Ukraine dairy industry struggles with oversupply

According to the index of professional production of milk, estimated by the government agencies, last year due to low purchasing prices and increases in feed prices, profitability of milk production in the country dropped by 31% compare to 2014, and by 36% compared to 2013.

According to Andriy Yarmak, economist at the investment department of the Food and Agriculture Organization (FAO), this year Ukraine’s market will have an excess of supply of 800,000 tonnes of milk. This amount had previously has been sold to Russia, Crimea and eastern regions of the country, but now all these markets are closed due to Russia’s embargo on Ukrainian food products and the continuing armed conflict in east of Ukraine.

Impact of tax reform on dairy farmers

In addition there is the recent tax reform, which has abolished any preferences on payment of VAT for all categories of livestock production. Deputy chairman of the All-Ukrainian Agricultural Council, Mikhail Sokolov, believes that dairy farming in the country is in the worst situation compared to all other segments of the livestock industry, so tax reform will hit it the hardest.

Cancellation of tax preferences is connected with the harsh situation regarding the county’s budget, but Mikhail Sokolov says that it is a real disaster for the sector and it is not actually clear, if manufacturers will be able to deal with it.

Need for export market development

According to Andriy Yarmak within the coming 3 years the development of the dairy industry in the country will be primarily associated with exports. He says that the most promising markets for Ukrainian dairy products are China and the African countries, but so far the process of export development has faltered, since Ukraine is not known in the world as an exporter of dairy production.  Head of All-Ukrainian Agricultural Council, Andei Dikun, added that the current crisis will lead to the improvement of efficiency of the country’s milk industry which would shift its focus to the production of dairy products of premium categories. However, according to him this will also be accompanied by a decrease in the dairy herd population and the overall milk production in the country.

Hopes for EU

Within the free trade zone agreement in 2016  – 10 Ukraine dairy producers received the right to export milk products into the European Union, duty free. However, duty-free supplies are carried out within quotas and Ukraine manufacturers complain that they are rather small. Quotas for the supply of milk, yoghurts and fermented dairy products account to only 8,000 tonnes, milk powder 1,500 tonnes and butter 1,500 tonnes. Olga Trofimtseva, head of the Ukrainian consulting group on agricultural trade within the free trade zone agreement with the EU, says that the quotas are extremely small, even ironical. At the same time, she added that the real free trade of Ukraine with Europe in dairy segment probably will not be really free for at least the next coming 5-7 years.