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MILK CRISIS Challenges for a supplier to dairy farms

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

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MILK CRISIS Challenges for a supplier to dairy farms

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  1. MILK CRISIS Challenges for a supplier to dairy farms AGP Conference, Harkany, HU Jan Zahora,VVS Verměřovice s.r.o., CZ June 22nd 2009

  2. 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

  3. VVS mission statement • We propose and implement solutions for effective animal nutrition and breeding

  4. 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.

  5. 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

  6. 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

  7. VVS milestones … almost 40-year history → TRADITION • 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

  8. VVS products • CONSULTANCY – nutrition, economics, managament, • Vitamin-mineral premixes for dairy cattle CORE BUSINESS – DAIRY FARMS

  9. FEED Decline… ?? ?? Crisis… MILK

  10. EU feed production 2008 Source: FEFAC Forecast for 2009: drop by 4%

  11. MILK supply chain and VVS role FEED SUPPLY CHAIN Feed compounds Consultancy Consultancy conservative FARMER Marketing Board/Warehouse effective?? Processor profitable Retail chain strong-decisive Pull strategy Nutritional needs CONSUMER (health)

  12. FOCUS ON DAIRY MARKET DAIRY WORLD 2008-2009

  13. UK : production decreasing again Holland: Friesland lowers price with 1.1 ct Farmers who left dairy are not welcome again Belfast: auction milk price < 30 ct/l China: already 3 babies died of baby milk France : farmers are blocking Entremont US: export booming also because of weak USD Brazil : strong investment in milk NZ : very aggressive on world market Key dairy news of 2008

  14. 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

  15. 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

  16. World Dairy Market 2008 • 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

  17. 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…

  18. FOCUS ON DAIRY MARKET CZECH DAIRY SECTOR 2009

  19. 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

  20. Farm gate milk prices of selected dairy plants in CZ Exch. Rate: EUR=CZK27 Source: CZ Dairies‘ Union Data Czech average in 2008 €c33,6/l Czech average in April 2009 €c22,7/l Average production cost 2008 > €c32/l

  21. 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

  22. Key issues • 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

  23. Farm-gate milk prices

  24. Heifers prices

  25. 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!!

  26. 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

  27. 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

  28. 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 EUco-financing • Barters – grain, heifers… • Seminars, farm supporting actions • petitions • fun actions

  29. Forage seminar serial 2009 ‚FORAGE MANAGEMENT‘

  30. Hiking to the Snezka, the highest mountain of the Czech Republic ‚HIKING AGAINST MILK CRISIS‘

  31. BEING CLOSE to FARMER! • Tailor made solution • Frequent visits/calls • Empathy • Building TRUST • Positive thinking

  32. 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!

  33. 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

  34. 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

  35. Solution proposals 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

  36. COMMON GOAL:farm-gate milk price above the production costFAIR GROSS MARGIN

  37. THANK YOU FOR YOUR ATTENTION!

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