Dairy products compete for alternative markets after door closes

Russia's decision to play hardball with Western food producers could not have come at a worse time for the New Zealand dairy sector as the season starts to get into full swing.

Last month, Russian President Vladimir Putin implemented a retaliatory food import ban on countries that had earlier placed sanctions on Russia for supporting pro-Russian separatists fighting Ukraine government forces along its Russian border.

The international dairy trade has been hardest hit by the ban, but the global fruit and vegetables market has also been affected.

Russia is the second-largest global importer of dairy products after China. With Russia's door closed, thousands of tonnes of dairy product are now having to find their way onto other markets.

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At this week's international dairy auction, prices fell by 6 per cent against the previous sale two weeks ago, reflecting the effects of Russian sanctions and increased local supply and as local season gathers pace. A build-up of dairy inventory in China has also depressed prices. Since the most recent peak in February, prices are down 44.5 per cent.

"It is giving us a degree of concern because it is creating some risk and uncertainty in international markets," Craig McBeth, regional team manager at DairyNZ said. "Product that would normally go to Russia has not been able to go in there now, and that's unsettling the market and creating softness in a market that was already easing."

For most spring calving farms, production goes from almost nothing in July to 3 to 4 per cent of their annual production in August, then rising steeply to around 10 per cent in September and hitting a peak of around 12 to 14 per cent in October-November. Production typically eases back a little in December to around 10 per cent, and January-February are big producing months, but after that production tapers off before the season ends in May.

"Timing is always everything and this could not have happened at a worse time, in terms of it being the start of our season," said Hayley Moynihan, Rabobank's director of dairy research for New Zealand and Asia.

At the moment, the ban is in place for one year, but the worry among farmers is that it could last longer, she said.

New Zealand is exempt from the ban but is not expected to benefit directly by having access to Russia because of the product mix - mostly milk powder - does not fit Russia's need for cheese and butter.

Local exports equate to around 20 billion litres of milk a year and Russia imports the equivalent of around 3 billion litres. Belarus is expected to ramp up production to help meet the gap, but Moynihan said the equivalent of about 2 billion litres of milk is looking to find alternative markets.

Fonterra last month stuck by its $6 a kg of milksolids farmgate milk price for 2014-15, which some commentators said was too optimistic.

On the strength of the auction, ANZ Bank cut its 2014-15 milk price forecast to $5.25/kg while ASB and Westpac put their $5.80 a kg forecasts on review.

ANZ rural economist Con Williams said if present market prices persisted, the farmgate price would be more akin to "somewhere in the mid $4s", meaning most farmers would not be able to cover their cost of production.

The European Commission last week said it would open "private storage aid" to alleviate the impact of Russian restrictions on imports of EU dairy products and to limit the negative effects on the internal market. Economists said more product going into storage was likely to lead to a buildup in inventories in Europe, which could also depress prices.