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

• 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

• 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

• 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

• 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 milestones… almost 40-year history → TRADITION

VVS products

• CONSULTANCY – nutrition, economics, managament, • Vitamin-mineral premixes for dairy cattle

CORE BUSINESS – DAIRY FARMS

MILK

FEEDDecline…

Crisis…

????

EU feed production 2008

Source: FEFAC

Forecast for 2009: drop by 4%

MILK supply chain and VVS role

FARMER

Marketing Board/Warehouse

Processor

Retail chain

CONSUMER (health)

profitable

strong-decisive

effective??

conservative

Feed compoundsConsultancy

Consultancy

Pull strategyNutritional needs

FEED SUPPLY CHAIN

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

US: export booming

also because of weak USD

Brazil : strong

investment in milk

NZ : very aggressive on world market

China: already 3

babies died of baby milk

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

• 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

World Dairy Market 2008

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– 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 CZDairy company November,

CZK/lDecember,

CZK/lAverage

2008, CZK/lApril 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

Czech average in 2008 €c33,6/lCzech average in April 2009 €c22,7/lAverage production cost 2008 > €c32/l

Source: CZ Dairies‘ Union Data

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

• Unequal subsidies within EU – discrimination of new members

• Weak support from national institutions in the area of consumers‘ education– 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

Key issues

Farm-gate milk prices

21,74

18,72

20,46

24,00

31,76

18,00

23,00

28,00

33,00

38,00

VII-07 VI-08 VIII-08 X-08 XI-08 XII-08 III-09

Month

€ct./

l

ø EU-25

CZ

A

D

PL

SK

Source: European Commission

CZ/EU-15: 76,09 % ie. -EUR6,83/100 kg

31,93

Heifers prices

311,8

222,3

190,4

207,3

272,1

279,0

170

190

210

230

250

270

290

310

13-2007 13-2008 40-2008 50-2008 7-2009 19-2009

Week

€/10

0kg

l.w

.

ø EU-25

CZ

A

D

PL

SK

Source: European CommissionCZ/EU-25: 71,3 %; ie. EUR89,5/100 kg

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

• 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!

• 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

• 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

State - government

• Facilitation of the communication amongst farmers organisations, banks and dairy companies

• Legislative pressure on retail sector• 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

• health benefits of milk products• consumption supporting programmes – eg. ‚school milk‘• role of rural sector in the society• side functions of agricultural activities

Solution proposals

COMMON GOAL:farm-gate milk price above the

production costFAIR GROSS MARGIN

THANK YOU FOR YOUR ATTENTION!