Russia ranks fifth in raw milk production in the world

‘Below is quoted as saying that Russia takes the 3rd place in the production of cheese, 5th – in butter production, 9th – in the production of skimmed milk powder and 10th – in whole milk powder.

According to Artem Belov, now the most actively developing segment in the Russian dairy industry is the production of eco – products, the volumes of which are not so high yet, but the potential in this sector is huge. Russian producers are ready to work to meet the demand for eco-products, as well as premium dairy products like in other countries.

Improving productivity in Russia’s dairy cow herd

Despite the expected decline of cow numbers, milk production is forecast to grow due to a steady improvement in productivity per cow.

Quality improvements and consumer confidence are also boosting demand for dairy products in Russia. A total of 8.043 million head of cows was reported in the country by Rosstat as of 1 July 2020. Despite the expected decline of cow inventories to 6.5 million head in 2021, milk production is forecast to grow to 31.8 million tons because of ongoing improvements in productivity as large, industrialized farms invest in better genetics and equipment and dual-purpose milk and meat cattle of local selection are replaced with modern highly productive dairy breeds. The average per cow yield at all types of farms was 4 642 kilograms in 2019, a 3.4% improvement year-on-year. At large industrialized farms, a 6.4% increase in per-cow yields was reported between January and August 2020.

Room for growth

Milk farming remains the least industrialized and the least consolidated agricultural subsector in Russia and is unequally developed throughout the country, which leaves room for further growth. Industrialized farms represent 41% of cow inventories and backyard farms 42%, however, a steady decline of rural populations has meant that inventory at backyard farms is shrinking. Small peasant farms account for 17%. The average yields per cow vary from as low as 1 802 kilograms per cow per year to as high as 8 591 kilograms.

Quality advances boost consumer confidence

The growing supply of raw milk and the improved productivity of the sector is occurring in tandem with quality improvement in the increasingly transparent market, boosting consumer confidence and demand. Quality advances are, in part, a result of Russian government initiatives to trace and remove products that do not comply with regulatory requirements. Growth opportunities are constrained, however, by weak consumer purchasing power and operational expenses driven higher by the depreciation of the rouble.

From 1 November 2019, the Mercury system of national electronic veterinary certification has become obligatory for registering and tracing all movements of dairy products from farm to table. Almost 500 companies producing falsified dairy products between January and August 2020 were identified and closed down. Recent audits detect less than 1% of fake dairy in the samples.

As a result of better transparency, demand for raw milk from processing plants has increased, thereby supporting milk prices. Rosstat reported that in August 2020, the price for a liter of milk reached 24.8 roubles (US$0.34) per kg, a historical high for August despite the Covid-19 related economic difficulties.

Foreign companies

Dairy market consolidation in Russia remains low, and milk production is divided as follows: 3.8% EkoNiva (German company), 2.2% government-owned companies, 1.3% Agrokompleks (Russian company) and other companies with less than 0.8% of total milk production. Among milk processors, the leading position is shared between Danone (France) with 7.5% and PepsiCo (USA, known as Wimm Bill Dann for dairy products in Russia) with 7.2%, Molvest (Russian) 2.3%, Kosmos Group (Russian) 2.2% and other companies with less than 2% market share. This means that the dairy market is mostly shaped by a few foreign companies, government companies and numerous small local companies that cannot compete in price with domestic or international companies. This also means that the dairy products on the shelves of most popular chain stores contain mostly products from Danone, Wimm Bill Dan and EkoNiva. Aside from price, an underdeveloped technological base is also an issue for the Russian dairy market. Producers need efficient technologies to produce cheaper products, and most production plants need modernization. Moreover, many producers are dependent on imported components, like the milk itself.

In order to develop the Russian dairy market, producers need technologies that can produce larger amounts with better quality and that use local components for lower prices; they also need a developed value chain. It is also important to have continuous development, especially at the market establishment stage, because of the slow return on investment and low-margin branches such as kefir and milk production. A good way to develop a stable dairy sector is to bring foreign investors into the Russian market. EkoNiva is a good example of a foreign investor that not only produces diverse dairy products and milk, but also has established its own dairy farming. The strategy of EkoNiva to develop a cluster for producing “made in Russia” dairy products allows local companies to profit by being integrated in some parts of this value chain.

Major improvements

Nevertheless, there are some major improvement trends in the Russian dairy market. Data from 2019 and 2020 demonstrate that many local companies grew more than 30% in terms of production, and local cheese producers showed especially good growth. Russia also gained special permission to export dairy products to Japan, Vietnam and China. Export of milk and milk products from Russia continues to grow since 2018: US$ 294 million in 2018, US$ 325 million in 2019 and US$ 380 million in 2020. New markets such as Japan, Vietnam and China may significantly raise export volume.

Consumption trends in the Russian dairy market are mostly driven by growing awareness of healthy food. Unfortunately for milk producers, many customers have eliminated or significantly reduced milk products from their diet. In 2019, consumption of milk and kefir decreased by 2.5% compared to 2018, while demand for cheese and yogurt increased. Moreover, demand for products with healthy additives is growing globally. Western companies are most successful at taking advantage of this trend, as they carefully follow the preferences of customers.

Opportunities for Investments

For European milk processors, the Russian market provides significant opportunities of new customers, low competition in the market, an approachable labor force and government subsidies. Slow but stable growth in the last 3 years in the Russian dairy market indicates good investment opportunities and readiness for further development.

LAN-Team Moscow

Sources: The DairyNews; Dairy Global