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By John Helmer, Moscow

Russian dairy producers have filed for protection from pseudo-cheese exported in growing volumes from Ukraine through customs checkpoints in the Belgorod region. According to Soyuzmoloko, the Russian dairy producers’ association, Ukrainian exporters have been cutting their cheese shipments across the border, and more than doubling the volume of the substitutes, camouflaging the switch with identical packaging and false labelling.

Conventional customs inspection cannot distinguish between cheese manufactured from dairy fats and fakes made out of vegetable oil. So Soyuzmoloko has applied to the Kremlin to install specialized testing units at border checkpoints, and to introduce a new labelling regulation to identify the vegetable oil substitution. An application to the Eurasian Economic Commission (EEC) – the rule-making executive of the customs union of Russia, Belarus and Kazakhstan — was filed on June 25 to impose protective duties against all Ukrainian cheese, pseudo-cheese, and other dairy product imports ranging from 25% to 35%.

Soyuzmoloko has identified the principal sources of the counterfeit products as enterprises in eastern Ukraine; mainly they are plants in Nikolaev, Kharkov, Sumy and Cherkassy regions, to the south and north of the current fighting in the Donbass. They are disguising themselves by labelling their products as Russian.

putin_fieldTwo weeks ago, President Vladimir Putin defended Ukrainian dairy products during a visit to farmers in the Stavropol region. “It’s hard to accept the fact that due to the grave events in Ukraine in general, there is a need to shut out all products. There are probably some problems with specific vendors, you need to work on them, you need to identify them. But indiscriminately to shut out all of the Ukraine – that’s wrong.” But Putin attacked the Ukrainian counterfeit trade: “it is imperative to improve the quality of the domestic market, carefully monitoring price formation, eliminating unfair competition, smuggling and counterfeit goods. Ultimately, this directly affects the quality of the products available to Russian consumers.”

Soyuzmoloko began a separate campaign to block all Ukrainian dairy imports in March, arguing that once Ukraine opens its western border to duty-free, price-subsidized European Union (EU) milk and dairy products, they will find their way eastwards and cross the Russian border to take market share from domestic products.

As of May 1, there were 3.5 million cows on Russian farms; compared to the same period of 2013 the number has fallen by 3%. Raw milk output from the herd for the four-month period to April 30 of this year was 3.6 million tonnes, representing a growth rate of just 0.5% since 2013. Russian production of cheese was 445,000 tonnes in 2012. It fell back in 2013 to 433,000 tonnes on account of the impact on dairy herds of drought in the western pasture areas. This year to April 30, the volume of domestic cheese has grown by 15% compared to a year ago; it has recovered to where it was in 2012. The value of the domestic production is estimated at just over $3 billion per annum. Domestic milk powder and butter production is worth another $2.3 billion.

About one-third of the cheese consumed in Russia is imported. Belarus, Ukraine, and Poland are the leading exporters to Russia of milk and dairy products. Imports of natural cheese from Ukraine totalled 56,150 tonnes in 2012, worth $304 million; 50,050 tonnes, $315 million, in 2013. In 2013 the volume of pseudo-cheese imports was 35,000 tonnes. Two-thirds came from Ukraine.

As the volume of genuine cheese shipments has dropped sharply this year, the Ukrainian pseudo-cheese trade has expanded. A report from Soyuzmoloko says that in the first quarter of 2014 imports of natural Ukrainian cheese have been reduced by 27%, compared to a year ago, while the volume of pseudo-cheese has jumped fivefold. Last year about 20,000 tonnes of Ukrainian pseudo-cheese were imported; in the first four months of this year, the volume is already at 10,000 tonnes. There are no precise Russian estimates of the value of the Ukrainian counterfeit, but to the Ukrainian producers they may be worth more than $40 million so far this year. Soyuzmoloko told the EEC that the takeover of the market by adulterated or counterfeit products has reached 10% of the Russian cheese market, and even more for butter.

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Bad cheese drives out good (1858)

What happens, the Russian producers claim, is a kind of Gresham’s Law, in which the volume of imported pseudo-cheese grows at a falling price; and this price effect drives down prices for domestic raw milk and processing to the point where it is no longer profitable to produce at all. Farmers then slaughter the dairy herd for meat. When the price of raw milk revives, the dairy herd cannot be expanded quickly enough to take advantage, so imports continue growing to feed the domestic demand.

Maria Zhebit, spokesman for Soyuzmoloko, explains that the recent drought years took their toll on the dairy herd because the rising costs of animal feed and energy were not offset by government support programmes for which funds had been budgeted and approved, but not delivered. “In general, the level of state support in Russia is several times lower than in the EU and Belarus. In Europe, the subsidy per litre of milk has reached 4 to 5 roubles, while feed suppliers receive subsidies of about €400 per hectare of cultivated land. In this situation, a significant number of the Russian producers have been facing a negative return, and been forced to cut production and reduce livestock. This in turn has raised the price of the finished product.”

According to Ministry of Agriculture data and Soyuzmoloko reports, since April 2013 the all-Russia rate of growth in the purchasing price of raw milk has been 37% . In some regions the price rise has been significantly greater. The Ukrainian imports take advantage of consumer demand by offering a counterfeit product at a falling price.

The government is expected shortly to introduce a new labelling regulation identifying cheese products with the qualifier — no milk fat, no protein.

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