Russian milk production remains well below the country's output targets for 2007, ensuring continued price hikes for the product on the back of increasing global demand, according to the US Department of Agriculture.
While milk production is expected to increase by 2.8 per cent to 32 million metric tones (MMT) for the year, production targets set out in Russia's National Priority Project (NPP) have not been met. This has resulted in further price rises in the future, says the USDA's latest report on the country's dairy industry.
The market conditions reflect the growing pressure on dairy processors in the country to offset high raw material prices, as demand for milk-based products - particularly form emerging markets like Russia - tightens milk supply further.
According to the report, growing demand in the country, driven in particular by butter and cheese products, will create a number of challenges for the country's dairy industry, as well as opportunities for foreign producers and processors.
Milk production within the country will continue to increase into 2008 on the back of continued replacement of low-yielding domestic cows with higher quality animals, the USDA said.
However, this has failed to prevent a 12 percent increase in the price for milk and dairy products expected to continue into the New Year.
In order to stem these price increases, the Russian government last month employed price freezes on domestic food producers and retailers for some food and beverage products, the report said.
In a further step to prevent massive price surges, the USDA also noted that in some cases, Russia had also moved to liberalise trade with some neighbours to ensure milk supply.
Imports of dairy products like cheese, buttermilk and yoghurt were found to have increased substantially over the same period the previous year, and are expected to continue this trend into 2008, the USDA said.
The need for increased imports to combat price rises for dairy products has led to the Russian government reassessing some restrictions on import standards.
Examples of this have included the recent lifting of a ban on Ukrainian dairy products following veterinary inspections by Russian officials.
Despite an increased focus on imported goods, potential within the country's dairy industry continues to attract investors, the USDA added.
Italy-based Parmalat has outlined plans to spend about €600m for expansion into emerging markets like Russia by the end of 2007, the USDA said. The rejuvenated dairy group continues to look for new markets with demand for value-added dairy product, with Russia seemingly fitting the profile.
The group is not alone in this expansion focus either according to the findings, with an unnamed Dutch dairy group planning the construction of ten dairy farms in the Omsk region, according to the local government.
A considerable gap in the dairy consumption rates between the market in Russia and its Western European counterparts, has given encouragement to investors that the country has potential for growth, the report added.