AN ASSESSMENT OF THE COMPETITIVENESS OF THE DAIRY FOOD CHAIN IN THE REPUBLIC OF MACEDONIA

Transcription

1 Enlargement Network for Agripolicy Analysis AN ASSESSMENT OF THE COMPETITIVENESS OF THE DAIRY FOOD CHAIN IN THE REPUBLIC OF MACEDONIA FEBRUARY 2009 Work Package WP2: Studies Deliverable D2.1 Study 1 Coordinator Siemen van Berkum (LEI) Authors of this report ANA KRSTEVSKA, MARINA NACKA, IVANA JANESKA, NENAD GEORGIEV

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, in 8 Candidate and otential Candidate Countries. More information on the project can be found at

3 CONTENT 1 Introduction Overview of the sector Sector definition: sector components and importance Production and value added Milk 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...9 Table 4 List of large dairies companies, with their processing capacity Production, consumption and trade developments Government policy Regulatory framework of the dairy sector Other dairy sector relevant policy areas e.g. environment policies 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 analysis at sector level Strengths and weaknesses Opportunities and threats Suggestions for policy recommendations...27 REFERENCES...28 Literature...28 Internet...29

4 1 Introduction The aim of this report is to provide insights into the condition and the performance of the dairy sub-sector in the Republic of Macedonia, as well as to estimate them. Furthermore, it aims to depict the competitiveness of the Macedonian dairy sub-sector and to identify some of the crucial constraints that hinder the competitiveness. The analysis is used to formulate prospects for the sub-sector s development. The method is based onto internationally accepted definitions of competitiveness, which focus on the ability of individual industries to profitably maintain or increase market share in either domestic or international export markets. Structure, conduct, and performance concepts are combined with resource analyses in judging the competitiveness of the Macedonian dairy chain. The study considers the entire dairy chain, from milk production at farm level to processing and transacting activities. The structure of the report is as follows. In section 2, an overview of the present situation and conditions in milk production and processing in Macedonia is provided. Section 3 further elaborates on the issue by evaluating factors, which influence the competitiveness and efficiency of the milk chain. Based on these analyses, some conclusions are drawn with respect to the sector s competitiveness. Together with a brief evaluation of trends in (mainly EU) policy and international markets, this paper concludes with presenting an outlook for the sector s development and some policy recommendations to help prepare the dairy chain for the challenges ahead in section 4. Page 4 / 29

5 2 Overview of the sector 2.1 Sector definition: sector components and importance The Macedonian dairy farming, similarly as other sub-sectors, went through dramatic structural changes during the economic transition period, since the country gained its independency in 1991 (Agriculture Sector Study, 1999). The brake-up of the former Federation and the ensuing regional conflicts meant a loss of a large and protected traditional market (DG-Agri, 2006), so farmers were left vulnerable to the competition, and had limited contacts in potentially interesting markets (Agriculture Sector Study, 1999). However, the situation is so far improving, with an abrupt halt in 2001 because of the ethnical conflict within the country, but henceforward 2002 the country has made considerable progress. The dairy sub-sector, nowadays, is embodied by a large number of small, subsistence oriented farm households and a decreasing number of large, specialised dairy enterprises that originate from the former socially owned large-scale agricultural enterprises, so-called agro-combinats 1 (MAASP, 2006). The milk production is mainly concentrated in the private sector, hence is very much focused on small scale, family units. A certain proportion of milk is retained on farms for family and livestock usage, and some quantities are sold directly to consumers, frequently through street markets. Majority of dairy cattle farmers, however, sell their milk to a dairy processor. At the processing level, there are 85 registered dairy companies which are mainly small and medium sized. There are some foreign investments that have entered into the industry (Sweden, Netherlands, Croatia, etc.) however the latest investment (a Swedish one) is nowadays in a financial crisis due to a stockholder s deceitfulness. The most important retail market outlets in Macedonia are small shops (66%) followed by supermarkets (18%) and huckster (more precisely, the street traders) (EU Framework Contract, 2006). The small shops and supermarkets are correct in terms of product presentation and cooling. Selling dairy products via street trader is under hygienic aspects, not acceptable under the present conditions Production and value added The milk production in the country, within the analysed period, participates with an average slightly below 9% in the total Gross Agricultural Output (GAO) at current 1 Agro-combinats operated during the period before the independence of the country. They were large farms in public ownership, who managed 20% of the total agricultural land, being in property of the state. These were given a massive budgetary support and were seen as pillars of agriculture development. Agro-combinats operated in different segments of the primary production, such as having a role in agriculture inputs supply, possessing and managing specific machinery for the production itself, and also were purchasers of agricultural production as well. Particularly, they had high accumulation of assets and power (The European Commission s Delegation to the Former Yugoslav Republic of Macedonia, 3/353, 2005). Page 5 / 29

6 prices (see Table 1). The milk production has the largest share in the total animal output (amounting approximately 12% of the total GAO). The great importance of milk production is seen in its capacity to grow in quantities and enhance in quality. During the analysed period, the value of milk production in the total GAO has a permanent growth, where in 2006 it reaches the pick, amounting of just below 10%. The total share of the milk production in GAO has risen by approximately 4.4% on average over the analysed period. Even though the data suggests a moderate fluctuation over the period, with an increase in the share over the past two years, yet the share is almost twice as low as compared to the average of the EU (15) as a whole, which accounts for 14% of Final Agricultural Production (Eurostat, 2006). The positive trend of the milk production, however, shows a good potential for a dairy sub-sector development. Table 1 Share of milk production in total Gross Agricultural Output (GAO) Total GAO (mil MKD at current prices) Share of milk production in GAO (%) Source: SSO of RM, As far as dairy processing is concerned, Table 2 indicates that the share of Gross Value Added (GVA) at current prices of the dairy industry in the total food and beverages industry shows an increase within the analysed period. While the total GVA in food and beverages industry shows a decrease during , the share of the dairy industry s GVA permanently increases. The share of the dairy industry GVA in the total food and beverages industry was the highest in 2006 (70.24%), while the lowest in 1998 (35.62%) (Note: Calculation done by the State Statistical Office). Table 2 Share of GVA of the dairy industry in total food and beverage industry GVA, Total GVA in food and beverages industry (mil MKD at current prices) Dairy production GVA (mil MKD at current prices) Share of GVA of the dairy industry in total food and beverage industry GVA - (%) Source: SSO of RM, Note 1: The mark (-) presents that there are no available data Note 2: The average daily exchange rate is (www, NBRM, 2009): 1 Euro = 61.4 MKD Page 6 / 29

7 2.1.2 Milk flows within the sector Figure 1 provides an overview of the dairy sub-sector, its components and associated milk flows, more particularly of the dairy marketing chain. The figure has been compiled with the use of data sources from Statistical Yearbook. However, some of the data about milk quantities, both, sold to the processing industry and remained on farm, were deficient, therefore are not presented in the flowchart below and can be not properly analysed. The largest share of the produced milk in the country is sold to the dairies, while small amount quantities are remained on farm for household s purposes and animal feed (a major part of this volume), or sold directly to the consumers via street market. We assume that this year, 2008 (even though is not a part of the analysis, but worth to be mention), mainly milk was remained on farm since the farmers were unsatisfied with the sales price obtained from the dairy, so decide to strike. Farm Production, Dairy Cows Imports of Cow Milk, T Total Raw Milk Production T Dairy Processing Sector Intake Farm Usage and Direct Sales Fresh Milk Cheese 6693 T Farm Animal Feed Fresh Dairy Products T Family Consumption and Direct Sales Retail Distribution Food Processing Food Services Exports T Figure 1 Overview of Macedonian dairy marketing channel As estimated, fresh milk and fresh dairy products (yoghurt, sour milk, cream, etc.) are mainly produced by the dairy processing industry in the country. Cheeses, as white and yellow traditional cheese, are also very important products of this industry. In Macedonia there is no butter production. Page 7 / 7

8 2.2 Structural features of the dairy supply chain: present situation and trends overtime Industry structure at primary level In order to analyse the dairy sub-sector at primary level, first will be described the socioeconomic characteristics of dairy cattle farmers, and thereafter will be explained the dairy farm characteristics. Dairy farms are spread all over the country except in the high mountainous regions where the costs of milk collection would be very high. The major cow milk production areas are found around the perimeter of the northern, western and eastern boundaries of the country near the cities in which neighbourhood are located focal dairy plants. These production areas surround the field crop growing regions, which encourage interaction and use of arable by-products. In order of importance, the main raw milk production areas are the Pelagonia region in the south, Polog region in the north-west and the North-eastern region in the country. The socioeconomic characteristics of the farm household are very important in the characterisation of the industry structure at primary level. Since, dairy farming is generally a family business, all family members are engaged in the farm activities, both men and women, except children who have other interests rather than farming. The dairy farming population diverges over the regions, though on average is middle aged. Small-holders have the weakest educational and professional level, and generally, they have a high school education. The main activity of the most dairy farmers in the country is milk production, where some of the farmers tend to sell live animals as well. The main reason for choosing the milk market instead of the meat market is that milk sale brings more frequent turnover of the capital invested. Moreover, farmers claim that it is cheapest to produce milk since the price of the feed has increased dramatically over the last years. The Macedonian dairy sub-sector has gone through an important structural change since the country gained its independency. The privatisation process resulted in a very fragmented farm structure. Just above 96% of the total dairy cattle are reared on the private farms (SSO, Agricultural Census, 2007), seeing as the dairy cattle farming has its roots in the former private sector. It is worth to mention that these source data diverge from those issued in the Statistical Yearbooks since the State Statistical Office has used different methods in the collection process. Table 3 Number of dairy farms in the individual sector (2007), in heads Farm size N o of heads up to 0.50 ha ha ha ha ha ha 3700 above 10 ha 6433 Republic of Macedonia (total) Source: Agricultural Census, Book III, 2007, 69 Page 8 / 8

9 The most intensive milk production is found in the Pelagonia region, which is traditionally famous for this kind of farming. Farmers usually own 11 to 30 cattle, with different composition in the herd. The cattle breed structure among dairy farmers at a country level includes mainly breeds for dual purpose (milk and meat), but the main orientation is for milk production. Meat production is generally subordinate and based on culled cows and fattening of male calves. Regarding the herd composition, interesting information is that artificial insemination is compulsory only in the region of Skopje, so bulls are not constituents of a herd. This condition is not regulated in the remaining regions, but still farmers prefer the artificial insemination, except holders of a large herd that own bulls. The dairy farms in the country are equipped with milking machines, indeed not advanced milking systems. Only large farms are well organised in a single line connection system for milking, where the milk immediately after milking flow into pipes and ends in a lacto freezer, where it is kept until delivery. In this way milk is protected from contamination. It can be concluded that hygienic management practices are not familiar to most of the farmers, because generally they have not yet exploited the modern systems of farming, including cooling equipment. Milk cooling requires an adequate supply of electricity and water. These are available on all farms, but can only be arranged at relatively high costs. The volume of daily milk production may be too small to justify a cooling system, and it would be too expensive to cool a small amount of milk on the farm. This also creates differences in the milk collection from the side of the dairies. Small quantities are too expensive to collect. The collection of milk on farms also requires a good road access for the milk transport trucks, which are generally in good condition throughout the country. In developed countries, dairy cows are sent for slaughter at about 5 years old, after only three or four lactations, whereas in Macedonia some farmers tend to milk the cow longer. The average age of the dairy cow in a herd is 4.5 years, but there are certainly enormous variations within a herd, whereby the maximum age of a dairy cow is found to be 7 years old. The period of lactation, or milk production, lasts on average for 305 days, producing 6212 kg of milk at average, which is less than the average of the developed countries (7000 kg). Dairy farmers have two alternatives where to sell the raw milk, namely large and small dairies. The chosen type of buyers differs by regions, and this difference is mainly due to the accessibility of the different type of dairies in the nearby site Industry structure at processing level Today, there are 85 registered dairy plants in the country. Most of the dairies are small-scaled in terms of number of employees and processing capacities as well. The dairies are divided into (EU Framework Contract, 2006): - Professional (mostly medium sized, growing dairies, and large dairies) and - Semi-professional (mostly small sized (mini) dairies that process 500 5,000 litres per day). The largest dairies in the country and their capacities are presented in table 4. Page 9 / 9

10 Table 4 List of large dairies companies, with their processing capacity Dairy BiMilk Swedmilk Ideal Shipka Zdravje Radovo Raw milk processing capacity 200 tonnes/day 250 tonnes/day 100 tonnes/day tonnes/day Raw milk processed 120 tonnes/day in winter and 50 tonnes (in 80 tonnes/day 18 tonnes/day 170 tonnes/day in summer 2007) Source: EU Framework Contract, 2006; Swedmilk, 2007 The large-scale dairy processors typically produce consumption milk (pasteurised and UHT) and dairy products, such as yoghurt, sour milk, yellow cheese (kashkaval), white cheese, quark (urda), etc. Neither of them has developed highly profitable dairy products, such as Gouda, Edamer, Camembert, sweet fruit yoghurt, etc. The small dairies tend to focus on yoghurt production, and usually sell the products to bakeries, as well as to schools. Page 10 / 10

11 2.3 Production, consumption and trade developments The supply/demand balance sheet, as provided by the SSO, summaries the key developments in production, consumption and trade of the cow milk in period of Raw milk production increased steadily over the analysed period. The imports have gone down significantly in period of assuming the conflict in RM in 2001, but in 2006 is achieved the largest import accounting of 13,334,000 l cow milk. On the other hand, the export indicates a significant increase excluding the period of when there was a very modest export of the cow milk. Since then, the export has been fluctuating and accomplished the higher result in The average export is 3,329,000 l of cow milk. Production and imports together, minus exports give the domestic consumption which amounts of 201,131,000 l in average. The domestic consumption has a share of 98% of the total consumption. The domestic consumption has a permanent increase during the period of , and it shows a raise of 71% in 2006 compared with Table 5 Supply/demand balance sheet on dairy products (in 000 tons equivalent of 3.5% fat milk) Indicator Cow milk '000 l Production Import Total Supply Export Domestic consumption Total consumption Selfsufficiency rate (%) Average 95% 95% 97% 97% 99% 99% 99% 99% 100% 97% 98% Note a): the self-sufficiency rate is calculated as production divided by domestic consumption! Source: SSO of RM, Year Production Total cow milk production, has been increasing in the analysed period for about 65% (see Figure 2). In the period from 2000 until 2001 there was a slight decrease in the production of milk and since thereafter it has been rather stable for three years when it started to fluctuate, where in 2006 has reached the peak (the accomplished production in 2006 is 76% higher than the production in 1997). This implies that the yields per cow have increased over time, and this increase is due to the improved breed structure, where high productive breeds were introduced. Currently, the average yields in Macedonia are about half the average yields in the EU. Page 11 / 11

12 Total milk production ('000 l) Figure 2 Total milk production ( ) Source: SSO of RM, 2007 The production trends of cheese, fresh dairy products and fresh consumption milk are presented in Table 6. Republic of Macedonia does not produce butter, but produces different kinds of cheeses, such as white and yellow, soft and hard, and cream cheeses as well. The production of fresh dairy products, such as sour milk, yoghurt, and sour cream, is significant since consumers have traditional habits to consume them. Their production in the recent years increases since the purchasing power of the consumers increases as well. In the following section where the consumption is observed, it can be noticed that even though the production of some dairy products is increased, yet the consumption is steady. This fact leads to an assumption that the export of those products has increased respectfully (confirmed in the export section). The largest increase in the dairy production is one of the cheese products, where the production in 2006 has risen for over 5 times from The production of fresh milk and fresh dairy products has relatively similar increase over the analysed period for around 80% in 2006 from the base year 1997, with a difference that fresh milk production fluctuates largely over the analysed years, and the production of fresh dairy products has a steady increase from 1997 until Table 6 Trends in dairy production Butter 000 t Cheese products t Fresh consumption milk, '000 l Fresh dairy products t Source: SSO of RM, Consumption The levels of milk and other dairy products consumption are expressed per household in litres or kilograms respectively. The milk consumption includes both fresh and sterilized milk and during the period it was stable with an average consumption of litres per household. The fresh milk consumption rapidly increased in 2001, i.e. for 20% compared to the previous period, and since the peak up to 2006 the consumption continuously decreases for about 6% per year (see Figure 3). Page 12 / 12

13 The milk consumption is relatively lower compared to the milk consumption in other EU countries, but there is still tradition for consuming milk and other dairy products in Macedonia. The fresh milk consumption is higher compared to the consumption of other dairy products (see figure 3). The consumption of cheese, including white cheese, yellow cheese and processed cheese is stable during the analysed period or 36.6 kilograms per household in average. The consumption of butter is very low during the whole period, i.e. in average it is 1.1 kilograms per household. Regarding the consumption of yogurt, sour milk, sour cream, curd cheese, milk powder and other dairy products as seen from the chart below, during the period , was stable accounting of 48.1 kilograms per household in average, while starting from 2002 until 2006 it shows moderate increase of 11%. Similar increasing trend line is found for cheese consumption and other dairy products consumption, perceived from the close value for the coefficient of variation, which for cheese consumption it accounts of 20.4%, while for other dairy products consumption 22.9% Fresh milk Cheese Butter Other dairy products Figure 3 Consumption of milk and dairy products per household Source: SSO of RM, Trade Butter, cheese, yogurt, milk and sour cream are main products in the international trade of Macedonia with other countries. A comparison of the Macedonian external trade with the other countries from the Balkan region, as well as several EU countries, will be presented subsequently. For the comparison analysis, three years were randomly selected. The available data from the international trade present a small export (for instance, during these years the export is accomplished only with two countries from the Balkan region). Exported dairy products are primarily cheese, milk and small quantity of some other dairy products, exported to the markets in Serbia and Monte Negro, as well as in Greece. The main imported dairy products are milk, cheese and butter. The major import sources are Croatia, and Serbia and Monte Negro from the region, as well as Germany and Slovenia as representatives from the EU countries. According to the data for 2004 the Republic of Macedonia realised the largest import of milk from the Republic of Page 13 / 13

14 Slovenia with around 45% of the total import, than Germany with 17%, Croatia 13%, Serbia and Montenegro 8% 2. The import of the main dairy products has been increased rapidly but on the other side there is a reduction of the export until During the analysed period the export of the butter has a large fluctuation, where the largest export was achieved in 2005 with kg. It is worth to be mentioned that Macedonia has no production of butter but it still exports this commodity. It is due to the fact that some quantities of the imported butter are again exported to other countries, so in 2003 the export amounted of kg. Compared with 2006, there was a butter export decrease of 30%. The export of the cheese also varies in this period and has reached the most significant quantity of kg in Compared with the previous year, the largest export is accomplished of 196%. The average exported quantities of cheese in the analysed period are kg. The export of milk and other fresh dairy products in the analysed period has an increasing trend especially in the last four years. The largest exported quantities of milk and fresh dairy products are achieved in The average export for the ten year analysed period was 3,355,262 kg. Since 1998 the import of the butter became significant. In 2002, the largest import was realised, amounting of 1,350,962 kg butter. The increase of the import is steady over the analysed period. The average import is 1,121,093 kg during The cheese import has had a permanent growth during the whole period. The largest import of cheese is accomplished in 2006 which is a 93% more than the import achieved in During the period of , there was a continuous increase of the import of milk and other dairy products. Since 2001, the products started to have almost 50% decreased import if assumed the conflict in Macedonia. After 2001 the import has started to grow up and in 2006 were accomplished the largest imported quantities of 16,846,000 kg milk and other dairy products. Regarding the balance done as a difference between the exported and imported quantities and values, generally, all of the aforementioned commodities have a much higher import than the export. During the analysed period the negative balance for the butter shows variation from roughly 700,000 up to 3,180,000 dollars. The negative balance for the cheese is fluctuating from 2,815,000 up to 7,412,000 dollars. The last category of commodities, milk and other dairy products, has as well negative balance which proves that Macedonia has a lack of production of some particular products. 2 These data cover the period of Page 14 / 14

15 On the other side the large import is due to the different assortment of products which are not produced in Macedonia. Their import is significant in terms when the market should be enriched with a product assortment which has a significant demand on the domestic market. Table 7 Export and import of dairy products (in kg), export/import balance and average of export and import of dairy products Export kg Average Butter Cheese Milk and other dairy products Import Butter Cheese Milk and other dairy products Balance Butter Cheese Milk and other dairy products Note: The balance of the products is calculated as a difference between export and import Source: SSO of RM, Table 8 Export and import of dairy products (in US $), export/import balance and average of export and import value of dairy products Export $ Average Butter Cheese Milk and other dairy products Import Butter Cheese Milk and other dairy products Balance Butter Cheese Milk and other dairy products Note: The balance of the products is calculated as a difference between export and import Source: SSO of RM, Page 15 / 15

16 2.4 Government policy Regulatory framework of the dairy sector In order to overcome the handicap of its small market, as well as with an objective of promoting regional cooperation, during the last ten years the Republic of Macedonia launched an aggressive trade policy of concluding preferential agreements, primarily with the countries from the region but also with other states. By ensuring tariff free treatment for Macedonian goods, the government wanted to open the markets to all domestic producers, and at the same time to attract foreign direct investments. According to the number of signed free trade agreements and other preferential arrangements, Macedonia is a leader in the region. Such policy was promoted to achieve the following goals: - Provide preferential access for Macedonian exports in the markets in countries from the region and Europe; - Improve the position of Macedonia as a destination for investments by increasing the opportunities for preferential sales of its production, and - Develop regional cooperation in a function of future integration with the European Union From 1996 to date, the Republic of Macedonia has concluded twelve free trade agreements, including the one with the European Union as part of the Stabilisation and Association Agreement (SAA). The Stabilisation and Association Agreement between the European Communities and their Member States, of the one part, and Republic of Macedonia, of the other part, (hereinafter referred to as "the SAA") was signed by Exchange of Letters in Luxembourg on 9 April 2001 and entered into force on 1 April Furthermore, Macedonia became a full member of WTO in April, Those agreements with the neighbouring countries and Macedonia s WTO accession in 2003 offer enhanced export opportunities to the Macedonian agriculture and food processors but also facilitate a rapid dismantling of previous high levels of protection of the domestic market. The average tariff on food imports from the EU will fall from 28% in 2002 to 9.6% in 2007 and to 6.4% in Producer prices are expected to drop by 13% - 20% until the end of the SAA in Macedonia negotiated low Aggregate Measures of Support with the WTO. The high protection of the Macedonian dairy industry caused low rates of technical progress of the dairy industry. Therefore the sector suffers now under the following drawbacks: - The cost/price per litre raw milk is high because the milk yield per cow is low; - The hygienic quality of the raw milk is still very bad; therefore high profitable, modern dairy products can not be produced from it; - The cost prices in the dairy production are too high because of not competitive dairy production management, and the existence often of small and partly outdated dairy factories with sometimes low utilisation rates, and - The dairy marketing is weak especially in small dairies. Page 16 / 16

17 The responsibility for the food processing is under transition from the Ministry of Economics to the MAFWE of Macedonia. The details have been under negotiations during our mission. Therefore no contact person had real information available. New strategies have been under development but are at a very early stadium. The Table 9 gives an overview about the agricultural support program in the period All agricultural support went down to zero in Table 9 Agricultural development support program: (million Euro) Year Financial support for crop production Financial support for Livestock breeding Financial support for Water economy General measures Agricultural Associations Development support of crisis regions To Finis measures started in the previous year Source: MAFWE of RM, 2006 In this respect the strategy for the dairy sector will be hopefully designed to partly reallocate the existing, or projected budgets for following years, toward developing an administrative and institutional structure that will be effective in the realization and monitoring of the policies instead of just allocating funds from the budget for direct support without aiming real indicators for their impact to the industries concerned. The further development of the dairy sector is an important element for Macedonia to attain the membership of the EU and is in line with the EU Council s decision of 30th January 2006, which states that Macedonia should Prepare a programme for upgrading food processing establishments to meet EU requirements Other dairy sector relevant policy areas e.g. environment policies In the preparation process towards integration with EU legislation, Republic of Macedonia has made a considerable progress, especially in the area of environmental protection according to which all dairies has to implement these legal acts. Accordingly, the European standards are adopted and are part of the national legal framework. The Law for the Environment approximates the so called Horizontal Legislation for the Environment within EU, and transfers all regulative of the Directives 96/61/EZ (IPPC Integrated Polluting Protection and Control), 85/337/EEZ fulfilled with 97/11/EZ (EIA - Environmental Impact Assessment). According to the Environmental Impact Assessment under the Law of Environment, in which the dairies are included as well in Annex II, clue 7c Production of dairy products, the final decisions for natural and added value usage and facility and installation construction planning are analysed and defined. Herein, the conduction of similar activities that have impact over the environment and human health are included as well. Total Page 17 / 17

18 According to the Integrated Polluting Protection and Control under the Law of Environment in Chapter XII, the issuing of integrated environmental certificates for facilities operation is regulated. As stated by this Law, no facility, including dairies, cannot start to operate without obtained certificate from the Ministry of Environment and Physical Planning (Article 93). The existing dairies in Macedonia belong to a group 6.4 (c), Annex II, which should acquire a B certificate for harmonisation of the operational plan. Regarding the fact that in Macedonia there is no dairy that have a capacity over 200 tonnes of milk processing, therefore these facilities are covered in Annex I, moreover have to have an A integrated certificate. The application for obtaining B integrated environmental certificate contains data for the operator and the dairy, as well as operator s obligations while operating the dairy. The application also contains information about emission monitoring, monitoring methods, and monitoring frequency. The Law, as well, emphasises the importance that the application should be submitted by competent and professional persons. Page 18 / 18

19 3 Performance of the dairy supply chain 3.1 Performance at farm level It has already been noted that Macedonian dairy farming is characterised by smallscale farms. With an average herd size of 3 cows (SSO, Statistical Yearbook, 2007), the country s dairy sub-sector has a very different size structure to that in the EU-15 (see Section 2.2.1). The dairy farm sizes in the country considerably diverge by regions, since there is different agricultural production orientation throughout the country. The small-scale structure of Macedonian milk production results in the subsector operating with a number of inefficiencies at the production level. It was noted that milk production participates on average around 8% in total GAO, while dairy production with approximately 46% in foods and beverages GVA on average. Regarding these data it can be perceived that even though milk production seems to have a minor importance in agriculture, still the fact that it has a good participation in the processing industry leads to a conclusion that the primary milk production has a potential to grow. Table 10 Cow numbers, average herd sizes, and milk yields in the country Dairy Cows Average Herd Size Average Cow Yield (litres per cow p.a.) Source: SSO of RM, Yields Yields One of the areas of low technical efficiency is that of milk yields. The average milk yield per cow in Macedonia is significantly lower if compared to those achieved in the EU. In the analysed period, the average yields per cow are litres (see Figure 4, and Table 12), which is as twice lower as the lowest achieved yields in some of the EU countries. It should be noted that differences in yields are wide among EU countries: the lowest yield countries were Lithuania and Latvia (4200 litres) while the highest average yields (over 7000 litres/cow) are achieved in the Netherlands and the Scandinavian countries. The milk yields, however, have an increasing trend, which show that some of the farm performance practices have been changed in the recent years, in terms of breed composition, farm condition, and feed or management practices. In the past decade, these practices have been managed in traditional manner (farmers were mainly using their inherited experience and technology) and have been inappropriate for intensive milk production, resulting in low milk yields. The situation is so far improving, but still is not at satisfactory level, having in mind that this production has a great potential to grow. Page 19 / 19

20 milk yields per cow (l) Figure 4 Milk yields per cow, (l) Source: SSO of RM, Prices The producer prices of cow milk in R. Macedonia vary from 15.6 to 17.9 MKD 3 /l within the analysed period , with an average price at farm gate of 16.9 MKD/l. The producer prices were permanently increasing during , and since thereafter a significant fluctuation has appeared (see Figure 5). The producer price in 2006 has reached the maximum level of 17.9 MKD/l, which indicates on a 13% increase in the producer price compared to Producer price Figure 5 Producer prices of cow milk (MKD/l) Source: SSO of RM, In the subsequent section an analysis of the milk gross margin is presented and thereafter is compared with the producer prices obtained by the Statistical Office, given in this section Gross margins The gross margin was based on a survey of 20 dairy farms in Macedonia. It can be noted that the milk yield is higher than the statistical average at country level. The milk producer price in 2004 obtained from the Statistical Office amounts of 17.4 MKD/l on average, while this survey outputted a producer price of 15 MKD/l with a cost of production at variable costs level of 0.2 Euro/l (the sales price at that period was based upon the percentage of milk fat). It has to be taken into consideration that the farms included in the survey practised balanced diet and the cows were mix of 3 1 Euro = 61.4 MKD (average daily exchange rate) (www, NBRM, 2009) Page 20 / 20

21 Holstein and domestic breed. The results from the survey resulted in the following calculation, which is presented in Table 11. Table 11 Gross margins for milk (including beef) in 2004, per head Product Production Sales price, Total income kg (l) Euro 4 /kg (l) Euro/head =2x3 Cow milk Fattened heifers Culled cows By-products Manure Agricultural policy measures participation 0 Total revenues Material costs Labor and services Costs for machinery 40.2 Total variable costs Gross margin structure 78.7% Cost of cow milk production (Euro/l) 0.2 Cost of fattened heifers (Euro/kg) 1.21 Cost of culled cows (Euro/kg) 1.21 Cost of manure (Euro/kg) Source: Survey data, 2004 The average income from the milk production is 0.28 Euro/l, while the sales price of beef from fattened heifers and culling cows is 1.38 Euro/head. The average income from kg manure is Euro/kg. Considering the produced quantities and the sales price of the main products and the by-products, the total income can be calculated and in this example it amounts of Euros. The variable costs in this representation is Euros, where the largest share in the structure of these costs have the material costs with 57%, while the labour costs and services participate with 40%. The costs for machinery contribute with only 3%. The calculated gross margin is Euros, i.e. the participation of the variable costs in the total revenues is 78.7%. Therefore, a conclusion for the cost of production for the dairy enterprise products can be outlined as follows: cow milk 0.2 Euro/litre, fattened heifers and low-quality cows 1.21 Euro/kg, and manure Euro/kg. 4 1 Euro = 61.4 MKD (average daily exchange rate) (www, NBRM, 2009) Page 21 / 21

22 3.2 Performance at industry level Turnover and employment in the dairy industry The advantage of the Macedonian dairy products is that these products meet the specific taste and the nutrition habits of the Macedonians. The largest share of the sales is realised at the domestic market, while at the foreign markets (exports) the share is poor. In Table 12 the performance indicators of three dairy processors in the country are presented. The average turnover of the three representatives is circa 13,600,000, where the largest turnover of 27,000,000 is attained by BiMilk (the former IMB). Table 12 Performance indicators of some dairy processors Dairy BiMilk (IMB) Ideal Shipka Zdravje Radovo No of plants Turnover 27,000,000 9,000,000 5,000,000 No of employee No of contracting farmers 4,000 1,400 2,000 (depending on the season) 800 smallholders + 30 farms No of milk collection centres 1 large near Skopje + 15 smaller 5 near Bitola and Prilep 5 near Kumanovo and Skopje Transport cost farm to dairy 0.02 /litre 0.02 /litre 0.02 /litre Average price for the raw milk 0.26 /litre 0.26 /litre 0.26 /litre Price determination % milk fat, % protein, % milk fat, % protein, Flat rate hygienic quality parameters hygienic quality parameters Milk fat % (average) Milk protein % (average) Bacteria 100,000 1,000, ,000 1,000,000 1,000,000 3,000,000 Somatic cells 400, , ,000 Laboratory Mlekokontrol, Bitola Mlekokontrol, Bitola (independent) (independent) Land O Lakes, Skopje (independent), once a month Payment target 30 days 30 days 30 days Marketing of dairy products Own wholesale distribution centre - Own wholesale distribution centre Marketing via own shops (%) 3 5 (together with export) 0 Marketing via wholesale trader (%) Marketing via retail chains (%) Transport cost dairy to market /kg /kg /kg Source: EU Framework Contract, 2006 The number of employees of the largest dairies in the country varies from 60 in Zdravje Radovo to 100 in BiMilk. Usually, the small dairies are family owned, and therefore the number of employees is lower than the remaining. Another example is illustrated in Table 13, presenting some Swedmilk s performance indicators and policies in 2007, as well as the planned ones for the subsequent period. This information was separately presented from the preceding, since was obtained at the very beginning of the Swedmilk s working life, and is expected to be changed. Nowadays, this dairy is in financial crisis since of the stockholder s deceitfulness. Page 22 / 22

23 Table 13 Swedmilk s performance indicators In 2007 Planned No of employees Daily output of various dairy products (litres) 50, ,000 Partner farmers - Subcontractors with own milk collection points - Farms with own lactofreezer - Group of farmers with common lacto freezer - Subcontractors with own organisation for milk collection Contracting Long term (1 5 years) Average price of the raw milk per class 0.29 /litre = extra class (+12%) 0.28 /litre = I class (+ 8%) 0.26 /litre = II class 0.23 /litre = III class 0.21 /litre = IV class Price determination % milk fat, % protein, hygienic quality parameters Laboratory Swedmilk, Skopje (according to EU standards) Payment target 30 days Way of payment Through bank (NLB Tutunska Banka), No payments in kind Source: Swedmilk, Value added and profits This sub-chapter cannot be appropriately analysed since there are lack of adequate data. We can only outline our view. Regarding the primary level on milk production, from section 3.1.3, we have learned that farmers have /l profit for the sold milk to the processors. However, this profit would be higher if other dairy products are produced on farm. There are few examples in the country, where primary milk producers have added value to their processed milk and earned much more than if sold as raw milk to the processors. Regarding the processing level, there are no available data for the employees in the dairy sector, and for the profits attained by the dairy processors Market share developments The largest share in the market of 26.4% has IMB (nowadays known as BiMilk). Mainly, this dairy participates on the market with UHT milk, but also produces a wide range of other dairy products. The traditional Macedonian dairy products are drinking milk, UHT- milk, different local cheeses, yoghurt and sour milk. For Macedonian dairies, the biggest international competition is on UHT-milk, where: - Slovenia has a market share of 21.0% on UHT 3.2% fat; - Megle a market share of 24.8% UHT 0,5 litre packaging, and - Croatia has a market share of 12.9% on UHT 0.5% fat. It is well known that Croatia and Slovenia are very active in those market segments in the Balkans. Nevertheless, the local brand IMB has market shares for UHT milk in Macedonia varying between 74.7% and 51.9% depending on fat contend and packing size. Macedonian dairies do not yet offer modern products or products with high profit rates like Gouda, Edamer, Brie, Camembert, puddings, etc. Therefore those sub- Page 23 / 23

24 markets are more or less completely in the hands of foreign dairies. The reason is that those products need a good hygienic raw milk quality which is not yet available in Macedonia. But more then 50% of the marked grow will take place in the aforementioned sub- markets. Table 14 Market shares by companies for different dairy products at the Macedonian dairy market (%) Companies Total Dairy marked Pasteurized Milk UHT 3,2% UHT 1,6% UHT 0,5% UHT 0,5 litre Chocolate Milk Soft Cow Cheese Feta Cheese Sour Cream Ricotta Cow Kashkaval Set Cow yoghurt IMB % Ideal Sipka % Zdravje Radovo Kri Kri % 6.1 Tetovska Bucen Kozjak Bogdanci Milkom Nogaevci Joka Strumica Megle Ljubljanska mlekara Greek brends Delta 1.7 Others Source: EU Framework Contract, 2006 Note: Data for Swedmilk are excluded since it has been incepted in Competitiveness at retail level The dairy products contribute 13% to 15% to the total turnover of the Macedonian retail shops. This is almost the largest share of a product group and it grows by 10% to 15% per year in the supermarkets. The local dairy product market will grow with the income of the consumers. The advantage of the Macedonian dairy products is that these products meet the specific taste and the nutrition habits of the Macedonians. Macedonia has a strong tradition in the consumption of traditional dairy products, like drinking milk, yogurt, soft cheese and yellow cheese, and there is not an important international competition in those traditional market segments. Macedonian consumers prefer to buy cheap offers, if comparable products are available. Comparable traditional products can be imported slightly cheaper but the amounts are often limited. It was for example reported that the supermarkets are interested to import more UHT-milk from Croatia but they can only deliver one truck per day. More is not more available at the moment. Some wholesale prices are still high in Macedonia and some modern products and/or products with high shelf profit rates like Gouda, Edamer, Brie, Camembert, puddings, etc.; are not offered by the Macedonian dairies. Macedonian consumers, wholesalers and retailers complain about the partly inconstant quality and taste of the local products. This is caused by low raw milk quality, weak processing management and, at least in the summer time, partly by missing cooling tracks for the transport of the ready products. Page 24 / 24