Strategy for the Dairy Industry
Belarus is recognized as one of the world’s dairy industry leaders. The quality of Belarusian dairy products is second to none. Indeed, those who buy our products get the best value for their money. The country is one of the world’s five biggest exporters of dairy products. None of the former Soviet Union republics can boast such an achievement. Belarus has set an ambitious goal for 2020 – to increase milk production from today’s 5.8 million tonnes up to 9 million tonnes. What are the prospects for the domestic dairy industry and what sales markets should we focus on?
Russia has always been the key market for Belarusian dairy companies. In 2014 some 3.37 million tonnes of products were sold there, or 96% of the total exports. The reasons are many, including geographical proximity, similar dietary habits, and a great popularity of Belarusian products.
Russia’s decision to ban the import of dairy products from the European Union and Ukraine in August 2014 was a challenge for Belarusian companies. Russia heavily relies on the import of cheese, milk, butter, and cottage cheese; therefore, the embargo resulted in a deficit of these products on the Russian market. Belarus decided to fill in the gap. The lack of their own raw materials prompted Belarusian companies to use European raw stock. The bulk of raw materials – mainly pasteurized milk used to make cheese - came from Poland, Lithuania, and Latvia. Specialists of the Agriculture and Food Ministry say that the share of imports was insignificant. Overall, the domestic dairy industry can easily do without imported raw stock. However, back then the import of finished products from the EU to Belarus was on the rise. This was due to falling prices for European dairy products, which made them very attractive for Belarusian retailers.
First of all, the embargo had a positive impact on cheese production in Belarus. Today Russia consumes about 800,000 tonnes of cheese per year, including 400,000 tonnes of imported cheese. Our country supplied about 100,000 tonnes of products. The figure has increased recently. Although Russia boosted its cheese production, the deficit of this product is still estimated at 150,000 tonnes. It means that Belarus can keep increasing cheese exports to Russia.
“We need to build up our cheese production capacity, including by upgrading existing facilities. This market segment should be given a priority. We need to expand cheese production by at least 60,000-70,000 tonnes in 2015,” the Agriculture and Food Ministry noted.
Cheese is the optimal product for the processing of the milk that remains in excess on the domestic market. Over 60% of the milk processed in the European Union is used to make cheese. By the way, the European Union is the world’s biggest cheese producer holding over 43% of the global market. The Russian market of dairy products has certain peculiarities that need to be taken into account. For example, cheese alternatives are getting more popular there as they are cheaper than cheese. Often cheese alternatives are disguised as true cheese. Belarus does not produce cheese imitations. Some market experts believe that Belarus can start producing cheese replacements simultaneously with the production of regular cheese. However, the majority of specialists believe that this might compromise Belarus’ reputation as a producer of high-quality organic products. After all, the high quality of products is the only way to maintain customer loyalty. By the way, global trends suggest that dairy products containing vegetable oils are unlikely to win repeat customers.
The biggest challenges facing Belarusian producers on the Russian market are import bans that are occasionally imposed on Belarusian dairy companies. The recent import restrictions were introduced in the autumn of 2014. At first, Russia claimed that Belarus re-exported sanctioned products from European countries and was dramatically increasing its product supplies. Belarus dismissed the re-export claims as unjustified. Apart from that, statistics does not support Russia’s statements alleging a significant increase in Belarus’ food exports to Russia. Indeed, before the embargo Belarus supplied about 260,000 tonnes of dairy products to Russia every month. After the embargo had been imposed the figure rose to 310,000315,000 tonnes. In other words, the increase was insignificant.
“We do not compete with Russian manufacturers. We replace the products from the countries that came under the food embargo,” the head of the foreign trade directorate at the Agriculture and Food Ministry Alexei Bogdanov said.
Another complaint of Russia is non-conformity with the food standards and requirements of Russia and the Customs Union.
“These are not ‘ food wars’. These are temporary restrictions caused by tougher requirements for product quality. All dairy importers,includingtheworld-famousbrands, are kept under constant control. Restrictions may also be imposed on the grounds of discrepancies in accompanying documents, and it is a human factor. As a rule, Belarus and Russia managed to settle their disputes pretty fast, and this indicates that Belarusian producers take all the necessary measures to meet the requirements of the Customs Union. By the way, the latest restrictions imposed by Russia on the delivery of Belarusian dairy products have been lifted,” the Agriculture and Food Ministry informed.
Belarus applies a multilayered system of quality assurance and food safety control. Raw materials come under control first. Then it is turn for in-house production control at enterprises. Afterwards the quality is checked by the State Committee for Standardization. The Belarusian veterinary service and the sanitary service of the Healthcare Ministry execute selective control and supervision when issuing their final findings. On 30 December 2014 Belarus toughened the already strict requirements for acceptable levels of residues in animal products and veterinary drugs. This decision is envisaged in Resolution No. 56 of the Agriculture and Food Ministry. The requirements for some items are even more stringent than those in the EU, for example, for the content of some antibiotics. The document has also expanded the paragraph regarding the harmful substances meat and dairy products should be examined for. The amendments have been made taking into account the integration in the Eurasian Economic Union.
The agricultural agencies of Belarus and Russia agreed on the volumes of supply of milk and dairy products in 2015. It is expected that Belarus will expand its dairy exports by 15% compared to the previous year. By the way, last year Belarus still managed to increase the supplies by 8.8% despite the temporary restrictions (3,374 tonnes of milk, which was above the planned 3,100 tonnes). Given that the production volumes in Russia have decreased and the output in Belarus increased, it is very important to take this market niche in Russia.
“Sooner or later the sanctions will be lifted and European goods will be back on the Russian market. Our task is to win as many customers as possible across as many market segments as we can. In other words, our goal is to retain our export at the current level once the sanctions are lifted,” Alexei Bogdanov said.
According to Marina Petrova, the director for corporate communications at the Russian company PiR Produkt, buyers in Russia are revising their consumer baskets. “When you increase prices, you should improve the quality,” she advised. Belarusian manufacturers should also work harder on branding and the recognition of their products.
All Around The World
Russia remains, of course, an attractive market for Belarusian exporters thanks to the longstanding ties. Deliveries to other countries are not big because the Russian market is highly lucrative for Belarus. However, the global experience and laws of economics show that one market should not account for more than 30% of the total export. This carries huge risks. Therefore, export diversification is an important objective for Belarusian producers.
“Certain types of domestic dairy products can be popular on the markets of other countries. The decision of the European Commission to allow Belarusian exports has enabled our businesses to start exploring this region. For example, Savushkin Product Dairy has entered into a long-term contract with the Lithuanian retail chain Maxima to supply yogurt and other drinking dairy products, the Agriculture and Food Ministry said.
Priority areas of diversification for Belarus are the CIS states thanks to the existing free trade zone agreement in the region. Then come the countries of Asia and Africa that, unlike the EU, do not apply market protection tariffs. In Europe import customs duties on many types of products are almost as big as the cost of the product. However, specialists do not expect a sharp increase in sales to new regions, as local consumers are not familiar with Belarusian products.
“Diversification will be smooth with gradual advancement to third markets. This requires a number of procedures. They include the evaluation of the state veterinary control system, company certification, laboratory tests of product samples, trial consignment, marketing and advertising,” representatives of the Agriculture and Food Ministry said.
Specialists believe that the work on advancing to new markets,
especially outside the CIS, needs a centralized system and one operator for product sales. Meat Dairy Company has preliminary agreements and an opportunity to supply milk powder products, butter and cheese to Africa, the Middle East, Southeast Asia, and China. The analysis of these markets shows that their capacity is high. Thus, Algeria, Angola, Bangladesh, Nicaragua, Oman, and Saudi Arabia purchase considerable volumes of skimmed milk powder and full cream powder, butter, whey powder and cheese. However, a well-developed producer support mechanism is needed for a large-scale diversification amid collapsing global prices. The Agriculture and Food Ministry is working on the issue.
Production expansion is seen as the only way to increase supplies both to Russia and other countries. The genetic productivity potential of Belarusian cows exceeds 10,000kg of milk per year. The potential can be fulfilled once the relevant animal welfare requirements are met.
Three hundred new farms have been built as part of the Belarusian dairy industry development program in 2010-2015. As many as 1,063 complexes have been upgraded. In 2014 sixty-two new farms were commissioned, 189 complexes were renovated. The recent efforts will allow building up dairy cattle numbers, securing conditions for their productivity gain and improving working conditions of the staff. Apart from efforts to improve milk production and animal welfare, the country is working hard to replace the outdated milking equipment, upgrade milking parlors, cow houses, premises for dry cows, repair access roads and cattle grids. High technology production based on loose housing is a priority in dairy cattle breeding. There are over 1,600 such farms in the country.
Yet, while the modernization improved cow treatment conditions in Belarus, the full feeding issue remains unsettled in some regions.
“We are still trying to address the issue with the insufficient amount of areas under legume grasses and their harvest time. As a result we have weak fodder power. Protein and sugar shortage leads to up to 30% in fodder excess consumption per head. The absence of available funds and a huge debt burden prevent the majority of agricultural organizations from purchasing necessary volumes of protein raw material and molasses,” the ministry noted.
The country is currently working on providing the milking herd with protein meal, balanced vitamin and mineral additives and formula feed which comprises local protein sources. It will help improve the main parameters for cattle reproduction and breed more highproducing cows.
By 2020 Belarus is expected to complete the comprehensive upgrade of all the dairy farms and develop the fodder base meeting
their needs. Domestic sales are set to reach 3.7 million tonnes of milk and dairy products per year, with the export potential expected to amount 5.3 million tonnes.
Although milk production standards in Belarus meet the global standards, such issues as cooperation with retail networks and a smart advertising strategy require more attention. At present the Belarusian Universal Commodity Exchange (BUCE) is the primary channel for the export of such goods as skimmed milk powder, butter, and cheese for the majority of Belarusian manufacturers. One can still use other mechanisms but only for the products that did not sell via the commodity exchange and only under the terms offered on the commodity exchange. The Agriculture and Food Ministry is convinced that it is essential to cancel mandatory primary sales at the BUCE. It will facilitate export and will help establish direct contacts with retail networks.
“We believe that it makes sense to let manufacturers choose sales methods on their own. Commodity exchange trade might be one of the options. We have drafted a legal act and submitted it to the Council of Ministers. The document has not been supported at this stage. However, the issue is still important as the demand is falling due to a number of reasons and the competition is growing. Nowadays manufacturers have to be more aggressive in promoting their products but the existing rules do not allow this,” the Agriculture and Food Ministry said.
Mindaugas Vizgaitis, head of the company Chr. HansenBaltics, agreed that Belarusian manufacturers should focus more on marketing.
“If we compare your products with European ones, we will see that there is no big difference. It is not the quality of sour cream or cheese that differs, but the design of packaging and marketing techniques. You should have a long-term product advancement plan. It is important to understand where to move and to plan this movement,” the European expert said.
Manufacturers should also monitor current trends in the industry and respond swiftly to changes. Specialists point out major peculiarities of the global dairy market. For example, the assortment of sliced cheese for salads and other dishes is growing. On the whole, the sales of packaged cheese are on the rise, while the over-the-counter sales are falling. Apart from that, retailers are now preoccupied with efficient allocation of shelf space. This is why Belarusian cheese manufacturers should ramp up the production of sliced and packaged cheese as round-shaped cheeses which they got used to produce do not contribute to the shelf space profitability. The production of cheese for industrial use (for sausages, pizzas) is a very promising line of business today. According to experts, this segment will shape the future of the industry and determine its output.
Snacks are getting more popular with modern consumers. This opens up vast opportunities for manufacturers of dairy products to promote drinking yoghurts as an easy, nourishing and healthy food which fits perfectly well with healthy lifestyle and dietary needs of consumers. Due to the growing popularity of snacks, standard halfliter packages are now replaced by smaller packages, and the sales of such a product rise by 20-30%.
The popularity of healthy foodstuffs is a propitious ground for innovations in the dairy industry. For example, the use of probiotics which improve the human gut microbiome is one of the main areas of focus. Dairy producers draw huge attention to these ingredients today. Certain manufacturers suggest ramping up the output of new kinds of cheese with increased calcium content in addition to traditional cheeses which are an important source of this mineral. Conventional cheeses from organic milk are increasingly popular in Europe. However, these products do not sell well in the postSoviet space as they are expensive.
A land of milk and honey exists only in fairy tales. In reality, the dairy industry is propelled by very hard work. Of course, the success of the dairy industry relies on many aspects. Having a good potential, Belarus is well positioned for advancing the industry to a brandnew level. The main ingredient is systematic and efficient work.