Unfortunately, the year that has passed cannot be considered as successful by dairy industry people. There were more negative factors than positive ones. The new 2017 year will also be very difficult. However, the dairy market operators are expecting a slight improvement.
In brief, the results of the 2016 and forecasts for 2017 are as follows:
In 2016 the number of cows continued to decline, although this decline was not as significant as in the previous year. Productivity of cows increased, but not enough to avoid a decrease in milk production.
Unfortunately, in 2017 the downward trend in milk production in Ukraine will continue. A significant drop is expected in the sector of milk production in households. Farms will generally show stable milk yields, but only by large dairy farms which are improving performance. Many small inefficient farms will abandon the dairy farming.
In 2016, there was almost no state support provided for the dairy sector, at least there was no any financial support. Moreover, the VAT which dairy farms could leave for themselves for their own development is now taken by the state.
Dairy processors may consider as positive the abolition of compulsory declaration of increase in prices for so-called socially important dairy products.
There is no sense to speak about expectations for the increase of state support in 2017. Moreover, the privileges on the VAT payments are completely abolished since the beginning of 2017. Instead of that the government is promising them subsidies. But these subsidies seem only be capable to only partially compensate for financial losses. Before milk producers had from their sales up to UAH 3 bn of VAT which they did not have to pay to the state budget. Now they are promised to get reimbursed only the difference between the tax credit and liabilities. Generally, the amount of UAH 5.5 bn allocated for the subsidies will certainly be not enough to subsidize a wide range of agricultural entities (other livestock, gardeners, agri equipment manufacturers and others).
Considering the decline in raw milk production the increase of dairy production seems very problematic. However, the total milk processing in 2016 fell quite slightly compared with the rapid fall in 2015. Production of some dairy product groups even managed to grow. Further noticeable decline in production occurs only in the category of cheeses. The process of decrease in production of the new dairy products has practically stopped.
In 2017 the situation in dairy production will not change dramatically, but some diversification in range of products selected for production may occur. The priority will be given to dairy commodities, especially butter and dry milk. Such expectations are based on the forecast growth in world prices for dairy products.
Given the acute economic crisis, consumption of dairy products in Ukraine has been declining for three years. Unfortunately, 2016 was no exception, but the rate of the decline has significantly slowed down and for some products this process completely stopped.
Experts believe that the bottom has been already reached. Now there are some prerequisites to believe that starting 2017 consumption of dairy products in Ukraine will gradually recover despite the significant growth in prices.
It is expected that the 2016 figures of dairy exports in monetary terms will show a decline to a record low since 90’s. According to preliminary estimates the value of the exported dairy will be only about USD 250 mn which is three times less than in pre-crisis 2013. This reduction is more due to the significant drop in prices, than decrease in physical volumes.
Not the least role in reducing of dairy exports played the new Russian trade restrictions imposed on Ukraine. In 2016 Russia banned Ukrainian transit of Ukrainian dairy to Kazakhstan and Kyrgyzstan.
The achievements of Ukrainian dairy exporters are their active entry to the market of China (with powdered milk and whey) and lifting the ban on the purchase of dairy products from Ukraine by Japan. At the end of 2016 several companies started to supply products to the EU. But this cannot be considered as a great achievement, because the volume of products sold in the EU is scarce. Only the Economic Development officials in their reports can afford claiming the increase in exports of certain goods to Europe hundreds of times (although when compared to last year zero, they are right)…
The world dairy prices are now rising and the forecast is that they will be strengthening. This means that the foreign currency earnings from exports of dairy products will significantly increase. But the quantity of goods sold will rise slightly, because dairy producers are simply unable to ramp up production.
Since 2013 due to hryvnia devaluation imports of milk has significantly reduced. But in 2016 there appeared a tendency to its growth.
Given the significant rise in process of domestic dairy products, in 2017 imports would be quite substantial. Foreign products are very competitive again in the Ukrainian market.
In the first half of 2016 export prices for dairy products fell to a record low since the beginning of 00’ years. Due to hryvnia devaluation the domestic dairy prices remained stable or growing. In the second half the cost of milk began to significantly increase both in the domestic market and for export products. The reasons were the improvement in the world markets and raw milk shortage in Ukraine. During the second half of the year the raw milk price has risen by about 40%, and for dairy produce it increased approximately 25%.
In 2017 we can expect further price increases for dairy products, as world prices are likely to rise and milk production in Ukraine will be declining.
In general, in the near future Ukrainian dairy industry will have to overcome many obstacles. But those who stay on the market in the medium term will receive good dividends from the dairy business. Sooner or later Ukraine will use its huge potential in the dairy industry.