Sanctions imposed by the US and EU governments against Russia (see our earlier blog) in response to the military crisis in Crimea and eastern Ukraine are having a significant impact on western industry. Due to the nature of the sanctions, particularly the sectors they target, the effect on the oil and gas industry has been well documented and, indeed, a topic we have blogged on frequently. A more indirect consequence of these sanctions has been Russia's decision to ban all imports of EU dairy products. The ban has meant that 2.5 billion litres of milk produced specifically for export to the Russian market has been left unsold and Russia has stated clearly that this will continue until the sanctions are lifted.
As with any global economic issue it is difficult to distinguish the impact of Russia's ban and the wider supply and demand issues globally. China is traditionally a prime driver of demand for milk produced in the EU, but large-scale forward-buying in 2013 and 2014 has also contributed to the negative effect on the marketplace this year.
As one of the main producers of dairy products globally, the price of milk in the UK is particularly sensitive to global market fluctuations. Milk that is kept in the domestic market is threatened by imported produce, while milk exported faces tight competition from other dairy exporting countries. UK dairy farmers need to keep the price competitive, or offer a significantly higher quality product, to maintain its market share in a competitive global environment.
The impact of supermarket prices wars
Competition, both globally and nationally, has led to supermarkets becoming increasingly competitive over their pricing of milk, with each trying to undercut the rest by offering cheaper products.
- Tesco, the largest retailer in the UK, slashed the price of milk from £1.39 to £1 for a four-pint carton.
- This cut was predictably matched in the following days by both Sainsbury's and the Co-operative, which cut the price of one and two-pint bottles to 45p and 85p respectively.
- Waitrose then followed suit by reducing its four-pint bottles from £1.39 to £1, matching Tesco's initial reduction.
- Morrisons then raised the stakes, reducing the price of 2-litres to 84p from 97p.
As each of the supermarket giants battle to win the loyalty of shoppers, the price of milk paid to farmers at wholesale takes a hit.
The National Farmers' Union (NFU) has repeatedly spoken out about the effect supermarket price wars is having on farmers who are losing out. Pricing is complicated and can depend on a number of factors, including the quality and fat level of the milk. The production of milk requires costly equipment, as well as housing, feeding and general care of the cows. This can cost a farmer upwards of 30p per litre of milk produced, while the milk can be sold for as little as 20p per litre.
Traditionally the wholesale price of milk, which buyers need to keep competitive in order to retain supply, fluctuates with the global economy but stays in line with the market generally. While the Russian ban on dairy imports from the EU has undoubtedly led to an abrupt shift in supply and demand, there is a danger of Russia being used as a 'convenient excuse' for the dramatic reduction in the price of milk.
One final thought
Analysis in Nexis picks up the 2015 Q2 Russia Agribusiness Report from Business Monitor International. This report notes that the country's ban on agricultural imports from certain countries will actually provide a boon to Russian production over the coming year. In a bizarre twist to the EU sanctions against Russia, the impact may well impact the EU more negatively than Russia.
- EU emergency meeting on situation in Ukraine
- Sanctions headaches continue for the oil and gas industry in 2015
- Keep up to date on EU sanctions with our regular blog
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