Ukraine. Dairy and Products.Annual Oct. 13, 2016

Highlights

Fluid milk production is expected to decrease in 2016-17 due to lack of foreign markets for Ukrainian dairy products. Exports of almost all processed dairy products to Russia stopped in 2014 and are not expected to recommence. Ukraine will continue to export dried dairy products and butter to utilize excess milk supply. Industry's efficiency will be improving due to increased investments in industrial milk production. Domestic demand shifted toward the cheapest products and is expected to stabilize in 2016.

Executive Summary

Due to lack of foreign markets, low world market prices and increased competition in the region, Ukraine's milk production is expected to drop in 2016 and 2017.

Ukrainian milk producers and processors concentrated on the domestic market and actively searched for new foreign markets for value-added dairy products. Once significant, the Russian cheese market remains closed for Ukrainian products since August 2014. Exports to smaller traditional markets in Central Asian countries were also complicated as new transit barriers had been imposed by Russia in the middle of 2016.

Unfortunately, no new export markets were discovered for Ukrainian cheese, butter or whole dairy products. Ukrainian cheese quality often needs improvement, and the type and taste of the product limits its distribution mainly to Former Soviet Union (FSU) countries.

After the Russia ban Ukrainian processors had no choice but to convert additional milk into non-fat dried milk and sell it on the world market at whatever price prevailed. Food and Agriculture Organization (FAO) experts estimate the excess milk supply for 2106 at 800 TMT. No state programs for butter or dairy product purchases were implemented in 2016 due to lack of financing.

Decreased margins from NFDM production in comparison with traditional cheese depressed fluid milk prices in 2016. Prices for industrially produced milk used for whole dairy products remained low, but attractive for producers, resulting in a fluid milk production increase. Households decreased their milk production and their share in total production. Overall milk production dropped.

Production

The macroeconomic environment in Ukraine remained very hostile due to conflict in Eastern Ukraine and the annexation of Crimea by Russia. Political and economic turmoil led to the Russian market closure and significant currency devaluation.

Despite significant negative impacts on domestic market real revenues, devaluation provided Ukrainian dairy producers with some competitive advantage on the world market in 2014-15. However as of 2016 only NFDM exports increased notably. The industry was slow in developing foreign markets for other dairy products due to inconsistent quality. The majority of milk for further processing continues to be supplied by households. In 2016 the currency devaluation impact is expected to disappear or to decrease significantly.

Raw Milk

Milk production in Ukraine is expected to decrease in 2016-17 due to decreased demand from the processors and export markets closures. Although on decline, fluid milk production may start to stabilize in 2017 as no new market shocks are expected.

Currency devaluation brought milk prices to an all-time low in 2015. An especially strong shock was experienced by producers in February of 2015 after a short-term currency drop of 200 percent that brought real milk prices down to 9 US cents/kg for a couple of days. In 2016 devaluation continued at a much slower pace, but raw milk prices remained low and comparable to 2015 levels.

Low milk price facilitated inefficient producers' market exit. Industrial enterprises managed to increase fluid milk production, while reducing animal numbers. Household productivity declined due to decreasing cow numbers and milk yields. Due to relatively small share of industrial fluid milk production (only 26 percent in 2016) the total milk production decreased.

Cow number decreases will continue a two-decade trend of animal number reduction accompanied by increased productivity. Being relatively low-efficient producers, rural households use a low-cost production model with a lot of seasonal crazing and minimum usage of expensive feeds or veterinary medicine.

Household milk is processed into basic, cheap dairy products and sold on open-air markets without any statistical record. Significant share of this milk is processed into soft cheese. Households were not able to benefit from the devaluation despite the demand shift into the low price/low quality category of dairy products. The quality of milk procured from households remained quite low. Bacterial contamination and veterinary problems resulted in decreased procurement prices for rural households. They get only 60-70 percent of the average price for industrially collected milk. The gap has widened significantly since 2013, when milk quality became an issue for export markets.

Ukrainian dairy processors could not avoid household milk purchases due to insufficient quality of industrially produced milk. They are trying to improve milk quality through the multiple programs: sanitary education, milk collection points with modern chilling equipment, subsidies for veterinary and breeding services, loyalty programs, etc. Ukrainian processors are also doing their best to increase the share of industrially processed milk. In 2015 it reached 57 percent of total fluid milk purchases, in comparison to 52 percent in 2014.

This trend for improved quality of Ukrainian processed products is expected to continue in 2017. It is also forced by foreign markets that demand quality products in addition to the very low price that Ukrainian processors can offer.

Butter

Butter production in 2015 decreased a bit as expected, but overall production level remains relatively high. Dairy processors see no alternative to cheese production, other than butter and NFDM, which will not likely see a significant production decrease. Making butter and NFDM is also one of the few ways that lower quality; household-produced milk can be used.

Butter price largely remains flat, following the world market trend. Insignificant price fluctuations are not expected to influence butter production by the end of 2016. Production in 2016 is expected to be just a bit higher than in 2015, driven by the same set of factors. Production in 2017 is expected to increase insignificantly following the world market stabilization and slight price rebound.

NFDM / WDM

Production of NFDM is closely tied to butter production. Russia's cheese market closure leaves producers with no choice but to switch to butter and NFDM for which world markets exist. Diversified markets in Asia and Africa where NFDM price is the major competitive advantage keep production going.

Like butter, NFDM price remains similar to 2015, but does not show any upward trends. Nevertheless production in 2016 is expected to increase insignificantly. With yet another small increase in 2017. WDM production is produced predominately for domestic market use. Its production is expected to remain flat in 2016-17.

Hard

Once very attractive for Ukrainian processors due to availability of the Russian market, the hard cheese market is now hardly one third of what it used to be. Producers concentrated on the domestic market and few remaining traditional markets. Being relatively high value added products, domestic cheese consumption suffered from the economic crisis developments of 2013-15. Domestic consumers were not able to sustain the same consumption levels and cheese production continued to decline.

Weak demand leaves no chance for hard cheese price increases, similar to other processed dairy products; domestic hard cheese prices remained flat and not very different from the 2015 level.

Soft and Melted

Soft and melted cheeses are significantly cheaper and their production rebounded in 2016. Those other cheeses' combined influence was strong enough to offset the hard cheese decline.

After significant economic downturn, Ukraine's GDP is expected to grow 1.5 percent in 2016 and 2.5 in 2017. Inflation estimates are expected to be close to 13 percent in 2016 and 8.5% in 2017.

Ukrainian consumers cut consumption of almost every single food product in 2015. For many product categories consumption decreases were very significant. However, it must be noted that official statistics does not include consumption in Russia annexed Crimea (1.9 million people) and some Eastern regions of Ukraine. Partially the drop can be explained by these developments. The rest of consumption contraction was caused by decreases in disposable income. Many Ukrainian retail chains reported a 30 percent contraction in turnover compared to 2013.

Dairy products remain a staple food in Ukraine and consumption suffers the least during economic turmoil. However, the consumption structure changed considerably in 2015. A significant share of low-income consumers stopped buying processed dairy products in official stores, switching to basic traditional dairy products from open-air markets. This includes soft cottage cheese to replace hard cheese, sour cream and fluid milk. Overall consumption of dairy products decreased in 2015 (by 6 percent) for the first time since 2011.

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

Exports of cheese kept declining in both 2015-16 as access to the major markets either disappeared (Russia) or became complicated (Central Asia and other FSU countries). No markets were found to replace Russia as a major consumer of Ukrainian cheese. Imports of hard cheese from Poland for the middle income market segment, and Germany, Netherlands and Italy for upper income consumers dropped to 4,000 MT in 2015. In 2016, Poland remained the major exporter with almost 50 percent market share as the hard cheese market started to recover.

NFDM

Export of NFDM remains diversified with over 84 percent of sales distributed among 20 destination markets. The low quality of Ukrainian milk pushes it into price-sensitive markets mostly in Asia and North Africa. Exports of NFDM in 2016-17 are expected to stay high due to lack of foreign

Butter

Following the Butter and NFDM production increase Ukraine had no choice but to increase butter exports. No domestic market exists for this additional supply. New markets in Turkey, Morocco and Egypt were discovered. After some decline in 2016, exports of butter are expected to stabilize in 2017.

Dairy, Milk, Fluid 2015 2016 2017

Hard and Soft Cheese PSD Table

Butter PSD Table

Nonfat Dry Milk

Dry Whole Milk Powder