Effects of market structure changes on supply chain in

Rade Popovic

Department for Agricultural Economics and Agribusiness The Faculty of Economics University of Novi Sad Dairy policies SERBIA  Until 2001

 Maximum retail prices and subsidies for

pasteurized  High border protection  After 2001

 Deregulation of dairy market

 Subsidies for row milk directly to producers

 Additional subsidies

 Free trade agreements and lowering of

border protection Dairy farms SERBIA  285,000 dairy farms in Serbia

 Small scale production 2.2 cow per farm  Family farms produce 91.3% of milk  Number and share of small farms decreasing  Number and share of commercial family farms increasing

 Companies produce 8.7% of milk

 Milk production is stable in last 10 years  Share of milk for human use in legal market channel is 52.6% and increasing

 No dairy cooperatives

 Production on farms is diversified  Small dairy farms in some areas losing market opportunities

Dairy farms SERBIA

3000

2500

2000

1500

1000

500

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Cows (in thousand) Milk yield (l/cow/year) Milk production for human use (million l) Dairy processors SERBIA  202 dairy processing companies in 2007

 4 the biggest companies control 60.3% of row milk market

 Successful privatization

 Concentration and Market power  Innovativeness and diversification of product  Active influence of dairy farms  Vertical integrations  Rationalization of supply base  Organize milk collecting stations and transport

prices establishing on the milk quality control carried out by processors

Dairy processors SERBIA

Deliveries of milk to Market share Company name (in liters) 2006 2007 2006 2007 Dairies in structure of DANUBE FOODS GROUP B.V. 350,374,975 361,959,880 47.4% 44.4% 1. - IMLEK, IMPAZ and 230,587,554 243,462,640 31.2% 29.9% Zemunska mlekara - Novosadska mlekara 60,697,564 61,205,680 8.2% 7.5% - Mlekara Subotica 59,089,857 57,291,560 8.0% 7.0% 2. „Mlekara Šabac“, Šabac 43,187,653 56,945,950 5.8% 7% 3. „Somboled“, Sombor 40,256,713 43,665,250 5.4% 5.4% 4. „Mlekoprodukt“, Zrenjanin 28,977,976 28,720,080 3.9% 3.5% Dairies from 5 to 15 millions liters 5. 126,563,765 158,097,080 17.1% 19.4% of processed milk Small sized dairies with less than 6. 150,584,654 165,139,540 20.4% 20.3% 5 millions liters processed milk TOTAL: 739,945,736 814,527,780 100.0% 100.0% 1Source: MAFW Register

Retail sector and consumers SERBIA  Mostly domestic companies  Foreign competitors mainly from ex Yugoslav republics

 Market power  High margins and high retail prices Huge credit period from processors, 90 – 100 days

 Demand drivers:  Population decreasing

 Income slightly increase

Milk Milk Milk and liquid Year production consumption milk products Per capita 2005 215.3 208.2 174.3 3.3 0.6 2006 214.1 205.7 170.8 3.3 0.5 2007 209.7 201.3 165.3 3.4 0.6 2008 208.3 200.6 163.3 3.5 0.7 Economics of milk production SERBIA

45

40 y = 0,0636x + 29,021 R2 = 0,4791 35

30 Dinar / liter Dinar

25

20 - 20 40 60 80 100 120 Herd size Average cost Marginal cost Average revenue Linear (Average revenue) Monthly milk prices 2006-2008 SERBIA

Germany 70,0 Poland 60,0 Serbia Serbia - commercial farms 50,0 World*

40,0

30,0

20,0

10,0 Monthly prices in US $/100kg milk $/100kg US in prices Monthly 0,0 jul.06 jul.07 jul.08 jan.06 feb.06 jun.06 jan.07 feb.07 jun.07 jan.08 feb.08 jun.08 apr.06 okt.06 apr.07 okt.07 apr.08 okt.08 avg.06 nov.06 avg.07 nov.07 avg.08 nov.08 maj.06 sep.06 dec.06 maj.07 sep.07 dec.07 maj.08 sep.08 dec.08 mar.06 mar.07 mar.08

 Asymmetric milk price transmission

 Time lagged and volatile milk prices

Conclusions SERBIA

 Changes along dairy supply chain are characterized:

 market deregulations,

 concentration of row milk production,

 strengthening of formal row milk market,

 successful privatization and development of dairy processing sector,

 concentration in retail sector and

 slightly decrease of dairy consumption with changing structure of its consumption

 Main constrains identified in dairy supply chain are:

 lack of dairy cooperatives,

 low transparency of economics of all links in dairy chain,

 retailers’ market power and

 lack of transparency and consistency in agriculture long term policy