Russia has begun building new dairy farms and milk processing, worth almost $3 billion, as it continues to lock out western food.
As the second largest global dairy importer, the sanctions have been immensely damaging with Europe stockpiling milk powder and sending the global dairy price to its lowest level in a decade.
Dairy stocks in Russian supermarket. Russia is the second largest dairy importer, but its band on western foods continues, as it co-invests $3 billion with Vietnamese and Thai businesses in dairy production. (Internet)
The Russians have commissioned Vietnam’s TH Group to develop three areas of dairy farming in the Kaluga districts at a cost of $190 million.
In addition, Thailand private company CP Group has signed an agreement to construct a $1 billion milk and dairy complex in Russia’s Ryazan region.
Before the sanctions, imposed in 2014 over the dispute in Ukraine and Crimea, Russia was Australia’s largest butter market.
The continuing sanctions have forced a 25 per cent reduction of Australia’s butter production, according to the latest report by the US Department of Agriculture.
But is Russia’s dairy investment significant in the larger scheme of dairy trends?
“Fine words make buttery caskets,” answers a sceptical dairy analyst in the United Kingdom, Richard Dillon, the editor of online magazine Dairy Markets.
“Problem is, it sounds good in headlines, but the other message I’m getting from Russian milk producers is there’s not enough support being given to them which is seriously holding back primary production.”
Europe’s growing stockpile
Hanging over the dairy market for the next 12 to 18 months is the milk powder in stockpiles in Europe.
Last year, the European Commission set aside a budget of 420 million euros to support its dairy farmers as the subsidies come off the industry.
“In 2015, there was another 3.2 billion litres of milk came out of the EU despite depressed global prices,” according to Dairy Australia’s Charles McElhone, group manager of trade and industry strategy.
About half of that increase was from the Netherlands, up 17 per cent, and Ireland, up 30 per cent.
The underlying reason is that the Netherlands has an environmental problem with fertiliser use.
“They’ve introduced phosphate rights, trying to impose limitations on phosphate use linked to cow numbers,” Mr McElhone said.
He said the dairy farmers needed a base line for developing a cap on phosphate, and they made the base line July 2015.
“So that provided an incentive for Dutch dairy farmers to increase their cow numbers with the knowledge that the future size of the herd would be dictated by the number they had at that date.”
The limitations will be put in place in January 2017, with Mr McElhone forecasting production will start to drop after that time.
The EU is also buying “intervention stocks”, as the main system left in place since production quotas, and export subsidies were ended.
The export subsidies had to be removed after a World Trade Organisation ruling on freeing up trade.
The remaining assistance is the EU paying for private storage “to provide some insulation from global price shocks”.
“It’s another way of distorting market signals, to keep the production coming, and cushion the farmers,” Mr McElhone said.
But Mr Dillon said he believes it remained possible for Europe to get rid of the almost 200,000 tonne stockpile of milk powder “without causing market meltdowns”.
About 180,000 tonnes of milk powder is sitting in private stores.
“We’re in unchartered territory now,” he said.
“After the support of 1698 euros per tonne, after that quantity is capped, it’s not known what the impact will be.”
Payments to reduce milk supply
Europe is also struggling to reign in oversupply of dairy, since the quotas were removed a year ago.
The EU Agricultural Commissioner has now opened the door to allow producers to reduce supply to increase the price.
Member states are allowed to compensate farmers up to 15,000 euro ($23,000) per farm in return for a 5 per cent reduction in supply over three years.
That means for a farm producing on average 100,000 litres per month, reducing by 5 per cent would be 5000 litres per month.
The farm could receive 25 cent a litre for a year, around 1250 euro a month, for milk not produced.
Pizza-led US recovery
As the US economy recovers, American families are eating out more.
“Gas prices have come down, people have more money in their pocket and pizzas are a good value meal, mozzarella sales are doing well,” said Alan Levitt, vice president of the US Dairy Export Council’s Trade Association.
Specialty cheese makers are also enjoying a booming interest, with the domestic US cheese market reaching $US17 billion in value in 2015, according to consumer analysts Packaged Facts.
Only 15 per cent of the US dairy product is exported, but the lower global dairy price has pushed the US dairy industry to focus on the domestic market.
“The US market has been strong domestically, so it keeps our prices higher than the world price, so it’s cost us some market share in some of our key markets; like cheese into Japan and Korea, skim milk powder into South-East Asia, all our products into the Middle East and North Africa region, where we had been performing well,” Mr Levitt said.
“The competition from Europe and Oceania has been a lot more aggressive in taking those markets.
“The world just needs less milk now than it did a couple of years ago.”
A lot of the increased production has been absorbed on the domestic market and a 40 per cent increase in demand from Mexico.
Global challenges with high production
Despite the oversupply weighing heavy on prices, dairy production continues to rise.
Mr McElhone said until production dropped globally, Australian farmers would be in for tough times and reduced prices.
“Year to date, the European Union has a 5 per cent increase in production on a year ago,” he said.
“The US is 1 or 2 per cent up on last year.
“[There are] really depressed price signals out of New Zealand, with $3.90/kg milk solids, and good seasons mean production will only drop by 2 to 3 per cent.
“There’s a lot of dairy production coming through, so looking ahead, the depression will continue for Australia and no major signs of real price improvement until well into 2017.”
Source: ABC
