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The CC: milk production in Latvia has low efficiency



In order to discuss the situation on the market due to the rapid decrease of procurement prices of raw milk, the Competition Council (CC) met with the representatives of the dairy industry - cooperatives, processors and retailers - on 22 January. Although participants of the meeting showed different opinion about the current situation in the dairy market, it is to be established that the procurement prices of raw milk are affected by a set of many factors of the local and global market. Besides, adverse changes in demand and prices have a trend to become even more frequent. 

In order to establish the opinion of participants of the milk supply chain (production of raw milk, milk processing and retail) about the reasons and trends for decrease of the procurement prices of raw milk, as well as how the decrease of procurement prices influence the shelf prices of dairy products in stores, the CC met with the representatives of the Latvian Association of Agricultural Cooperatives, Central Union of Latvian Milk Manufacturers and the Latvian Food Retailers Association.

During the meeting, it was discovered that there is a low trust between the companies, operating in each of the stages of milk product supply chain, and during the periods, when rapid changes in procurement prices of raw milk take place, cooperation terms between certain producers and processors may be ignored. Besides, it was also concluded that the dynamics of price changes for milk products in Latvia is slow, namely, when prices of raw materials fall down, they are reflected in the price of the end product only within a long period of time.

The representative of the Latvian Food Retailers Association confirmed that the drop down of prices of raw milk currently still has not been reflected in the lower procurement price received from milk processors and thus the decreased price in stores. In its turn, the representative of the Central Union of Latvian Milk Manufacturers indicated that insufficient income from export of dairy products and drop down of the domestic consumption for dairy products does not provide a possibility to establish the profitable milk processing. Therefore it should be concluded that the production capacities of processors are not fully used. At the same time frequent promotions for dairy products in hypermarkets confirm that milk processors still deliver to buyers the advantages from price decreased in the form of regular promotions.

Taking into account the issues discussed during the meeting, the CC concludes that the dairy industry was and still is characterized by cyclicality. Although the processors call the current price decrease of raw milk as price fluctuations, however it is clear that raw milk producers will not be protected from them also in the future, because it is caused by a set of several factors: the demand and situation of raw materials and dairy products, including industrial milk powder, on the foreign markets, as well as specifics of the local dairy industry - at first significant overproduction of raw product and fragmentation of farms, low efficiency raw milk processing and lack of export markets. It is to be established that milk processors, specialising in the production of niche products, better overcome the crisis situations and there are currently also a number of companies - both, the raw milk producers as well as processors related with them, who have not been affected by fluctuations of milk prices and having a big demand in retail, even regardless of availability of more cheaper products of other countries.

Skaidrīte Ābrama, the Chairwoman of the CC: “Two significant things were highlighter during the discussion: The Latvian milk processing in general has low efficiency and the matter of survival for raw milk producers is to plan their activities strategically and in the long term rather than rely on the fact that it will always be the same upon increase of procurement prices of raw milk. Afterwards when prices drop down, it may be already too late for processors to reproach incapability to produce milk products in such volumes in order both, consumers as well as raw materials producers would be satisfied with the price. That means to search for trusted raw milk sale channels already during ‘good times’ or even to develop certain types of processing up to specialising in a certain niche.”

At the same time the participants of the meeting agreed that counterparties - raw milk producers and processors - should be correct in mutual relations, should warn on changes of the procurement prices or volumes in a timely manner, providing a possibility for partners to get prepared for such changes timely. The Latvian Association of Agricultural Cooperatives and Central Union of Latvian Milk Manufacturers confirmed their readiness to address solving of the problem.

The CC will continue to carefully follow the events in the milk production, processing and retail market.