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Dairy group talks down threat from rouble plunge

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Dairy giant Ekosem-Agrar joined commentators talking down the threat of the Ukraine crisis to former Soviet Union farm operators, saying that a weak rouble offered "more positive than negative impacts".

The Russia-based group - revealing that its dairy cow herd had risen by 25% to 19,300 head in 2013, and its daily milk output by 38% to 370 tonnes as of year-end – said that it had "no problem with the depreciation of the rouble".

The rouble this week hit a record low against the dollar, as did Ukraine's hryvnia, after Russia deployed troops to Crimea, causing an international uproar which led to the US on Thursday to impose visa bans on officials deemed to be involved.

Many observers have cautioned over the threat to former Soviet Union farm groups from inflation fuelled by weak currencies, making imported materials more expensive, besides warning over the threat to exports from any sanctions, and to Ukraine spring sowings from the country's financial hardships.

Indeed, shares in former Soviet Union-linked agriculture groups have fallen sharply this week.

'More positive than negative'

However, Ekosem-Agrar said that it "does not consider the depreciation of the rouble to pose a risk to its business".

Share price performance of Russia, Ukraine related ag groups this week

Trigon Agri (Stockholm-listed shares): -8.9%

Agrokultura (Stockholm-listed shares): -13.3%

Avangard (London-listed shares): -15.4%

Astarta (Warsaw-listed shares): -18.0%

Ros Agro (London-listed shares): -18.4%

Kernel Holding (Warsaw-listed shares): -21%

Share price moves in week to close on March 6

Major expenses, such as personnel costs, and most of the group's debt are in roubles, while domestic milk prices are to some degree hedged against depreciation by Russia's huge imports, the price of which are linked to world market currencies.

"Due to the high dependence on imports, the rouble sales price is regularly derived from the world market price, which is denominated in euros and dollars," Ekosem-Agrar said.

Prices vs costs

Indeed, the group, which sells to the likes of Danone and PepsiCo in Russia, said that, thanks to rouble depreciation, it had "recently" agreed with one of its main customers a 15% increase in milk prices, in rouble terms, to the equivalent of 47 euro cents per litre.

That is more than received by most European Union producers, which as of December were getting an average of 34.75 euro cents per litre, according to European Commission data.

Only Cypriot dairy farmers earning more than 47 euro cents per litre.

The "only" negative effects for the group of the weak rouble is on its euro-denominated liabilities, said Ekosem-Agrar, which is owned by German-based Ekoniva Group.

'Structural undersupply'

Ekosem-Agrar added the "general environment for Russia's milk producers remains positive", with demand exceeding domestic supplies by some 8m tonnes.

"This is equivalent to the output of roughly 1m dairy cows and an investment of E8bn," it said.

"As the number of private and small producers is on the decline and businesses intending to build up large herds are facing high market entry barriers, the structural undersupply will not be eliminated any time soon."


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