October 27, 2003
Ukraine Dairy and Products Annual 2003
The short feed crop of 2003 will pose a significant restriction on milk production in the first half of 2004. Ukraine's dairy export sector will be hampered by an expected 4% reduction in the supply of raw milk supply and further pressured by unfavorable world market prices for certain Ukrainian dairy exports. Nevertheless, it is expected that the gross export value of dairy products will increase from an estimated US $143 million in 2003 to US $155-$160 million in the year 2004.
Facing a raw milk supply shortage in 2004, Ukrainian food processors are expected to utilize a larger share of domestic fluid milk. The volume of industrially processed milk is expected to exceed 50 percent of fluid milk production. Higher factory use in 2004 is reflected in reduced domestic fluid milk consumption.
We anticipate an increase in U.S. dairy product imports into Ukraine following the September 2003 signing of a veterinary export certificate for U.S. milk and dairy products. However, high import tariffs and low consumer purchasing power will likely result in U.S. suppliers filling the value-added product niche, competing with similar high-value products from the EU, Poland, and the Russian Federation.
Cheese will remain one of Ukraine's major export items in 2004, supplying traditional export markets within the Russian Federation, the Former Soviet Republics, and Eastern Europe. Export sales of butter will grow in 2003 despite a slight decline in butter production. In 2004, butter exports are expected to decline, reflecting a shortage in raw milk, low stocks, weak demand for non-fat dry milk (NFDM) in world markets, and weakening demand for Ukrainian butter in Russia. NFDM and whole dry milk (WDM) exports will drop slightly as most dairy processors focus on domestic whole milk products, utilizing dry milk for domestic production of yogurt, ice cream and cheese products.
Expectations for an increase in fluid milk production in 2003 were not met due to extremely unfavorable weather conditions. A cold winter and hot dry spring resulted in feed shortages and high prices for fodder crops. Especially high are prices for feed grain and compound feed. The diet for dairy cows is worsening as a higher proportion of straw is being introduced into the ration. Continued feed problems will likely restrict milk production throughout the first half of 2004.
Facing tight feed supplies, former collective farms have reduced 2003 cow inventories by more than 20%. At the same time, private household farms managed to avoid a decline in overall dairy numbers. In Ukraine, rural households view backyard milk production as a "safety net" to protect family income. Household production is rather inelastic and rarely subject to significant changes.
Only 26% of the Ukrainian dairy herd is held by former collective farms, while private households account for the remaining 74%. The 20% decline in former collective farm inventories resulted in a decline of only 7% in the overall domestic cow inventory and an even smaller percentage decline in milk production. Growing production efficiencies contributed to stable milk production.
The downward trend in the cow population is likely to continue during the first half of 2004 with some stabilization in the second half, assuming normal weather conditions and an average crop. Milk prices are on the rise, currently at 533-776 UAH per 1 MT (US $100-$145). This price increase should help slow down the decline in milk production.
The production and export of milk products are unaffected by the downward trend in fluid milk production. Semi-annual data for cheese, NFDM, ice cream, and canned milk indicate noticeable production growth as well as a sizable increase in exports. Growth in factory use of processed milk during a period of declining fluid milk production is reflected in a decline in domestic consumption of fluid milk. Milk product production numbers have been revised to reflect the current situation. For 2004, it is expected that the upward trend in milk product production will continue, boosted by growth in the dairy processing industry and despite anticipated milk shortages.
Revisions were made to the 2002 production numbers to reflect official GOU statistics. The 2003 production trends are estimated based on semi-annual data. Production estimates for cheese, WDM, and NFDM have been increased, while estimates for fluid milk have been lowered. The 2004 estimates reflect the 2003 mid-year trend with the exception of butter. A decline in butter production was accompanied by export growth in the first half of 2003. This situation will lead to significant inventory cuts and eventually will result in a sharp export decline. Production of WDM and NFDM in 2004 is likely to increase marginally, following growth in domestic demand. Cheese production will grow by one third, reflecting both export market growth in Russia and increased domestic demand.
Dairy product consumption in Ukraine will be shaped by rising domestic disposable income, which in turn shifts consumer preferences to value-added processed products. This excess demand will facilitate capital flow into and modern development of Ukraine's domestic dairy industry.
A once sizable sector, household raw milk consumption is quickly shrinking, as consumers become increasingly dissatisfied with the quality of non-processed fluid milk, skim milk, and homemade soft cheese.
Per capita consumption of milk and dairy products in milk equivalent will grow from an estimated 188 kilograms per capita in 2003 to 209 kilograms per capita in 2004.
The import of dairy products into Ukraine will remain limited in both 2003 and 2004, reflecting an abundance of cheap, domestically produced dairy products, high import tariffs and a small, value-added products market. There is a widely held belief among domestic consumers that Ukrainian dairy products are of better quality than foreign imports. Dairy imports will be mainly limited to yogurt, cheese, and ice cream.
The signing of a veterinary export certificate for U.S. milk and dairy products removed existing non-tariff barriers to trade with the United States. This is expected to mainly benefit U.S. exports of the above-mentioned popular imports: yogurt, cheese and ice cream.
Ukraine will remain a net exporter of dairy products in 2004, with the main destinations being Russia and other countries within the Commonwealth of Independent States (CIS). Continued delays with value added tax (VAT) reimbursement to exporters will not heavily influence dairy exports. The macroeconomic situation is also quite favorable as the Ukrainian "hryvnia (UAH)" is unofficially pegged to the U.S. dollar. The slow dollar depreciation throughout 2003 has made Ukrainian dairy exports more competitive on world markets.
EU enlargement, expected to take place in May 2004, could reduce trade flows. Imports of dairy products from Poland could decline as they adopt EU trade practices. Also, Lithuania will be required to denounce their free trade agreement with Ukraine once they adopt new EU practices. Ukrainian cheese exports to the Czech Republic and Hungary may also suffer losses, since no Ukrainian dairy processor is licensed for export to the EU.
Growth of trade in cheese has remained strong throughout 2003. This trend is likely to continue in 2004. Russia remains the biggest market. Ukrainian cheese has slowly regained a significant market share in Russia. Several factors have contributed to this increase in market share. First, standards for cheese remain unchanged in both countries and throughout most of the CIS since Soviet times. Thus, there are no technical barriers to trade. Second, a Russia-Ukraine free trade regime for dairy products has been in place since 1993. Third, Ukrainian brands are well known in Russia. Fourth, Ukrainian cheese possesses just the right price/quality ratio for nearly every Russian consumer's pocketbook.
The export of high quality cheese remains insignificant. This is mainly because of the low quality of raw milk. Most dairy cows are located on private household farms where it is very difficult to ensure high sanitary standards. Unfortunately, the introduction of new milk procurement standards in 2003 (Whole Cows Milk: Purchasing Requirements) did not significantly improve the sanitary situation within the household farm sector. Only 3% to 10% of Ukrainian gross milk yield is considered suitable for cheese production.
International trade in butter is very volatile. In recent years, producers concentrated on production of NFDM because it was in high demand on the world market. Butter was treated as a "by-product" of the NFDM production process. Consequently, large quantities of butter were dumped on the market. Domestically, butter competes with less-expensive spreads and margarines. This increased the excess supply of butter even further, resulting in a significant export surge - despite unattractive trade margins.
Russia had been the most accessible market for Ukraine's butter, as it was competitively priced and relatively high quality. Russian consumers could afford Ukrainian butter imported under the free trade regime and appreciated the quality. The recent NFDM price downturn resulted in a sharp drop in butter production. To protect the internal market, Russia introduced a special 5% import duty on butter during the second half of 2002. This had only a limited effect on Ukrainian exports to Russia in 2003. The shrinking raw milk supply in Ukraine will significantly lower exports to Russia in 2004, assuming no change in the world market situation for NFDM.
Being one of the major export commodities in 2001, trade in NFDM is now on the decline. Most processors see greater opportunity in the domestic market with whole milk products and have stopped exporting NFDM. The domestic market for NFDM is developing quickly, but is still too small to warrant large-scale production. Ukraine's milk quality problems result in only low quality dry milk, which is used in developed countries as a component of animal feed. Nevertheless, Ukraine managed to develop some new markets in Africa and the Middle East for NFDM. The reputation of Ukrainian N FDM was damaged in the EU when traces of the antibiotic chloramfenicol were found in some shipments. Certain producers likely used this antibiotic to keep bacterial contamination levels down so that their raw milk could meet Ukraine's new milk procurement sanitary standards.
Trade in WDM is also on the decline for the same reasons as trade in NFDM. The trend is likely to continue in 2004, assuming no change in world markets for this product. Domestic consumption of WDM will grow as this product is often used for whole milk products. The export potential for WDM as well as for NFDM is significant. Exports could once again surge should world prices increase.