Strat­egy for the Dairy In­dus­try

Economy of Belarus - - FRONT PAGE - Irina KONTSAVENKO

Be­larus is rec­og­nized as one of the world’s dairy in­dus­try lead­ers. The qual­ity of Be­laru­sian dairy prod­ucts is sec­ond to none. In­deed, those who buy our prod­ucts get the best value for their money. The coun­try is one of the world’s five big­gest ex­porters of dairy prod­ucts. None of the for­mer Soviet Union re­publics can boast such an achieve­ment. Be­larus has set an am­bi­tious goal for 2020 – to in­crease milk pro­duc­tion from to­day’s 5.8 mil­lion tonnes up to 9 mil­lion tonnes. What are the prospects for the do­mes­tic dairy in­dus­try and what sales mar­kets should we fo­cus on?

Em­bargo Ef­fect

Rus­sia has al­ways been the key mar­ket for Be­laru­sian dairy com­pa­nies. In 2014 some 3.37 mil­lion tonnes of prod­ucts were sold there, or 96% of the to­tal ex­ports. The rea­sons are many, in­clud­ing ge­o­graph­i­cal prox­im­ity, sim­i­lar di­etary habits, and a great pop­u­lar­ity of Be­laru­sian prod­ucts.

Rus­sia’s de­ci­sion to ban the im­port of dairy prod­ucts from the Euro­pean Union and Ukraine in Au­gust 2014 was a chal­lenge for Be­laru­sian com­pa­nies. Rus­sia heav­ily re­lies on the im­port of cheese, milk, but­ter, and cottage cheese; there­fore, the em­bargo re­sulted in a deficit of th­ese prod­ucts on the Rus­sian mar­ket. Be­larus de­cided to fill in the gap. The lack of their own raw ma­te­ri­als prompted Be­laru­sian com­pa­nies to use Euro­pean raw stock. The bulk of raw ma­te­ri­als – mainly pas­teur­ized milk used to make cheese - came from Poland, Lithua­nia, and Latvia. Spe­cial­ists of the Agri­cul­ture and Food Min­istry say that the share of im­ports was in­signif­i­cant. Over­all, the do­mes­tic dairy in­dus­try can eas­ily do with­out im­ported raw stock. How­ever, back then the im­port of fin­ished prod­ucts from the EU to Be­larus was on the rise. This was due to fall­ing prices for Euro­pean dairy prod­ucts, which made them very at­trac­tive for Be­laru­sian re­tail­ers.

First of all, the em­bargo had a pos­i­tive im­pact on cheese pro­duc­tion in Be­larus. To­day Rus­sia con­sumes about 800,000 tonnes of cheese per year, in­clud­ing 400,000 tonnes of im­ported cheese. Our coun­try sup­plied about 100,000 tonnes of prod­ucts. The fig­ure has in­creased re­cently. Although Rus­sia boosted its cheese pro­duc­tion, the deficit of this prod­uct is still es­ti­mated at 150,000 tonnes. It means that Be­larus can keep in­creas­ing cheese ex­ports to Rus­sia.

“We need to build up our cheese pro­duc­tion ca­pac­ity, in­clud­ing by up­grad­ing ex­ist­ing fa­cil­i­ties. This mar­ket seg­ment should be given a pri­or­ity. We need to ex­pand cheese pro­duc­tion by at least 60,000-70,000 tonnes in 2015,” the Agri­cul­ture and Food Min­istry noted.

Cheese is the op­ti­mal prod­uct for the pro­cess­ing of the milk that re­mains in ex­cess on the do­mes­tic mar­ket. Over 60% of the milk pro­cessed in the Euro­pean Union is used to make cheese. By the way, the Euro­pean Union is the world’s big­gest cheese pro­ducer hold­ing over 43% of the global mar­ket. The Rus­sian mar­ket of dairy prod­ucts has cer­tain pe­cu­liar­i­ties that need to be taken into ac­count. For ex­am­ple, cheese al­ter­na­tives are get­ting more popular there as they are cheaper than cheese. Of­ten cheese al­ter­na­tives are dis­guised as true cheese. Be­larus does not pro­duce cheese im­i­ta­tions. Some mar­ket ex­perts be­lieve that Be­larus can start pro­duc­ing cheese re­place­ments si­mul­ta­ne­ously with the pro­duc­tion of regular cheese. How­ever, the ma­jor­ity of spe­cial­ists be­lieve that this might com­pro­mise Be­larus’ rep­u­ta­tion as a pro­ducer of high-qual­ity or­ganic prod­ucts. Af­ter all, the high qual­ity of prod­ucts is the only way to main­tain cus­tomer loy­alty. By the way, global trends sug­gest that dairy prod­ucts con­tain­ing veg­etable oils are un­likely to win re­peat cus­tomers.

The big­gest chal­lenges fac­ing Be­laru­sian pro­duc­ers on the Rus­sian mar­ket are im­port bans that are oc­ca­sion­ally im­posed on Be­laru­sian dairy com­pa­nies. The re­cent im­port re­stric­tions were in­tro­duced in the au­tumn of 2014. At first, Rus­sia claimed that Be­larus re-ex­ported sanc­tioned prod­ucts from Euro­pean coun­tries and was dramatically in­creas­ing its prod­uct sup­plies. Be­larus dis­missed the re-ex­port claims as un­jus­ti­fied. Apart from that, statis­tics does not sup­port Rus­sia’s state­ments al­leg­ing a sig­nif­i­cant in­crease in Be­larus’ food ex­ports to Rus­sia. In­deed, be­fore the em­bargo Be­larus sup­plied about 260,000 tonnes of dairy prod­ucts to Rus­sia ev­ery month. Af­ter the em­bargo had been im­posed the fig­ure rose to 310,000315,000 tonnes. In other words, the in­crease was in­signif­i­cant.

“We do not com­pete with Rus­sian man­u­fac­tur­ers. We re­place the prod­ucts from the coun­tries that came un­der the food em­bargo,” the head of the for­eign trade di­rec­torate at the Agri­cul­ture and Food Min­istry Alexei Bog­danov said.

An­other com­plaint of Rus­sia is non-con­form­ity with the food stan­dards and re­quire­ments of Rus­sia and the Cus­toms Union.

“Th­ese are not ‘ food wars’. Th­ese are tem­po­rary re­stric­tions caused by tougher re­quire­ments for prod­uct qual­ity. All dairy im­porters,in­clud­ingth­e­world-fa­mous­brands, are kept un­der con­stant con­trol. Re­stric­tions may also be im­posed on the grounds of dis­crep­an­cies in ac­com­pa­ny­ing doc­u­ments, and it is a hu­man fac­tor. As a rule, Be­larus and Rus­sia man­aged to set­tle their dis­putes pretty fast, and this in­di­cates that Be­laru­sian pro­duc­ers take all the nec­es­sary mea­sures to meet the re­quire­ments of the Cus­toms Union. By the way, the lat­est re­stric­tions im­posed by Rus­sia on the de­liv­ery of Be­laru­sian dairy prod­ucts have been lifted,” the Agri­cul­ture and Food Min­istry in­formed.

Be­larus ap­plies a mul­ti­lay­ered sys­tem of qual­ity as­sur­ance and food safety con­trol. Raw ma­te­ri­als come un­der con­trol first. Then it is turn for in-house pro­duc­tion con­trol at en­ter­prises. Af­ter­wards the qual­ity is checked by the State Com­mit­tee for Stan­dard­iza­tion. The Be­laru­sian ve­teri­nary ser­vice and the san­i­tary ser­vice of the Health­care Min­istry ex­e­cute se­lec­tive con­trol and su­per­vi­sion when is­su­ing their fi­nal find­ings. On 30 De­cem­ber 2014 Be­larus tough­ened the al­ready strict re­quire­ments for ac­cept­able lev­els of residues in an­i­mal prod­ucts and ve­teri­nary drugs. This de­ci­sion is en­vis­aged in Res­o­lu­tion No. 56 of the Agri­cul­ture and Food Min­istry. The re­quire­ments for some items are even more strin­gent than those in the EU, for ex­am­ple, for the con­tent of some an­tibi­otics. The doc­u­ment has also ex­panded the para­graph re­gard­ing the harm­ful sub­stances meat and dairy prod­ucts should be ex­am­ined for. The amend­ments have been made tak­ing into ac­count the in­te­gra­tion in the Eurasian Eco­nomic Union.

The agri­cul­tural agen­cies of Be­larus and Rus­sia agreed on the vol­umes of sup­ply of milk and dairy prod­ucts in 2015. It is ex­pected that Be­larus will ex­pand its dairy ex­ports by 15% com­pared to the pre­vi­ous year. By the way, last year Be­larus still man­aged to in­crease the sup­plies by 8.8% de­spite the tem­po­rary re­stric­tions (3,374 tonnes of milk, which was above the planned 3,100 tonnes). Given that the pro­duc­tion vol­umes in Rus­sia have de­creased and the out­put in Be­larus in­creased, it is very im­por­tant to take this mar­ket niche in Rus­sia.

“Sooner or later the sanc­tions will be lifted and Euro­pean goods will be back on the Rus­sian mar­ket. Our task is to win as many cus­tomers as pos­si­ble across as many mar­ket seg­ments as we can. In other words, our goal is to re­tain our ex­port at the cur­rent level once the sanc­tions are lifted,” Alexei Bog­danov said.

Ac­cord­ing to Ma­rina Petrova, the direc­tor for cor­po­rate com­mu­ni­ca­tions at the Rus­sian com­pany PiR Pro­dukt, buy­ers in Rus­sia are re­vis­ing their con­sumer bas­kets. “When you in­crease prices, you should im­prove the qual­ity,” she ad­vised. Be­laru­sian man­u­fac­tur­ers should also work harder on brand­ing and the recog­ni­tion of their prod­ucts.

All Around The World

Rus­sia re­mains, of course, an at­trac­tive mar­ket for Be­laru­sian ex­porters thanks to the long­stand­ing ties. De­liv­er­ies to other coun­tries are not big be­cause the Rus­sian mar­ket is highly lu­cra­tive for Be­larus. How­ever, the global ex­pe­ri­ence and laws of eco­nomics show that one mar­ket should not ac­count for more than 30% of the to­tal ex­port. This car­ries huge risks. There­fore, ex­port di­ver­si­fi­ca­tion is an im­por­tant ob­jec­tive for Be­laru­sian pro­duc­ers.

“Cer­tain types of do­mes­tic dairy prod­ucts can be popular on the mar­kets of other coun­tries. The de­ci­sion of the Euro­pean Com­mis­sion to al­low Be­laru­sian ex­ports has en­abled our busi­nesses to start ex­plor­ing this re­gion. For ex­am­ple, Savushkin Prod­uct Dairy has en­tered into a long-term con­tract with the Lithua­nian re­tail chain Max­ima to sup­ply yo­gurt and other drink­ing dairy prod­ucts, the Agri­cul­ture and Food Min­istry said.

Pri­or­ity ar­eas of di­ver­si­fi­ca­tion for Be­larus are the CIS states thanks to the ex­ist­ing free trade zone agree­ment in the re­gion. Then come the coun­tries of Asia and Africa that, un­like the EU, do not ap­ply mar­ket pro­tec­tion tar­iffs. In Europe im­port cus­toms du­ties on many types of prod­ucts are al­most as big as the cost of the prod­uct. How­ever, spe­cial­ists do not ex­pect a sharp in­crease in sales to new re­gions, as lo­cal con­sumers are not familiar with Be­laru­sian prod­ucts.

“Di­ver­si­fi­ca­tion will be smooth with grad­ual ad­vance­ment to third mar­kets. This re­quires a num­ber of pro­ce­dures. They in­clude the eval­u­a­tion of the state ve­teri­nary con­trol sys­tem, com­pany cer­ti­fi­ca­tion, lab­o­ra­tory tests of prod­uct sam­ples, trial con­sign­ment, mar­ket­ing and ad­ver­tis­ing,” rep­re­sen­ta­tives of the Agri­cul­ture and Food Min­istry said.

Spe­cial­ists be­lieve that the work on ad­vanc­ing to new mar­kets,

es­pe­cially out­side the CIS, needs a cen­tral­ized sys­tem and one op­er­a­tor for prod­uct sales. Meat Dairy Com­pany has pre­lim­i­nary agree­ments and an op­por­tu­nity to sup­ply milk pow­der prod­ucts, but­ter and cheese to Africa, the Mid­dle East, Southeast Asia, and China. The anal­y­sis of th­ese mar­kets shows that their ca­pac­ity is high. Thus, Al­ge­ria, An­gola, Bangladesh, Nicaragua, Oman, and Saudi Ara­bia pur­chase con­sid­er­able vol­umes of skimmed milk pow­der and full cream pow­der, but­ter, whey pow­der and cheese. How­ever, a well-de­vel­oped pro­ducer sup­port mech­a­nism is needed for a large-scale di­ver­si­fi­ca­tion amid col­laps­ing global prices. The Agri­cul­ture and Food Min­istry is work­ing on the is­sue.

Trend­ing Up

Pro­duc­tion ex­pan­sion is seen as the only way to in­crease sup­plies both to Rus­sia and other coun­tries. The ge­netic pro­duc­tiv­ity po­ten­tial of Be­laru­sian cows ex­ceeds 10,000kg of milk per year. The po­ten­tial can be ful­filled once the rel­e­vant an­i­mal wel­fare re­quire­ments are met.

Three hun­dred new farms have been built as part of the Be­laru­sian dairy in­dus­try devel­op­ment pro­gram in 2010-2015. As many as 1,063 com­plexes have been up­graded. In 2014 sixty-two new farms were com­mis­sioned, 189 com­plexes were ren­o­vated. The re­cent ef­forts will al­low build­ing up dairy cat­tle num­bers, se­cur­ing con­di­tions for their pro­duc­tiv­ity gain and im­prov­ing work­ing con­di­tions of the staff. Apart from ef­forts to im­prove milk pro­duc­tion and an­i­mal wel­fare, the coun­try is work­ing hard to re­place the out­dated milk­ing equip­ment, up­grade milk­ing par­lors, cow houses, premises for dry cows, re­pair ac­cess roads and cat­tle grids. High tech­nol­ogy pro­duc­tion based on loose hous­ing is a pri­or­ity in dairy cat­tle breed­ing. There are over 1,600 such farms in the coun­try.

Yet, while the mod­ern­iza­tion im­proved cow treat­ment con­di­tions in Be­larus, the full feed­ing is­sue re­mains un­set­tled in some re­gions.

“We are still try­ing to ad­dress the is­sue with the in­suf­fi­cient amount of ar­eas un­der legume grasses and their har­vest time. As a re­sult we have weak fod­der power. Pro­tein and sugar short­age leads to up to 30% in fod­der ex­cess con­sump­tion per head. The ab­sence of avail­able funds and a huge debt bur­den pre­vent the ma­jor­ity of agri­cul­tural or­ga­ni­za­tions from pur­chas­ing nec­es­sary vol­umes of pro­tein raw ma­te­rial and mo­lasses,” the min­istry noted.

The coun­try is cur­rently work­ing on pro­vid­ing the milk­ing herd with pro­tein meal, bal­anced vi­ta­min and min­eral ad­di­tives and for­mula feed which com­prises lo­cal pro­tein sources. It will help im­prove the main pa­ram­e­ters for cat­tle re­pro­duc­tion and breed more high­pro­duc­ing cows.

By 2020 Be­larus is ex­pected to com­plete the com­pre­hen­sive up­grade of all the dairy farms and de­velop the fod­der base meet­ing

their needs. Do­mes­tic sales are set to reach 3.7 mil­lion tonnes of milk and dairy prod­ucts per year, with the ex­port po­ten­tial ex­pected to amount 5.3 mil­lion tonnes.

Sales Pol­icy

Although milk pro­duc­tion stan­dards in Be­larus meet the global stan­dards, such is­sues as co­op­er­a­tion with re­tail net­works and a smart ad­ver­tis­ing strat­egy re­quire more at­ten­tion. At present the Be­laru­sian Uni­ver­sal Com­mod­ity Ex­change (BUCE) is the pri­mary chan­nel for the ex­port of such goods as skimmed milk pow­der, but­ter, and cheese for the ma­jor­ity of Be­laru­sian man­u­fac­tur­ers. One can still use other mech­a­nisms but only for the prod­ucts that did not sell via the com­mod­ity ex­change and only un­der the terms of­fered on the com­mod­ity ex­change. The Agri­cul­ture and Food Min­istry is con­vinced that it is es­sen­tial to cancel manda­tory pri­mary sales at the BUCE. It will fa­cil­i­tate ex­port and will help es­tab­lish di­rect con­tacts with re­tail net­works.

“We be­lieve that it makes sense to let man­u­fac­tur­ers choose sales meth­ods on their own. Com­mod­ity ex­change trade might be one of the op­tions. We have drafted a legal act and sub­mit­ted it to the Coun­cil of Min­is­ters. The doc­u­ment has not been sup­ported at this stage. How­ever, the is­sue is still im­por­tant as the de­mand is fall­ing due to a num­ber of rea­sons and the com­pe­ti­tion is grow­ing. Nowa­days man­u­fac­tur­ers have to be more ag­gres­sive in pro­mot­ing their prod­ucts but the ex­ist­ing rules do not al­low this,” the Agri­cul­ture and Food Min­istry said.

Min­dau­gas Viz­gaitis, head of the com­pany Chr. HansenBaltics, agreed that Be­laru­sian man­u­fac­tur­ers should fo­cus more on mar­ket­ing.

“If we com­pare your prod­ucts with Euro­pean ones, we will see that there is no big dif­fer­ence. It is not the qual­ity of sour cream or cheese that dif­fers, but the de­sign of pack­ag­ing and mar­ket­ing tech­niques. You should have a long-term prod­uct ad­vance­ment plan. It is im­por­tant to un­der­stand where to move and to plan this move­ment,” the Euro­pean ex­pert said.

Man­u­fac­tur­ers should also mon­i­tor cur­rent trends in the in­dus­try and re­spond swiftly to changes. Spe­cial­ists point out ma­jor pe­cu­liar­i­ties of the global dairy mar­ket. For ex­am­ple, the as­sort­ment of sliced cheese for sal­ads and other dishes is grow­ing. On the whole, the sales of pack­aged cheese are on the rise, while the over-the-counter sales are fall­ing. Apart from that, re­tail­ers are now pre­oc­cu­pied with ef­fi­cient al­lo­ca­tion of shelf space. This is why Be­laru­sian cheese man­u­fac­tur­ers should ramp up the pro­duc­tion of sliced and pack­aged cheese as round-shaped cheeses which they got used to pro­duce do not con­trib­ute to the shelf space prof­itabil­ity. The pro­duc­tion of cheese for industrial use (for sausages, piz­zas) is a very promis­ing line of busi­ness to­day. Ac­cord­ing to ex­perts, this seg­ment will shape the fu­ture of the in­dus­try and de­ter­mine its out­put.

Snacks are get­ting more popular with mod­ern con­sumers. This opens up vast op­por­tu­ni­ties for man­u­fac­tur­ers of dairy prod­ucts to pro­mote drink­ing yo­ghurts as an easy, nour­ish­ing and healthy food which fits per­fectly well with healthy life­style and di­etary needs of con­sumers. Due to the grow­ing pop­u­lar­ity of snacks, stan­dard halfliter packages are now re­placed by smaller packages, and the sales of such a prod­uct rise by 20-30%.

The pop­u­lar­ity of healthy food­stuffs is a pro­pi­tious ground for in­no­va­tions in the dairy in­dus­try. For ex­am­ple, the use of pro­bi­otics which im­prove the hu­man gut mi­cro­biome is one of the main ar­eas of fo­cus. Dairy pro­duc­ers draw huge at­ten­tion to th­ese in­gre­di­ents to­day. Cer­tain man­u­fac­tur­ers sug­gest ramp­ing up the out­put of new kinds of cheese with in­creased cal­cium con­tent in ad­di­tion to tra­di­tional cheeses which are an im­por­tant source of this min­eral. Con­ven­tional cheeses from or­ganic milk are in­creas­ingly popular in Europe. How­ever, th­ese prod­ucts do not sell well in the postSoviet space as they are ex­pen­sive.

A land of milk and honey ex­ists only in fairy tales. In re­al­ity, the dairy in­dus­try is pro­pelled by very hard work. Of course, the suc­cess of the dairy in­dus­try re­lies on many as­pects. Hav­ing a good po­ten­tial, Be­larus is well po­si­tioned for ad­vanc­ing the in­dus­try to a brand­new level. The main in­gre­di­ent is sys­tem­atic and ef­fi­cient work.

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