17 April 2008

8 minute read

Report Highlights

Milk production is forecast to increase 1.6 percent in 2008, reaching 32.7 million metric tons (MMT) compared to the previous year as dairy operations continue to replace low yielding domestic cows with imported pedigree animals and better genetics. However, domestic milk output remains well below the target outlined in Russia's National Priority Projects (NPP) for Agriculture. The number of cows in milk is expected to increase slightly in 2008 reaching 9.92 million head. Rising grain prices are hurting producers' profits as feed becomes more expensive. In April 2008 the farmgate price for raw milk dropped to 8-9 RUR/kg compared to 15RUR/kg in late 2007 even as retail prices hit record levels. Demand for pedigree dairy cattle and elite bovine genetics remains strong in Russia as dairy operations look to increase productivity by improving genetic stock. Veterinary certificates for U.S.-origin live cattle and bovine embryos have been negotiated.

Executive Summary

Milk production is forecast to increase 1.6 percent in 2008, reaching 32.725 million metric tons (MMT) compared to the previous year as dairy operations continue to replace lowyielding domestic cows with imported pedigree animals and genetics. However, domestic milk output remains well below the target outlined in Russia’s National Priority Project (NPP) for Agriculture. Rising grain prices are taking a bite our of producers’ profits as production costs increase. At the same time the farmgate price for raw milk dropped in April 2008 to 8- 9 RUR/kg1 compared to 15 RUR/kg seen in late 2007 even as retail prices hit record levels.

The number of cows in milk is forecast to increase slightly to 9.92 million head in 2008 compared to 9.91 million head in 2007. The national herd average in 2007 rose to 3,798 kilograms compared to 3,623 kilograms in 2006. This is well below genetic potential and leaves room for considerable growth in Russia’s average per-cow productivity merely through better nutrition, proper veterinary care, and adoption of modern herd management practices.

Imports of cheese, buttermilk, and yogurt increased substantially in 2007 and are expected to grow even higher in 2008 as Russia begins to lift import restrictions on neighboring countries. Consumption of domestic raw milk is steadily decreasing due to record high retail prices. The Russian Federal Statistics Agency (Rosstat) recently reported that average food prices increased by 15.6 percent in 2007 compared to the previous year. Prices for milk and dairy products increased 30.4 percent while the cost of butter increased 40 percent in 2007.

Production

Milk production is forecast to increase 1.6 percent in 2008, reaching 32.725 million metric tons (MMT), as dairy operations continue to improve low-yielding domestic herds with imported pedigree animals and genetics. Ministry of Agriculture officials have publicly expressed concern that domestic milk production has not come close to meeting the increase envisioned in Russia’s National Priority Project (NPP) in Agriculture (see RS7020). Market analysts attribute the modest growth in domestic milk production to general underperformance of the dairy cattle sector in Russia and rising feed prices.

Russia currently has approximately 9.91 million milk cows although this number is forecast to increase slightly to 9.92 million by the end of 2008, continuing a reversal of long-term decline since 1990. One-third of total domestic Russian milk is produced in 7 provinces2 demonstrating that production of dairy products is gravitating to the milksheds of major population centers or areas with some sort of relative advantage in dairying. From January- March 2008, Russian milk production increased 2 percent over the same period in 2007. Per cow productivity in 2007 rose to 3,798 kilograms compared to 3,623 kilograms in 2006. This is well below genetic potential and leaves room for considerable growth in Russia’s per-cow productivity merely through better nutrition, proper veterinary care, and herd management. The calf crop in 2007 was at the same level as in 2006. Cattle losses in 2007 reached 2.6 percent compared to 2.4 percent seen in 2006.

Approximately 48 percent of Russia’s milk is produced on private subsidiary plots. In 2007, the last year for which complete data are available, out of 32 MMT of milk produced in Russia, 16.64 MMT was produced in the commercial dairy sector. As the aging rural population continues to dwindle, and is not replaced, room for expansion by profitable commercial dairy farms is expected to unfold. In general, commercial dairy farms showing gross profitability of at least 40 percent tend to stay in business and expand; dairy farms with lower than 40 percent gross profitability tend to go out of business.

Milk production was very profitable in the second half of 2007 and the first quarter of 2008. During this time, strong demand for raw milk increased the farmgate price to 15 RUR/kg. Many large dairy operations took out bank loans to expand their operations as market analysts predicted increasing demand and even higher prices. In April 2008, the farmgate price for raw milk suddenly dropped to 8-9 RUR/kg due, in part, to season fluctuation even though average retail prices for raw milk are at record levels.

Consumption

Slower growth in the manufacturing sector, a resumption of higher import duties on dairy products, and rising retail prices are expected to keep dairy consumption relatively flat in 2008. Domestic consumption of raw milk will grow 1 percent while factory use consumption is expected to grow 2 percent. Domestic consumption of cheese will decrease 1 percent in 2008 as average retail prices are up 60 percent compared to last year. Butter consumption will likely grow 5 percent in 2008.

Trade

During the second half of 2007, Russian imports of cheese, buttermilk and whey increased substantially over the same period in 2006. Imports are forecast to grow even further in 2008 and 2009 as the Russian government takes measures to combat rising prices. For example, Russia approved dozens of new Ukrainian dairy facilities for export. In addition, Russia announced that 125 Belarussian dairy facilities would be permitted to export to Russia beginning May 1, 2008, after joint inspections took place. Belarus exported 2.1 MMT of dairy products to Russia in 2007. Russia and Belarus signed an agreement in March 2008 permitting Belarus to export 2.8 MMT of dairy products to Russia in 2008 and 2009; 2.7 MMT in 2010; 2.6 MMT in 2011; and 2.5 MMT in 2012.

Russian exports of buttermilk, yogurt, cheese and butter to neighboring countries increased substantially in 2007 and are expected to increase even further in 2008. Russia’s largest export markets for dairy products include Ukraine, Kazakhstan and Azerbaijan.

Prices

Dairy retail prices are growing at a higher rate than overall inflation in Russia. From June 2007 to March 2008, the retail price for raw milk jumped 33 percent while the retail price for cheese rose 60 percent.

Rosstat recently reported that consumer prices in Russia increased 11.9 percent in 2007 and 4.8 percent in the first quarter of 2008. Food prices rose even higher in Russia reaching 15.6 percent in 2007. Fluid milk prices increased 30.4 percent while the cost of butter jumped by 40 percent in 2007. Market analysts believe that dairy prices are rising in Russia due in part to changes in European Union (EU) farm policies, rising grain prices and changing trade patterns among Russia’s regional neighbors. Imported European milk is relatively expensive thought of much higher quality than domestic. Less than one-third of all raw milk produced in Russia meets the EU’s high quality standards.

Dairy Stocks

Stocks of dairy products and raw dairy material increased in 2008 due to higher import volumes from neighboring countries and rising retail prices. Market analysts have stated in recent press articles that consumption of most cheeses has fallen significantly during the last six months.

Feed stocks

Feed stocks as of April 1, 2008 are at the same level as in 2007. Lower feed stocks in 2007 have hindered milk production and contributed to higher dairy prices.

Policy

The Russian government decided not to extend lower import duties on milk and cheese introduced last fall in an attempt to lower rising prices. According to representatives of the Ministry of Economic Trade and Development, the measure was not an effective tool in slowing the growth in dairy prices. The Russian government signed an order in October 2007 temporarily reducing import duties on milk and dairy products from 15 percent to 5 percent until May 1, 2008 (see RS7071). Import duties on dairy products now reverted back to their original levels. As dairy retail prices continue to grow, consumers have begun demanding that federal and regional government officials should consider special subsidies for raw milk production to protect low-wage earners from rising dairy prices.

Marketing

Health certificates for live cattle and bovine embryos have been negotiated, permitting export sales to Russia. Demand for pedigree dairy cattle and genetics is booming in Russia. Copies of the health certificates can be found at the USDA Animal and Plant Health Inspection Service website http://www.aphis.usda.gov/vs/ncie/iregs/animals/rs.html. Baby food producers based in Russia have begun purchasing imported raw milk as most locally produced milk does not meet their quality control standards. Domestic milk producers can only provide approximately 15 percent of the high quality product needed for baby food manufacturing.

As of May 1, 2008, Russia permitted imports of poultry and dairy products from 135 Belarussian facilities after performing joint inspections in the first quarter of 2008. Six other dairy facilities in Belarus will be jointly inspected in June 2008 as well.

Further Reading

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