Russia’s dairy industry has faltered along with the Russian economy, but that doesn’t necessarily mean more exports for leading dairy exporters.
The battered Russian economy has spilled over into the nation’s dairy industry. While the World Bank is now calling for Russia’s economy to grow by 0.7 percent in 2016, this year the economy is forecast to contract 2.7 percent, cutting into both the ability of farmers to produce milk and the wherewithal of consumers to purchase dairy products.
Plunging oil prices and Western sanctions imposed over Russia’s aggression in the Ukraine have ravaged the country’s economy. If oil prices remain near $50 per barrel, Russia’s Ministry of Economic Development expects consumer prices in Russia to rise 11.9 percent, real wages to decline 9.6 percent, and disposable income to fall 6.3 percent in 2015.
Last August the Russian government implemented a ban on dairy product imports from the world’s largest exporters, including the European Union, United States, Canada, Norway, and Australia.
Mary Ledman, dairy economist with the Daily Dairy Report and president of Keough Ledman Associates Inc., Libertyville, Ill, says that while the ban is slated to expire in a couple of months, it is uncertain whether that will actually occur.
“Russian dairy producers initially benefited after the August 2014 ban on dairy imports,” says Ledman. “Domestic production filled retail shelves that were left barren from lack of imports.” Russian cheese production increased by 7 percent, or 47,000 metric tons, and butter output increased 15 percent, or 33,000 metric tons, according to a recent USDA Foreign Agricultural Service GAIN report.
“By the first quarter of this year, however, Russian consumers’ lack of purchasing power and their desire for less-expensive and better-quality dairy products resulted in a saturated market,” notes Ledman.
Looking forward, milk production in Russia is expected to decrease 2.2 percent to 29.5 million metric tons in 2015 as the country’s dairy herd contracts. The Russian dairy herd is expected to shrink by nearly 4 percent in 2015 to 7.75 million head compared to the prior year, according to USDA. The contraction will be driven by both economic conditions and lower wholesale milk prices, says Ledman.
“Russian government statistics indicate that backyard dairies account for 47 percent of the nation’s milking herd, while large-scale professional dairies account for about 40 percent of the herd,” notes Ledman. “Tighter margins due to rising production costs and depreciation of the ruble have prompted greater culling among the backyard farmers.”
However, the Russian government continues to support milk production via direct subsidies to commercial dairy operations to encourage modernization of existing facilities and construction of new ones. Last year, the government paid nearly $543 million to the country’s dairy producers in per-liter-of-milk subsidies, partial interest rate coverage for long- and short-term loans, and financial assistance for maintaining a purebred herd, according to the GAIN report.
“In addition, for 2015 the Russian government is considering reimbursing up to 20 percent of capital investments made on commercial dairy farms,” notes Ledman. “Despite these incentives, limited investments to modernize existing dairy operations are expected in 2015 because of poor macroeconomics.”
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