MILK CRISIS
Challenges for a supplier to
dairy farms
AGP Conference, Harkany, HU
Jan Zahora,VVS Verměřovice s.r.o., CZ
June 22nd 2009
Topics
• VVS profile
• Dairy Market:
– WW overview 2008-2009
– Czech dairy sector
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Feed-Food chain
Milk production crisis – key issues of the sector
Challenges for farmers and VVS role
Solution proposals
Conclusion
VVS mission statement
• We propose and implement
solutions for effective animal
nutrition and breeding
VVS vision
• ….to play a key role on the farm – the basis
of the food chain - and thus influence the
quality, assortment and security of the
foodstuffs not only in the Central European
region.
VVS values
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Teamwork
Strong commitment to achieve corporate goals
Comprehensive advice and customer service
Maximum quality of products and services
Continuous education and the development of own
know-how
• Fair–play competition and respect for competitors
• Flexible introduction of scientific findings into
practice
VVS numbers
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Private company – 2 owners
Turnover of EUR10,8M in 2008
3 doughter companies
Production of >8 000T of premixes per year
34 employees in Czech Republic
More than 200 relevant customers
Located in East Bohemia, 25km from PL and 150km
from SK
• Overdraft from 2 banks
VVS milestones
… almost 40-year history → TRADITION
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November 1970 – production start
1975 - production of mineral mixes
1986 – premix production started
1989 – new VVS established as a part of ZD Mistrovice
cooperative
1995 – computerised production
2000 – VVS Vermerovice Ltd. established
2000 – focus on quality - ISO 9001 certificate
Since 1998 - export activities: SK, PL, LT, UAE
2005 - HACCP system applied
2005 – VVS LT Ltd. established
2006 – VVS SK Ltd. established
2006 – bar code system implementation
2007 - VVS PL Ltd. established
2008 – new mixing technology and pneumatic transport
VVS products
• CONSULTANCY – nutrition, economics, managament,
• Vitamin-mineral premixes for dairy cattle
CORE BUSINESS – DAIRY FARMS
FEED
Decline…
??
??
Crisis…
MILK
EU feed production 2008
Source: FEFAC
Forecast for 2009: drop by 4%
MILK supply chain and VVS role
FEED SUPPLY CHAIN
Feed compounds
Consultancy
FARMER
Consultancy
conservative
Marketing Board/Warehouse
effective??
Processor
profitable
Retail chain
Pull strategy
Nutritional needs
strong-decisive
CONSUMER (health)
FOCUS ON DAIRY MARKET
DAIRY WORLD 2008-2009
Key dairy news of 2008
UK :
production
decreasing
again
Holland:
Friesland
lowers price
with 1.1 ct
Belfast:
auction milk
price < 30
ct/l
France :
farmers are
blocking
Entremont
Farmers
who left
dairy are not
welcome
again
China:
already 3
babies died
of baby milk
US: export
booming
also
because of
weak USD
Brazil :
strong
investment
in milk
NZ : very
aggressive on
world market
World Dairy Market 2008
• Key market players - EU, US and NZ
• Only ONE GLOBAL MARKET
• EU facts
– Milk production : 130.354.000 MT
• Cheese : + 2,1%
• Butter : -3,3%
• SMP : - 9,4%
– Consumption:
• Cheese stable 16 Kg/capita
• Butter stable 4,2 Kg/capita
World Dairy Market 2008
• US facts
– Milk production : 82.464.000 MT
• Cheese : + 3,8%
• Butter : + 8,0%
• SMP : + 25,7%
– Consumption
• Cheese from 13,5 until 16 Kg/capita
• Butter stable 2 Kg/capita
World Dairy Market 2008
• NZ facts
– Milk production : 14.702.000MT
• Cheese : +1,4%
• Butter : +5,9%
• SMP : +6,4%
– Consumption
• Cheese from 7.0 until 6.5 Kg/capita
• Butter 8.0 to 6.0 Kg/capita
Key Issues
– In 2008, EU lost positions on the free markets with
SMP and butter. NZ and US took the stake.
– fam-gate milk prices are under extreme pressure
currently at about 20-25 € ct/l, on the free market as
low as 16 € ct/l, some smaller cheese producers
have stopped collecting milk.
– quota system in the EU allows milk overproduction
athough it is not exceeded…
– EU dairy market for wheypowder stable around
400€/MT, but the lowest prices have been seen!
– EU becomes competitive only due to subsidies and
a stronger dollar…
FOCUS ON DAIRY MARKET
CZECH DAIRY SECTOR 2009
Czech dairy sector
• Primary production
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raw milk production of 2,68 M litres
409 k dairy cows
average annual yield of 6,6 k litres
2.500 subjects
• private farms
• cooperatives
• share-holding companies
• Dairy processing
– 40 cooperatives (milk marketing boards)
– 41 processors – dairy companies
– private companies
Source: MZe 2008
Farm gate milk prices of selected
dairy plants in CZ
Dairy company
November,
CZK/l
December,
CZK/l
Average
2008, CZK/l
April 2009,
CZK/l
Madeta
7,11
6,64
8,44
6,29
Pragolaktos
7,13
6,61
8,50
6,19
Muller
7,39
6,44
8,61
5,89
Sedlčany
7,27
7,01
8,58
6,27
Poděbrady
7,01
6,05
7,50
5,86
Hlinsko
6,84
6,48
8,36
5,79
Danone
7,38
7,01
8,61
6,19
Source: CZ Dairies‘ Union Data
Czech average in 2008 €c33,6/l
Czech average in April 2009 €c22,7/l
Average production cost 2008 > €c32/l
Exch. Rate:
EUR=CZK27
Key issues
• Farm-gate milk prices well bellow production cost
> €c7/l
• Dairy farms have faced losses since November
2008 – negative impact on cash situation
• Falling animal numbers – threat for the future as
restart is impossible
• Ineffective communication among food chain
parts
• Low sector integration – farming cut from
processing
Key issues
• Unequal subsidies within EU – discrimination of new
members
• Weak support from national institutions in the area of
consumers‘ education
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Farmers‘ role
Agrobusiness share on GDP
Food safety/security – labeling, consumers‘ protection
Milk nutritional properties
• No social status for farmers – consumer does not
recognise food self-sufficiency
• Unfair value distribution within the food chain – margin
stays within processing-retail
Farm-gate milk prices
Source: European Commission
ø EU-25
CZ/EU-15: 76,09 % ie. -EUR6,83/100 kg
38,00
CZ
€ct./l
33,00
31,76
31,93
28,00
A
D
24,00
PL
23,00
21,74
20,46
18,00
18,72
VII-07
VI-08
VIII-08
X-08
Month
XI-08
XII-08
III-09
SK
Heifers prices
CZ/EU-25: 71,3 %; ie. EUR89,5/100 kg
Source: European Commission
ø EU-25
311,8
310
CZ
290
279,0
€/100kg l.w.
270
272,1
A
250
D
230
222,3
210
207,3
190
190,4
170
13-2007
13-2008
40-2008
50-2008
Week
7-2009
19-2009
PL
SK
Impact on VVS business
• Falling sales – by 30% compared to 2008!,
although full customers‘ retention
– cheaper premixes, mineral feeds
– limited consumption
• Month-to-month negotiations with banks
– operational finance – lower overdraft limits
– lack of cash - limited expansion possibilities
• Frequent cost budget reviews
EVERYBODY IS CONCERNED!!
VVS internal provisions
• OPEX cut back
– marketing
– personal (commitment)
• Gross margin based remuneration – staff
motivation!
• Cash flow management
• Faster turnover of current assets
– invetory control
– strict purchasing policy
EMPHASIS ON CASH FLOW
AND PROFITABILITY CONTROL
IT - Key role of data
• Fast and accurate data/figures/rates –
assumption of the successful management
• Company information system should provide
reliable and accurate data reports to the
executives
• VVS monthly financial report, benchmarking
IF YOU DO NOT MEASURE,
YOU CANNOT MANAGE
VVS farm ‚crisis‘ services
• Reformulation of the feed doses
– least cost formulations
– maximum utilisation of home-made feed raw materials
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Unit cost calculations – milk, feeding day
Forage quality control
Information service – ‚VVS package‘
Projects with EU co-financing
Barters – grain, heifers…
Seminars, farm supporting actions
– petitions
– fun actions
Forage seminar serial 2009
‚FORAGE MANAGEMENT‘
Hiking to the Snezka, the highest
mountain of the Czech Republic
‚HIKING AGAINST MILK CRISIS‘
BEING CLOSE to FARMER!
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Tailor made solution
Frequent visits/calls
Empathy
Building TRUST
Positive thinking
Crisis as OPPORTUNITY
• Expansion of the activities into regions where
company has never been active
– within CZ
– outside CZ – EE, BG, CR,?
• Diversification to other sectors – RISKS
elimination
– petfood area
– horses
GROWING A MARKET SHARE!
Recommendations to the
customers-farmers
• Plan, calculate and minimise expenses
– purchased feeds and feed materials
– minimise expenses for VET services
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Maintain health status of the herd
Focus on forage quality
Optimise farm work load
Develop diverse activities
Build up the reserves
Solution proposals
Private sector
• Milk processing optimalisation
• higher capacity utilisation
• marketing of added-value products (high processing, BIO)
→ lower credits/interests, of which payments are ‚passed over‘ on
the farmers
• Vertical integration of the sector
• farmers-dairies
• milk marketing boards-dairies
• Effective communication
• banks-farmer organisations-processors
Solution proposals
State - government
• Facilitation of the communication amongst farmers
organisations, banks and dairy companies
• Legislative pressure on retail sector
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strict control of foodstuff labeling – consumers‘ protection
anti dumping rules
equal position of food supplier a and retail chain
setting up % of basic foodstuffs of domestic/regional origin on the shelf
high fines in CZK M in the case of rule breach
• Equation of subsidies level for all EU27 members
• Consumers‘ education
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health benefits of milk products
consumption supporting programmes – eg. ‚school milk‘
role of rural sector in the society
side functions of agricultural activities
COMMON GOAL:
farm-gate milk price above the
production cost
FAIR GROSS MARGIN
THANK YOU FOR YOUR
ATTENTION!