Putin Plugs the Dairy Pipeline

07:18AM Oct 08, 2014
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Russian leader Vladimir Putin dealt a nasty blow to the European and U.S. dairy industry in August. 

When Russia “invaded” Ukraine earlier this summer, the European Union (EU) and the U.S. responded
with economic sanctions and other tactics. In early August, Putin responded by blockading dairy product imports from the EU, U.S., Australia, Norway and Canada.

Da! Russia hasn’t allowed much of anything dairy from the U.S. to cross its border for years. This wasn’t and isn’t the problem. The problem is the EU, which has been sending huge volumes of several dairy products into Russia and other members of the federation for years.

Russia’s ban of EU dairy products will create a significant backlog of supplies. About one-third of the cheese exported by the EU during 2013 was delivered to customers in Russia. In other words, about 257,000 metric tons (MT), or 567 million pounds, moved east out of Western Europe. 

The EU also sent 37,000 MT of butter, 25,000 MT of dry whey, 21,000 MT of skim milk powder, 66,000 MT of yogurt and other dairy productions to Russia during 2013.

To put this into perspective, total cheese exports from the U.S. to all destinations during 2013 total 317,000 MT, or 698 million pounds. We exported about 6.3% of the cheese manufactured here; EU countries 
exported 8% of total output.

The Russians have, in some respects, cut off their nose to spite their face. The import ban theoretically blocks 75% of the amount of cheese the country imported in 2013, half of the butter and more than half of the whey and skim milk powder.

A well-respected U.S. diplomat reminded attendees at the U.S. Dairy Export Council board of directors meeting recently that the Russian government has, in the past, “left its population in very dire straits.”  On the other hand, another observer noted, the Russian black market will become much more liquid. Smuggling will abound.

The pain is yet to come, but here is what I think it will feel like at your dairy. The bottom line is that a huge volume of cheese needs to find a new home. Within a month, the European marketplace was seriously disrupted. The ripples of that disruption are just beginning to land on U.S. shores:

  • First ripple: EU dairy product prices tumbled lower with greater determination.
  • Second ripple: Overseas customers of U.S. cheese exports began “re-negotiating” and/or canceling their orders because they began to receive better pricing from EU suppliers. The price spread is far too wide for CWT to handle.
  • Third ripple: European and Oceania products will be arriving in the U.S.
  • Fourth ripple: As reported here in September, U.S. milk prices will correct and move sharply lower.
With a large portion of European Union production backlisted from Russia, the U.S. will be forced to offer competitively lower prices to international customers.