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Shake Out from Russian Ban Coming into Focus

18:35PM Oct 02, 2014

Russia’s ban on dairy products imported from the U.S., Europe, Canada, and Australia is creating problems for Europe and opportunities for South America and India.

Russia’s ban on dairy products imported from the United States, Europe, Canada, and Australia is creating problems for Europe and opportunities for South America and India.

Last week the European Commission announced that it was closing its Private Storage Aid (PSA) program to cheese. The announcement came less than a month after the commission decided to open the program to cheese following the ban. Originally the European Union’s PSA program was developed to provide support for butter and skim milk powder, but the Delegated Act allows for temporary modification of rules during extraordinary circumstances. Loss of the Russian cheese market, estimated near 1 billion euros, according to the commission, apparently qualified. When making its announcement in late August, the European Commission opened PSA to 155,000 metric tons of cheese.

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“In less than a month, current claims have consumed 87 percent of the total apportionment,” says Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle.

In a press release, the commission said it would shut down cheese PSA as of September 23 as a precautionary step so that it would not fill its total allocation by the end of the first month of purchases.

“But it was silent on whether the program would be reopened for cheese,” says Dorland.

In 2013, Russia accounted for more than 75 percent of Finland’s cheese exports, or 45,714 metric tons, and 51 percent of Lithuania’s, or 36,638 metric tons. While Finland and the Baltic states were most affected by the ban, several other countries were also exporting large volumes of cheese to Russia as well.

“Italy, however, was not one of them,” says Dorland. “Last year, Italy exported only 7,207 metric tons of cheese to Russia, yet Italy submitted PSA claims for between 74,000 and 84,000 metric tons of cheese in cold storage, according to various reports. This claim far exceeds any other country’s request.”

Russia looks to India and Latin America

“At the same time Europe wrestles with where to send its cheese, Russia is broadcasting where it intends to source dairy products for the year-long life of the ban,” notes Dorland. “And one thing is clear: Russia is initially turning to India and Latin America.”

Russia and India recently reached an agreement for India to supply dairy products to Russia, says Dorland. “This month, Indian dairy facilities will go through a plant inspection process. Once the inspections are completed, Russia will need an additional 30 days to issue certificates,” she says. “Based on that timeline, Indian dairy companies could begin supplying the Russian market as soon as December.”

Russia is also looking to source dairy products from Brazil. Brazil’s Agriculture Minister Marcelo Junqueira announced in late September that one Brazilian dairy company was already shipping to Russia, and three others reportedly have the needed documents to ship to Russia. Argentina is also a good candidate to ramp up its exports to Russia, Dorland says. Through July, Russia accounted for 7.4 percent of Argentina’s 2014 dairy export volume, making Russia Argentina’s fifth largest dairy trading partner, she adds.

U.S. and others to backfill supplier markets

“Dairy markets in Brazil, Argentina, and India are largely balanced,” notes Dorland. “And that suggests that the supply available in these markets for domestic use could tighten. Dairy manufacturers in supplier countries will likely divert domestic milk production to fulfill orders to Russia to meet country-of-origin requirements. In turn, these countries could have to backfill with dairy solids from other regions—namely Oceania, the United States, and Europe—to meet domestic and regional demand.”

And as the pipeline to Russia begins to fill, global dairy product markets could stabilize as suppliers look to countries with banned product to sell.