Required Report - public distribution

**Date:** 11/9/2004

**GAIN Report Number:** RS4061

RS4061

**Russian Federation**

**Dairy and Products**

**Annual**

**2004**

**Approved by:**

![](media/image1.wmf)Allan Mustard

American Embassy, Moscow

**Prepared by:**

Mikhail Maksimenko and Randall Hager

**Report Highlights:**

Milk production in the short and medium term is expected to be at best
steady, as the Russian dairy herd continues to contract as a result of
low profitability and improper management. However, some leading
producers are expanding output by bringing superior animals on line.
Greater output would assist the expanding processing industry, which
sees an opportunity to provide a wide range of dairy items to a
population with growing disposable income.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Moscow \[RS1\]

\[RS\]

Table of Contents

[**Executive Summary 3**](#executive-summary)

[Table 1. Fluid Milk Supply and Demand
3](#table-1.-fluid-milk-supply-and-demand)

[Table 2. Production of dairy products
4](#table-2.-production-of-dairy-products)

[Table 3. Cheese Supply and Demand
5](#table-3.-cheese-supply-and-demand)

[Table 4. Butter Supply and Demand
6](#table-4.-butter-supply-and-demand)

[Table 5. Whole Milk Powder Supply and Demand
7](#table-5.-whole-milk-powder-supply-and-demand)

[Table 6. NonFat Dry Milk Supply and Demand
8](#table-6.-nonfat-dry-milk-supply-and-demand)

[Consumption 9](#consumption)

[Trade 9](#trade)

[Table 7. Russia's Imports from all Sources, Selected Items, January --
May, MT
9](#table-7.-russias-imports-from-all-sources-selected-items-january-may-mt)

[Stocks 9](#stocks)

[Policy 9](#policy)

[Marketing 10](#marketing)

[Table 8: Russian Cheese Imports, by Countries, in 2001, 2002, and 2003,
MT
11](#table-8-russian-cheese-imports-by-countries-in-2001-2002-and-2003-mt)

[Table 9: Russian Butter Imports, by Countries, in 2001, 2002, and 2003,
MT
11](#table-9-russian-butter-imports-by-countries-in-2001-2002-and-2003-mt)

# Executive Summary

Russia's dairy herd continues to contract because of low profitability,
insufficient management, economic transition, and unstable feed
supplies. In fact, the domestic herd is now estimated to be six percent
smaller than in December 2003, and could decline a further three percent
by December 2005. As a result, milk production is about 2.5 percent
lower in 2004, and forecast to at best hold steady in 2005. However,
expanded employment of higher-producing pedigree dairy cattle has
partially offset milk output lost from culled lower yielding cows.

Improvements are being made in Russia's milk processing sector, and with
the growth of larger, well-managed dairies the supply of raw materials
to these operations has become steadier and less seasonal. This will
result in a more competitive overall dairy sector. Dairy was the only
profitable branch of livestock husbandry in 2003 -- its profitability
was 6.4 percent in 2003.

## Table 1. Fluid Milk Supply and Demand

  ------------------ -------------- ---------- ---------- ---------- ------------ ----------
  **PSD Table**                                                                   

  **Country**        **Russian                                                    
                     Federation**                                                 

  **Commodity**      **Dairy, Milk,                                  (1000        
                     Fluid**                                         HEAD)(1000   
                                                                     MT)          

                     2003           Revised    2004       Estimate   2005         Forecast

                     USDA Official  Post       USDA       Post       USDA         Post
                     \[Old\]        Estimate   Official   Estimate   Official     Estimate
                                    \[New\]    \[Old\]    \[New\]    \[Old\]      \[New\]

  **Market Year                     01/2003               01/2004                 01/2005
  Begin**                                                                         

  Cows In Milk       11700          11700      11000      10970      0            10640

  Cows Milk          33000          33000      32300      32200      0            32200
  Production                                                                      

  Other Milk         0              0          0          0          0            0
  Production                                                                      

  TOTAL Production   33000          33000      32300      32200      0            32200

  Intra EC Imports   0              0          0          0          0            0

  Total Imports      100            100        100        100        0            110

  TOTAL Imports      100            100        100        100        0            110

  TOTAL SUPPLY       33100          33100      32400      32300      0            32310

  Intra EC Exports   0              0          0          0          0            0

  Total Exports      5              5          5          5          0            0

  TOTAL Exports      5              5          5          5          0            0

  Fluid Use Dom.     13350          13350      13300      13000      0            13000
  Consum.                                                                         

  Factory Use        16700          16700      16095      16295      0            16410
  Consum.                                                                         

  Feed Use Dom.      3045           3045       3000       3000       0            2900
  Consum.                                                                         

  TOTAL Dom.         33095          33095      32395      32295      0            32310
  Consumption                                                                     

  TOTAL DISTRIBUTION 33100          33100      32400      32300      0            32310

  Calendar Yr. Imp.  0              0          0          0          0            0
  from U.S.                                                                       
  ------------------ -------------- ---------- ---------- ---------- ------------ ----------

Large dairy processors, located for the most part in the major cities,
are expanding production. To continue this process, they have begun to
augment their traditional nearby sources with raw milk from other
regions by offering a higher price. In doing so, they compete strongly
with provincial processors, who are now finding it difficult to meet
this competition because their customers can't afford to buy dairy
products at the resulting higher prices. The overall situation has
benefited milk producers.

## Table 2. Production of dairy products

  ----------------- ----------------- ----------------- --------------------
                    2002              2003              January-September,
                                                        2004 as a percent of
                                                        January-September
                                                        2003

  Vegetable oil     1,186             1,637             127.2

  Margarine         516               541               102.3
  products                                              

  Butter            278               272               93.8

  Whole-milk        7,452             7,728             102.6
  products (milk                                        
  equivalent)                                           

  Fat cheese        318               333               97.9
  (including feta                                       

  Ice cream         376               387               95.9

  NFDM              104               105               n/a

  milkdw            92                87.4              N/a.
  ----------------- ----------------- ----------------- --------------------

Source: Russian State Statistics Service

Cheese production during January-September 2004 was two percent lower
than in January-September 2003. However, full year 2004 cheese
production is expected to be steady as compared to 2003 as better
feedstuff supply supported raw milk output in the second half of 2004.
Cheese production in 2005 is expected to increase slightly.

## Table 3. Cheese Supply and Demand

  ------------------ -------------- ---------- ---------- ---------- ---------- ----------
  **PSD Table**                                                                 

  **Country**        **Russian                                                  
                     Federation**                                               

  **Commodity**      **Dairy,                                        (1000 MT)  
                     Cheese**                                                   

                     2003           Revised    2004       Estimate   2005       Forecast

                     USDA Official  Post       USDA       Post       USDA       Post
                     \[Old\]        Estimate   Official   Estimate   Official   Estimate
                                    \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year                     01/2003               01/2004               01/2005
  Begin**                                                                       

  Beginning Stocks   8              8          10         10         0          12

  Production         335            335        330        330        0          335

  Intra EC Imports   0              0          0          0          0          0

  Total Imports      175            175        175        190        0          185

  TOTAL Imports      175            175        175        190        0          185

  TOTAL SUPPLY       518            518        515        530        0          532

  Intra EC Exports   0              0          0          0          0          0

  Total Exports      10             10         10         10         0          10

  TOTAL Exports      10             10         10         10         0          10

  Human Dom.         498            498        505        508        0          510
  Consumption                                                                   

  Other Use, Losses  0              0          0          0          0          0

  Total Dom.         498            498        505        508        0          510
  Consumption                                                                   

  TOTAL Use          508            508        515        518        0          520

  Ending Stocks      10             10         0          12         0          12

  TOTAL DISTRIBUTION 518            518        515        530        0          532

  Calendar Yr. Imp.  0              0          0          0          0          0
  from U.S.                                                                     

  Calendar Yr. Exp.  0              0          0          0          0          0
  to U.S.                                                                       
  ------------------ -------------- ---------- ---------- ---------- ---------- ----------

Butter production decreased by six percent in the first nine months of
2004 due to shortages in the supply of raw milk. As with cheese output,
analysts expect that an improved supply of feedstuffs for the dairy
industry in 2005 will support raw milk output and hold butter production
steady, year-to-year.

## Table 4. Butter Supply and Demand

  ------------------ -------------- ---------- ---------- ---------- ---------- ----------
  **PSD Table**                                                                 

  **Country**        **Russian                                                  
                     Federation**                                               

  **Commodity**      **Dairy,                                        (1000 MT)  
                     Butter**                                                   

                     2003           Revised    2004       Estimate   2005       Forecast

                     USDA Official  Post       USDA       Post       USDA       Post
                     \[Old\]        Estimate   Official   Estimate   Official   Estimate
                                    \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year                     01/2003               01/2004               01/2005
  Begin**                                                                       

  Beginning Stocks   22             22         17         17         17         15

  Production         280            280        275        270        0          275

  Intra EC Imports   0              0          0          0          0          0

  Total Imports      135            160        135        170        0          170

  TOTAL Imports      135            160        135        170        0          170

  TOTAL SUPPLY       437            462        427        457        17         460

  Intra EC Exports   0              0          0          0          0          0

  Total Exports      5              5          5          5          0          5

  TOTAL Exports      5              5          5          5          0          5

  Domestic           415            440        405        437        0          440
  Consumption                                                                   

  TOTAL Use          420            445        410        442        0          445

  Ending Stocks      17             17         17         15         0          15

  TOTAL DISTRIBUTION 437            462        427        457        0          460

  Calendar Yr. Imp.  0              0          0          0          0          0
  from U.S.                                                                     

  Calendar Yr. Exp.  0              0          0          0          0          0
  to U.S.                                                                       
  ------------------ -------------- ---------- ---------- ---------- ---------- ----------

As an input for milk product production, dry milk is not as critical for
milk product producers as before because the supply of fluid milk
throughout the year is becoming more stable.

## Table 5. Whole Milk Powder Supply and Demand

  ------------------ -------------- ---------- ---------- ---------- ---------- ----------
  **PSD Table**                                                                 

  **Country**        **Russian                                                  
                     Federation**                                               

  **Commodity**      **Dairy, Dry                                    (1000 MT)  
                     Whole Milk                                                 
                     Powder**                                                   

                     2003           Revised    2004       Estimate   2005       Forecast

                     USDA Official  Post       USDA       Post       USDA       Post
                     \[Old\]        Estimate   Official   Estimate   Official   Estimate
                                    \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year                     01/2003               01/2004               01/2005
  Begin**                                                                       

  Beginning Stocks   0              0          0          0          0          0

  Production         110            110        100        90         0          85

  Intra EC Imports   0              0          0          0          0          0

  Total Imports      20             20         25         25         0          25

  TOTAL Imports      20             20         25         25         0          25

  TOTAL SUPPLY       130            130        125        115        0          110

  Intra EC Exports   0              0          0          0          0          0

  Total Exports      6              6          6          6          0          5

  TOTAL Exports      6              6          6          6          0          5

  Human Dom.         124            124        119        109        0          105
  Consumption                                                                   

  Other Use, Losses  0              0          0          0          0          0

  Total Dom.         124            124        119        109        0          105
  Consumption                                                                   

  TOTAL Use          130            130        125        115        0          110

  Ending Stocks      0              0          0          0          0          0

  TOTAL DISTRIBUTION 130            130        125        115        0          110
  ------------------ -------------- ---------- ---------- ---------- ---------- ----------

## Table 6. NonFat Dry Milk Supply and Demand

  ------------------ -------------- ---------- ---------- ---------- ---------- ----------
  **PSD Table**                                                                 

  **Country**        **Russian                                                  
                     Federation**                                               

  **Commodity**      **Dairy, Milk,                                  (1000 MT)  
                     Nonfat Dry**                                               

                     2003           Revised    2004       Estimate   2005       Forecast

                     USDA Official  Post       USDA       Post       USDA       Post
                     \[Old\]        Estimate   Official   Estimate   Official   Estimate
                                    \[New\]    \[Old\]    \[New\]    \[Old\]    \[New\]

  **Market Year                     01/2003               01/2004               01/2005
  Begin**                                                                       

  Beginning Stocks   0              0          0          0          0          0

  Production         145            145        140        125        0          120

  Intra EC Imports   0              0          0          0          0          0

  Total Imports      60             60         65         65         0          60

  TOTAL Imports      60             60         65         65         0          60

  TOTAL SUPPLY       205            205        205        190        0          180

  Intra EC Exports   0              0          0          0          0          0

  Total Exports      25             25         25         20         0          15

  TOTAL Exports      25             25         25         20         0          15

  Human Dom.         180            180        180        170        0          165
  Consumption                                                                   

  Other Use, Losses  0              0          0          0          0          0

  Total Dom.         180            180        180        170        0          165
  Consumption                                                                   

  TOTAL Use          205            205        205        190        0          180

  Ending Stocks      0              0          0          0          0          0

  TOTAL DISTRIBUTION 205            205        205        190        0          180
  ------------------ -------------- ---------- ---------- ---------- ---------- ----------

# Consumption

Butter consumption is decreasing in the Russian Federation, because
reduced fluid milk availability does not permit enough butter to be
produced. In addition, low prices for other fat containing products like
vegetable oil and margarine have caused consumers to substitute them for
dairy butter. Finally, tastes and preferences have come into play.
Consumers are becoming dissatisfied with some "dairy butter" products
that in fact contain a large portion vegetable fat, driving down overall
demand.

# Trade

Imports of dairy products depend on two factors. The first one is the
ability of domestic producers to satisfy customers' demand, and the
second is the ability of customers to buy dairy products at the offered
price. Both factors ultimately depend on disposable income. Stable
production of dairy products together with income growth has resulted in
slightly growing imports of most of dairy products.

Real income, adjusted for inflation, was 9.2% higher in January-August
2004 than in January-August 2003. The average employee wage was
tentatively \$237 in August 2004, up 24.5% year-to-year. In
January-August 2004, the average salary was \$227 or 25.5% more
year-to-year.

## Table 7. Russia's Imports from all Sources, Selected Items, January -- May, MT

  -------- ---------------------- ---------- --------------------- ---------- ------- ----------
  **HS     **Description**        **2002**                         **2003**   **-**   **2004**
  Code**                                                                              

                                                                                      

           04                                                                         
           DAIRY,EGGS,HONEY,ETC                                                       

  0406     CHEESE AND CURD        42,984                           63,363             78,211

  0405     BUTTER,OILS FROM MILK  48,524                           55,522             49,627

  0402     MILK,CREAM CONC,SWEET  5,585                            8,082              19,831

  0403     BUTTERMLK,YOGURT,ETC   19,276                           11,761             13,239

  0404     WHEY,OTHER MILK PRODS  2,579                            7,114              15,679

  0407     BIRD EGG+SHELL                                                             

  0401     MILK,CREAM,N SWT/CONC  1,871                            4,018              4,271
  -------- ---------------------- ---------- --------------------- ---------- ------- ----------

**Source: World Trade Atlas**

# Stocks

Domestic dairy product stocks have become more stable, due to
improvements in production systems for raw milk and regular imports. A
better-developed system of wholesale and retail trade allows stocks of
dairy products to now be kept at a more reasonable level.

# Policy

Emerging large dairy enterprises are creating a better raw milk supply
system. Still, about 70 percent of dairy farms are said to be
inefficient. As an example of the contrast between traditional and new
businesses, average annual output per cow, although growing, is only
2,976 liters, while modern farmers in Leningrad oblast produce 6,100
liters per cow from the region's 130,000 cow herd. About 15-20 percent
of the most modern dairy farms are producing 80 percent of Russia's
milk.

Belgorod oblast is putting into place a program to develop its dairy
industry with investments from a large Moscow-based company. The new
dairy farms will be equipped with modern imported milking and storage
equipment. The oblast has already brought together a 1,500 cow herd,
with a goal of a 150,000-170,000 herd for an investment of about 15
billion rubles.

Wimm-Bill-Dann, the country's major dairy processing firm, plans to
expand its agricultural business in Krasnodar oblast. Wimm-Bill-Dann
already has a dairy farm with 2,500 cows in Volgograd oblast, with
average milk yields from 7,000 to 8,000 liters, much higher than the
average figure for all of Russia. Wimm-Bill-Dann Food Products is also
holding talks on buying two dairy plants in Perm oblast (Ural region).
The company plans to produce dairy products of the medium and high price
category in the region and distribute them to the Ural region. Danone is
showing interest in buying a dairy food plant that is owned by Perm
region. However, no official talks on Danone buying this plant have
taken place. The Perm oblast Ministry of Agriculture plans to
reconstruct its dairy industry. Consumption is growing but at the
expence of trade from outside of oblast. There is a danger that the
other regions will win in Perm oblast. Highly processed dairy products
are in demand amongst customers --yogurt, farmers cheese ("tvorozhki"),
dairy products enriched with bioadditives and others that are not
commonly produced in the oblast. Packaging and marketing will also need
to be further developed.

Tyumen oblast has invested 100 million rubles to equip raw milk
collection points for small producers. Chillers, quality measures, and
transportation will be bought in to help to improve raw milk quality.
There are about 550 milk collection points in the oblast, which are
owned by the municipalcities and private entities. The number will reach
700 soon and will cover 60 percent of the territory of Tumen oblast.

## 

Russian milk producers have requested protection against dry milk
imports from the Ukraine and Belarus. These imports are from 6-10 rubles
per kilogram cheaper than the locally produced milk, making domestically
produced dry milk uncompetitive. To approve these protective measures,
the plan needs approval from 50 percent of the 160 dry milk producers in
the Russian Federation.

# Marketing

**Certification**

The Lianozovsky Dairy Plant, Wimm-Bill-Dann Food Product\'s leading
enterprise, has received a license to export dairy products to the
European Union. The EU and Russian Agriculture Ministry veterinary
services inspected plants that include the entire production cycle for
dairy products and also the plant\'s raw materials base. The company's
dairy plant and baby milk product plant will also soon undergo
inspections for export licenses. Wimm-Bill-Dann wants to receive
licenses so that they can expand export potential. The company is
currently holding talks with retail networks in Latvia, Lithuania and
Germany on possible dairy exports under the trademarks "Neo", "Bio Max",
"Chudo", "Domik v Derevne" and "Ryzhy Ap" by the end of 2004.

The Altaikholod (Barnaul) and Lipetsk Refrigeration plants have also
received export licenses.

**Adulterated Condensed Milk**

The State Trading Inspectorate has discovered adulterated condensed milk
in a number of large supermarket chains in Moscow and St. Petersburg.
During inspections, 22% of inspected milk was destroyed. Reportedly, the
main infraction was the inclusion of vegetable fat, instead of
butterfat, which contradicts government standards. Further, the labels
also did not contain information on the amount of vegetable fat in the
product.

## Table 8: Russian Cheese Imports, by Countries, in 2001, 2002, and 2003, MT

  -------------- -------------- -------------- -------------- --------------
                 Country        2001           2002           2003

  0              The World      111,581        129,282        176,288

  1              Germany        38,733         43,225         57,392

  2              Ukraine        28,796         34,523         58,081

  3              Finland        11,940         15,287         15,952

  4              Lithuania      9,353          11,268         11,021

  5              Poland         6,562          6,374          9,102

  6              Netherlands    5,166          7,455          8,873

  7              New Zealand    4,457          3,416          2,242

  8              Sweden         2,170          1,524          1,101

  9              France         846            1,790          3,509

  10             Austria        684            328            1,151
  -------------- -------------- -------------- -------------- --------------

Source: World Trade Atlas

## Table 9: Russian Butter Imports, by Countries, in 2001, 2002, and 2003, MT

  ------------- -------------- -------------- -------------- --------------
                Country        2001           2002           2003

  0             \--The         109,104        109,924        133,796
                World\--                                     

  1             New Zealand    20,004         41,805         36,735

  2             Finland        15,306         17,931         19,524

  3             Germany        1,769          5,389          16,596

  4             Ukraine        49,940         13,063         12,314

  5             Belgium        247,400        3,065          10,994

  6             Czech Republic 7,595          9,306          8,358

  7             Netherlands    363            1,152          7,176

  8             Sweden         2,093          3,183          4,485

  9             Uruguay        0              2,586          3,748

  10            Australia      4,736          4,167          3,264

  11            France         1,073          1,246          1,614
  ------------- -------------- -------------- -------------- --------------

Source: World Trade Atlas