Country Report ¦ IDM
Russia runs out of package:
The dairy industry in Russia is
running out of packaging material
July/August 2022 ¦ international-dairy.com · 37
Initiative estimated. However, the Russian
newspaper Fontanka reported that accomplishing
this task would require importing
foreign equipment, which is also problematic
due to the sanctions.
As explained by Konstantin Sinetsky,
chairman of the Russian Southern Dairy
Union some companies have an opportunity
to switch to alternative packages, but
this would entail a rise in production costs,
plus reduce the products' shelf life. All in
all, such steps would make dairy businesses
less efficient. In addition, the government
agencies would have to weaken control
over dairy producers.
"In the context of a sharp shortage of
packaging, when its stocks are exhausted,
the state will have to turn a blind eye to deviations
from the regulatory framework,"
Sinetsky said, explaining that due to the
crisis some companies may start sparing
money on quality control. "This could
cause several delayed consequences: falsification,
safely problems, quality degradation,"
he added.
The current supply disruptions are not
only about the package. Russian dairy
companies have a dependence on Western
equipment and raw materials too.
"Now, for example, some manufacturers
are also experiencing an acute shortage
of hydrogen peroxide – needed to disinfect
packaging. As it turned out, peroxide is
also not produced here in Russia. In addition,
it is a dual-use item. How now to
maintain the previous level of production
quality is the question for the manufacturers
to answer," Sinetsky added.
The lack of imported equipment, on
the other hand, is not an immediate task to
solve. However, in the next 6 to 12 months,
it can start causing serious troubles.
"As for domestic production, we are
heavily dependent on imports. The share of
imported equipment is close to 80%. The
performance of the equipment is highly
dependent on the availability of imported
spare parts, components, and consumables,"
said Lyudmila Manitskaya, chairman
of the Russian dairy union.
In the long run, the absence of imported
equipment could hamper investment
activity in the Russian dairy industry.
Consumption is on the line
The Ukraine war is likely to bring problems
not only on the production side. The Russian
GDP is expected to slump by 11% in
2022, the World Bank forecasted. This is
the strongest decline since the 1990s and
is likely to be associated with a sharp drop
in the population's purchasing power. The
domestic demand for dairy products is expected
to be hindered.
"In 2022, due to the current situation,
high inflation, and a possible increase in
unemployment, sales in the dairy market
as a whole are likely to fall," said Albina
Iskakova, commercial director of the Russian
group of companies Belaya Dolina.
"First of all, the decline will be seen in
more expensive categories of non-essential
items - cottage cheese and dessert group
and yogurts, secondly - butter, cottage
cheese, sour cream, and cheeses. At the
same time, regardless of the category,
there will be a shift of demand to the low
price segment, especially in regions where
the consumer is historically more sensitive
to food prices," Iskakova said.
On the other hand, the consumption
of milk in the film, cottage cheese in the
flow pack will grow, and the demand for
products with milk fat substitutes is also
predicted to rise.
"A price hike on the dairy market will
also contribute to a drop in demand. The
latter will occur due to a significant rise
in the cost of raw materials, packaging,
equipment, and components, their possible
shortage, as well as an increase in the
interest rate on loans," Iskakova said.
In 2021, the average price of dairy
products in Russia increased by only 7%,
while the production costs soared by 25%.
During the Covid-19 pandemic, numerous
companies constrained the rise in retail
prices, sacrificing margins, in a bid to preserve
customers' loyalty until better times.
Now, it seems that these better times are
not going to come any time soon.
"In 2022, there is and will be no other
way for dairy manufacturers to survive
but to synchronize the rise in prices with a
growth of production costs," Iskakov said,
adding that the current crisis is likely to
stimulate industry consolidation, as less effective
companies would be forced to leave
the market.
Things are still can deteriorate, as the
new sanctions discussed by world powers,
including an embargo on the Russian
oil and gas exports could turn into a major
blow for Russia, sparking an economic
turmoil of unprecedented scale with poorly
predicted consequences.
/international-dairy.com
