Dairy workers are not welcome at the factories

As it became known to Kommersant, due to an overabundance of raw milk against the background of a decrease in consumption of finished products by Russians, processors began to terminate contracts with suppliers of raw materials. Producers of cottage cheese, sour cream, yoghurts, cheese expect that as a result, contractors will agree to reduce purchase prices. The average cost of raw milk, the production of which is subsidized by the state, has increased by 13% this year, reaching an all-time high.

Kommersant’s sources said that a number of large dairy producers began to notify raw material suppliers of the termination of contracts due to low demand for part of the range. So processors are trying to force raw milk producers to lower prices, another Kommersant interlocutor adds.

Dmitry Matveev, the owner of the milk producer and processor Kabosh Group, confirms that some processors are indeed trying to terminate contracts with suppliers.

According to him, contracts with large players are usually concluded for at least a year and stipulate the volume of deliveries. Dairymen, who do not have long-term contracts, found themselves in the most difficult situation, Mr. Matveev adds.

Early unilateral termination of the contract is possible in case of significant changes in circumstances, violations, or if such a right is provided for by the contract, notes Forward Legal lawyer Evgeny Zubkov. According to him, suppliers can through the court to invalidate the notice of withdrawal from the contract. Danone (brands Prostokvashino, Activia), PepsiCo (House in the Village, Chudo) declined to comment. In Molvest (Vkusnoteevo) and Komos Group (Green Village), Kommersant did not answer.

Cheese manufacturer Foodland, says the company’s CEO Maxim Polyakov, does not renounce existing contracts. However, he clarifies that in the past six months the company has not entered into long-term contracts for the purchase of raw materials, “counting on a possible reduction in prices for raw milk.”

According to Mr. Polyakov, the supply of raw materials is growing against the backdrop of weak consumer demand for dairy products, which “may require unpopular measures.”

Thus, according to him, sales of hard and semi-hard cheeses in January-February decreased by 4% yoy, while the production of raw milk grew.

According to the Milknews agency, in the first two months of the year, the production of commercial milk increased by 7.6% yoy, to 3.13 million tons. Average prices for raw materials at the beginning of the year reached 34.7 rubles. per 1 kg, having increased by 13% year-on-year, this is a historical maximum.

According to NielsenIQ, in 2022, sales of cottage cheese desserts in physical terms decreased by 18.6%, yogurts – by 15.2-17.3%. Sales of sour cream, cottage cheese, kefir decreased in the range of 1.9–4.2%. Chairman of the Presidium of the Association of Retail Companies (includes X5 Group, Magnit, Lenta, Auchan) Igor Karavaev says that the assortment of yogurts and cottage cheese desserts in large chains has decreased by about 10% due to restrained consumer behavior and correction of supply and demand after the rapid development of the segment in previous years. According to Mr. Karavaev, demand is now shifting towards drinking milk, butter, sour cream, kefir and cheeses.

Alexei Gruzdev, CEO of Streda Consulting, notes that the review of contracts with raw material suppliers is a standard process for the production of dairy products, the peak of which falls on March-April before the seasonal increase in milk volumes. Advance notice of refusal to purchase is an adequate and conscientious step for processors, whose need for raw materials may change depending on market conditions, allowing the supplier to find a new buyer, he points out.

Kommersant’s source on the market says that demand for raw milk will recover after price cuts. Government subsidies for raw milk production have made the business very profitable and have led to a surplus of raw milk, he notes.

The Ministry of Agriculture told Kommersant that they are constantly monitoring the situation on the dairy market, and the industry remains profitable, including thanks to comprehensive state support measures. If necessary, the ministry, they say, will work with businesses to develop additional solutions to support profitability in the sector.

Anatoly Kostyrev