MILK CRISIS Challenges for a supplier to dairy

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

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

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

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.

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

VVS numbers • • Private company – 2 owners Turnover of EUR 10, 8 M in 2008 3 doughter companies Production of >8 000 T of premixes per year 34 employees in Czech Republic More than 200 relevant customers Located in East Bohemia, 25 km from PL and 150 km from SK • Overdraft from 2 banks

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

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

FEED Decline… ? ? Crisis… MILK

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

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

FOCUS ON DAIRY MARKET DAIRY WORLD 2008 -2009

Key dairy news of 2008 UK : production decreasing again Holland: Friesland lowers price with 1. 1 ct Belfast: auction milk price < 30 ct/l France : farmers are blocking Entremont Farmers who left dairy are not welcome again China: already 3 babies died of baby milk US: export booming also because of weak USD Brazil : strong investment in milk NZ : very aggressive on world market

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

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

World Dairy Market 2008 • NZ facts – Milk production : 14. 702. 000 MT • 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

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…

FOCUS ON DAIRY MARKET CZECH DAIRY SECTOR 2009

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

Farm gate milk prices of selected dairy plants in CZ Dairy company November, CZK/l December, CZK/l Average 2008, CZK/l April 2009, CZK/l Madeta 7, 11 6, 64 8, 44 6, 29 Pragolaktos 7, 13 6, 61 8, 50 6, 19 Muller 7, 39 6, 44 8, 61 5, 89 Sedlčany 7, 27 7, 01 8, 58 6, 27 Poděbrady 7, 01 6, 05 7, 50 5, 86 Hlinsko 6, 84 6, 48 8, 36 5, 79 Danone 7, 38 7, 01 8, 61 6, 19 Source: CZ Dairies‘ Union Data Czech average in 2008 €c 33, 6/l Czech average in April 2009 €c 22, 7/l Average production cost 2008 > €c 32/l Exch. Rate: EUR=CZK 27

Key issues • Farm-gate milk prices well bellow production cost > €c 7/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

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

Farm-gate milk prices

Heifers prices

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!!

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

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

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 EU co-financing Barters – grain, heifers… Seminars, farm supporting actions – petitions – fun actions

Forage seminar serial 2009 ‚FORAGE MANAGEMENT‘

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

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

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!

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

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

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 EU 27 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

COMMON GOAL: farm-gate milk price above the production cost FAIR GROSS MARGIN

THANK YOU FOR YOUR ATTENTION!