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USDA GAIN: Dairy and Products


25 May 2012

USDA GAIN: Russian Federation Dairy and Products Semi-Annual 2012USDA GAIN: Russian Federation Dairy and Products Semi-Annual 2012

The Russian dairy industry has demonstrated a better-than-expected start to 2012, increasing production as prices continue to show resiliency to the onset of seasonally higher production.
USDA Gain Report - Dairy and Products

In addition to a favorable prices, output remains supported by slowing dairy herd contraction, new market access trade barriers, maintained levels of state support, higher per cow feed stocks, and improving milk yields and animal husbandry at agricultural enterprises. Nonetheless, Russia's dairy statistics as well as its support programs have recently come under increased scrutiny for gross inaccuracies and failure to reach production targets. Taken in combination with domestic uncertainties concerning Russia's pending WTO accession, the GOR is again entertaining new proposed support measures.

Summary

The Russian dairy industry has demonstrated a better-than-expected start to 2012, increasing production as prices continue to show resiliency to the onset of seasonally higher production. In addition to a favorable prices, output remains supported by slowing dairy herd contraction, new market access trade barriers, maintained levels of state support, higher per cow feed stocks, and improving milk yields and animal husbandry at agricultural enterprises. Nonetheless, Russia's dairy statistics as well as its support programs have recently come under increased scrutiny for gross inaccuracies and failure to reach production targets. Taken in combination with domestic uncertainties concerning Russia's pending WTO accession, the GOR is again entertaining new proposed support measures.

Fluid Milk

A higher revised 2012 milk production forecast reflects 4.5% stronger milk production in January- March compared to the previous year. In addition to a favorable prices, output remains supported by slowing dairy herd contraction, new market access trade barriers, maintained levels of state support, higher per cow feed stocks, and improving milk yields and animal husbandry at agricultural enterprises. Combined, federal and regional state programs allocated more than RUR27 billion ($900 million) for dairy cattle husbandry in 2011 and RUR94 billion ($3.1 billion) over 2008-2011. In 2012, the Ministry of Agriculture expects the amount of funds shall be roughly equivalent. Feed stocks were 39% higher as of April 1, 2012, compared to the April 1, 2011. Milk yield increased in modernized and new agricultural farms to 1,217 kilograms in January-March 2012 from 1,108 in January-March 2011. FAS Moscow increased inventories of dairy cows-in-milk for 2010, 2011, and 2012 following revisions by Russia's state statistical agency (Rosstat).

In accordance with a producer-processor agreement, the raw milk price range is generally fixed at RUR12-16/liter in 2012. Raw milk prices remain stable but are edging slightly higher to RUR16/kg. At the end of April, the Ministry of Agriculture responded to producer concerns of alleged lower producer milk prices (coinciding with the start seasonally higher production) by charging the regional authorities to monitor Belarusian dairy imports to ensure compliance with their bilateral agreement on price and volume. In contrast to the retail market, 2012 raw milk prices remain below 2011.

Fluid Milk Prices, RUR/kg

Rosstat reported Russia produced 31.7 MMT of fluid milk in 2011. Agricultural enterprises accounted for 45.4% (44.9%) in total milk production in 2011 (2010) while private households produced 49.7% (50.4%). Milk yields at agricultural enterprises totaled 4,741 (4,589) kilograms in 2011 (2010).

Cheese

Through April 2012, production of cheese and cheese products was 6.0 percent higher while imports of all cheeses (including cottage cheese) was 2.1 percent lower, compared to January-April 2011. Cheese prices are beginning to trend lower in line with historical trends, but the market has so far resisted the traditional sharp summer decline, which is beginning to widen the gap of current prices above those of past years.

Cheese production decreased to 425,359 MT in 2011 as processors began to face high milk prices and appeared to favor butter, cream, and milk powder production. The primary foreign suppliers were the EU (52%), Belarus (26%), and Ukraine (20%).

Russia prohibited imports of cheese from several Ukrainian facilities in February 2012, which Russia claimed were in violation of its requirements, particularly for the alleged use of tropical oils in cheese production. Russia lifted restrictions from some facilities at the beginning of May 2012 following inspections. Russia and Ukraine also agreed to create a working group to address harmonization of technical regulations between the two countries, specifically related to cheese production.

According to My Business Magazine (#139, December 2011), hard cheeses occupied 65% of total cheese trade in 2010, followed by cheese spreads (24%) and soft and lactic cheese (11%). Forty-one percent of customers were said to buy hard cheeses once or twice per week. The share of cheese marketed under private labels was 9% in 2011 and continues to grow, the source reported.

Butter

Through April 2012, production of butter was 6.8 percent higher while imports were 22.8 percent lower, compared to January-April 2011. Butter prices remain steady, near the highs set at the end of 2011.

Butter production increased to 216,273 MT in 2011. The primary foreign suppliers were Belarus (36%), New Zealand (27%), and the EU (24%).

Milk Powders

NOTE: FAS Moscow has changed its estimation of milk powders after discovery that its previous estimates mistakenly included dry whey and milk replacer production and as well as concentrated/condensed milk trade from Belarus.

Through April 2012, production of granulated milk powder was 22.0 percent higher while imports of concentrated milk and milk powder were 12.4 percent lower, compared to January-April 2011.

In 2011, production of whole milk powder reached 49,863 MT, including 9,230 MT with 2-18% fat and 40,633 MT with 20% fat, and skim milk powder production reached 56,549 MT. Belarus held the dominant position in market share at 74% for WMP and 62% for NFDM, followed by the EU at 14% and 27%, respectively.

Policy

WTO Accession

The Russian Ministry of Agriculture tasked the dairy industry associations and regions in April 2012 to prepare a “road map” for the development of Russia's dairy industry, reflecting existing and additional necessary measures. The National Dairy Producers Union proposed to increase the subsidy level from RUR3.0 to RUR5.0/ liter of milk produced as well as start a new subsidy of RUR25.0/kg of beef produced from 2013 to 2020 in order to counter alleged impacts from WTO accession.

Upon Russia's WTO Accession in mid-2012, Russia's dairy sector is subject to market opening. Russia will immediately eliminate its current requirement for foreign suppliers to be on a GOR-approved supplier list. Also, over transition period, Russia will be bound to lower its tariff on dairy products from an average of 19.8% to 14.9% and a new tariff-rate quota will be administered for select modified whey. However, in April the Ministry of Agriculture requested the Russian dairy industry to submit proposals by June 1, 2012, to increase import duties on milk and dairy products in hopes of renegotiating its WTO commitments.

Presidential Audit of the Ministry of Agriculture

At the end of 2011, a Presidential audit of the Ministry of Agriculture showed that the target indicators for the dairy industry had not been met and, in particular, noted the questionable variations in official cattle inventories that had previously been used as the basis for distributing federal subsidies to the regions. The audit concluded that the creation of a new state program “On the Development of Agriculture, 2013-2020,” it should improve mechanisms for counting cattle inventories, increase support for milk producers, as well as tighten the rules on the use of powdered milk and vegetable oils in the manufacture of dairy products.

Strategy for the Development of the Russian Food Industry to 2020

GOR Resolution #559R of April 17, 2012, approved the “Strategy for Development of the Russian Food Industry until 2020” and contains three main objectives relative to the dairy industry:

  • increase production of dairy products from milk-based resources;
  • decrease imports of milk and dairy product resources; and
  • increase human consumption of dairy products.

The Strategy notes production is carried out by more than 1,500 producers of various forms of ownership, including 500 large and medium size establishments. As well, average annual capacity of dairy processors in 2010 was 16.48 MMT (57% capacity utilization) for production of dairy products, 543,900 MT (63.4 percent) for the production of cheese and cheese products, and 614,400 MT (27.4 percent capacity utilization) for the production of butter and butter products. The Strategy also attempts to identify the perceived problems hindering the development of the dairy industry, including (1) the decline in raw milk production, (2) seasonality of production, (3) a low proportion of liquid premium milk, (4) lack of refrigeration systems on dairy farms, as well as (5) depreciation of fixed assets at dairy processors, most of which were built in 1970 - 1980 and do not meet modern requirements for energy efficiency and environmental protection, nor allow the processing of byproducts, including dry whey, lactose, milk protein concentrates, milk replacer, and nutritional and biologically active substances.

By 2016, the Strategy targets production of butter – 267,000 MT, cheese and cheese products – 529,000 MT, and whole milk products to reach 12.5 MMT. In order to achieve this, the Strategy considers it necessary to build 19 new facilities and 142 renovated facilities for milk, butter, and cheese production as well as whey drying/processing at an estimated investment cost of RUR47,493 million, of which RUR33,245 million will be borrowed funds. Milk processing plants will have a targeted daily capacity of 200-500 MT.

Ultimately by 2020, the Strategy targets production of milk to reach 38.2 MMT, butter – 280,000 MT, cheese and cheese products – 546,000 MT, and whole milk products – 13.5 MMT (whole milk equivalent). It also targets the commercialization of 1.0 MMT of whey. In total, the Strategy envisions the building of 64 new facilities for processing milk, cheese, and whey and the renovation of 296 existing facilities.

The Strategy also calculated 2010 milk consumption at 247 kg per capita versus the recommended norm of 320-340 kilogram. [Note: Russia's Federal Service on Customers' Rights Protection and Human Well-being Surveillance estimates per capita consumption of 240 liters of milk instead of the recommended 340-360 liters. More specifically, Russia's Nutrition Institute developed the following recommended consumption norms: whole milk – 116 liters, butter – 6.1 kg, sour milk – 6.5 kg, cottage cheese – 8.8 kg, cheese – 6.1 kg, and ice cream – 8 kg.]

Customs Union Technical Regulation “On Milk and Dairy Products”

At the end of April 2012, Customs Union (CU) member countries discussed their major differences on the CU technical regulation “On milk and dairy products”. They agreed on the following:

  • exclude “vegetable-milk containing products”;
  • tighten tolerances for antibiotic residues (effective July 1, 2015),
  • cancel categories of milk with establishment of maximum level of bacterial insemination and somatic sells content (effective July 1, 2017).

Several issues were not resolved. Particularly, the Russian side pushed to reject reconstituted milk as equivalent to “drinking milk”. The issue will be elevated to consideration at the governmental level of the CU.

CU member countries also continue to discuss the technical regulation as it relates to the sensitive issue of tropical oil use in dairy manufacturing. The Russian Ministry of Agriculture requested the urgent establishment of an interagency working group to monitor compliance with technical regulations on milk and dairy products and fight counterfeit products, especially in the case of small and medium-sized regional milk processing enterprises. According to the Ministry of Economic Development (MED) Russia has 2,000 dairy product producers, and 99.5% of them use vegetable oil to decrease production costs and compensate for a shortage of high-quality milk fat. MED concluded that Russia needs 968,000 MT of milk fat for the dairy industry while milk fat supplies account for only 601,000 MT, creating a 367,000 MT deficit being filled by vegetable fat. Such products remain popular among price-conscious, low-income consumers. MED noted the cost for sour cream where milk fat was substituted by vegetable oil is 50% lower.

May 2012

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