecast 100,000 MT of butter imports in 2016, which is 13 percent annual growth. The increase in imports is anticipated due to projected decrease of domestic production and favorable export prices offered by non-restricted suppliers.

The Belarus share of Russian butter imports grew from 32 percent in 2013 to 75 percent in 2015. Bilateral trade has been boosted by trade preferences under EAEU agreements, proximity of the markets, and discounted export prices Belarus offers to its most important export market. Similar to other dairy products, most of Russian butter imports in 2016 will originate in Belarus. Belstat reported 22.5 percent growth of butter exports to Russia to 65,723 MT in 2015. In January and February 2016 Belarus increased shipments of butter to Russia to 10,761 MT compared to 5,054 MT in the same months of 2015.

In January and February of 2016 Uruguay and New Zealand also increased butter exports to Russia, shipping 1,600 (10 percent growth year-to-date) and 1,217 (117 percent growth year-to-date) MT respectively.

Based on available full year trade data FAS Moscow has revised the 2015 butter import estimate to 88,000 MT, which is a 35.7 percent drop year-on-year, due to trade restrictions and the weak ruble. HS code 040510 accounts for 99 percent of the imports.

Russia: Whole Milk Powder Supply and Distribution, 1,000 MT

Dairy, Dry Whole Milk Powder

2014

2015

2016

Jan 2014

Jan 2015

Jan 2016

Market Begin Year Russia

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Beginning Stocks

0

1

0

5

0

4

Production

46

46

38

42

36

44

Other Imports

37

36

33

38

35

38

Total Imports

37

36

33

38

35

38

Total Supply

83

82

71

85

71

86

Other Exports

1

1

1

2

1

2

Total Exports

1

1

1

2

1

2

Human Dom.

82

77

70

79

70

80

Other Use, Losses

Total Dom Consumption

0

0

0

0

0

0

Total Use

82

77

70

79

70

80

Ending Stocks

Total Distribution

83

78

71

81

71

82

Russia: Non-Fat Dry Milk (NFDM) Supply and Distribution, 1,000 MT

Dairy, Milk, Nonfat

2014

2015

2016

Market begin year

Jan 2015

Jan 216

Jan 2017

Russia

USDA Official

New Post

USDA Official

New Post

USDA Official

New Post

Beginning Stocks

0

5

0

8

0

7

Production

84

84

70

69

75

70

Other Imports

103

103

120

110

117

110

Total Imports

103

103

120

110

117

110

Total Supply

187

192

190

187

192

187

Other Exports

3

3

2

2

2

2

Total Exports

3

3

2

2

2

2

Human Dom.

184

181

188

178

190

180

Other Use, Losses

0

0

0

0

0

0

Total Dom.

184

181

188

178

190

180

Total Use

187

184

190

180

192

182

Ending Stocks

0

8

0

7

0

5

Total Distribution

187

192

190

187

192

187

Production of WMP and NFDM

FAS/Moscow increased its previous 2016 WMP production forecast to 44,000 MT, which is an annual increase of 2,000 MT. After the positive start of the year, domestic producers are motivated to increase output due to a promising favorable market outlook for WMP. Stronger production growth is not expected because the exporters from Belarus most likely will be able to offer very competitive products in terms of price-quality ratio and maintain the market share they gained in 2014-2015. In 2015 WMP production decreased by 4,000 MT to 42,000 MT; FAS/Moscow has revised the previous estimate based on the available year-end Rosstat statistics. FAS/Moscow forecasts 70,000 MT of NFDM production in 2016, a minor annual increase (1,000 MT). Considering the anticipated decline of butter production in 2016 and the reported decline of NFDM output in the first quarter of 2016, the realization of the stable production forecast will strongly depend on the implementation of the state intervention purchases plans. In 2015 NFDM production decreased by 5,000 MT to 69,000 MT; FAS/Moscow has revised its previous estimate based on the available year-end Rosstat statistics.

The milk powder output traditionally increases in Russia between May and September each year, although the total annual production volume depends on the specific market situation. Most of the producers do not specialize exclusively on milk powder production, and add the powders to their summer assortment, store it and use between November and March to reduce expenses during the “low milk season". Some unused capacity at drying facilities exists and dryers may increase the output of milk powder when the immediate market is favorable and additional sales are promising profits. Considering the flexibility of the industry to reduce or increase powder production, the annual output in 2016 will be influenced by four major factors: fluctuations of the demand for milk fat and protein ingredients from the domestic food industry in the course of the year, pricing policies of the government of Belarus, the seasonal surplus of raw milk in summer, and the possible launch of GOR intervention purchases of 4,000 MT of WMP and 6,000 MT of NFDM in nine pilot regions. During the first quarter of 2016, production of NFDM in Russia declined by 12 percent compared to the same months of 2015, while the production of WMP has increased by 14.6 percent compared to the first quarter of the previous year. According to industry contacts, the demand for dairy products with milk fat substitutes is much lower in the beginning of 2016 compared to the same months of 2015, and producers reduced their purchases of NFDM. On the contrary, demand for WMP in confectionary and bakery sectors showed some positive dynamics due to growth of export sales driven by the devalued ruble. Pricing policies in Belarus continue to significantly impact the price patterns of the Russian milk powder market. In the beginning of 2016, Belarus had increased the minimum recommended export prices for WMP by 8 percent (from Rub 185 per kg. to Rub 200 per kg.) and for NFDM by 6.25 percent (from Rub 160 per kg. to Rub 170 per kg.); prices for WMP and NFDM grew in Russia by 11.6 percent for WMP and 3.6 percent for NFDM.

WMP and NFDM Consumption

Based on current price trends, the final year-end market data, and the revised stocks, FAS/Moscow revised its previous forecast of WMP consumption in 2016 to 80,000 MT. The projection is increased to 2.6 percent growth from zero. In 2015 WMP consumption was revised to 79,000 MT.

The demand for NFDM is anticipated to stabilize, and the forecast of NFDM consumption in 2016 has been changed to 178,000 MT, equal to the consumption of 2015 (revised from 188,000 MT, the previous estimate). The previous increase in demand for NFDM followed the food embargo, when producers of milk-containing cheese products and spreads increased their use of NFDM as an ingredient. As noted in this The current cheese market is balanced, and there are no expectations of further increase of NFDM use for cheese products this year. After falling in 2015, the demand for WMP ingredient from food producers has improved in the beginning of 2016.

WMP and NFDM Trade FAS/Moscow increased 2016 imports forecast for WMP to 38,000 MT (from the previous 33,000 MT) and decreased the forecast of NFDM imports to 110,000 MT (from the previous 117,000 MT). The estimate is based on the assumption that Belarus will be following the price strategies that allow maintaining the volume of WMP and NFDM exports at 2015 level. FAS/Moscow changed 2015 import estimates of WMP to 38,000 and NFDM to 110,000 MT based on the available year-end trade data.

In 2015 Russia imported 61.58 percent of the total volume of NFDM and 48.1 percent of the WMP it consumed. The share of imports in domestic consumption of milk powders is anticipated to remain high because the suppliers from Belarus will likely continue offering low prices that significantly impact price trends in the neighbor market.

Belarus has strengthened its position as the major supplier of dry milk powders to Russia after the August 2014 import embargo. In 2013 the Belarusian share of Russian NFDM imports was 64.8 percent, of WMP – 89 percent. In 2015 Belarus accounted for more that 95 percent of both WMP and NFDM imports. That share has increased, although the value of this trade deteriorated due to ruble depreciation. Compared to 2013, the year preceding the embargo, the value in US dollars of shipments of WMP and NFDM from Belarus has fallen by 51 percent and 40 percent, respectively.

Production Information

Russian Quarterly Milk Production, All Types of Producers, 1999- Q1 2016, 1,000 MT

Year

Annual

Quarters

I

II

III

IV

1999

32,274

5,846

10,784

10,347

5,297

2000

32,259

5,861

10,646

10,323

5,429

2001

32,874

5,879

10,766

10,419

5,810

2002

33,462

6,240

10,813

10,352

6,057

2003

33,316

6,358

10,519

10,400

6,039

2004

31,861

6,149

10,081

9,844

5,787

2005

31,070

5,880

9,677

9,559

5,954

2006

31,339

5,946

9,552

9,633

6,208

2007

31,988

6,080

9,723

9,766

6,419

2008

32,363

6,218

9,814

9,835

6,496

2009

32,570

6,201

9,764

9,898

6,707

2010

31,847

6,270

9,610

9,573

6,394

2011

31,646

6,109

9,380

9,524

6,633

2012

31,756

6,434

9,480

9,427

6,415

2013

30,529

6,155

9,007

9,074

6,293

2014

30,791

6,114

9,018

9,184

6,428

2015

30,550

6,200

8,839

8,956

6,553

2016

6,276