Russian Dairy Ideology Needs Investment Starter

03.11.2009 — Analysis

The ways to rehabilitate Russian dairy market are simple. In order to increase the share of profitable enterprises, promote the technological modernization of production and cut down the "unhealthy" seasonal gaps of volumes and prices we need to ensure sustainable development of the sector for at least 5-10 years. RusBusinessNews experts are convinced that temporary surgical procedures in the form of interventions are unlikely to be effective.

Russian Government is planning state funded purchases of milk and dairy products in 2010. Prime Minister Vladimir Putin made an announcement to that effect in the beginning of October and Yelena Skrynnik, the Minister for Agriculture, confirmed it later. By 1 December the Ministry for Agriculture of the RF should develop the order for carrying out the interventions. So far it is known that they will start during the "big milk" period next spring. Authorities are planning to purchase from agrarians products with storage life less than eight months. These include butter, UHT milk, cheeses. According to preliminary information Russian Government is going to allocate 2.8 billion roubles for the dairy interventions. Further 300 million is planned to be channelled into the storage of purchased products. However, what the purchase conditions would be, the amounts and proportions, where the products would be kept and how they would be retailed remains unknown.

According to the authorities' idea the intervention should level out the seasonal fluctuations of prices in the dairy market. During the traditional seasonal spring-summer overproduction the surplus will be purchased into the food commodity fund and released into the market in autumn-winter when the production volumes are traditionally down and the demand is up. Officials reckon that this measure will ensure sustainable profitability of agricultural companies all year round. And as a result this will cut down the number of companies making losses.

Milk boils and evaporates

It is true that there is a certain imbalance of milk production in the spring-summer and autumn-winter periods. According to data from the Russian Milk Union, the first half of the year traditionally sees a 50% rise in production vs. the second half. In recent years milk producers make about a million tons of milk in January, in June - up to 1.5 million, and by November-December the monthly production drops to about 0.9-1 million again. This leads to the seasonal price gap of 5 to 20%.

According to statistical data in January-August 2009 the price for unprocessed milk in the Tyumen Oblast has dropped by 6.6%. From the beginning of autumn, according to Nikolay Silkachev, the Head of the Food and Processing Industry Department of the regional AIC, the market prices rise by 15-20 kopecks weekly. The purchase price amounted to 9.5-11 roubles per litre of milk in the middle of October.

According to some assessments about a half of agro companies producing milk work with zero profitability or make losses. Ineffective business causes livestock numbers to decrease. Russian Ministry for Agriculture informed RusBusinessNews that since 1990 the number of cattle in the country has decreased 2.2 times. Annual milk production volumes have dropped by 24 million tons. At the same time the proportion of milk imports has reached 16.5%, according to Rosstat. CIS countries are the main suppliers of dairy, for instance due to low milk production cost the Byelorussian products are more competitive in the Russian market.

In 2009 the Russian Government tried to introduce protection measures against the "invaders" several times: duties were raised, technical regulations changed, and direct prohibitions introduced against some dairies. Domestic milk producers, however, cannot provide for the full import substitution neither in terms of volumes nor quality. According to the statement made by a representative of one of the world's largest dairy products manufacturers, Russian milk contains less fat and protein than imported. In Europe the average fat content is 4.2%, protein content - 3.3%, while in Russia these figures are 3.6% and 2.9% respectively.

Gaps in money fabric

Russian milk producers, in contrast with officials, say that seasonal fluctuations are fare from being the main cause of the high proportion of inefficient companies. One of the glaring examples is the fact that in the Sverdlovsk Oblast the spring-autumn "gap" only amounts to 10-12%. At the same time the Urals Livestock Farmers Association informed RusBusinessNews that according to the results of January-June 2009 the proportion of loss making companies grew by 25%.

The main cause of low profitability of dairy farms is the inequivalent relationship between the production costs and purchase prices offered by processing companies. Several Mid Urals farms informed RusBusinessNews that the production cost of a litre of milk today amounts to about 12-13 roubles. Animal feed amounts to about 50% of the cost, wages - 18-20%. In recent years the proportion of electricity costs has grown considerably. According to Vitaliy Dunin, the Director General of Byelorechenskiy Agroindustrial Combine, payments to natural monopolies amounted to under one percent of the production cost before. Now payments for electricity, heating, gas amount to 5 to 10% of milk production cost. At the same time the purchase prices for unprocessed milk in the Urals varies from 7 roubles (in Bashkiria) to 10 roubles in the Sverdlovsk Oblast (in April 2008 this figure was 13.5 roubles).

Rouble worth a life

So far the gap between costs and revenues was reimbursed to the agrarians by the Oblast and federal authorities. In regions where subsidy support was used the subsidy for a litre of milk amounted to 1.5-3.5 roubles. Due to the crisis, however, some regional authorities had to cut down the budget spending, including the support for cattle farming. "The Sverdlovsk Oblast budget for 2009 initially planned to allocate 1.161 billion. This money included the subsidies for milk production at 3 roubles per litre. In May, however, the funding was suspended. We waited for the July money almost until the end of summer. In October an amendment was introduced to the budget, according to this amendment the support to cattle farming was cut down to 714 million roubles. So it turns out that we are compensated only for the costs of milk sold in January-June. All the rest of it we have been producing at a loss," says Yelena Stafeyeva, the Executive Director of the Urals Livestock Farmers Association.

Moreover, the Sverdlovsk agricultural producers are still waiting for the 486 million out of the promised 561 million roubles in compensation for the technical modernization of farms. According to Yelena Stafeyeva in 2008 the regional authorities selected a range of modernization projects and promised them financial support. Agrarians took out loans and purchased machines and equipment. The authorities have still not reimbursed them. The credit commitments and the lack of subsidies may destroy some of the producers. Then the interventions promised for the spring will be too late, the agrarians will have to slaughter the cattle in order to keep up with payments to banks.

Slaughter will not help

Farmers surveyed by RusBusinessNews are unanimous: there is no need in inventing new inefficient methods for stabilizing the market. Even the minimal, but stable compensations for the delta between the costs and revenues in milk production would enable farmers to make long term plans for the development of business taking into account predictable factors. "Stability is crucial for agriculture. The rules of the game must be understandable and system-based. For 5 years ahead at least," says Yelena Stafeyeva. "The establishment of farms cost about 250 thousand roubles per single animal. So the farm for 1,200 animals will cost more than 300 million. The payback time for these projects is very long. Which means that nobody will risk investing in either the construction of new farms or the modernization of existing ones in the conditions of "financial turbulence". We do nevertheless need to modernize the farms. More than 80% of farms in the Sverdlovsk Oblast are at a very low developmental stage."

The best example of the direct effect of the stable support to cattle farmers through the compensation of the price "gap" is in the Tyumen Oblast. Throughout 2009 the agrarians have been receiving, without fail, 3-3.5 roubles per litre of milk sold. This enables them not only to cover their costs but to invest money into development as well. As a result of the implementation of new technologies the seasonal gap in milk production volumes has been driven to a minimum, the growth dynamic of the milk yield and sales is the highest in the Urals Federal District. There are virtually no loss making farms left in the region, they either fell into oblivion or are currently managed by more effective proprietors. Only this November 2 new farms will start working in the region - one for 400 animals and one for 1,200. The Tyumen Oblast provides for 100% of own milk demand. By 2012 the government is planning to increase the production by 30 % and promote the expansion of local producers into markets of neighbouring regions.

It is obvious that one-off state funded dairy purchases will not change the situation in the market. According to the data from the Ministry for Agriculture the proportion of farms with modern equipment in Russia does not exceed 15%. In the situation of budget deficit the money should be channelled into the support of competitive companies rather than attempting to pull everybody out of the abyss indiscriminately. This is why taking the "surplus" raw materials off the market looks like a surgical procedure rather than systematic work for the prevention of diseases.

Yevghenia Yeryomina