Kiwi milk run to Russia

A milk tanker near Moscow.

01-04-2009 | Richard Rennie

The deep black soils of the Penza region, 600km south-east of Moscow, are proving a lure to Kiwi farmer investors interested in Russian land ownership.

In late March former vet and overseas farming consultant Dr Richard Mahoney was due to accompany eight New Zealand farmers to reconnoitre a proposed dairy farm investment project in the vast province.

Dr Mahoney has had extensive experience in overseas farm projects, his most recent being work on the Fonterra dairy operation in China, and investment in 7000ha with a group of NZ farmer investors near Vladivostok.

This new project is a cropping operation supplying the local feed stock industry.

With his experience in developing overseas projects with confinement dairy systems, Mahoney was shoulder-tapped by accountancy firm Staples Rodway Limited to evaluate an investment opportunity in the Penza region with their Russian client.

The proposal being presented to NZ investors has a personal Russian connection through Russian businessman Adyl Khydebekov.

Mahoney is anxious to dispel any connotation with some of the more dubious wealth that has been created in Russia in recent years through the global resource boom.

"Mr Khydebekov already has invested in land in NZ, including a dairy farm in Northland, and has an affinity for NZers and NZ agriculture."

Khydebekov's wealth has been created through media investments and oil exploration technology. Mahoney maintains a career in overseas farm development, including work with the Dairy Board, has given him a good intuition about investors, and he believes Khydebekov's commitment is genuine.

"I have been presented with business cases from people looking for investors where the land is obviously just being parked, with the work usually involving someone else's money and time while those putting up the deal take a capital gain.

"Khydebekov has invested extensively himself in equipment and people, owning 37,000ha of land and already cultivating over 12,000ha in the Penza region."

He is looking to partner up 50:50 with Kiwi investors to invest in initially developing 8500ha into a dairy unit. Investors are being sought starting at $NZ500,000 each.

With land values about $US1200/ha, the amount being sought from NZ investors to match the Russian partner's equity is around $US10 million.

Mahoney says the initial project is essentially a 2000 cow pilot-farm operation, with potential to ramp up production and cow numbers with a plentiful supply of land available.

He is confident the soundness of the partner, and the physical appeal and potential of the region, will interest Kiwi farmers keen to invest in land capable of earning double digit cash flow returns, compared to NZ's historically low cash returns and creeping cost structure.

However, the proposed operation does contrast sharply with NZ's traditional outdoor dairy system, with plans to make the operation a confined "cut and carry" dairy system.

At present the land is being run as a cropping operation. The present target is to build confinement and milking facilities for 2000 cows with completion by the end of 2009. Imported cattle will arrive in the first quarter of 2010.

It appears the domestic mood is looking positive for those prepared to take the risk investing in a country virtually as remote as possible from NZ and the hands-on Kiwi farming psyche.

Domestic milk production in Russia remains well below targets set out in the country's agricultural plan, and cow numbers this year are estimated to drop even further, to levels similar to the US herd at around 9.7 million.

Yields remain relatively low at 4000L/cow/year. Mahoney believes with the right management cows sourced largely from Australia will have the ability to produce 10,000L/cow/year.

Under the recently released Russian report, "Development of Dairy Cattle Breeding and Increase of Milk Production in 2009-2012", plans are afoot to boost production. The government there is actively encouraging greater productivity in the sector by subsidising the introduction of higher quality cattle, semen and embryos.

Encouragement is also being offered to farmers wanting to upgrade equipment and modernise plant.

Steps are being taken to ensure domestic farmers receive higher prices, with the Russian government recently intervening to increase the tariff on butter to not less than 0.35 Euro/kg, up from 0.22 Euro/kg. The import duty on milk (and cream) was also increased from 15% to 20%, effective early March this year.

Mahoney says due to these issues over poor production levels, milk supplies in Russia are tight. Slower growth in milk consumption has also been attributed to increased imports of powdered milk.

To boost values for fresh product and returns to domestic producers, the government has also announced strict quality standards to define fresh milk, putting it in a more premium bracket to the so-called "milk beverages" which may be powdered milk products.

The appeal of providing fresh milk to the Russian market is aided by the urban market's understanding of milk products and desire to consume more of them, says Mahoney.

The ability to meet a short-supplied domestic fresh milk market holds appeal compared to countries where production in surplus to domestic needs puts producers immediately into the competitive global arena of dairy trade, as NZ farmers can well appreciate.

The milk-savvy Russian market also requires less consumer education than some markets in Asia, where dairy products are a relatively new introduction to traditional diets.

"You also have an urban base in cities like Moscow that have quite a high level of disposable income and are prepared to pay a premium for fresh milk products," he says.

The image of impoverished Muscovites tramping through snow to the government store does not necessarily hold anymore.

Significant numbers of citizens in government provided housing were given those houses when communism ended and as a result are not encumbered by high mortgage repayments or rent.

Underlying support for local producers is also a philosophical desire by the Russian government to become more self sufficient in dairy supplies. At present, the country produces 70% of its required consumption and aims to produce 95% for complete food security.

Sentiment against importation of more dairy products is strong. Investment in Russian fresh milk production could provide a means for Kiwi dairy farmers to isolate themselves from any further protectionist measures that would impact on Fonterra's ability to expand exports there.

"We believe there are few places in the world offering an undersupplied, sophisticated market and the potential for expansion of milk production, all within the same country," says Mahoney.

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