KEY PROBLEMS OF THE DEVELOPMENT OF THE DAIRY INDUSTRY OF UKRAINE
- the need to form a new model of functioning of the dairy industry with 3 components: (households – self-sufficiency, peasant dairy farm – craft; dairy farm – commodity milk-raw material);
- solving the problem of shortage of milk-raw material in the conditions of openness of the dairy market of Ukraine – by stimulating investment activity of agrarian business entities to expand activities in the dairy sector (subsidies for growth, compensation for breeding livestock);
- increasing transparency of the market of milk-raw material and dairy products, reducing the volume of shadow milk processing (using the resources of the State Agrarian Register);
- introducing effective instruments for financial support of the activities of dairy processing enterprises (problem of settlements, availability of credit resources)
- improving the institutional conditions for the functioning of the dairy market of Ukraine: changing the practice of contractual relations (introduction of “long” contracts); introduction of a price arbitrage mechanism in the milk-raw material market;
- approximation of the milk-raw material supply base to European standards;
SPECIFIC FEATURES OF THE UKRAINIAN MODEL OF THE DAIRY INDUSTRY
significant isolation of milk production and milk processing processes due to:
– lack of cooperation, as is the case in Poland, France and other countries
– low level of vertical integration.
OBSTACLES TO INVESTMENT IN DAIRY FARMING
- – complexity of construction/reconstruction of dairy farms (outdated standards and regulations, complexity of land allocation and commissioning procedures, etc.);
- – lack of “free” agricultural land for the formation of a feed base – at the same time, the state does not encourage the extension of value chains (example – minimum tax liability);
- – complicated access to breeding resources;
- – significant payback period (the longest among the types of agricultural business);
- – complexity of cow husbandry technologies, especially for non-specialised agricultural enterprises;
- – low profitability of cow husbandry (currently, this argument does not work);
- – uncertainty regarding the export prospects for dairy products (fears that additional volumes of raw milk will prove to be ‘excessive’).
SOLUTION – encourage processing enterprises to participate in investment projects for the construction/reconstruction of dairy farms (develop partnerships between processing enterprises and dairy farms). A possible option is for milk processing enterprises to participate in the process of lending to dairy farms when they implement investment projects in dairy farming.
KEY TASK – increase the supply of raw milk, motivate dairy farms to invest in expanding their milk production capacities. Small and medium-sized enterprises are more willing to invest in milk processing – for them, this is their only area of activity, while agricultural enterprises have a number of alternative areas of activity (crop production, other types of animal husbandry, etc.).
EXCESSIVE VOLATILITY OF THE RAW MILK MARKET
REASON – imperfect approaches to the organisation of contractual relations between dairy farms and milk processing enterprises and pricing for raw milk
KEY ISSUES, hindering the balanced development of the dairy industry in Ukraine based on
the harmonisation of interests between dairy farms and milk processing enterprises:
– the use of “short contracts”, which create excessive risks of losing the raw material base and cause price uncertainty even in the short term;
– too frequent price revisions (at least twice a month), which, in conditions of excitement on the raw milk market, leads to a rapid rise in prices over a short period of time, significantly reducing the economic efficiency of milk processing enterprises and their economic stability;
– the lack of practice in applying the concept of “first buyer” of raw milk and, as a result, the underdevelopment of the spot market for raw milk (accordingly, instead of meeting their operational needs for raw milk among themselves (developing a secondary market), market operators ‘lure’ milk producers with short-term offers of higher prices.
SOLUTION TO AN ISSUE of excessive price volatility in the raw milk market –
PROVIDES for the improvement of the organisational principles
of its functioning:
- in terms of optimising contractual relations and their documentation;
- in terms of improving approaches to pricing in the raw milk market.
RESOLVING THE PROBLEM OF EXCESSIVE PRICE VOLATILITY IN THE RAW MILK MARKET
PROPOSALS or improving the organisational principles of the raw milk market
(optimisation of contractual relations between dairy farms and milk processing enterprises):
– transition to the use of ‘long-term’ contracts (with a term of at least 6 months);
– provision in contracts for price reviews no more than once a month;
– ensuring the functioning of the spot market for raw milk exclusively through milk processing enterprises – by recognising the rights of the ‘first buyer’ and strictly adhering to them;
– establishing in contracts the possibility of unilateral termination of the contract no earlier than 30 calendar days after written notification of the buyer of such a decision (except in cases where one of the parties systematically violates the terms of the contract);
– ensure the formation of intra-industry statistics on contracted volumes of raw milk purchases and prices for it..
PROPOSALS for improving approaches to setting prices for raw milk, ensuring objectivity in determining their level to balance the economic interests of dairy farms and milk processing enterprises:
– joint formation by representative associations of dairy farms and milk processing enterprises of a recommended price range based on a comprehensive assessment of internal and external factors affecting the price of raw milk.
SPECIFIC FEATURES OF THE UKRAINIAN MODEL OF THE DAIRY INDUSTRY
significant separation of milk production and milk processing processes due to:
– lack of cooperation, as is the case in Poland, France and other countries
– ow level of vertical integration.
CHALLENGES/THREATS TO THE FURTHER DEVELOPMENT OF DAIRY FARMING IN UKRAINE
- – the state of ‘transition’ – the segment of private farms is gradually disappearing – as a result, economic transformation of private farms is necessary and the state will take care of this;
- – the need for active implementation of progressive technologies for keeping cows;
- “caution” of agribusiness entities regarding investment in dairy farming – currently (at the moment, the profitability of dairy farming is quite high, with income being regular and not dependent on logistics issues (formally, consumers of dairy products ‘overpay’ for dairy products, while milk producers do not invest in the development of the dairy cattle sector;
- – the EU’s green agenda (European Green Deal) – the European Commission’s initiatives on climate neutrality by 2050. Some countries are already introducing legislative solutions in this regard, in particular Denmark has already introduced a tax on animals that produce CO2 (cattle, pigs). Thus, starting in 2030, a tax of €40.2 per tonne of CO2 emissions is expected to be introduced, and from 2035 – €100/t. At the same time, tax breaks have been introduced, according to which the rates will be €16 and €40 respectively (reduced by 2.5 times); accordingly, there is a risk that the environmental tax rate on CO2 emissions from livestock will increase significantly.
CHALLENGES/THREATS TO THE FURTHER DEVELOPMENT OF DAIRY FARMING IN UKRAINE
- – Strengthening animal welfare requirements (European integration requirements put forward by environmentalists) – The Law “On Veterinary Medicine” (No. 1206, adopted in early 2021) defines the principles for activities in the areas of animal health and welfare, veterinary practice, veterinary drugs, and the circulation of animal by-products. In terms of animal welfare requirements, the provisions of the Law will come into force one year after the end or cancellation of martial law (at the latest in 2027);
- – The “non-standard” nature of Ukrainian dairy farming from the point of view of European “canons” – the average size of Ukrainian dairy farms is already several times larger than that of Eastern European EU countries (it is unclear what to expect from dairy farms with a herd of 1,000+ cows in the context of European integration).
