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Russian dairy production is predicted to see a fall in production in 2014 and the domestic market could be hit further following the accession to the World Trade Organisation by an influx of cheap imports, writes Chris Harris.

An increase in cheaper products could hit sales of the more expensive better quality domestically produced milk products forcing some Russian producers out of the market.

Over the last year the sector has seen a calm and stable market allowing for a small degree of development and according to figures from the Ministry of Economic Development production rose by 3.5 per cent compared to 2011.

But the dairy market in Russia has seen some uneven development in recent years, with the recession followed by a short-term rise in the market.

In 2011, the sector saw a 0.3 per cent fall in production compared to 2010 and the Ministry of Economic Development said that the current rise in production is likely to be short-term with a one per cent fall to 31.5 million tonnes compared to 2010 figures in 2014.

The ministry said that a fall in consumer demand is the result of the financial crisis, rising production costs, significant seasonal fluctuations in milk prices and the drought, which has reduced the size of the dairy herd because of rising feed costs.

All this will be reflected in milk production in the medium term.

The ministry added that an increased intensification of production has led to increased productivity in the cattle. However, this has not compensated for the fall in production caused by the reduction of the dairy herd.

From January to November 2012 Russia produced 13.607 million tonnes of milk - 3.2 per cent up on the same period in the previous year.

But the ministry said that at the end of the year the market was showing signs of a downturn in production as the November figures were 1.020 million tonnes - down by 2.1 per cent on the same month a year previously.

For the first 11 months of 2012, only the Siberian Federal District, among the federal districts, where production fell by one per cent, saw a decline in production compared to the previous year.

The main producing district was the Volga District, which produced 4.3 million tonnes of milk in the first 11 months of last year - a rise of three per cent on 2011.

The Central Federal District came second in production with an increase of five per cent to 3.5 million tonnes.

The highest rise came in the North Caucasian District, which saw an increase of 17 per cent to 315,000 tonnes.

The North West and Far East districts had four per cent increase - producing 1.3 million tonnes and 143,000 tonnes respectively.

The Southern and Ural Districts saw three per cent rises to 961,000 tonnes and 922,000 tonnes. Tartarstan produced 982,900 tonnes of milk - a 1.9 per cent fall in production.

Krasnodar produced 804,700 tonnes, a rise of 3.5 per cent. The Moscow Region produced 583,000 tonnes a rise of 3.4 per cent, Altai 572,000 tonnes a fall of 1.8 per cent and the Republic of Bashkortostan 510,000 tonnes a rise of 5.2 per cent.

IN all, the Ministry of Economic Development said that 56 regions showed a rise in production and 26 had a fall.

According to the Ministry of Agriculture, there has been an increase in the dairy breeding herd, with a rise of 26.8 per cent between 2008 and 2012 to 1.0015 million head.

The ministry adds that the productivity of the cattle has also been increasing in general.

In January 2012, the average yield was 6,457 kg per cow per year - an increase of 205kg compared to 2008 figures.

The growth in potential productivity has been put down to a growth in local resources and also a growth in the numbers of pedigree cattle. In 2012, the Russian agricultural sector bought 127,700 dairy calves including 53,900 imported and 109,100 head of young beef cattle of which 67,300 were imported.

According to the Federal State Statistics Service the number of dairy cattle in the Russian herd was 9.05 million at the end of last year - virtually the same as last year. However, the figures show a large growth in the number of cattle of small family farms.

The Ministry of Economic Development forecasts that dairy imports are expected to grow, with a rise of 17.6 per cent to 9.3 million tonnes in 2014 compared to the 2010 base.

The domestic share of the market is expected to fall by two per cent to 74 per cent, although per capita consumption is expected to increase to 249-250 pounds in 2014 compared 245 pounds in 2010.

The official; statistics show an increase of 4.5 times more milk and condensed cream last year to 130,300 tonnes - a rise of 28,900 tonnes compared to a year earlier.

In value terms imports rose to $341.9 million.

Imports of butter in 2012 rose to 103,900 tonnes compared to 71,000 tonnes the previous year - a rise of 46.3 per cent. In value terms this was a rise of 36.3 per cent to $406.2 million.

Although Russia has been an importer of milk for some time, this recent rapid growth has been put down to several factors, including the recent accession to the World Trade Organisation.

After a reduction in quotas in August, the market became flooded with cheap pork and also dairy products that were not of the highest quality.

However, market analysts at AgroRu say that this has been a boost to consumers, as it has given them a great choice between the higher quality domestically produced dairy products and the cheaper imports.

The influx of cheap imports has brought some concern from the dairy sector itself, as the unions and industry associations fear they could hit the Russian milk producers.

They fear that the cheap imports will lower prices and bankrupt the domestic producer and this in turn will mean that consumers will lose access to quality dairy products. It will mean that consumers will be forced to buy imported products, which might not be readily available on the shelves.

The analysts said that many countries in the WTO have introduced high duties to protect the market, as has Russia, but they indirectly support the producer by subsidising the farmers' costs such as gas, electricity and by subsidising the land.

They said that these markets are open in name only and opening up the markets when they are poorly protected by the state could put them at risk.

They say that if the consumers opt to buy the new products from abroad, then the Russian brands could soon disappear off the supermarket shelves.

The official figures show that Russian exports of dairy products are negligible - just 0.1 per cent of production in 2011 and the situation is much the same last year and is unlikely to change this year.

However, it has been predicted that exports could grow slightly to countries such as Abkhazia, Azebaijan and Georgia, because of the recent access to the WTO.

So far WTO accession has had little influence on prices in the Russian market with the average cost of raw milk 16.1 rubles per litre. Analysts believe this could rise to 17-18 rubles a litre this year despite the increase in cheaper products from abroad.

Last year, consumption of dairy products in Russia grew considerably. In 2011, consumption was about 7kg per person higher than the previous year.

Between January and March alone, the value of dairy products consumed in Russia was 100 billion rubles - 12 per cent up on the 2011 figure.

It is forecast that consumption of dairy products will have risen considerably last year and could reach 275-276 kg per person per year - reaching a total of 12 million tonnes.

It is predicted that if consumption continues to grow to reach the levels recommended by health experts and the state can protect the market, Russian producers should have a fairly comfortable time up to about 2020.

However, if consumption remains static or grows slowly and there is an influx of products from outside of Russia because of an easing of the market through the WTO, the profitability of the national dairy sector will be hit, putting pressure on small and large producers.