Despite Ukraine’s great potential in agriculture, it has nothing to boast about when it comes to its dairy business. Ukrainian raw milk is more expensive than in most European countries, while the quality of its dairy products is often lower.
What’s more, the production of milk in Ukraine has shrunk in recent years, while imported milk and dairy products have significantly increased. Experts fear that the future of the nation’s dairy sector could be under threat if its major challenges are not addressed soon.
One such challenge is the recent attempt to regulate minimal procurement prices for raw milk bought by dairy plants from the population. Three draft laws on dairy business registered in the Ukrainian parliament suggested the price of raw milk should be regulated administratively. The explanation was clear.
“It happened historically that approximately one milk plant was built in each oblast. Therefore today we have a monopoly of these producers and groundless insignificant prices (for milk from villages),” said Vladyslav Atroshenko, a member of parliament from the ruling Party of Regions and author of one of the draft laws regarding introducing minimal procurement prices of milk. “As there is a monopoly and no rivalry, state regulation is needed.”
The business community doesn’t agree that there is no market competition.
Producers said that, in most villages, three to four various companies purchase milk and competition is high. While the nominal purchase price of raw milk on the unconsolidated market is lower than the price offered by farms, the price for the processor is at least comparable to the one on the organized market or even higher, taking into account expenses on milk collection and tests.
These arguments were laid out in a letter from the American Chamber of Commerce to the head of the Verkhovna Rada Committee on Agrarian Policy and Land Relations and heads of the parliamentary factions. The chamber warned lawmakers that setting minimal procurement prices will affect the competitiveness of the Ukrainian dairy products both on the domestic and foreign markets. The chamber has yet to receive any response.
“Price for milk on the international market is formed by countries which have unique weather and climate conditions such as New Zealand, or by the states which have large farms such as the U.S.,” explained Mykhaylo Sokolov, expert for the chamber and a partner at Kesarev Consulting. “Farms in European countries are relatively small, but they receive generous subsidies from the government. All these countries can offer better prices than Ukraine, and we have to compete with them.”
Last year the average price for raw milk in Ukraine produced by farms was up to 350 euros per ton of milk with 3.4 percent of fat and 3 percent of proteins. Almost the same high prices could be seen in Russia, while in neighboring Belarus and Poland the price for raw milk was 175 and 230 euro per ton, respectively.
High prices on raw milk in Ukraine have already led to the decrease of local production of dairy products and stimulated import. If the prices are set on a higher level, the situation will be even worse, experts said.
The Ukrainian government also made attempts to control milk prices in 2012. Ahead of parliament elections last year, the Cabinet of Ministers introduced minimal purchase prices for milk at Hr 2.2 per liter, or around 50 kopeks higher than the market price.
These administrative measures led only to the reduction of milk purchased from farmers. In 2012 milk purchases from private households fell by 6.9 percent, or by 148,000 tons. At the same time purchases on the organized market grew by 12.6 percent, or 247,600 tons.
“Last year for the first time in 10 years dairy plants bought more milk from agro enterprises than from the population,” Vadym Chaharovsky, head of the Union of Milk Enterprises.
According to official statistics, 11.5 million tons of milk was produced in Ukraine in 2012. But Chaharovsky believes the real figure is around 8 million tons. Approximately 5.5 million tons were produced by villagers and 2.5 million tons by farms. Dairy plants bought 2.3 million tons from the population and 2.5 million tons from enterprises.
In 1990 , Ukraine produced 24 million tons of milk, at least two times more than now. The cow population in the country has decreased since 1990, from 8.5 million to 2.5 million. The import of dairy goods reached $200 million in 2012.
While parliament has yet to decide on the draft law to control milk prices, the Agrarian Ministry does not seem to support the idea.
“I support economic drivers dictating the price of milk – that is demand for milk. As for an administrative driver, a minimum price, it could be inefficient,” Mykola Prysyazhnyuk, Ukraine’s minister for agriculture policy and food said during the Milk Forum on April 23.
For many private households, milk production is a major source of income which adds a social aspect to the problem.
“A poor state is trying to solve social issues not by itself but at the expense of the business,” commented Maria Kolisnyk, an agricultural expert with the AAA Consulting agency. “Government could just increase pensions for such people.”
But Sokolov from the American chamber suggested that all value added tax collected from the purchase of raw milk should be used to support villagers as well as farms.
“We have to support our producers with subsidies,” Sokolov said. “But we have to understand that, in the future, production of milk by villagers will go down while volume of milk produced by farms will increase.”
Most market players agree that the only solution to this problem is to encourage villagers to form cooperatives, making it easier for villagers to find financing to buy new equipment in order to increase the quality of milk produced. Now most milk produced by villagers is second class, while processors prefer first class milk.
“We are working hard to encourage cooperatives where production of milk can be modernized,” said Frederick Aherne, chief executive officer at the Ukraine’s office of Milkiland, a dairy company. Aherne said in the last years his company helped start 16 cooperatives in Ukraine.
This will solve not only the problem of the quality of milk, but also decrease seasonal volatility of the nation’s milk production. At the moment 65 percent of milk in Ukraine in produced in spring and summer and just 35 percent in autumn and winter. This results in price hikes during the year. For example, during first three month of this year, the price for raw milk produced by farms grew almost 7 percent to Hr 3,247 per ton compared with the same period last year.
Thus, all the problems listed above are not the main one for the industry, said Milkiland’s chief.
“The main threat to dairy business is consumer confidence,” Aherne said. “Consumers do not trust dairy companies in Ukraine. There is a mistaken belief that milk from a babushka on the market is perfect, but if it is from the company than there may be some doubt about it.”
What government could do in this situation is to make sure that product labeling is accurate, he said.
The lack of consumer trust can be seen in statistics. According to Andriy Dykun, president of Association of Milk Producers, Ukrainians consume some 200 kilograms of milk per person annually, while international standards said it should be 320 kilograms per person.
Kyiv Post staff writer Oksana Faryna can be reached at [email protected]. Kyiv Post staff writer Anastasia Forina can be reached at [email protected].
