Integration Will Badly Affect Russia’s Dairy Producers

The integration processes taking place in the framework of the Common Economic Space create some serious competition challenges for Russia’s dairy producers. Russian agricultural producers are experiencing a strong pressure from Belarus, whose current priority is to increase its production and exports of agricultural products.

At present, the per capita production of dairy products  in the Republic of Belarus is 2.8 times higher than in the European Union; that of meat – 1.1 times higher; that of grain – 1.6 times higher. The orientation towards increasing agricultural exports is consolidated in government programs. The share of dairy products in the structure of Belarus’s exports to Russia amounts to 47.9% (2011).

Russia’s dairy producers have repeatedly pointed to the three main threats posed by their Belarusian counterparts: (1) high volumes of exports, (2) low prices, which are ensured by (3) strong support of dairy producers by the government of Belarus.

It should be noted that it is rather difficult to accurately compare the prices in each phase of the production chain - from the release of products to their sale within the Russian domestic trade system, as well as to compare the relative volumes of government support in Belarus and Russia. The main reason is the administrative regulation of production and other costs as well as of purchase and retail prices, and the Belarusian national currency’s exchange rate.  

At the same time, an analysis of the existing situation revealed that the ambitious goals of increasing Belarusian exports are backed by government support. Thus, Minsk is planning, by 2015, to push up the volume of dairy production to 10m tons, thus achieving a rise on 2009 by 4.4m tons. By comparison, by 2015 Russia is aiming to increase her dairy production on 2009 by only 0.3m tons. No attempt at a breakthrough has been made or even contemplated so far.  

The programs for funding the development of the dairy industries in Belarus and Russia envisage very different scales of spending. Thus, in the Republic of Belarus it was planned to earmark for the construction and re-equipment of the dairy industry an equivalent of Rb 412bn over a period of 6 years, or Rb 68.7bn per annum (at the official exchange rate as of the moment of elaborating the program of government assistance to the dairy industry for 2010). The Moloko [Milk] Program in Russia envisages funding in the amount of Rb 12bn, or Rb 4bn per annum on the average. The dairy producers in Russia may indeed make use of the funding allocated under the Program, but only alongside other categories of agricultural producers. Even if one gives consideration to that fact, the difference in the scale of government assistance to the dairy industry becomes evident.

An analysis of prices along the production chain reveals that Belarus imposes administrative constraints on the prices set for the construction of agricultural buildings under the government assistance programs; and that the prices of fodder are artificially set at a much lower level than the interest rates on the loans issued in Russia to agricultural producers. Besides, Belarus has lower fuel prices. Thus, the profit derived by the Belarusian exporters of dairy products into Russia is generated by the artificially low costs in the Belarusian administrative system coupled with the relatively high sales prices in Russia.

However, the issue of such a model being genuinely beneficial for agricultural producers in Belarus is by no means so simple. No doubt, it is beneficial for Belarusian exporters. But the agricultural producers – who themselves neither process milk not export dairy products to Russia – actually sell it to the government at fixed prices. Even if part of their milk is sold at prices higher than the fixed level, these are not market prices because they are subject to government restrictions, as the government regulated the prices on a broad assortment of dairy products sold at retail outlets. It is quite understandable why the processors of milk are interested in exports.  

It can hardly be possible for such a model to create any long-term benefits. Everything has its downside: the delivery of cheap mixed fodder to agricultural producers – at prices set at the levels that are recommended to fodder producers – is followed by the delivery of grain by grain producers to the producers of mixed fodder also at recommended prices. Is that really the kind of government assistance that the Russian agricultural producers would want to enjoy?

N.I. Shagaida – Doctor of Economic Sciences, Head of the Agricultural Policy Department