Essential steps for further development of Russian Dairy Industry

Currently the market prices for both raw milk and dairy products are hardening. But unfortunately firm pricing is only one of many factors that are required in order to induce the growth of dairy production volume and encourage investments in Russian Dairy Industry, which depends on imports so far.

We have had quite sufficient amount of experience, positive as well as negative, during past five years in order to be able to design and implement a long-term (preferably for at least 20 years) program for the development of dairy and meat animal husbandry.

We can see today that maximum fixed average price for one kilogram of basic quality raw milk is about 14 rubles, which proves SOUZMOLOKO’s previous forecasts of price band between 11 and 15 rubles excluding VAT for milk with protein and fat content of 3.0 and 3.4 accordingly. Purchasing power has set the top of the range, and both traders and processors had to slow down the price growth as far as they could. Of course, there are some cases of purchase price being up to 17 rubles excluding VAT for one kilogram of basic quality raw milk, but these are exceptional events in separate regions, and they cannot be interpreted as a consistent pattern. It’s worth mentioning that prime costs of imported dairy products in Russian market are quite competitive (even with customs tariffs and VAT), with prime cost of one kilogram of basic quality raw milk being 14 rubles, which adds to the fact that the price band between 11 and 15 rubles is justified.

Profit balance inside the industry is gradually getting back to normal: dairy processing profitability level is getting lower, enabling milk producers run their businesses, unlike last year, without losses (except for those who suffered greatly from this summer’s draughts). It is necessary to maintain this balance within the industry through a system of price bands that has been successfully implemented worldwide, enabling all the market participants’ activities be profitable.

Strengthening of the ruble throughout current year makes raw material and end product supplies from abroad more competitive, that is why it is so important to keep the customs import tariffs in order to maintain current balance. Strategic customs tariff regulation within common customs space in order to maintain competitive price balance. Moreover, it is important to have common milk and dairy products production and consumption balance and a common price-forming system for raw milk and end dairy products with Kazakhstan and Belarus in the framework of Common Customs Space.

The profitability of milk production largely depends on beef prices. Currently live weight pork price on domestic market is higher than beef price, even though beef production cost is considerably higher than that of pork. In order to eliminate this disproportion and create equal competition for domestic producers we should increase customs tariff for beef imports from current 15% and not less than 0.2 EUR to 25% and not less than 0.6 EUR per kilogram.

Federal Service for Supervision of Consumer Rights Protection and Human Welfare and Federal Service for Veterinary and Phytosanitary Supervision should increase the control over the execution of the Federal law “Technical regulations of milk and dairy products” N 88-ÔÇ dated July 12, 2008 and the federal law “On making the alterations to the Federal law Technical regulations of milk and dairy products” N 163-ÔÇ dated July 22, 2010 in order to provide for reasonable competition on the market.

Acute fluctuations of purchase prices that occurred in previous years, drastic changes in the level of regional support (sometimes taking place several times in a year), numerous administrative obstacles considerably slow down new investment flow, especially in the regions, causing large agro-holdings to finance their dairy departments on leftover principle, or perceive them as social projects necessary to keep good relationship with local administrations. Probably we need to discover what regions could be the best for dairy animal husbandry development, taking into consideration federal and regional governmental support and their geographic position close to large cities – potential consumers. It is quite often that the banks’ executives unawareness of the peculiarities of dairy industry, unwillingness to work out a more flexible system of credit payouts delays during the periods of lows in raw milk purchase prices, drastic increases of credit interest rates, not quite well developed practice of long-term contracts with dairy processors, and many other factors make dairy animal husbandry investments less attractive if compared to other industries faster cash cycle. We need to prepare bank managers to work with agriculture, and dairy and meat animal husbandry in particular (e.g. typical business plans, business models and so on).

The level of state support should be identical for dairy producers and processors in order to develop these interdependent industry branches. We need to keep current state support program “Dairy animal husbandry for the period from 2009 till 2012”, and 100% reimburse of refinance rate of dairy projects crediting, pure-strain stock-breeding subsidy program, and target support program for dairy animal husbandry and beef production should remain among its priorities.

International practice shows that cooperation together with tax remissions and soft reversionary government credits leads to considerable positive results. We need to induce cooperation development in Russia.

It is extremely important that raw milk and dairy products prices grow in accordance with inflation index. So far we have quite often witnessed groundless increases and decreases of the price level.

We need a reform in agricultural insurance system that would make insurance affordable for a larger number of agro producers. Probably we need to implement mandatory insurance for the enterprises with governmental subsidies.

It is extremely important to develop butter, cheese and powdered milk production, for these branches of dairy industry influence the lows of raw milk purchase price, allow for effective use of milk production surplus in summer, and, moreover, they are the most import-dependent branches of dairy industry nowadays.

We need to design a program for educating agricultural specialists, particularly those for dairy and meat animal husbandry.

The agricultural and business communities need a very clear sign that would guarantee a long-term and prioritized state and regional support of effectively working dairy animal husbandry. The enterprises supported should be not those equipped with modern technologies, but rather those with effective technology implementation, that can be seen in low operational production and processing costs per kilogram of milk and in maintaining annual production volume at the same level.

It is a known fact that dairy industry requires long-term investment (at least 10 years), as well as properly trained specialists. Another characteristic feature of dairy business is a very small cash cycle compared to capital investment (about 300 million of annual turnover per 1 billion of capital investment). In this respect the most important thing for inducing the industry’s development is a persistent long-term policy on all authority levels from 10 to 20 years (for the whole period of capital investment return). And this is, first of all, pricing policy coherent to expense levels and inflation index, strategic customs tariff regulation and flexible banking policies. For most countries of the world, dairy animal husbandry is a lifestyle. And the development of this industry directly depends on the level and the amount of state support.


Chairman of the Board of SOUZMOLOKO
Andrei Danilenko