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As relations between Russia and western countries continue to deteriorate, Russia announced retaliatory sanctions on those countries with sanctions currently against Russia. The one-year ban that started on August 7 includes fruit, vegetables, fish, meat and dairy products. These bans now add Australia, Canada, the European Union, Norway and United States to a rapidly expanding list of countries Russia will no longer accept dairy products. In July, Russia had banned dairy imports from the Ukraine in response to a Ukrainian ban on Russian dairy products. While typical posturing among political leaders, the uncertainty of this move could push already weak dairy markets off the cliff.

    In terms of world dairy trade, Russia is a major market player. In 2013, Russia was the largest butter importer and second largest cheese importer accounting for 89,844 metric tons (or 198 million pounds) and 326,770MT (721 million pounds), respectively. While a sizeable market for dairy products, the current ban does little to impact U.S. exports to Russia. Since 2010, the United States has exported very few dairy solids directly to Russia due to an on-going dispute over import documentation. That said, the United States may feel the brunt of the blowback from sanctions against the EU and Australia.

    This latest message from Russia appears to be targeting the European Union. In 2013, the EU-28 accounted for just over 30% of Russia’s butter imports and a large 80% of cheese imports according to the U.S. Dairy Export Council. Holistically, Russia’s ban simply rearranges its trade partners for the coming year meaning there is very little impact on global trade. Practically, it could take months for European companies to develop relationships and documentation necessary to divert large amounts of product originally earmarked for Russia. Expect European companies will look to markets that are current serviced by U.S. manufacturers to gain share quickly and get product moving again. This chain reaction could dislodge U.S. cheese and butter products from the Middle East, South Korea and Japan.  Australia and Canada are in a similar predicament. Additionally, European companies may be compelled to shift more milk back to skim milk powder (SMP) and butter production until they sort out their current cheese trade dilemma. Given today’s dismal prospects for SMP and butter trade, more product could work to pressure markets even lower headed into the end of the year.

    Who stands to benefit from these sanctions? New Zealand, Argentina and Uruguay are in an excellent position to fill Russia’s dairy demand in the coming year. That said, it would take nearly all of New Zealand and Argentina’s combined cheese exports in 2013 to fill the hole left by Europe and Ukraine which may prove to be an impossible feat. Russia is already a market for New Zealand butterfat, so this is a much lower risk. In recent weeks, New Zealand dairy product prices have suffered tremendous losses as China’s whole milk powder (WMP) demand vanished almost overnight. New Zealand was forced to buy-back market share from the United States and Europe at a hefty cost. New Zealand may quietly be looking at these sanctions as a fortuitous event which may help to not only arrest its dairy product price freefall; it may reverse it.

    Publicly Russia has stated that the ban should “boost domestic agriculture” according Prime Minister Medvedev. Interestingly, Russia has been working for several years on an initiative to foster growth of its dairy industry. The program has been less than successful. The program was designed to expand milk supply and dairy product processing through government supports and loans. Unfortunately, the program was a complete catastrophe as Russia’s domestic milk production has declined since the implementation of the program. Given high U.S. dairy product prices this summer and stiff competition overseas it is likely U.S. dairy product could remain on-shore through the end of 2014 helping to bring prices down from historically high levels. The question is how severely U.S. exports could be affected by this latest round of policy as other dairy producing regions look to get product quickly moving again. The fallout from this ban could have long reaching implications for dairy markets and prices.