The removal of milk quotas in a year will profoundly modify allocation of production volumes across EU countries. MTT Agrifood Research Finland has completed a competitiveness analysis of dairy supply chains in the countries surrounding the Baltic Sea.
In addition to Finland, the cross-country comparison included Sweden, Denmark, Germany, Poland and the three Baltic states. The study reveals that competitive positions are likely to change rapidly in the future.
The originality of MTT’s study stems from its focus on the entire supply chain. The competitive development and positions of the dairy chains in eight countries were analysed via five groups of factors, namely economic performance, productivity, foreign trade performance, growth and innovation, which are either direct indicators or determinants of competitiveness.
All the links in the chain should be strong in order to shape a competitive sector. Otherwise, the stronger elements of the chain tend to seek commercial alliances with companies in neighbouring countries, which may give rise to tensions within the dairy supply chain in the country. This can be illustrated with reference to the Baltic countries. Lithuanian dairy processing forms the strongest link of the national dairy supply chain, which currently imports almost a quarter of its raw milk from neighbouring countries. By contrast, in Estonia large corporate farms enjoy a much stronger position than national dairy processors and, as a result, often decide to export their raw milk. In the last few years a quarter of the milk produced in Estonia and a third of that produced in Latvia has been exported to Lithuania for processing.
Across the Baltic Sea region, the most influential player of dairy supply chains remains the retail sector. Following the recession in 2009, consumers’ purchasing power has contracted and the popularity of discount retailers has consequently risen. The stronger retailers have responded to the increased price sensitivity of consumers by developing their offerings of private label products in the cheese and yoghurt groups as well as by giving a new impetus to their strategy to conquer shares of the market for fluid milk.
Total factor productivity (TFP) of milk farms has grown at similar speeds in Finland, Germany, Denmark and Sweden between 1995 and 2010. The productivity advantage of the leaders has not shrunk significantly in the last fifteen years. Structural differences across countries account for the bulk of productivity differences. Although production moves to larger farms in all countries, the speed of this development varies. The average milk farm has 31 dairy cows in Finland, as compared to 75 in Sweden and 164 in Denmark. The Danish lead seems insurmountable, but in fact, their fast structural development has been achieved through heavy investment. The resulting burden of debt makes Danish milk producers vulnerable to market fluctuations. Among the four most recent EU members, TFP growth has been fastest in Estonia, as the relative importance of very small farms in the other three countries has hindered structural development.
In dairy processing, the newer EU members are quickly closing their productivity gap with the leading countries of the comparison. Since the turn of the century, annual TFP growth has taken place at the average rate of 3.7% in Poland and 2.4% in Lithuania, or much faster than in Finland where the corresponding rate is only 0.7%. At the same time, TFP in German and Swedish dairy processing slightly declined. The more successful countries of the comparison group have managed to expand their sales both domestically and on export markets.
Differences in performance between older and newer EU members suggest that the size of operation is a significant factor in the adoption of new technologies and efficient production methods. When the dairy industry is based on the operation of a few large firms, those have usually managed to catch up with the foreign leaders in the industry through deliberate investments, R&D efforts and marketing and sales operations. At the same time, development in dairy farming of Poland, Latvia and Lithuania requires intensification and concentration of thousands of currently very small farms.
The dairy sector accounts for a significant share of the food sector throughout the Baltic Sea region. The countries of the region have performed well on export markets and have consequently achieved positive balance of trade in dairy products, with the exception of Sweden. World demand for dairy products is predicted to grow faster than supply, as consumption expands steadily in emerging countries. The EU seeks to get its share of that growth, which will affect markets in, for example, China, Russia, the Arab world, and Africa.
The removal of milk quotas in a year will profoundly modify allocation of production volumes across EU countries, as the profound effects of the reform of the EU sugar policy, which took place a few years ago, may suggest. The countries in which production has been constrained by the quota system, such as Ireland, the Netherlands, Germany, Denmark and Poland, are ready to increase their production of dairy products.
The importance of raw milk availability for the competitiveness of national dairy chains will rise in the future. With the expansion of milk production on farms, dairy industry can easily materialise opportunities to conquer new markets. It is clear that the removal of milk quotas within the EU will boost production and exports to world markets, but a swing in world prices may also result in overproduction within the EU’s common market. In periods of low world market prices, a large amount of “excess” dairy products would flow into the internal EU market further exacerbating the positions of those dairies which predominantly act in their domestic market or within EU. In this context, competitiveness of the sector also requires that its position on the domestic market be preserved.
