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The company intends to become one of the leading grain exporters and to supply up to million tons of grain to the world market.

On the one hand, the market can benefit from this project. Exporting of intervention grain that stockpiled last year and became a heavy burden for the new marketing year will unload elevators whose capacities are limited as it is. A positive side may also be the establishing of trade relations with new countries-importers of Russian grain since so far traditional domestic traders cannot count on expansion to new markets. On the other hand, one cannot exclude that the state company will start operating on the already developed markets and in this case may become a serious competitor to private exporters.

II. Market of milk Basic trends The effect of economic crisis on the sector was coupled with the lowering of purchase prices for milk thus worsening the performance of dairy farms even more.

In recent years the market of milk was seriously affected by strong fluctuations of prices for raw milk received by farm producers. After growing at a high rate in 2007 - early they started to fall notwithstanding the rise of retail prices for dairy products. This trend had a negative effect on consumer demand that was also undermined by the decline of real personal incomes in the crisis period. Some government regulation measures were introduced in order RUSSIAN ECONOMY IN trends and outlooks to stabilize the situation on the market including restriction of dairy itemsТ import and stimulation of consumer demand. These efforts facilitated a certain recovery of prices for raw milk.

After the 1998 crisis when Russian agriculture benefited from active investment activities and first steps were made for intensifying dairy farming, the decline of output at dairy farms slowed down.

In 2006-2007 the drop of milk output and cow inventories was halted owing to the successful implementation of one of the components of Priority National Project УDevelopment of agrifood sectorФ - УAccelerated development of livestock productionФ. However, in 20082009 the lowering of purchase prices for raw milk and the worsening of farm producersТ performance in the crisis situation re-triggered the decrease of dairy herd: the total number of cows in all types of farms reduced from 9.4 million heads in 2007 to 9.1 million heads in 2008. By the end of October 2009 cow inventories in corporate farms were 0.3% below the corresponding previous year indicator.

The positive dynamics of milk production still preserved owing to the improving productivity of dairy herd but the rates of growth fell. As a result the gross output of milk in was only 0.6% above the previous year indicator - 32.4 million tons (in 2007 the growth amounted to 2.5%). In 2009 milk production grew similarly and totaled 32.6 million tons (Fig. 3).

55,51,47,46,42,39,35,34,33,33,3 33,32,32,32,3 32,3 32,2 32,2 32,31,31,Source: Rosstat, 2009 - УSoyuzmolokoФ.

Fig. 3. Milk output in all categories of farms In the beginning of 2000Тs dairy processing also started to recover. Since then the output of dairy products was growing. In 2000-2008 the biggest increase was observed in production of high-fat cheeses (by 94.7%), whole milk products (by 66.1%), dry dairy products (by 47.2%) and canned milk (by 35.9%). Production of butter, low-fat milk products and ice cream has shown actually no growth (Table 4).

million tons Section The Real Sector In 2008-2009 the performance of milk processing plants was affected by lower consumer demand due to the fall of real personal incomes in the situation of global financial crisis. The output of butter, cheeses and whole milk products demonstrated a downward trend. Smaller output of dry milk products is conditioned by lower demand for them after the enforcement of Technical Regulation for milk (see the section examining market regulation).

Table Output of milk products, thousand tons January2008/ 2009/ 2000 2005 2006 2007 2008 December 2000, % 2008, % Butter 267.2 253.9 267.8 272.4 271.8 101.7 231.8 85.High-fat cheeses includ- 220.7 378.3 421 436.6 429.8 194.7 436.1 101.ing brinzen Whole milk products in 6214.7 9732.6 10020.8 10514.6 10322.7 166.1 10473.7 101.milk equivalent Dry whole milk, dry 74.5 79.7 75.3 78.8 83.2 111.cream, dry milk mixes 157.8 70.Skimmed milk powder, 96.7 123.2 135.7 149 142.3 147.milk replacer, dry whey Ice cream 346.2 406.5 388.6 382.9 367.7 106.2 277.1* 96.Canned milk, million 623 897 833 759 865.4 135.9 536.9* 98.standard cases Low-fat milk products in 534 457.7 523.9 513.9 509.9 95.5 n.a. n.a.

milk equivalent *January-August 2009.

Source: Rosstat.

In recent years the situation on dairy market was greatly influenced by strong fluctuations of purchase prices for raw milk. In 2007 - early 2008 they surged and reached the peak level in March 2008 - 12.8 rubles per kg (Fig. 4). But then they started to fall. By August 2009 the average price for raw milk dropped down to 9.5 rubles per kg that is below the production cost in many dairy farms.

Source: Rosstat, УSoyuzmolokoФ.

Fig. 4. Prices for raw milk received by farm producers, rubles per ton May July Oct.

Jan.

April Aug.

Nov.

Dec.

June Febr.

Sept.

March RUSSIAN ECONOMY IN trends and outlooks The raising of prices for raw milk in 2008-2009 was constrained by both internal and external factors. First, sluggish demand for raw milk was due to smaller demand for domestic dry milk and supply of cheap dry milk from Belarus. Given the current ratio of prices for Russian raw milk and dry milk from Belarus, domestic processors are not interested in the development of home production of dry milk. With the price for whole milk ranging from 10 to rubles per kg, the production of 1 kg of dry milk will cost minimum 100-110 rubles while the market price for skimmed milk powder from Belarus is about 70 rubles per kg.

Second, the market was influenced by the adoption of Technical Regulation for milk and milk products. The lowering of prices for milk received by farm producers was due to smaller demand for it since processors wanted to utilize earlier purchased stocks of dry milk before the enforcement of Federal Law on Technical Regulation that restricted the use of dry input for producing dairy products. In 2008 imports of dry milk were 38% bigger than in the previous year.

Third, a widespread processorsТ practice of replacing milk with fats and proteins of vegetable origin also had a limiting effect on the demand for raw milk (for more details see the section on market regulation).

An external market factor was the lowering of world prices for milk and milk products due to the growth of their global output (Fig. 5). In response to that in 2009 the EU has reestablished export subsidies for cheese and butter.

Average monthly price in EU New Zealand USA *Total bacterial count < 2,5*104, somatic cells < 2,5*105, fat content 4,2 %, protein content 3,4 %.

Source: Russian Dairy Union.

Fig. 5. Purchase prices for raw milk in the EU, New Zealand and the US in 2007-2009, EUR per 1000 kg * In recent years corporate farms produced about 44-45% of raw milk in the country. In 2005-2007 cow inventories in the TOP 100 largest and most efficient dairy farms in Russia ranged from 800 to 6000 heads1. 63 of them kept from 1 to 2 thousand cows. The average profitability of milk marketing by the largest producers was 41.1% while in the rest of corporate farms engaged in milk production - only 12.6%. This proves the suggestion that the efficiency of top milk producers is well above that of other farms in the sector. According to data Rating of the Russian large and medium corporate farms in 2005-2007. The All-Russian Institute of Agrarian Problems and Informatics, 2008.

May July May July May July May July Nov.

Nov.

Nov.

Sept.

Sept.

Sept.

March March March March Jan.Jan.Jan.Jan.Section The Real Sector of the All-Russian Agricultural Census the most part of the latter (88% in 2006) are small farms keeping up to 500 cows. Estimates show that in farms having less than 500 cows the efficiency of milk production crosses the break-even point, i.e. they become loss-making. So, in 2008-2009 after the lowering of purchase prices for milk most Russian farms were close to this point and to the cutting of their dairy herd.

Despite the drop of purchase prices for milk the retail prices for dairy products were growing. Within two years (from September 2007 to September 2009) this growth averaged 30% and had a negative effect on consumer demand that was additionally undermined by the decline of real personal incomes in the crisis situation.

An upward trend of consumer demand was one of the contributors to domestic market development after 2000 (Fig. 6). A steady growth of real disposable incomes conditioned larger consumption of food products. In 2007, after a notable rise of prices for dairy products on the world and later on the domestic market their per capita consumption in Russia started to fall.

In 2008-2009 the lowering of populationТs purchasing power led to the continuing decline of demand for dairy products (in 2008 - down to 228 kg per capita). In 2009 the drop of demand was reinforced by incorrect PR-campaign for the adoption of Technical Regulation for milk.

As a result of it consumers got a strong feeling that milk offered by retailers was not natural (see the section on market regulation).

So, the limited consumer demand is currently one of the factors hindering milk market development in Russia. A campaign for social advertising of milk started in 2009 in order to promote consumption of dairy products by population. Budget funds were used to film a commercial that was demonstrated on the central TV channels. The promotional campaign is supposed to make milk (as a commodity group) more popular.

Due to the crisis developments the availability of credit resources for enterprises in real economy including agriculture reduced. The outbreak of the crisis resulted in smaller number of new investment projects in dairy farming initiated in 2008-2009. In some cases the implementation of already launched projects was halted. According to data of УSoyuzmolokoФ by the middle of 2009 the construction of about 25% of founded mega-farms (with average capacity of 1-1.5 thousand heads of cattle) remained uncompleted.

consumption rational norm Source: Russian Dairy Union, Rosstat.

Fig. 6. Average per capita consumption of milk and dairy products (in milk equivalent) in Russia, kg per annum RUSSIAN ECONOMY IN trends and outlooks State regulation In 2008-2009 the state regulation of the market of milk and dairy products was especially active. In order to stabilize the situation on the market aggravated by the crisis a complex of measures was carried out that aimed to restrict import of dairy products, to stimulate demand for them and to improve the efficiency of milk production. In particular, production of milk is supported in the framework of the State program for agricultural development and regulation of agricultural and food markets in 2008-2012. In 2008 a special branch program УDevelopment of dairy farming and expansion of milk production in Russia in 2009-2012Ф was adopted to provide additional state support to the sector. Some changes to customs regulation were adopted including the raising of import duties on selected dairy items and the introduction of amendments to the balance of milk and dairy products of the Union State of Russia and Belarus that were to limit imports of cheap dairy produce from Belarus. At the end of 2008 the Federal Law УTechnical regulation for milk and milk productsФ was enforced that sets requirements to the safety of these products, to the processes of their production, storage, transportation, marketing and utilization as well as to the terminology, packing and labeling of milk and milk products. In 2009 a social advertising program was launched in order to promote consumption of milk by population.

Despite a whole set of measures undertaken by the state on the milk market, the problems due to the limited consumer demand, seasonal fluctuations of raw milk production and nonavailability of soft long-term credits for the market operators remain still unsettled. Their solution is impossible without further state support and regulation as well as private investments in the sector that otherwise wonТt be able to fully realize its potential competitive advantages on the domestic market.

In particular, the state needs to develop an adequate normative basis for technical regulation on the market; to widely promote milk and dairy productsТ consumption and to implement respective target programs; to control supply of milk products from Belarus and Ukraine; to provide long-term credits for the development of dairy farming and to settle land legislation issues.

Measures for the development of dairy farming envisaged in the State program for agricultural development and regulation of agricultural and food markets in 2008-2012 proved to be insufficient for ensuring the projected rates of milk production growth.

In order to provide additional state support to the sector aimed to cope with its lagging behind a special branch program УDevelopment of dairy farming and expansion of milk production in Russia in 2009-2012Ф was developed. Its funding totals 30.5 billion rubles including 7.4 billion rubles in 2009. In the framework of the program the output of milk is planned to grow from 32.2 million tons in 2007 to 37 million tons in 2012.

The following measures are envisaged in the program:

- subsidies to pedigree breeding and pedigree reproduction farms (covering up to 30% of their per expenditures - 5000 rubles per head in the former and 4500 rubles in the latter farms);

- subsidies to pedigree reproduction farms for purchasing semen of breeding bulls (30 rubles per dose);

- subsidies for purchasing young cattle stock (30 rubles per kg of live weight);

- partial compensation of expenditures on formula feed;

Section The Real Sector - interventions on the market of dry milk1.

- The target indicators of the program are as follows:

- the share of breeding stock in the total cattle inventories - 15%;

- purchase of not less than 100 thousand heads of pedigree young stock per annum;

- milk output - 37 million tons by 2012;

- average milk production per cow - 4.5 thousand kg per annum.

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