Although Russia is not a major destination for U.S. dairy exports, the U.S. is likely to ultimately be affected by a spillover effect.
By Will Babler and Luke Strub, Atten Babler Commodities LLC
In early August, Russia banned imports of many Western foods in retaliations for sanctions placed on Russia for its involvement in Ukraine. The one-year ban became valid August 7 and includes milk and dairy imports from the EU-28, the U.S., Australia, Canada and Norway. Imports from Ukraine had already been banned since July. Dairy imports from New Zealand, Argentina, and Brazil were not banned, but are unlikely to be able to fill the void left from the banned products.
Russian Dairy Imports
According to USDA FAS, Russia is the second largest dairy importing nation in the world, trailing only China. Russia is the world’s largest importer of butter and cheese, while also finishing in the top five importing nations for whole milk powder (WMP) and nonfat dry milk (NFDM). Russia’s dominance in these import markets is immense, accounting for nearly half of the world’s butter imports and nearly a third of global cheese imports in 2013.
Potential Impact on the EU-28
The EU-28 is likely to be most directly affected by the Russian import ban as Russia has been an important destination for European butterfat and cheese exports in recent years. EU cheese exports to Russia represent 33% of the EU’s total cheese exports, and EU butterfat exports to Russia account for 32% of the EU’s total butter exports. With the relative importance of European dairy product exports to Russia, it is of little surprise that European dairy product prices have fallen significantly since the Russian ban was announced. From the first week of August to the second week of September, key EU dairy product prices have fallen significantly, as shown below.
Although international dairy product prices had been declining prior to the announcement of the Russia dairy import ban, percent declines over the six-week period since implementation of the Russian dairy ban have been the largest year to date for all products. The decline in butter prices was the largest in over four and a half years, and the declines in WMP and SMP/NFDM were the largest in over 10 years.
Potential Impact on the U.S.
Unlike the EU-28, U.S. dairy exports to Russia represent an insignificant fraction of total U.S. dairy exports, having accounted for just 0.5% of total U.S. dairy product exports since 2000. Although Russia is not a major destination for U.S. dairy exports, the U.S. is likely to ultimately be affected by a spillover effect, where more product is available to be exported elsewhere, particularly from the EU-28. Many believe that European food exporters, among others affected by the ban, could target regions currently served by New Zealand and the U.S. to take up the expected surplus created by the Russian ban.
Areas including the Middle East, North Africa, South Korea, and Japan could be particularly susceptible to relative declines in U.S. dairy imports. EU-28 butter could displace U.S. butter in the Middle East and North Africa, which accounted for 64% of total U.S. butterfat exports in 2013. Likewise, EU-28 cheese exporters could look to South Korea and Japan for potential sales. South Korea and Japan are two of the top three destinations for U.S. cheese exports, accounting for 25% of total U.S. cheese exports in 2013. Overall, the Middle East, North Africa, South Korea, and Japan accounted for a combined 24% of total U.S. dairy exports in 2013.
It is important to keep an eye on international trade affairs for events that could increase downside price risk. International trade affairs rarely act in isolation to the rest of the world, and the Russian dairy import ban is no exception. Although the U.S. does not directly export more than a fraction of their total dairy exports to Russia, as excess supply for export becomes available in other major dairy exporting regions, including the EU-28, global dairy prices are likely to decline, affecting domestic markets.
Will Babler is a principal with Atten Babler Commodities LLC. The firm serves producers, processors and end users in the dairy industry by providing education, margin management programs and futures and options brokerage services. You can reach Atten Babler Commodities at 800-884-8290, firstname.lastname@example.org or www.attenbabler.com.
The information and comments contained herein are provided as general commentary of market conditions and are not and should not be interpreted as trading advice or recommendation. The information and comments contained herein are not and should not be interpreted to be predictive of any future market event or condition. Information contained herein is obtained from sources believed to be reliable, but cannot be guaranteed as to its accuracy or completeness.