AN ASSESSMENT OF THE COMPETITIVENESS OF THE DAIRY FOOD CHAIN IN BULGARIA

Transcription

1 Enlargement Network for Agripolicy Analysis AN ASSESSMENT OF THE COMPETITIVENESS OF THE DAIRY FOOD CHAIN IN BULGARIA FEBRUARY 2009 Work Package WP2: Studies Deliverable D2.1 Study 1 Coordinator Siemen van Berkum (LEI) Author of this report DR. BOZHIDAR IVANOV, INSTITUTE OF AGRICULTURAL ECONOMICS, SOFIA

2 ACKNOWLEDGEMENT This report forms part of the deliverables from a project called "AgriPolicy" which has been awarded financial support by the European Commission under the 7th Framework Programme. The project aims to establish a network of experts involved in agricultural policy analysis and rural development in the 12 New Member States and in 8 Candidate and Potential Candidate Countries. More information on the project can be found at Page 2 / 29

3 CONTENT 1 Introduction Overview of the sector Sector definition: sector components and importance Production and value added Product flows within the sector Structural features of the dairy supply chain: present situation and trends overtime Industry structure at primary level Industry structure at processing level Production, consumption and trade developments Government policy Regulatory framework of the dairy sector Other dairy sector relevant policy areas e.g. environment policies, competition policy etc Performance of the dairy supply chain Performance at farm level Yields Prices Gross margins Performance at industry level Turnover and employment in the dairy industry Value added and profits Market share developments Competitiveness at retail level SWOT Strengths and weaknesses Opportunities and Threats Suggestions for policy recommendations...24 Page 3 / 29

4 1 Introduction As a member of EU since 2007, Bulgaria has been applying all requirements and mechanisms of the Common Market Organization (CMO) concerning livestock products, particularly the milk and milk products. In relation with the implementation of the quota system for cow milk, as one of the tools of CMO in the sector Milk and Dairy Products as of April 2007, with a monitoring period are allocated individual milk quotas for market supply to dairy plants and for direct marketing. The EU standards impose high and severe criteria in terms of production organization of milk (farms meeting the hygienic and sanitary requirements, following closely the prescription for animal health checking and feeding) and demands huge efforts and funds from the ordinary producers to accomplish them. In turn, the adoption of those criteria brought about restructuring and adjustment of dairy sector, ensued with the reduction of the small, self-subsistence farms. Generally, the competitiveness of national dairy chain is a function of different factors, namely: the situation in the upstream production sectors, trend of the world dairy market, world price level, purchase power of consumers, State policies and interventions. In addition, the competitiveness of dairy chain depends not only on the above mentioned factors but it is also determined by the historical causes and circumstances and it should be considered in a historical aspect, i.e. the current standing of the sector is driven and is a consequence of the reality and running conditions in the sector in past time. From the historical point of view, the development of the contemporary dairy sector has passed through three distinctive phases, each of them has branded the situation in the sector. The first period covers the span over the 90 s characterized with considerable decrease in the number of livestock compared to 1989 the 2000 numbers were 39% less cows, 59% less dairy buffalos and 73% less ewes due to structural reforms from central planning economy toward market economy. Moreover, most dairy animals were reared in small-scale (semi-)subsistence farms accounting for the biggest share of livestock holdings (Bachev, 2008). As for the milk processing establishments (MPE), according to Ministry of Agriculture and Food (MAF, 2000), the development trends are in opposite direction characterized by a strongly increasing number from 53 plants in 1989 up to 826 dairies in Regarding the second phase from 2000 to 2006, the dairy sector has been characterised by relatively steady development in livestock numbers and production levels. The main reason for this relative stability in the sector probably has been the perspective on EU accession and the implementation of new rules and requirements as well as establishment of the pre-accession EU Funds (SAPARD) assumed to support and facilitate the Bulgarian agriculture and food sectors. The measures implemented under the SAPARD could not have managed to solve the imminent problems over the sector because the funds allotted to the sector were completely insufficient (71 MEUR for modernization of dairy farms and 67 MEUR for improvement of the production of dairy products). As for the current phase, it started with the accession of Bulgaria in EU, as the national dairy sector become part of the EU dairy sector hence obliged to implement the acquis communitaire in this area. However, taking into account the plenty of existing problems in the national dairy sector and difficulties in the full integration and adjustment of national production to the EU standards, there are derogations in some areas as milk quality, milk processing, dairy farms. Altogether, the new conditions and requirements address the sector with new challenges and tasks and questioned the ability of the sector to handle those issues and to benefit from the EU membership. Page 4 / 29

5 2 Overview of the sector 2.1 Sector definition: sector components and importance Production and value added According to Ivanov (2007), in Bulgaria, the main dairy livestock includes cows, sheep, buffaloes and goats. Their investigation in a common group is relevant because of the similar problems. The breakdown within the milk varieties posts that cow milk accounts for 85% of total production, while the second is ranged the sheep milk with around 7%, followed by goat milk with also about 7% (MAF, 2007). The total production of milk over the period declined by an estimated 12%, of which over half happened in 2007 (MAF, 2007). The reason of the relatively big drop in the milk production in 2007 is the reduction of livestock numbers: 4.2% decrease of cow herd, 6.7% fall in the sheep number and 9.8% reduction of goat flock in Behind the reported decline in the number of dairy herds and production, the cycling problems envisaged as crisis in the fodder provision (high prices of concentrated fodder and shortage in the fodder supply) frequently emerge. The last crisis of the fodder deficit and expensive prices has appeared in 2007 additionally affected the state of dairy livestock, leading to new wave of herd reduction. Regarding the period , the most noticeable change was scored in the production of goat milk, which over this period reports a decrease more than twice from tons in 2000 up to tons in 2007 forecast by Agro-statistics Directorate of MAF. Hence, the fraction of goat milk in the gross milk structure has shrunk from 11% up to 7%, which represents the greatest change occurred after The reasons for this change and fall in the goat milk production might be attributed to the immense reduction of the goat herd, which curiously was the only sub-sector within dairy livestock indicating positive trend and growth in the transition period juxtaposed with big collapse in other productions. According to Stoyanov, Hagieva, Yovchevska and Ivanov (2008), the years during the transition period occurred to be appropriate for the goat keeping featuring as an easy, accessible and cheap way for self-subsistence with milk and meat of a dozen of Bulgarian people, living in rural areas. However, in the new condition characterized with depopulation of the rural areas and increasing costs for self-subsistent production, the goat husbandry turns out to be not so attractive and begins to fade down. As for the scale of the dairy farms, a majority of them are seen as small households, and this refers to 98% of cow and buffalo farms, 97% of sheep farms and 99% of goat farms. In relation to the farm pattern, the positive signal is the observation of a gradual increase of the large scale farms at the expense of small, selfsubsistent households, as for example on annual base, the increase of cow farms keeping more than 20 cows in 2007 collated with 2006 is with 20.7% up to units (1.6% out of all farms), whereas for the sheep, the increase of the large farms rearing over 50 heads in 2007 compared with 2006 is averagely 6.3% up to farms (3% out of all sheep farms). As for the Gross Output Value (GOV) in the dairy sector, through the transition years, it varies in the range of 307 MEUR in 1997 labelled as the most critical time for the agricultural sector up to 416 MEUR in 2000 and moved slightly down again in 2005 up to 403 MEUR. According to MAF figures, the year 2005 proves to be the most successful within 3 consecutive years. It was posted an elevation of the dairy gross output from about 36% in 2005 compared with Especially, for 2007 the GOV figures are not released yet but by the expertise point of view, the dairy gross output will have been strongly affected by the drop Page 5 / 29

6 in the production, which likely will have not be offset by the improved market structure of dairy production. Table 1 Share of milk production in total Gross Agricultural Output (GAO) Total GAO, million, MEUR Share of milk production 12% 10.8% 12.8% 12% 9.2% 8.5% 10.2% 11.4% n.a n.a in GAO (%) Source: EUROSTAT The improved market structure in the sector recently is connected with the considerable increase of produced milk in farms supplied to the milk processing plants, enhancement of the export of dairy products, widening of the production of dairy products with higher value added, as cheeses. For example, according to Ivanov (2007), at the end of 90 s and very beginning of new millennium, the processing of some milk varieties (for instance sheep milk) by dairies had slumped down to 12-15% of total produced milk. Contrarily, in 2006, the percent of total manufactured by plants milk accounts for 59% and amounts up to tons. Table 2 Share of Gross value Added (GVA) of dairy industry in total food and beverage industry Total GVA in food and beverages industry, MEUR Dairy production GVA, MEUR Share of GVA of the dairy industry in total food and beverage industry GVA - (%) Source: EUROSTAT n.a n.a 7% 7.1% 8.1% 7.5% 6.6% 7.2% 7.6% n.a Product flows within the sector As it was mentioned in the previous section, in the years mainly prior to 2000, a significant part of the produced by farms milk was not supplied to the dairies (between 22-25% of all derived milk, according to MAF, 2000) due to the incapability of dairies to place their dairy products in the market and low purchase prices offered to the farmers. Since 2000, the situation with the market realization of produced milk gradually has been improved, as in 2006, the share of purchase by the dairies cow milk makes for about 63% of whole produced cow milk, while for some milk varieties as sheep and buffalo milk, the supplies to the market are still low, namely 36.4% and 20.8% of total buffalo milk production. According to Kovacheva, Petrova, Malamova, Yovchevska & Radev (2008), as a result of fallen agrarian reform, the big part of the livestock herds were devastated, the production conditions of animal breeding, milk producing, storing and delivering have deteriorated hereby the quantities of produced milk in 2006 accounts for 60% of the levels achieved in 1989, while in terms of processed milk, it is merely 42% out of 1989 records. As regards the milk input flows, about 59% of produced milk from farms was dispatched to the processing dairies but a significant part of remained milk was marketed directly by the farmers. For example, according to MAF, in 2006 by direct sales was realized 13.4% ( tons) of the whole milk, which stands for a decrease compared with 2003, when this percentage was 16.1%, equal to tons. Page 6 / 29

7 Fig.1 Production flow chart Structure of dairy production in 2007, tons Goat milk Sheep milk Buffalo milk Cow milk Cow milk Buffalo milk Sheep milk Goat milk Source: MAF, Agro-statistics Directorate In addition, the interesting fact is that until , more than 95% of milk sold directly by farmers was cow milk, while later the percentage of cow milk diminished up to 69% and a very sharp growth of direct sales of predominantly goat and in less extent sheep milk appears. The direct sales of goat milk in 2005 and 2006 years rise up to 32.2% and 44.7% out of whole derived goat milk collated with merely 2% goat milk supplied to the industrial processing. In same fashion, comparatively high turn out to be direct sales of sheep milk (about 12.3% out of total sheep milk in 2006 according to MAF), which indicates that both kind of milks considered as complementary and specific are not priority for industrial dairy plants and they are better dealt in direct marketing. Fig. 2. Production flow chart within dairy chain Homemade and farm consumed milk in tons Milk processed in dairy plants in tons Source: MAF, Agro-statistics Directorate Page 7 / 29

8 A significant factor affecting the product flows and their marketing allocation is the implementation of the quota system (given to Bulgaria tons, of which tons for industrial processing and tons for direct marketing). The quotas by the opinion of Kovacheva, Petrova, Malamova, Yovchevska & Radev (2008) hinders the production of dairy products from local input at very low level inasmuch as it have been calculated based on the referent quantity of processed milk in period, when it had been low, whereas bigger part of the supplies had been designated to the murky economy hidden from the official statistics. The monitoring period of the quotas in Bulgaria was initiated in April 2006, as of April 2007 the legislation for milk quotas was enacted and dairy farms applied as the quantity of enrolled milk exceeded with about tons the available national milk quota. The allocation of quota among the different type of producers was not even, as dairy farmers from first (in compliance with EU requirements) and second (in transformation to fit EU standards) categories, totally units have received thorough applied individual quota, amounting to tons, while to the farms from third (not indication even to meet EU standards) category were distributed the remaining quota portion for industrial processing, tallied up to tons. The distribution of these quantities led to reduction of individual quotas of those producers up to 47% of their needs and preliminarily requested quotas, which becomes severe obstacle for upward restoration and development of the sector. In the same time, the receiving of additional quotas by farmers proves to be difficult problem because the trading quotas, in the country insofar do not work well, everything is very centralized and farmers willing to get bigger quota encounter a clumsy and slow administration. The system of animal registration and earmarking insofar is not properly implemented and it hinders the milk quota trading, interlinked with the number of dairy cows and demonstration of their availability by animal identification earmarks. 2.2 Structural features of the dairy supply chain: present situation and trends overtime Industry structure at primary level According to Bachev (2008), the majority of dairy farms have been left out of modern marketing channels and their prospects of post-eu accession development are extremely limited. A great part of the farms have not been able to adapt to ever increasing competition, industry requirements, and evolving institutional quality, hygiene, animal welfare, environmental standards, etc. Consequently, the number of livestock farms constantly decreases (since its peak in 1994), while the number of animals per farm slightly has increased. For instance, farms (about 80% of all farms in 2007) keep between 1 and 2 dairy cows, as the number of cows in such small self-subsistent farms makes up for 36% of the whole herd. Furthermore, the share of cow in all self-subsistent farms can be estimated up to 61%, while for other dairy sub-sectors, the percentage of animal husbandry in selfsubsistent households stands for: 62% for ewes and 92.6% for goats in 2007 (MAF, 2008). Regarding a research of the Catholic University Leuven (2004), the group of farms having more than 5 cows has grown the most in importance, in other words, there is limited preliminary evidence of growth in the small-scale Bulgarian dairy sector. The throughout little enlargement of the livestock farms occurring in last couple of years and confirmed by the statistical sources indicates that the average number of stocks per units rises up from 1.9 dairy cows (2000) up to 2.8 heads (2007), 6 sheep (2000) up to 10.1 head (2007) and 2.8 goats (2000) up to 3.2 goats in However, such structure of primary production within livestock sector is still very adverse, spelling for serious challenges for dairy producers in Page 8 / 29

9 terms of modernization of their farming, improving quality and efficiency of their production, adoption of contemporary and safety technologies, etc. According to Ivanov (2007), a reduction in the number of small, self-subsistent households can be achieved mainly by creating conditions for stabilization of milk purchase prices, providing certainty and incentive return from dairy livestock and not at the last place, improving the lifestyle of the producers, etc. The Bulgarian dairy livestock is characterized with great depreciation and backwardness due to lack of modern technologies, saving labour and time thus the job exerted by those farmers in time being is displeasing, burdening and wearying. Table 3 Size structure of the livestock farms in 2007 FARMS COWS Specification No. of farms % of total Cum. % No. of head % of total Cum. % Average head / farm TOTAL % 100% % 100% 1-2 heads % 79.8% % 36.1% heads % 91.5% % 51.4% heads % 95.8% % 61.2% heads % 98.3% % 73% heads % 99% % 80.4% heads % 99.5% % 89.3% heads % 99.8% % 94.5% 79 >100 heads % 100% % 100% 231 Source: MAF, Agro-statistics Directorate As regards the issues appearing after accession of Bulgaria in EU in 2007, the most crucial question pertains to the direct payments bound to the agricultural producers under first pillar of CAP. Bulgaria has decided to use Single Payment per Area, which is variant gifting big landlords engaged in mainly cereal and crop farming and afflicting specialized in livestock large farms. It turns out that based on the figures from the last overlook of the farm structure in Bulgaria (MAF, 2006), about 59% of all dairy cow farms have not had the necessary over 1 ha agricultural land thus they are excluded from the possibility to grasp direct payments. Furthermore, almost same high fractions are reported for sheep sub-sector, as 65.5% of sheep entities are not eligible to receive direct payments (MAF, 2006). This situation illustrates the limited opportunities of dairy farms to lift up their income that was one of the main reasons for triggering up the national protest of dairy producers started on August, The national protest of farmers from dairy sub-sector was provoked by heightening prices of fodder as a result of the cereal crisis from 2007 and lack of State countermeasures to compensate their increased expenditures. The cereal crisis in 2007 inflicts the thorough country, as the yields of main cereal forages notches a drop with about 34% compared with average yields. The strike of the dairy farmers reveals that the sector is not sustainable, the producers are vulnerable from external crisis and the schemes distributed under the implementation of CAP in Bulgaria may not redress the deficiencies, which strongly deprives the enthusiasm of potential people to tackle with such activity Industry structure at processing level The processing industry in Bulgaria has passed through different metamorphosis, stretching from a high concentration during the years of socialistic period (overall processing was enclosed in 53 establishments) through a swiftly swarming of milk processing establishments (MPE), tallying up to 826 units in 1995 and ensued whittling of their number up to 233 in The features in the years of 90 s were connected with a huge increase in Page 9 / 29

10 the number of MPE that have produced dairy goods with very doubtful qualities, dumped the prices of these products, threatened the health of customers and shirked the dealt payment conditions with farmers. These negative circumstances emanated in throughout rejection by the wide public and a process of restructuring has been initiated driven by the integration mechanism on the country in EU. There have been closed 77% of dairy plants with small capacity and 45% of MPE considered as industrial type ones. The industrial type dairies are thought the dairy plants with processing capacity of over 30 tons milk / per day, as usually such plants rely on milk delivery crossing behind the realm of their district. Besides, the remaining MPE have been forced to embark ample innovation and improvement by incorporating HACCP and ISO systems, as in the period , the costs for adoption of long-term assets are tallied up to 150 MEUR, which represents about 18% of gross investments in the food sector. Table 4 Size distribution of dairy industry, in number of employees Size band, in numbers of employees Number of Enterprises Over Source: MAF, Agro-statistics Directorate The direct foreign investment also scores a growth from 38.2 MUS$ (2001) up to 51.4 MUS$ (2005), as regarding this indicators, the sector accumulates 17.5% of all foreign investments embarked in the production of food thus occupies the second place in the overall food industry after the sector of bread, pastry and confection food. In last couple of years, serious takeovers in the processing industry occurred, as the Greek Company Vivartia acquired the biggest MPE in Bulgaria United Milk Company at the beginning of 2007, while later the Spanish Company GED Capital Development took over the biggest plant in North-eastern Bulgaria in Dobrich. It is estimated that the foreign owned companies purchase and process about 18% of all industrial processed milk, as they own the biggest milk processing establishments in the country. Table 5 List of large dairies with their milk collected and processed in 2006 Name of the Ownership Estimated intake annually company in tons As % of total intake Danone DANONE France % United Milk Company VIVARTIA, Greece % (UMC) Zorov-97 ZOROV LTD Bulgaria % Laktis - SIS SIS 7 Ltd, Bulgaria % Tribul TIRIS JSC 3% Greece Source: National Statistical Institute, Ministry of Agriculture and Food, Own estimation Regarding the problems in processing industry, the lack of enough financial resources was considered as one of the factors brought about the delay of the industry restructuring. For instance, in 2007 only 27 MPE (11.6%) out of 233 meet the requirements in Regulation 853/2004/EU and are permitted to dispatch dairy and cheese products into EU. The other dairies are comparatively little and are really impeded to enlarge and undertake investments to match the EU standards. It leads irrevocably to thawing the number of processing entities, which slackens and affects the competition whereof the remaining dairies do not feel Page 10 / 29

11 imminent need to rise up the purchasing prices of the milk input and to decline the prices of their final products. Moreover, the ceasing activity of a dozen of dairies and reducing the overall number of milk processing establishments leads to scarce network density whereof, significant production realms are left out of adjacent situated serving MPE. There are a lot of cases, when the dairies are forced to commute hundreds kilometers to collect the raw milk from farms, which unanimously indicates that their efficiency is aggravated and it might be at the costs of maintaining high prices of the final products and underpaying of purchased milk from farmers. Besides, the economic efficiency of dairy plants is exacerbated by the fact the majority of milk they processed is collected by common milk collection stations located throughout the country. Those collection stations are owned by either the producers delivering milk and by milk mediators (vendors) or dairies itself, which have established such stations in order to get together the fragmented producers. According to Ivanov (2007), the major problem concerning the milk collection stations is that the number of these units is not sufficient to ensure convenient gathering of the whole milk yielded by the producers, which are also mandated to control and registration and in the end of 2007, they enumerate units. Abreast with the number of collection units, the problem can be extended to the lack of proper testing of milk quality at the stations due to poor equipment thus the application of the milk traceability by MPE is cumbered. At the same time, the dairy plants are not prone to give additional stimulus to farmers for quality milk because they reckon the producers as inflexible (without great possibility to respond, stopping or changing their deliveries) and assume that the subsidies granted by the State to farmers for quality milk substitute their role and policy in this matter. Under the schemes for national complementary payments, the State subsidizes farmers delivering quality milk following the Ministry Order from February Production, consumption and trade developments According to Ivanov, the consumption of dairy products depends on the customer preferences and nutrition habits of people, e.g. a great number of customers are prone to substitute great quantities of different milk products for smaller quantities of more delicious and high quality food. Table 6 Supply/demand dairy product balance (in 000 tons equivalent of 3.5% fat milk) Production Imports Exports Stock variation Supply available Human consumption Av. Cons. Per capita litre Self-sufficiency rate (%) 108% 109% 108% 104% 104% 104% 106% 104% 106% 106% Source: National Statistical Institute, Ministry of Agriculture and Food, Own estimation Page 11 / 29

12 According to National Statistical Institute (2007), the annual consumption of dairy products per capita in Bulgaria during 2006 amounts up to 62.3 kg, which represents about 3% less than the same indicator in This indicator does not include completely the consumption of dairy products in the public dining places as well as does not take into account the milk remained in farms and the milk distributed by direct sales. Estimating these qualities and recapitulating them in milk equivalents, the annual per capita milk consumption in 2006 might be approximated about 139 litres. Table 7 Trends in dairy production (ten most recent years) Total Fresh milk' tons Only packed fresh milk' tons Yoghurt' tons Only processed yoghurt' tons Total brined cheeses' tons Only processed brined cheeses' tons Total cheddar' tons Only processed cheddars Fresh, fromage and other cheeses' tons Total cream and other dairy products' tons Butter and buttermilk' tons Only manufactored butter' tons Source: National Statistical Institute, Ministry of Agriculture and Food The feature in Bulgaria is that 38.6% of milk consumption comes from the direct sales and in-farm consumption thus not all customers have equal chance to participate in distribution of this milk. As for the internal consumption structure of dairy products, the average consumption of brined cheese in 2006 accounts for an enhancement with 16.3% per capita compared with 2000, while regarding the yellow cheese the increase in 2006 to 2000 is even higher 38%. Only in relation to the consumption of fresh milk, the quantities consumed by the households in 2006 collated to 2000 score a decrease, reaching 28.1%, which might be explicated by the consumption habits changes and substitution effect of the goods. In allusion to Kovacheva, Petrova, Malamova, Yovchevska & Radev (2008), the main factor for development of the dairy industry in the period is connected with the grown purchase power of consumers in Bulgaria and respectively the demand for dairy products. The growth of national economy and resident incomes, overtaking the inflation rate till 2006 have contributed to the ascending development of the dairy production and enhancement of the consumption of products manufactured in the dairy plants. However, in 2007, the price growth of dairy products outmatch the income growth of particular social groups, which led to shrug in the consumption of dairy products and decline in the quantities of milk processed by Page 12 / 29

13 dairy plants by around 10% annualized. Another blow to the national dairy production was the dairy import from EU, which also draws back the national processing stage, cumbered to sell and distribute their production. Table 8 Consumption of main dairy products per capita Fresh milk, liter 32,2 31,8 28,9 27,7 26, ,2 20,8 19,6 Yoghurt, kg 23, ,1 21,9 24,7 25,6 26,1 25, ,3 Cheese, kg 9,4 9,8 9,2 9,2 9,9 10, ,7 10,6 Cheddar, kg 1,7 2,5 2,1 2,1 2,4 2,5 2,4 2,6 2,9 3 Other dairy, kg 2,9 3,8 1,2 1,1 1,3 1,4 1,3 1,3 1,4 1,7 Butter, kg 0,5 0,5 0,4 0,4 0,4 0,4 0,5 0,5 0,5 0,5 Source: National Statistical Institute, Ministry of Agriculture and Food The dynamic of the export and import of dairy products in terms of value in the period after 2000 shows tendencies of increase. Regarding the export of dairy products, in many years, Bulgaria sustains as a net exporter in terms of value, as in 2006 the import of all dairy products amounted up to 39.7 million US$, whilst the export is tallied up to 47.7 million US$. Regarding the quantity, Bulgaria is a net importer, as the import reach up to tons, while the export is estimated up to tons, which stands for a drop with about 15.7% in 2006 collated with After the accession of Bulgaria in EU in 2007, there have been immediately noticed a significant moving in the trade, as by the preliminary projection of NSI, the import in 2007 is estimated to reach tons (increase with 24.3% compared to 2006), while the counterpart export is forecast to tons (marked up with 22.9% to 2006), which indicates that the import has been outgrowing the export after EU membership. Table 9 Export of main dairy products Export of main dairy products - tons TOTAL - Milk and Dairy products Milk and creamnone concentrated, not sweetened Milk and cream concentrated, sweetened Yoghurt Whey skim milk and powder milk Butter and buttermilk ,5 2, Cheeses and curds Source: National Statistical Institute, Ministry of Agriculture and Food Within the import pattern in 2007, the biggest imported quantities are reported for concentrated milk and cream, including powder milk scoring tons (35% of overall dairy import) and for whey, either concentrated or powdered, reaching up to tons. As for the Page 13 / 29

14 export in 2007, along with the estimated increase compared with 2006, the biggest share in the export pattern (same as previous years) forms the cheeses and curd, accounting for 68%. Bulgaria turns out to export mainly cheese, which is much more expensive and utilizing significant milk inputs as long as the import is attributed chiefly to milk powder and concentrated milk. However, in terms of EU, Bulgaria represents a net importer as about 75% of our dairy import comes from EU and merely 44% of our export is designated to EU. Table 10 Import of main dairy products Import of main dairy products - tons TOTAL - Milk and Dairy products Milk and creamnone concentrated, not sweetened Milk and cream concentrated, sweetened Yoghurt Whey skim milk and powder milk Butter and buttermilk Cheeses and curds Source: National Statistical Institute, Ministry of Agriculture and Food 2.4 Government policy Regulatory framework of the dairy sector From , all requirements and mechanisms relevant for the member countries of EU regarding the Common Market Organization (CMO) of animal products, particularly relating to milk and milk products are mandatory for Bulgaria too. The mechanism of quota system represents one of the mechanisms in the sector, as it was fully implemented in Bulgaria from April 2007, along with the monitoring period commenced from April 2006 till April, The implementation of the EU regulations and Commission Decisions is laid down in the Law for Implementation of Common Market Organization of Agricultural Products in EU (LICMOAPEU) relating to national reserve, individual milk quotas, admission of vendors and the process for milk purchasing. The main efforts are directed in implementation of the EU Regulation 843/2004, which pertains to quality and safety aspect of dairy products. In pursuance of these requirements, the Bulgarian government sets up an Order No4 from covering the specific requirements in production, storage and transportation of raw cow milk and requirements for marketing of the milk and milk products. Furthermore, the MAF established a public register of all categorized farm producing cow milk in direct relation with EC Regulation 853/2004 and registers of accredited laboratories for examining of raw cow milk and approved vendors of cow milk Other dairy sector relevant policy areas e.g. environment policies, competition policy etc. As a country of EU, Bulgaria implements the trade and market mechanisms in the sector Milk and milk products. For the sake of regulation of the export from the third Page 14 / 29

15 countries (out of EU), the MAF applies the license regime for all those products referred and listed in the Common Market Organization regulation of EU. The Directorate Marketing and Regulatory Regimes of MAF issues the export licenses (AGRIM) for each import in EU, every time the quantity exceeds 150 kg. Along with the license regime applied in the dairy product trade, Bulgaria in pursuance of EU legislation implements the quotas and tariff levies for the import out of none EU countries. According to the regulations (MAF, 2008), Bulgaria applies preference trade regimes with some countries having Trade Agreements with EU, namely Turkey, South Africa, Switzerland, Norway, Iceland, as for some limits of dairy products, the levies are fixed to 0%. Abreast with the State policy in the sphere of foreign trade, the government tries to prevent the crisis outbreaks in the dairy production and through the presumed governmental intervention to solve the problems. Annually, the government through the State Fund Agriculture distributes to the dairy farmers target subsidy for produced and sold qualitative milk (above spoken farms from first and second categories). As regards the current 2008 year, the financial support amounts up to 0.10 EUR/Litre for qualitative cow and goat milk and 0.13 EUR/Litre for qualitative buffalo and sheep milk. Other forms for support of agricultural producers that was applied nowadays belong to the Regulation 1535/2007 of EU (de minimis), whereof the registered producers fallen to the financial burdens may enrol to a maximum support calculated up to EUR over a three year period. The stimulus for the dairy sector is consistently undertaken State support in relation to the breeding activity, fodder procurement and investments in dairy livestock farms. Only concerning the State policy for support of the fodder procurement and animal feeding, the total subsidy is assigned up to 1.6 MEUR for Bulgarian government allocates the supporting means to dairy production, funding the investment initiations for: acquisition of purebred and fecund animals; development of production infrastructure and facilities; production of market-oriented goods. The term for running of this investment policy is , as of , the dairy production is being liable for support by Rural Development Program too. As a result of the enacted Council Directive 91/676/EEC, called popularly Nitrate Directive and the Bulgarian obligation to adopt the whole EU legislation, on is introduced the Order No2 for the prevention of the water from the pollution caused by the agricultural sources. This Order was procreated as a joint act of the Minister of Environment and Water, Minister of Agriculture and the Minister of Health Care. The object of this Order is the water resources or part of them, containing the surface water, underground, including mineral springs and seaside waters. The main goal of this Order is to safeguard the waters from the different agricultural polluters, as the livestock is thought as one of the big contaminators. In pursuance with this Order, the water basin or part of them that are polluted or are threatened by pollution are determined. Besides, in 2005 the Minister of Agriculture and Forestry enacted the Order for Good Agricultural Practice, concerning the dimensions and characteristics of the depots for manure storage, including the measures for preventing the pollution of surface and underground waters from liquids originating from the manure depots or stocked fodder. This measure especially affects the farms in their process of adopting all requirements necessary to continue operation after EU membership. Regarding the environmental issues, the compliance with the requirements of the Nitrate Directives is one of the severe challenges for the farms and one of the critical barriers, majority of farms successfully to transform from the II and III categories to the I category, fully entitled to market the produced milk and to receive milk quotas. Regardless, the MAF has elaborated the curriculum and carries out the training workshops in order to acquaint farmers with the necessary requirements the lack of financial resources curbs the farmers intentions. Page 15 / 29

16 3 Performance of the dairy supply chain 3.1 Performance at farm level Yields According to Stoyanov, Hagieva, Yovchevska and Ivanov (2008), bred in Bulgaria dairy cows, alluding the expertise of specialists are with productive potential used not more than 2/3 and instead of liter/per cow, the average yield scores up to per cow/per lactation. As regards the MAF data (2008), in 2006 the average milk yield per cow is liters, which accounts for 1.7% increase compared with 2002 year. Table 11 Cow numbers, size and milk yields in some selected EU member states, in 2006 Country Dairy cows (000) Average Herd size Average Cow Yield (litres per cow p.a.) Denmark Sweden United Kingdom Greece Belgium Portugal France Source: EUROSTAT The milk yield of cows in Bulgaria varies widely between and liters in dependence with pedigree potential as well as from feeding and zoo-hygienic used technologies. Furthermore, according to the MAF (2008), the milk yield seriously differs between farms with controlled cows by the Executive Agency for Breeding and Reproduction in the Livestock Sector (EABRLS) and other farms concerning all cow breeds. Unfortunately, the number of controlled cows is merely in 2006 year (12.4% out of whole herd), as the highest yield is reached for the Red and White Holstein breed about kg (increase with 9.8% collated with 2005). As for the small ruminants, the average yield per ewe in 2006 was estimated up to 87 liters/per lactation, which makes up for an enhancement with 6% compared with 2002 year. Table 12 Developments in milk yields per cow - selected countries in the EU Sweden United Kingdom Greece Denmark France Source: Danish Dairy Board and United States Department of Agriculture As for the goat, the average milk yield per lactation is tallied up to 220 liters/per goat, standing for increase with 16.4% compared with In allusion to Stoyanov, Hagieva, Yovchevska and Ivanov (2008), the national small ruminants notice significant backward in relation with the average milk productivity in other EU countries, developing industrial production, as for the ewes, the national milk yield fluctuates about 55% of the average yield in EU, while for goat this percentage is 71%. Page 16 / 29

17 3.1.2 Prices According to Popov (2008), the levels and dynamics of food prices in Bulgaria depend on following factors: world prices, market conditions within EU and local specificities. Bulgaria is country with very open economy, strongly depending on the export and import that from the other hand is unable to impact the prices on the international market, i.e. it is price taker. Figure 3 Farm gate and direct sale prices of milk paid to farmers in recent years Prices Euro 0,45 0,4 0,35 0,3 0,25 0,2 0,15 0,1 0, Years Source: MAF, Agro-statistics Directorate Farm gate prices of cow milk Milk prices of direct sales As for the prices of dairy products, they turn out to mark up acutely from the joint of the country into EU, supposing all food products. For example, the gross harmonized index of consumer prices in Bulgaria for 1 st quarter of 2008 are at level 40.8% higher than referent year of 2005, while for EU-27, this increase is merely 10.04% (EUROSTAT). In addition, the increase of prices of the group of milk, cheese and eggs in 2007 (the first year of EU membership) and 2006 accounts for 17.5% at annual base, while in comparison, the change in 2006 to the previous 2005 is only 4.1%. For the whole period , the reported increase of the fresh milk reaches 57.9%, which is recorded as the highest increase in the group of dairy products, whereas the prices of brined cheeses in 2007 based on the 2000 year have jumped with 37.7%, the least price change in this group. In the same time, the farm-gate prices of raw cow milk in 2007 year have risen up with 28.5% compared with 2006, which testifies for the lag of farm-gate prices and the conclusion that from the galloping price increase of dairy products, the most gained are the downstream sectors in dairy chain. The great jump of the dairy product prices offered to the final consumers started with the Bulgarian joint in EU has slowed down in the end of 2007 and in 2008 extreme soaring of the prices were not observed (annualized inflation of the dairy goods about 10,2% in September 2008 as long as the overall inflation rate over the same period is 11%). Abreast with that, the purchase prices of milk have not been subject to any increase for this period at kept in the levels from end of 2007 thus the farmers last to be surrounded from distribution of the higher profits coming from the price increase Gross margins According to the last FADN survey in Bulgaria from 2004 (MAF, 2007) is clear that the professional big dairy farms in Bulgaria had been 36% out of all specialized professional entities in that time. In the same time, the average economic size (AES) of the livestock farms Page 17 / 29

18 (the Standard Gross Margin divided to EUR) is about 3 economic units or 3 times less than the AES of farms specialized in crop production. The gross output of the specialized livestock farms (including dairy farms keeping ruminant animals and meat specialized farms) in 2004 represents a decrease of 14.4% compared with the pilot FADN survey carried out in However, according to FADN-2004 year, the gross output only in dairy farms had been calculated at levels, which significantly prevails the gross output obtained by the other livestock farms, keeping pig and poultry. The figures from 2004 FADN study shows that within the gross output of dairy farms, the cow milk production represents up to 87%, while the sheep milk production is estimated up to 14%. In the dairy farms, the gross output generated by dairy sector makes up for 70.5% out of total gross output in those farms. As regards the intermediate consumption (direct costs) in dairy farms in reference to 2004 FADN data, the total direct costs are estimated up to EUR. The biggest percentage within direct costs in dairy farms occupies the forage expenditures about 70.6%. Furthermore, the calculation of SGM in dairy farms equalizes up to EUR (FADN-2004), as gross margin rate only taking into account the milk sales is calculated up to 55%. Along with that, the fraction of milk and dairy products in the total revenues of the specialized dairy farms is estimated up to 70,5%, while the gross margin rate generated by milk sales lagged up to 55%. It testifies for the significant share of the other revenues outside milk in the dairy farms also derived by livestock (calves, culled animals, etc) as well as for the sound size of the direct costs. As a result, the pure average net income of dairy farms in Bulgaria over 2004 has been estimated up to EUR, as at the time being the incomes and gross margin are anticipated to be higher at least due to the single payments and other subsidies allocated to farmers. Table 13 Gross margins at Bulgarian dairy farms in 2004 Number of cows 12 Number of sheep 19 Yield (kg/cow) Yield (kg/sheep) 84 Grassland (ha) 4,8 Other crop (ha) Values in per 100 kg milk Total revenues 29,36 - Milk and dairy products 20,71 - Turnover (calf sales) 3,82 - Other revenues 4,83 Total calculated costs 18,06 - Feed concentrates 12,75 - Health care 1,55 - Other costs 3,76 Gross margin per 100 kg of milk 11,30 Gross margin rate (of return on milk sale) 55 % Gross margin (total revenues less variable costs) Source: MAF, Agro-statistics Directorate Page 18 / 29

19 3.2 Performance at industry level Turnover and employment in the dairy industry The dairy industry represents roughly 8% of the turnover of the food industry in Bulgaria and employing slightly more than 9% of the permanent employment in the food and beverage sector. The turnover of dairy sector only within the structure of animal production represents 34% thus it ranges the highest share in this segment. The turnover share of dairy sector through the years demonstrates a growth from 7.7% in 2000 through 7.4% in 2004 up to 7.9% in It is expected that this trend will last to increase due to consistently scored growth of the prices and processed milk production but significant restrains may render the quotas and tough requirements accompanied the membership in the EU. Table 14 Some selected performance indicators of the dairy industry MEUR Years Value Added Value Added per employee Labour productivity per person employed Turnover Gross Production Value Source: EUROSTAT As for the employment, in the period , the number of employees in the dairy sector slowly increases in contrast with the reduction within the number of dairy plants. For example, in the years , the index of employment in dairy processing plants is compared with 2000 year. According to Kovacheva, Petrova, Malamova, Yovchevska & Radev (2008), the positive assumption is that the paces of growth of working force are noticed at significantly lower levels compared with the growth of produced output, which witnesses for an enhancement of the work productivity in the sector Value added and profits The financial-economic conditions in the dairy sector for the period after 2000 remain unsatisfied and adverse due to the impaired coefficient of profitability and return. From the financial analysis of the MPE, the majority of them based on the bookkeeping data run at the level of breakeven point (poising only the revenues and variable costs), while adding other fixed costs, administrative and depreciation expenditures their results exacerbate. Although, the aggregated turnover in the period incessantly increase with 61,6% from MEUR up to MEUR, the costs soar up more quickly and net financial results submitted by MPE to the statistical authorities indicate loss incurrence. However, such results demonstrated by the dairy plants are very much doubtful and should be admitted carefully because in controversial for the above reviewed period, other figures concerning the labour productivity per person employed reveal an increase by 59%, implying that in terms of labour milk processors have achieved a notable improvement. According to Kovacheva, Petrova, Malamova, Yovchevska & Radev (2008), the aggravated outcomes are due to the increasing of the fixed and operative costs ascribed to the low efficiency and decayed optimality of the dairy processing plants. Page 19 / 29

20 Table 15 Gross Value Added per employee in the dairy, food and manufacturing sectors GVA per employee, 2005 Number of person employed, in 2005/ / in 2005/ /1999 MEUR index index number index index Dairy industry (15.5) Food industry (15) Manufacturing (D) Source: EUROSTAT It is affirmed by the slowed turnover of the short-term assets (mainly manufacturing materials and input), from 60 up to 75 days (Kovacheva et al 2008). The gross value added in the period also indicates an increase by 84% from 18.9 MEUR up to 34.8 MEUR, which witnesses that the milk-processing plants have achieved a higher market realization of their production, gained a taller price of their products and created greater value of their products. The MPE struggle with a permanent default of turnover means thereof the shortterm bank credits notch an enhancement almost twice in the period years. In fact, virtual financial creditors for the dairy plants become producers, as liabilities to them increase, as their sum exceeds the amount of bank loans thus the producers act as the greatest free creditor to the dairy processing companies (Kovacheva et al, 2008). The financial risk for the MPE heightens because the leverage (proportion between the own equity and outside liabilities is 1 to 3) proves to be vulnerable and eventual reason for the financial burdens Market share developments The dairy industry in Bulgaria forms about 10.3% market share within the structure of the food sector in 2006, which poses this sub-sector to the third position. Regarding the intersector market share distribution, by the expertise point of view, the highest market share in terms of value takes the brined cheese product, accounting for about 30.9% of the market sales. In the segment of brined cheese, the external competition is not exerted significantly because this cheese is very specific and nationally determined and domestic dairy plants do not feel menaced. The second ranged dairy product is the yogurt, whose market share is tallied up to 27.8% in The share of imported yoghurt in the overall pattern of this product is about 2% and shows the dominance of domestic production, explicated mainly by the taste preferences of consumers bent to yoghurt fermented by traditional way (using specific milk bacteria Lactus Bacilicus Bulgaricus). In the time dynamic point of view, the substantial changes are not identified, as for the period , the common share of brined cheese and yogurt has been shrunk from 59.5% (2001) to 58.7% (2006). Even though the market range of brined cheese to have declined from 34% (2001) down to 30.9%, it difficultly might be moved away from anyone product. The third biggest market share in 2006 occupies the yellow cheese up to 16.1%, as the percentage of this product has lifted up from 13.6% (2001) up to 16.1%, climbing up from fourth to third place. Altogether, the local dairy products possess a major share in the domestic market, as small exclusion can be related to the butter, cream, flavor milks, where the representation of the foreign products is more tangible. The predominant portion of the import in the dairy sector is composed of milk input commoditized as condense milk, powder and skimmed milk and whey and used by dairy plants for further processing and manufacturing of final products. Page 20 / 29