28 March 2008

5 minute read

Europe

Recent reports from the United States Department of Agriculture have estimated that at the end of 2007, dairy cow inventory was about 1.5 million heads, 7.7 percent lower than a year before, this is mainly a consequence of forage shortages. Figures from the same source also show that milk deliveries for processing rose by 3.35 percent in 2007 over 2006, reaching 1,144,097 MT.

Dairy farms discontent

Recently, several hundred farmers demonstrated in front of the six largest processing plants over the prices they receive. Farmers claim that in the context of rapidly rising feed costs, the current price is not sufficient even to cover their production costs. Farmers demanded the processing plants engage in negotiations on price increases and threatened to stop milk deliveries. They also threatened to block the border entry points through which raw milk enters Romania for processing. The difference between the price received by farmers and the retail price is perceived as profit for processing plants and retailers.

In turn, the milk processors are dissatisfied with the market dominance of the retailers in the relation to their purchases from the processors. The milk processors association recently signed an agreement – along with other relevant food associations – to develop a Guide for Good Commercial Practices, to be observed by both retailers and their suppliers.

An Eye on Production

A significant percentage of the production (27 percent) is marketed directly either as fluid milk or dairy products, 41 percent is retained for self-consumption, while the balance goes for feeding. The total national reference quantity for milk set for Romania is 3,057,000 MT, of which 1,251,000 MT for deliveries and 1,806,000 MT for direct sales. This structure is the result of the amendment approved by the European Commission for a transfer of MT 158,000 from direct sales to deliveries. Romania is also entitled to a reserved quota of 188,000 MT to be allocated in 2009.

According to the Agency for Milk Quota Administration, now part of the Agricultural Paying and Intervention Agency, there are 870,000 milk providers. Currently about 250,000 farmers have delivery quotas for selling raw milk to about 400 milk buyers (processors or milk collectors). The farmers owning the quotas for direct sales can be divided into two categories: more than 5 MT (about 50,000 farmers) and less than 5 MT (550,000 farmers, generally with 1-2 cows). Direct sales consist of sales of raw, non-pasteurized milk or dairy products to final consumers (especially in the rural areas).

The milk quota approved for Romania is perceived as insufficient since many farms have plans to expand capacity, or have just entered the market, but there is no additional available quota. In this context, the Romanian Government decided to increase the penalty to 30 percent (from 2 percent) for farmers who sell their quotas. Funds from the 30 percent penalty will be kept for national reserves and distributed among the other quota beneficiaries.

As a result of feed shortages and small subsistence farm sizes, milk quotas distributed to agricultural holdings (1-2 cows) are expected to go unfilled during the marketing year (April 2007- March 2008). Large dairy farms are likely to exceed their quotas, since they received lower quotas than requested. Nonetheless, Romania does not risk paying penalties to EU, as this surplus will be offset at national level.

An Ear to Trade

With EU accession, Romania eliminated duties on imports from EU member states. As a result, milk and dairy product imports have increased dramatically. In 2007, milk imports increased ten-fold, reaching 42,428 MT during the first eleven months. Milk was exclusively sourced from EU countries, predominantly from Hungary (80 percent). Cheese imports from EU countries tripled in 2007 compared to a year before, reaching 10,192 MT during the first eleven months. Non-EU countries have only ma rginal dairy products exports to the Romanian market, while United States was present on the market only at the farm level through exports of genetics.

Policy and structural issues

According to the latest available statistical data, there were about 1,515 commercial farms in 2005, holding about 107,000 dairy cows (4 percent of the total dairy numb er of 2.7 million). The rest of 2.6 million dairy was owned by agricultural holdings, 84 percent of this herd being in holdings with less than 10 cows. Apart from the farm size, a number of priorities remain to be addressed in the sector: improvements in feed and forage practices at the farm level, cold storage equipment, and introduction on a larger scale of specialized dairy breeds, since the average annual milk yield is about 3,500 litres. The dairy market is estimated by the dairy industry at 1 billion EURO (1.3 billion USD), with the following structure: milk - 16 percent; cheese (of which 91 percent is cow cheese) - 26 percent; yogurts - 35 percent; sour cream - 14 percent; kefir and other sour products - 7 percent. The driving force for the sector will be the fluid milk for consumption and fresh products (sour cream, kefir). Direct sales are expected to shrink as consumers increasingly prefer buy milk from retail chains. Product diversification and new brands launching, along with rising per capita milk consumption, will contribute to expected progress in the sector.

Marketing

According to data provided by the Romanian Statistical Office, cow milk had one of the highest price increases among food products during 2007-2008. The cow milk price increased over last year by 11.61 percent compared to a year before, and the rising trend continues in 2008 (3.77 percent in January and 3.27 percent in February). It is worth noting that the price of dairy products rose less than the price of fluid milk (only by 6.5 percent), which indicates that consumer market could not absorb more processed products.

Currently, small farmers delivering non-EU standard milk receive 21-31 cents/liter (0.5-0.75 RON/liter), while for milk complying with EU standard, large farms receive about 42 cents/liter (1.0 RON/liter). Farmers are demanding a price of 42 cents/liter (1 RON/liter) for non-EU standard raw milk and 52-63 cents/liter (1.25-1.5 RON/liter) for EU standard raw milk.

According to the dairy industry, about 70 percent of the raw milk on the market comes from farms with 1-2 cows. This explains the failure of processing plants to pay a higher price, since they incur high collection costs, deal with poor milk quality, and have to handle changing volumes of seasonal supplies. In other words, it is costly to collect milk from rural areas – both in terms of logistics costs and safety. In this context, some processors have increased milk imports from other EU member states (see trade section).

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