ECONOMY AND MARKETING IN DAIRY INDUSTRY

D. HUGHES^a)
a) Univ. of London, Wye College, Wye, Ashford, Kent, England TN25 5AH

Summary of lecture presented on congress
Language: English

THE EUROPEAN MARKET FOR DAIRY PRODUCTS - GOING FOR GROWTH
Wider Europe is a significant player in the business of world dairying: EU and CEE countries combined have one-third of the world's dairy cows and produce more than half of global output of cows' milk. The EU accounts for close to half of world exports in dairy products (milk equivalent basis), with a market share more than double its nearest rival (New Zealand). From an EU perspective the trade picture appears, on the surface, to be rosy, but, it is only a facade! Only 6 percent of world milk production is traded in international markets each year and the dominant EU trade position is only maintained through massive consumer and taxpayer subsidies. Indeed, world-wide, nations elect to use dairy policy as an integral element of social policy for the rural sector. Typically, erecting trade barriers to protect domestic dairy industries has satisfied political objectives, but, at the expense of economic efficiency and has generated a production rather than a market orientation. So, at first sight, what might appear to be a buoyant picture reveals an EU dairy industry that is in decline: EU milk production has declined over the last decade; EU supply management quotas are, at best, static; the overall size (value) of the dairy market is forecasted to decline; of the three major dairy product categories - liquid milk, butter and cheese - two appear to be in long-term decline; and, notwithstanding consumer signals to the contrary, farmers are producing milk with increasing amounts of butterfat, while milk protein content remains static.

Slow or no growth although markets for dairy products may appear to be, the structure and organisation of the dairy industry in the EU is changing rapidly: every year, around 7 percent of dairy farmers exit the milk production business; the number of dairy processing plants has been reduced by more than one-half over the last fifteen years; there has been frenzied merger and joint venture activity in the EU dairy processing sector over the past five years driven, not least, by firms and co-operatives seeking to position themselves to benefit from the formation of the "Single Market"; and, ominously growing in bargaining power, major retailers across the EU have captured, inexorably, a majority position in the retail markets of Europe and, certainly in the U.K., have targeted the dairy category in the supermarket as a key area for own-label (private label) growth (80 percent of dairy products in the U.K. are supermarket own-label branded).

From an EU dairy farmer's perspective, the outlook could be seen as bleak: milk production is constrained by quotas; overall demand for dairy products is declining; CAP reform and GATT initiatives, increasingly, are eroding away the protective trade barriers; economic liberalisation in CEE countries may present the EU with the prospect of strong commercial pressure from nearby lower cost competitors (particularly, on low value dairy commodity items); and, downstream from the farmer in the dairy marketing chain, processors and retailers are growing in size and market power. Should the dairy producer give up and switch to growing chickens? In fact and, perhaps surprisingly, the answer is "No"!

In the U.K., the dairy product category in the major supermarkets is one of the most appealing and dynamic categories in the store. In a J Sainsbury "superstore", for example, over 600 different chilled dairy products are on display (let alone, the number of frozen dairy products). In contrast to declining 

markets for whole milk and butter, market growth for reduced fat milk, non-commodity cheeses, yoghurt, fromage frais and other fresh cheese products, and premium, chilled dairy desserts is strong and sustained. Market growth in one product area and decline in another can be explained by evolving consumer trends, of which the most important are:

• slow population growth in EU countries - creating an increasingly competitive commercial environment in which dairy firms must become more efficient and more consumer-orientated to survive and prosper;

• polarisation of consumer incomes - growth in real incomes for most consumers is fuelling demand for premium dairy products, whereas for the minority who are experiencing real income declines, there remains strong demand for low-priced, discount products;

• average household size is decreasing, but, household numbers are increasing - creating strong demand for high margin individual or two-person portions of dairy products;

• the convenience factor - consumers are too busy to prepare/cook meals and are willing to "buy time", for example, through purchasing ready-to-eat dairy desserts;

• better educated shoppers express increasing concern about the impact of diet on their health, nutrition, and on food safety and ethical issues (e.g. environment, animal welfare) - "low fat" products proliferate in the dairy category of the supermarket responding to consumer desires to look attractive and live longer;

• away-from-home eating is increasingly important as, indeed, is snacking/"grazing" - providing new market opportunities in catering and for snack products such as yoghurts and hand-held ice cream;

• across Europe, diets are becoming more international - providing opportunities in the U.K., for example, to introduce fresh cheese products into a flagging traditional cheese market.

The principal market implication of these trends is that the outlook for value-added products is, in general, strong, whereas it is weak for the traditional dairy commodities. Processing firms across the EU have sought to merge/acquire and/or forge partnerships with other firms to improve their competitive position through: gaining economies of scale in producing low value commodities; and gaining technological and market know-how, plus distribution strength, to secure first or second brand position on the supermarket shelves of Europe. First or second position can benefit from the "the virtuous circle" of strong brands, leading to increased bargaining power, enhanced returns on investment, releasing funds to reinvest in new product development and to enhance the strength of the brands - the third brand or lower is doomed to low and declining margins.

If dairy processing firms are to flourish in the competitive world of an expanding European Union, then, they must undergo a cultural change. For the farmer-owned co-operatives, they must ensure that they serve the interests of consumers first and of farmers second - in the absence of consumers, we have no customers! Through developing strong vertical and horizontal alliances, both dairy farmers and processors can ensure that they can access the high volume and lucrative markets that is the domain of the supermarket chains and food service companies in Europe. For farmers, increasingly, they will be producing milk of specified composition for specific customers. The wise farmer will look for the customer that can add most value to his/her milk and who is prepared to pay the most for it over the long-term. And, finally, for the EU dairy industry to flourish, the location of milk production in the EU should be determined by economic forces and not by politically-driven administrative dictate.

EUROPEAN DAIRY MARKETS - TRENDS AND PROSPECTS

W. KROSTITZ^a)
a) Schusterbistlweg 21, 83471 Berchtesgaden, Germany

Professional paper
Language: English

ABSTRACT
Europe is the world’ s largest milk producing region, although its share in the global total is decreasing. Up to the 1980s output was well above effective demand which requiered huge subsidies on domestic consumption and exports. However, in the early 1990s, demand and production contracted sharply in the former socialist contries. Adjustment in West Evrope has been slower. Further reductions in milk output and prices will, therefore, be required to restore equilibrium between supply and demand. But the average size of dairy farms and milk plants is likely to continue to increase. In the Eastern part of the continent, demand and production are expected to recover during the second half of the 1990s, accompained by modernization and rationalisation of farming and marketing. Yet, average levels of consumption will probably remain much lower then in the past, with widening differences within the population.

Key words: Europe, milk production, consumption of milk and milk products, trade, policies, prospects.

THE AUSTRIAN DAIRY INDUSTRY BEFORE AND AFTER EU MEMBERSHIP

J. HASCHKA^a)
a) Nö. Landes-Landwirtschaftskammer, 2.3. Tierproduktion, Löwelstraße 16, 1014 Wien

Professional paper
Language: English

ABSTRACT
Having conformed with the membership requirements, and following the referendum on June 12, 1994, Austria joined the EU on January 1, 1995; five years after the initial application. Although membership may have overall advantages, it represents the greatest change and challenge for Austrian agriculture - particularly the dairy industry - in this century. The collapse of the Austro-Hungarian empire in 1918 demanded a change of approach for the dairy sector. With state help, expansion in the 1920’s was such that the milk industry become over extended and the producer price for milk plummeted. The situation led to the founding in 1931 of the Milchwirtschaftsfond (a form of Milk Marketing Board), which regulated prices and managed a compensation system linked to transport costs. Specific regions (so called catchment and service areas) were allocated to dairies, and butter production was supported at the cost of the fresh milk products. The system as it stood at the beginning of the 1960’s remained in place until 1994. A qualitative and quantitative comparison of the state of the industry immediately before membership with the state today shows radical changes in industry structures, prices and products developments - with appropriate implications for milk producers, dairies and consumers.

VALUE OF INFORMATION IN DECISION MAKING: APPLICATION IN MILK PRODUCTION AND PROCESSING

S. KAVČIČ^a)
a) Univ. of Ljubljana, Biotechnical Fac., Zootechnical Dept., Groblje 3, SI-1230 Domžale, Slovenia

Review paper
Language: Slovene

ABSTRACT
This paper emphasises the distinction between intuitive and a systematic approach in business decision making and explains the basic elements and principles of decision making theory. It presents most frequently used techniques of risk management as a key factor in decision making and exposes the theoretical background of the term Value of information. Hypothetical examples in milk production and processing are used to illustrate the possibility of applying these methods in practice and some possible disadvantages. Finally, the article critically assesses potential of more sophisticated techniques to overcome these problems.

Key words: decision making, value of information, decision analysis, risk management.

INFLUENCE OF AGGRAVATED DEMANDS ON MILK QUALITY AND STRUCTURE OF PRODUCERS

J. HOČEVAR^a)
a) Veterinarski zavod Slovenije, Cesta v Mestni Log 47a, SI-1000 Ljubljana, Slovenia

Professional paper
Language: Slovene

ABSTRACT
We have increased the number of parameters for the assesment of milk quality, which determines the raw milk price and imposed more strict criteria for payment classes at Hruševje dairy. The analysis was made on the data of 439 milk producers from the community of Postojna during the period June 1993 - March 1995. The number of milk producers whose raw milk was classified into E quality grade has increased from 40 (13%) to 106 (43%) and the number of those in the final quality grade has reduced from 142 (46%) to 1 (0.40%) during the period studied. The average monthly quantity of raw milk increased from 534 to 970 litres per milk producer. In spite of the reduced number of milk producers the monthly quantity of the delivered milk has increased from 206,553 to 241,556 litres. It can be concluded that the regulations on the determination of the redemtion price of cow’s milk have had positive influnce on milk quality and milk producers structure and have realized the intention of the legislator according to greater intensity and more up-to-date milk production.

Key words: raw milk quality, Postojna, total bacterial count, number of somatic cells.

MILK PRODUCTION PROJECTION IN SLOVENIA

S. ČEPIN^a), J. FERČEJ, M. ČEPON
^a) Univ. of Ljubljana, Biotechnical Fac., Zootechnical Dept., Groblje 3, SI-1230 Domžale, Slovenia

Professional paper
Language: Slovene

ABSTRACT
Between 1985 and 1994 in Slovenia, the number of cattle decreased by 17.3 %, whereas the number of all cows 20.2 % and number of cows for market milk by 21.5 %. In the same period the amount of market milk was unvaryingly among 350 and 390 mil. Litres. The amount of market milk yield increased by 36.5 % per cow (from 1,990 Litres in 1985 to 2,716 Litres in 1994), which is an average of 4 % per year. Due to expected intensive production of milk and steady consumption, the numbers of cows for market milk production will decrease in future. If the average increase in market milk yield per cow is not changed, after ten years the same amount of milk will be produced by 100,000 cows. Owing to agricultural land structure in Slovenia (64.5 % of grasslands) at least 230,000 cows or 580,000 cattle will be needed to prevent the overgrowing of agricultural land and to preserve the settlement and landscape. The mentioned number of cattle should be reared for wished beef production. Milk production should not be considered apart from beef production but in connection with overall cattle breeding and agricultural production respectively.

Key words: dairy cows, milk production, trends, perspectives.

continued overleaf