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For the first time in at least a decade, milk production became more profitable on average than poultry or grain production in Russia

02.01.2018 16:30 "Agro Perspectiva" (Kyiv) For the first time in at least a decade, milk production became more profitable on average than poultry or grain production in Russia. Global high prices for milkfat, the stronger ruble, and reduced cost of capital allowed local producers to improve margins, and encouraged greater production of dairy products. However, soft demand at the consumer level persists. The resulting high stocks of butter, Whole Milk Powder (WMP), and Skimmed Milk Powder (SMP) will likely limit further production growth in 2018 until continuing economic improvement for consumers rebalances demand with supply later in the year. Market consolidation and greater efficiency at commercial dairies increase with investor interest in the sector, but imports remain high for now.

Executive Summary:

Because milk farms depended on state subsidies rather than consumer demand and did not generate profits for decades, Russias milk production sector remains far less modernized and consolidated compared to pork, poultry, sugar, and grains. The key weakness of Russias milk production sector is its inefficiency, but the high cost of capital has long constrained development; over time these factors resulted in high milk production costs in Russia compared to the countries that export processed dairy to Russia. As a result, the markets for raw milk and processed dairy products remain strongly dependent on the price of imports. World prices for milkfat and proteins continue to influence Russias market in spite of the counter sanctions. The share of imported processed dairy from Belarus and other nonrestricted suppliers remains high because the total capacity of all Russias milk farms remains below the countrys demand.

For the first time in at least a decade in Russia, milk production was more profitable than poultry or grain production in January-September 2017. Global high prices for milkfat made milk and dairy produced in Russia price competitive to imports. Milk remains dependent on imports so further growth of industrial milk production is possible and could come at the expense of imports. However, world market experts anticipate some decline of world butter prices in 2018, which would affect forecasts.

Per cow yields at commercial farms continues growing. The share of industrially processed milk is increasing at the expense of shrinking on farm consumption of fluid milk. The top 50 biggest farms, which currently account for 4.8 percent of total milk production, will continue to grow and

increase their share in the market. Good financial performance in the sector in 2017 may stimulate investorsinterest and market consolidation activities in the sector in 2018.

Responding to improved profitability due to high world prices, producers increased the output of butter and milk powders January-September 2017, but the market is struggling to absorb the expensive dairy.

Processing plants accumulated high stocks of butter and milk powders by the end of Russias «high milk season» in September 2017. Butter and milk powder stocks are anticipated to remain high in the beginning of 2018, which will soften demand from processing plants. If consumer purchasing power improves as anticipated in the macroeconomic forecasts, the milk market in Russia will stabilize in the second half of 2018, when recovered consumption will balance with available supply from local plants and imports. The recovery will not quite make up for the high butter and powder stocks in the first half of 2018, and so Post forecasts a small annual decline in production of fluid milk, butter, and SMP. The production of WMP is anticipated to increase at the expense of imports, the production of cheese is forecasted to increase one percent because of anticipated recovery of demand for semi-hard and specialty cheeses.

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