Because of the rising costs of raw materials and energy resources the situation in the dairy industry is currently tragic, as dairy companies are forced to work below operating costs and there is a risk of multiple businesses going bankrupt, admits the board chairman of Latvian Dairy Committee (LPCS) Jānis Šolks.
«It’s not just serious – it’s tragic,» he stresses. «The current situation is that the industry is in a deep and serious crisis, one which the government has yet to admit and understand despite our best efforts,» explains the chairman of LPCS.
He stresses that in the last couple of years – since the start of the pandemic – there have been several important developments, including an unexpectedly rapid increase of milk procurement prices. According to him, until now the milk procurement price was stable and predictable – about 30 cents per 1 kg. This has since changed, and the price is now 35.8 cents per 1 kg. Estimates presented by the committee suggest the milk procurement price will reach 38 cents per 1 kg in December and 40 cents next year.
«There are no indications the situation might change the other way in January or February. This means the price will likely reach 40 or more cents. This would be an unprecedented price in Latvia’s history so far,» says Šolks.
The crisis in the dairy industry is further escalated by the increase of costs of energy resources and logistics services, as well as growing packaging prices, foreign competition and the gradually reducing industrial stores of dairy products in the world.
«The world has run through its entire stores of industrial dairy products such as industrial cheese, all kinds of dry milk products and butter. There is almost nothing left. While in the past there were thousands of tonnes both in private storage and what was procured in intervention, now there is zero,» says the board chairman of LPCS. At the same time, there has been a recent drop in milk production in Australia and in New Zealand there has been a drop in product output. All this has led to a situation when there is, though a small, but a deficit of industrial and other dairy products around the world.
Growing competition is another problematic factor. More and more products made in Lithuania, Estonia and Poland keep entering Latvia’s market. Domestic producers are simply unable to compete with them on equal terms.
«Our local dairy producers seem are rather small when compared to their competitors,» says Šolks.
An average of 1 500 tonnes of milk is processed in Latvia every day and more than 900 tonnes of milk is exported to Lithuania and Poland. In Poland, on the other hand, one efficient company processes 4 000 to 7 000 tonnes of milk on average every day. This is more than all of Latvia’s 20 to 30 dairy companies combined.
«This is the main reason why we cannot directly compete with the aforementioned countries on equal footing,» stresses the chairman of LPCS, adding that the milk procurement price in Latvia is close to the general price in the EU.
When asked about company merging and optimisation processes, Šolks says all merges and product optimisations the companies in Latvia could afford have already happened.
At the same time, the apparent fractured state of the industry came to be over the course of history, and it is not possible to force any additional mergers.
Šolks also says export markets are the most financially attractive ones at the moment. However, for businesses that have not explored them and remain dependent on sales in Latvia, the situation is poor. «Latvia’s market is currently the biggest ditch, or rather, a pit for us. Those able to export their goods are doing better than the rest, but only slightly. The main revenue comes from the domestic market,» comments the chairman of the board.
He also says that although the prices of Latvian goods are often equal to the prices of products from Germany or Poland, the price-formation system in Latvia is different. The biggest difference is the reduced VAT rate for dairy products in those countries (7% in Germany and 5% in Poland). There is also the markup applied by stores. According to Šolks, in Germany and Poland it is below the one in Latvia.
«I’m not trying to blame anyone – to each their own. However, the trader is not the losing side in this, they work with positive results even in such tough times. This is why we, the processing companies, as the middle stage of sorts, are unable to stay within operating costs,» stresses Šolks.
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On top of that, there is a principle that has formed in Latvia. It goes like this «the more you produce, the higher the surcharge». This situation is true when a contract is signed with hospitals or other health institutions, municipal institutions and prisons. «During contract negotiations the opportunity to change product prices is very limited, and even if we do manage to change it, no one would agree to a price increase to cover costs,» said the head of the committee, adding that the industry already operates below operating costs.
According to estimates from LPCS, the industry’s biggest companies currently suffer losses worth several million euros.
«Of course, a large company is able to soldier through it and continue operating, but it is not a long-term solution – it is a short-term measure,» says the chairman of LPCS.
When asked about available support options, Šolks said every day he receives calls from businessmen, who ask about news in regards to any upcoming aid from the state. He says that considering the extent at which the industry has been impacted by Covid-19 pandemic, the government should seriously consider providing aid.
Otherwise Latvia may lose dairy companies or even the entire industry.
«If we sever this milk artery, this means more lost jobs, more unemployed people, as well as major bankruptcies for the state to deal with. I’m speaking opening. I fear for the smaller enterprises the most, but the situation is already severe enough that there is no reason to look at the size of affected companies,» say the chairman.
To explain the contribution of the dairy industry to Latvia’s national economy, Šolks listed several aspects. Among them is the fact that, aside from VAT, the industry contributes 15-20 million euros in the form of taxes every year. At the same time, in 2019 and 2020 the dairy industry exported products worth EUR 160 million to more than 70 countries around the world.
The industry directly employs approximately 3 000 people. Indirect employment, on the other hand, includes several thousand farms and the people employed in the livestock sector.
«If we assume each farm has at least three to four people employed and we have 5 000 to 6 000 farms that supply milk for the dairy industry, we come to several dozen thousand residents who continue maintaining and developing our countryside environment,» Šolks stresses.
He confirms LPCS has sent a letter to the government, Saeima, Ministry of Agriculture, Ministry of Economics and Ministry of Finances with a request to provide support to the industry. «We are a strategic industry after all. We provide the country with a very valuable resource – dairy products. If something goes wrong here, it usually has dire consequences,» adds Šolks.
In the letter sent on 15 December LPCS notes that its strategy for work with its partners is working in a mutually beneficial way, supporting each other in a long-term perspective. Flexibility is an element of this cooperation.
«It is our turn to mobilize flexibly to pay our partners a competitive price for milk, perform processing at increased resource and service prices and fulfil our obligations before our consumers at the most lenient level of price changes possible. In any other situation it would be a challenging task for businessmen, but this time the situation is critical,» the letter details.
The letter also mentions that LPCS understands in the near future it will not be possible to increase the prices of dairy products to a level that would completely cover production costs. When doing business with their partners both in retail networks and other clients (hospitals, institutions under the Ministry of Defence, prisons, municipal companies, etc,) milk processing companies are forced to suffer considerable losses.
In regards to the aforementioned, LPCS urges the Cabinet of Ministers to find a way to partially compensate uncovered but objective costs during the state of emergency.
The minimal compensation amount would be EUR 56 per 1 ton of processed milk. The total compensation amount would be EUR 2.4 million a month. This support would be needed for December 2021, as well as January 2022 and maybe even February.
The Ministry of Finance is so far the only institution to have responded to the letter from LPCS. In its official response, the ministry notes that because the Ministry of Agriculture and Ministry of Economics are among the noted addressees and the questions asked therein are in these institutions’ field of expertise, the ministry will take it into account and will use it in accordance to the information stated in the request.
Commenting on this response, Šolks says he is confused and surprised, since, according to him, it is the Ministry of Finance that has avoided studying this situation and has basically delegated the responsibility for it to other state institutions.
«It’s not a political project. It’s not tied to elections or anything else. It is a cry for help to the government, which is directly responsible for everything happening in the country. This isn’t a jab either, and we will definitely perform other measures to demonstrate just how severe the situation really is,» says the head of LPCS.
When asked about the exact number of businesses that are at risk of shutting down, Šolks says it is difficult to say for sure. He adds there are some companies forced to subsist at the expense of everyone else.
Dairy companies are forced to postpone tax payments, payments to milk suppliers, wages, etc.
«This tragedy is already in the making. Some small companies live for today. For tomorrow they hope for the best,» adds Šolks.
Commenting on the price rise observed in stores, Šolks says dairy product prices have increased from 4% to 11% over the course of the year. According to estimates from the Institute of Agricultural Resources and Economics, the average annual growth is 6%.
Future estimates show that prices are expected to grow, though slightly, in February.
This outlook is based on the fact that the industry in general and stores both understand it will not be possible to increase prices of dairy products during and right after holidays.
According to Šolks, the government should make its announcement about providing aid to the dairy industry as soon as possible. He stresses it is far easier to destroy the dairy industry than to restore it. At the same time, restoration of the industry will cost considerable financial resources if done later rather than sooner. ‘The question is whether or not we need this exercise in its full swing while we have an option to fix the situation with minimal resources and thereby preserve jobs, pay taxes and maintain product turnover at a familiar and appropriate level,’ comments the chairman of LPCS.
Latvian Dairy Committee: the situation in the industry is tragic
