Milk producers demanding subsidies not to raise prices
The growth of the prime cost and milk product labelling leave the sector helpless
The prime cost of raw milk in Russia increased by 15%, while that of processing did by 5-7%. The reason is a rise in the price for energy resources, mineral fertilisers, lubricants and protein forage. It has become possible to get only 4% back in retailing. Milk product labelling introduced this year will lead to additional costs. The National Union of Milk Producers thinks that the state should subsidise the sector and completely compensate for labelling costs not to raise the price for milk. At the moment, the Russian government is ready to provide only a preferential loan and preferential leasing. Read in Realnoe Vremya’s report how much prices for milk will rise this year, how much money Agrosila JSC will spend on product labelling and when the dairy with palm oil will disappear.
Support from the federal centre is necessary
Vice Premier and Minister of Agriculture and Food of the Republic of Tatarstan Marat Zyabbarov named milk white oil because its production is a promising and dynamically developing area of the agricultural business.
Compared to 2019, Tatarstan’s milk production rose by 2% and totalled over 1,9 million tonnes of milk, the productivity per cow — 6,334 kg — did by 8%, but it is anyway below the average Russian digits. More than 70% of raw milk is processed in the republic. Last year, investments in processing were equal to over 5 billion rubles.
Kukmor is the most dairy productive district, Atna, Baltasi, Saba, Aktanysh follow it, they make over 32% of the republic’s milk whose daily sales revenue is up to 8 million rubles in every district.
Another 23 complexes will be put into operation soon, which will allow increasing milk production by 3% every year. Zyabbarov noted that milk prices are at the moment favourable for producers — 27,29 rubles per litre (including VAT), which is one ruble more than in 2020. However, the prime cost of the product also increased because of a rise in prices for forage, metal, energy resources and so on. To save the producers’ profitability, the minister asked the federal centre for support.
Growth of the diary price is within inflation
Director General of the National Union of Milk Producers of Russia Artyom Belov who became the main speaker of the meeting claimed that in 2020 the industry faced challenges it hadn’t been aware of. First of all, it is the pandemic that in April and May was considered with alarm: the closure of borders, air traffic reduction, a fall in the population’s incomes because businesses stopped operating were seen as an inevitable collapse of the market at first. As it turned out, it wasn’t so bad: when people stood home, they began to cook more, which means that started to purchase milk products, more potential buyers remained in Russia because they couldn’t travel, while the state’s handouts to families with children allowed supporting them financially. All this helped to keep the demand for the dairy, which even grew in some categories. This year, raw milk yield in Russia is due to rise by 3,5%, according to forecasts.
However, because of the hike in the price for energy resources, mineral fertilisers, lubricants, protein forage, the prime cost of milk grew by 15%, that of milk processing did by 5-7%. The rise for buyers totalled 4% on average. Such price cuts affected producers’ profitability. The head of the union thinks that the state should subsidise the sector, so they won’t have to raise prices because of the growth of the prime cost. In his opinion, the value of the commodity on the shelves will increase insignificantly — within inflation.
“The prime cost rose significantly. But milk is a socially important category. We all see that a considerable part of the milk is sold at auctions, discounts are big enough, this is why it will always be a balance of interests for the producer: conservation of the consumer of a rise in price and reduction of consumption. This is why I don’t expect a serious growth in milk prices. I think it will be within consumer inflation,” Artyom Belov thinks.
The Bank of Russia forecasts inflation in 2021 to be 3,7-4,2%. In January, the annual growth pace of consumer prices reached 5,2%.
Preferential loans for labelling
This year, the sector will encounter another serious regulatory measure — product labelling. Vice Director of Agrosila JSC Svetlana Bayrasheva said how much this would cost the enterprise. They will need 98 million rubles VAT excluded to buy necessary equipment, software, consumables, labelling codes, to hire additional staff, pay for printing and so on. The equipment itself is assessed at 50 million rubles. Such costs will lead to a rise in the prime cost of products by 1,7 rubles or 13% per item.
This isn’t yet the end of costs. Bayrasheva noted that shops don’t have enough space to install the new equipment, which means they will have to change the configuration of the area, remove lines. They will also have to rebuild warehouses and logistics, change the design of packaging, there might be problems with the unused packaging whose amount is hard to calculate in advance. All this also costs huge money. Producers’ problems during the transition could provoke fines from retailers.
“We put all the possible effort to make sure the transition to labelling is as painless as possible and businesses have the lowest costs. Here a number of both organisational and financial decisions is made. He called stages of the launch of labelling as the first decision — the process will take around 3 years and end in 2023.
“Now we are entering a stage when the Data Matrix code will be put on the packaging. From 1 June for cheese and ice cream, from 1 September for products with a shelf life of more than 40 days, from 1 December 2021 — for products with a shelf life of fewer than 40 days. But this is only the first stage. Then a question arises: what type of product will be tracked. Here it is a very important result that products with a shelf life shorter than 40 days won’t be tracked item per item. The amount that will be counted. Why is this important from a perspective of a business and producer? Because, in fact, this allows seriously reducing costs of the business on introducing the machine vision technology and so on. Moreover, a per-item count for products with a shelf life of more than 40 days will be introduced only from 1 December 2023. In other words, there will be a transition period to get ready.”
Belov noted that at the moment it was decided that producers would be given preferential loans and provided preferential leasing to buy equipment to scan the Data Matrix. Now compensation for costs a business carries because of the introduction of labelling is now actively discussed.
The stance of the National Union of Milk Producers is that the state should compensate for labelling costs. He urged Tatarstan producers to join this message addressed to the Russian government.
About production waste
The head of the union called the conservation of CapEx — investment costs to buy goods — is among the priority tasks besides the subsidisation of milk price and costs on labelling. Now the Russian Cabinet of Ministers is discussing their cancellation in 2020. The milk union thinks that they should be saved for 4-5 years because they help attract investors to the industry. Among upcoming costs that will affect the prime cost, Belov named those linked with the environment, particularly greenhouse gases and emissions. It is a global trend that arrived in Russia. The association actively participates in the discussion of these issues. For instance, last year, it managed to change the hazard category of enterprises of the industry from 1 to 2. While this means a reduction in costs from 20 to 300 million rubles.
“The issue of manure and droppings, fines for not obtaining a licence on this activity remains unresolved. Nowadays we are working to withdraw these products from the ‘waste’ category and added to the category ‘by-products of animal husbandry’. Corresponding changes are added to the federal law No. 109, which was now considered in the State Duma at the second reading. Consequently, we prepared a bill on animal husbandry by-products with senators. We will work in these two areas. Our task is to simplify everything when it comes to manure and droppings and their use as organic fertilisers as much as possible, in other words, to apply the practice existing in the world in Russia.”
The share of the dairy with palm oil doesn’t exceed 1-1,5%
Answering Realnoe Vremya’s question, Artyom Belov noted that the amount of palm oil in the dairy was reducing.
“The topic of counterfeit is very important. It is a topic that is often discussed together with milk. But I can say that the situation in the last 5-6 years has dramatically changed. If the amount of counterfeit products suddenly rose after 2014, the devaluation of the ruble and sanctions that were imposed. According to our estimates, the share of counterfeits in milk on average doesn’t exceed 1-1,5%. Moreover, this number is fighting the numbers supervisory agencies provide, the same Russian consumer rights protection watchdog.”
Belov noted key risk areas where such products can be found. It is state contracts and traditional retailing. To change the situation, he thinks the existing mechanisms are not enough: changes in the federal law No. 44 are necessary, and a more careful attitude to local suppliers is needed.
“I hope the problem of milk counterfeits will be as less topical as possible soon,” the head of the union noted.
Exports as benchmark
Artyom Belov thinks that exports will short-term become a driver of the sector’s growth. In 2020, it rose by 20%, up to 870,000 tonnes, or $365 million. Approximately the same dynamics are expected in 2021 too.
“A series of factors facilitate this. Last year, a number of new markets opened, China, Japan, Algeria and other countries. The first supplies of whey to China took place. Permeate have been supplied for the first time this year. The current price situation in the world market allows us to hope that powdered whole milk and powdered skimmed milk will be supplied this year to far-off countries, this is why I have a positive outlook this year. I think exports will grow by 15-20%.”
Director General of Streda consulting Alexey Gruzdev urged others to have a closer look at this activity of Tatarstan producers too. The growth of feedstock production favours export development. At the same time, the reduction of consumption and the population’s income, high competition. He put an example of the cheese sector that is now a leader of investments.
“Really implemented projects when people build production from scratch and develop it — over 160,000 tonnes — is about 30% of today’s cheese consumption. Believe me, cheese consumption will not increase so much in three years. This means the level of competition in the market will be very high in three years. This is why not to face these problems in the domestic market, it is necessary to think about exports.”
The speaker noted that according to global forecasts, Russia is expected to be in the top 3 biggest suppliers of milk products in the world market in the next 10-15 years. First of all, because we have land where we can plant forage and graze livestock. It is a big deficit in other countries moreover, the economic situation is good: the population’s income in the world increase, the dairy consumption grows, world commerce will rise 1,5 times in 10-15 years. “It would be a sin not to take advantage of this moment,” Gruzdev stressed.
He noted that 15 biggest countries that didn’t join sanctions of the USA and Europe are open for us. While the market of CIS countries still accounts for 90% of the exports.
The head of Streda consulting noted that Tatarstan’s milk industry has huge potential from a perspective of both logistics, the presence of huge feedstock amount, investors and state support, a good prime cost.
Of course, a desire is not enough to enter the world market. It is necessary to reconsider the assortment of products that are made. For instance, those types of cheese that are sold in the domestic market — Rossiysky, Poshekhonsky, Kostromskoy — are consumed only in Belarus. It is also necessary to focus on certain products, not the whole range of 100 types our milk processing enterprises can have. Food ingredients (whey or milk processing products) are a promising area.
“An ingredient factory is a complicated thing but it is possible. Obviously, Russia needs such a factory, and it will anyway appear in the next years. It would be great if it appeared on the territory of Tatarstan where there is a real possibility of providing it with feedstock.”