Global politics, local economy shape Russia’s dairy trends

Editor’s note: Passport to Cheese is Cheese Market News’ feature series exploring the dairy industries of nations around the world. Each month this series takes an in-depth look at various nations/regions’ dairy industries with coverage of their milk and cheese statistics and key issues affecting them. The nations’ interplay with the United States also is explored. We are pleased to introduce our latest country — Russia.

By Rena Archwamety

MADISON, Wis. — The United States has not had a dairy trade relationship with Russia since 2010, but more recent political events have further insulated Russia’s dairy industry from other parts of the world as well. Russia’s annexation of Crimea in 2014 prompted trade sanctions from the United States, the European Union (EU) and other countries, which in turn prompted counter-sanctions that barred a number of imports from these countries — including cheese and dairy imports — into Russia.

The sanctions had little direct impact on U.S. dairy, as a disagreement over product certification has prevented the United States from exporting significant quantities of dairy to Russia since 2010.

However, it did greatly impact trade with the EU, which has changed global market dynamics as EU exporters now compete in other markets to make up for lost business in Russia. The U.S. Dairy Export Council notes that prior to the embargo, Russia was the EU’s largest dairy export market, taking about a third of its cheese exports and a quarter of its butterfat shipments.

In 2013, Russia imported 466,000 metric tons of cheese and curd — nearly half its cheese consumption — according to data from the Federal Customs Service of Russia and Belstat reported by USDA.

This plummeted to 349,000 metric tons in 2014 and 216,000 metric tons in 2015, as cheese from the EU, which previously comprised half of Russia’s imports, disappeared.

Meanwhile in Russia, existing and entrepreneurial cheese and dairy producers have an opportunity to fill the gap in supply left by the embargo.

However, growth has been limited due to decreased consumer spending power and a shortage of quality dairy supplies.

• Dairy production

In 2016, Russia had 7.55 million milk cows producing a little more than 30 million metric tons of milk, according to USDA’s Foreign Agricultural Service (FAS). These numbers have been gradually decreasing, as commercial dairies increase milk production while “backyard farms” continue to decrease output.

In its “Dairy and Products Annual” report on the Russian Federation, published in October 2016, USDA notes that Russia’s dairy sector has struggled for decades with insufficient financing for modernization.

“Investments in Russian milk production sector have been considered risky, with volatile milk prices, margins trending downward, a long payback period on investments, a history of inconsistent implementation of state dairy programs, the increased use of vegetable oil substitutes by processors, dependence on highly consolidated retail chains, and declining demographics and lack of skilled work force in rural areas,” USDA says.

“Further, during the economic crisis of 2015-2016, low consumer demand for high-margin dairy products depressed milk prices and producers’ margins, which will result in further declines in cow inventories in 2017.”

About half of Russia’s total milk herd is at household farms, and dairy farming is perhaps the least industrialized sector in Russian agriculture, USDA adds.

FAS/Moscow forecasts cheese and curd production in 2017 to be 840,000 metric tons, down slightly from 2016 estimates.

“Multiple trends from the current market will likely remain in 2017, including weak, consumer demand for premium high-margin cheese and strong competition from non-banned exports in the market,” USDA’s report notes. “Additionally, higher prices on quality raw milk suitable for cheese production are expected to constrain growth of cheese sector.”

FAS/Moscow anticipates 1.060 million metric tons of domestic cheese and curd consumption in Russia in 2017, or approximately 7.45 kilograms (16.4 pounds) per capita — unchanged from 2016.

• Cheese trends

Last month, Russia’s National Union of Milk Producers Souzmoloko organized the first meeting of a national cheesemaker’s club. Speakers at the meeting discussed challenges with milk procurement and state support for the cheesemaking industry, consumer preferences for cheese, problems with cheese smuggling, the potential for goat’s milk cheese in Russia, and other trends and challenges in the market. The event concluded with a cheese and wine tasting.

As domestic cheese manufacturers have become more accustomed to the new economic conditions, and Belarus became the major cheese exporter to Russia, the dairy market situation started to stabilize this last year, according to Euromonitor International.

“In general, the geographic origin of cheese is perceived by Russian consumers as an important factor,” Euromonitor notes in its September 2016 “Cheese In Russia” report. “Cheese manufactured within nearby regions is treated as more fresh and natural; however, at a time of economic slowdown, price became a more significant factor.

Thus, consumers looked for products with more value for the price. Under such conditions, Belorussian cheese achieved a strong reputation among Russian consumers, as such products are normally rather low in price and of a decent quality.”

Domestic cheesemakers also began to take advantage of the lack of foreign competition in the cheese sector.

In response to empty shelves after the embargo, numerous new local brands emerged in 2015, USDA reports.

However, consumers were not satisfied with the quality of many of these new products. The situation became favorable for the expansion of well-known, locally-produced brands and private labels, which have been able to fill in the market niche.

“Despite stabilization of cheese supplies in the medium and economy market segments, there is no adequate replacement of premium imported cheeses,” USDA reports. “Local producers were not able to fill in the segment of premium cheeses, and consumers continue to prefer less expensive grocery items within product groups.”

As a result, native mid-priced cheese varieties such as Rossiysky, similar to German Tilsiter; Gollandsky, a Russian interpretation of Dutch Edam with a slightly spicy, sour taste; Poshekhonsky, an aged rennet cheese developed about 50 years ago in the Poshehonsky province; and Adygeisky, a cheese widely used in cooking, remain increasingly popular hard and semi-hard cheeses.

Rossiysky is the most popular cheese variety, with more than 60-percent share of total consumption, USDA reports.

Meanwhile, purchases of Gouda and Maasdam continue to decline because consumers have not adjusted to the new local taste of cheeses that had been mostly supplied by imports prior to the embargo.

Euromonitor reports that soft cheese posted the strongest current value growth — 7 percent — across all cheese categories in Russia in 2016. Traditionally an import-dependent category, this area was left unoccupied after the embargo, resulting in stronger activity from domestic manufacturers. Euromonitor adds that Hochland Russland, which is present in processed cheese with its Hochland brand, led cheese in Russia in 2016.

Unpackaged cheese accounted for a 72-percent volume share of unprocessed cheese in Russia in 2016, Euromonitor says. However, over the course of the review period, the volume share of unpackaged cheese steadily declined due to the development of modern retailing and the overall increasing importance of convenience in Russia.

Euromonitor reports that stabilizing economic conditions and stronger competition from smaller local manufacturers and private label limited price growth of cheese in Russia in 2016.

“Another reason for restrained price growth was a decline in the average quality of cheese products, as manufacturers tried to cut costs,” Euromonitor says. “Increasing use of vegetable fat instead of animal fat was seen as a major concern in relation to the quality of cheese products in 2016.”

USDA notes that according to multiple media publications, milk producers have complained about the pervasive problem of illegal palm-oil use in cheese production. If authorities detect that a dairy processor uses palm oil in violation of technical and labeling regulations, the processor is most likely charged a fine, but these fines are small and typically don’t motivate processors to stop the illegal practices.

Locally-produced, well-recognized brands have begun to capture greater shares of the current cheese market, USDA reports.

According to Souzmoloko, there are approximately 600 large- and medium-sized cheese plants in Russia, and the top 40 producers now account for approximately 30-40 percent of the market. Trade restrictions have forced producers of popular international brands to localize or expand existing production operations in Russia. For example, Pepsico recently increased production of its cheese brand Lamber by 40 percent to 24,000 metric tons at its plant in Altayskiy Krai. Valio (based in Finland) increased production of its processed cheese Viola from 4,000 to 10,000 metric tons at its plant in the Moscow region and launched production of Valio tvorog (similar to quark or cottage cheese) at the facilities of its German partner company Ehrmann in the Moscow region in 2015. Arla Foods, in partnership with Russian company Molvest, invested in 7,400 metric tons of capacity for its branded yellow cheese and a new production line for Arla’s processed cream cheese with a capacity of 9,000 metric tons was opened in November 2015.

• Other dairy

Danone is Russia’s leading producer of traditional dairy, including tvorog, and of overall dairy products in the country. The France-based company first entered Russia in 1992 and was one of the first foreign companies to invest in the Russian economy at a time of democratic transition and high volatility. In 2000, Danone opened its largest plant in the world in Checkhov, Russia, where production capacity is more than 290,000 metric tons a year. In 2010, Danone acquired Russian dairy giant Unimilk.

Throughout Russia, Danone operates 20 plants and employs approximately 11,000 people.

Danone has worked with the dairy industry in Russia to help create the “Milk Business Academy” project to increase Russian farmers’ long-term productivity and ensure a high quality milk supply. An educational center operates a 100-cow demo farm and provides on-site training.

Sustainable practices are promoted in areas such as animal welfare, feed systems, breeding, milk quality and good milking practices.

Euromonitor reports that fluid milk products in Russia were more affected by the economic downturn rather than the imports embargo, as the category is comprised mostly of domestically-produced products. The economic downturn also affected other dairy segments, such as yogurt, powdered milk and condensed milk, which were considered non-essential.

Danone was the category leader in all non-cheese dairy in 2016, Euromonitor reports, holding 25-percent value share of drinking milk products, 19-percent value share in yogurt and sour milk products, and a 21-percent value share of other dairy, which includes chilled snacks, condensed milk, cream, fromage frais and quark.

“Danone Russia Group of Cos. has a strong reputation in Russia due to its high-quality products, a presence across many categories in dairy products and a long-standing presence in Russia,”

Euromonitor says. “Its localized facilities allow the manufacturer to limit price growth and run continuous advertising campaigns to attract more and more consumers.”

CMN

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