11 EQ7: Structure of dairy industry

Transcription

1 11 EQ7: Structure of dairy industry To what extent have the CAP measures applicable to the dairy sector influenced structural changes in the processing sector? 11.1 Interpretation and comprehension of the key terms of EQ7 The question in EQ7 relates to structural change in the processing sector and how this has been changed due to the 2003 CAP reform for milk and milk products evaluated in this project. A first step to answer the question is to check whether there have been structural changes and a second step is to check if they are related to the CAP reform. Structural change is related to production capacities but also to the number of firms, entry and exit, merging activities. In the long run the structure of an industry depends on a) the intensity of competition, b) the nature of the goods, c) the size of the market and d) the characteristics of the technology (Sutton, 1991). The CAP measures that potentially affect supply and demand of milk products (analysed in EQ6) and affected price stability (EQ5) in the milk processing sector can indirectly cause structural changes in the dairy sector. This question aims in pointing out these indirect effects Methodology used for answering EQ Methodology Structural changes in the processing sector are identified by looking at the evolution of the sector and describing changes in the number of firms, their share in processing milk and in their concentration ratio. The concentration ratio is used to show if the biggest dairy processing firms control the market. It has been calculated for the biggest dairy processors and shows their market share (in %). It is given as follows: CR m = S i (1) m Where: CR: concentration ratio Si: market share if firm i m: number of firms The concentration ration can range between 0 and 100% indicating perfect competition and monopoly respectively. Changes of the concentration ratio as well suggest restructuring of the dairy processing sector. A survey developed for dairy processing firms gave more insights into how the CAP measures affected and changed the structure of the interviewed firms. In total 42 processors in 10 Member States were interviewed. It should be noted that these processors are the ones who accepted to answer the questionnaire. The number of processors who have been approached was higher. 234

2 On a second step, changes in the structure are combined with the conclusions of the previous EQs and in particular of EQ6 in order to synthesise and to link structural changes with the effects of the CAP reform on the supply and demand of milk products Limitations and difficulties faced Serious difficulties were faced in gathering the information for the survey to processors, and in several cases also in the gathering of systematic information about factual changes. The questionnaire consisted of 34 questions, which covered all the topics in the evaluation questions in Theme 1 (raw milk) and Theme 2 (milk products). The questionnaire was not only extensive, but also asked the respondents for detailed information about issues that are generally considered to be sensitive and confidential. For example, information was asked about the payment system they were using and the way in which this system was applied to determine the milk price. The processors were asked to answer about how important they perceive competition with other dairies in the formation of the milk price they pay to farmers. Moreover, information was asked on the response to market signals and policy incentives in the dairy product markets, as well as on the strategic choices behind product mix orientation and adjustments. Pilot pre-testing interviews were done in the Netherlands and Germany in order to improve the questionnaire, while additional stakeholders were consulted. The questionnaires were filled in during a face to face interview with a high ranked employee of the dairy company. This was a necessary condition because of the detailed information the questionnaire was asking. Interviews were done as much as possible by senior interviewers, with an extended experience in the dairy sector. The Commission provided a letter of recommendation which was sent to the dairies together with the request for the interview informing them about the background of the research and the confidentiality of information-use. The response rate was very low and as the dairies explained the questions were asking for sensitive information. It appeared that it was not in the interest of the dairies to share this information with third parties. In addition to this, the dairies also knew that a number of colleagues would be asked the same questions. Most likely this added to the fear that sensitive information via this process might come into the hands of competitors, although it was promised that confidentiality and anonymity would be respected. Moreover, some dairies indicated that their position was so specific that it would be impossible to guarantee anonymity because insiders in the sector would be able to trace back their identity from the information on the firm s structural characteristics, which was also part of the questionnaire. After a disappointing response in the first round in most of the Member States where case studies were done, a second attempt was made where it was tried to more intensively utilise network relationships to convince more (and other) dairies to participate. This helped to get a minimum of 2 or 3 participating dairies per case study region. It should be noted that when dairies accepted to participate, they could still decide (and they indeed did) not to answer certain questions. Moreover, the sensitivity could make them behave in a strategic way, which introduces potential biases in the responses obtained. A protocol was made with respect to the gathering of factual information, aiming at generating systematic and standardised information about the structure of the dairy industry in a case study Member State. The efforts made in this respect include a detailed assessment of available national statistics, contacts with national branch organisations, checks of annual reports of key dairies, and interactions with dairy experts. Although this generated a lot of information, it turned out to be difficult to create a systematic data base over Member States from this data (except for a number of rather general indicators such the number of dairies and aggregated production and trade data). The problems faced impose limits on the analysis and imply that where results are presented they should be treated with care. For this reason no clear and absolute conclusions can be made based on the information from the questionnaires (small, non-representative samples, potential of strategic behaviour). 235

3 11.3 Judgement criteria, indicators and information sources used for each indicator Table 11.1 summarises the indicators and information sources used to address EQ7. Table 11.1 Indicators, data requirements and information sources for EQ7 Indicator Data requirement Information sources Overview of the EU dairy processing sector - Identification of structural change - Evolution of the EU dairy processing sector per Member State - Market share of EU dairy firms worldwide - Concentration ratio of the biggest dairy firms per Member State Number and size of dairy enterprises per Member State Processed milk by dairy enterprises per Member State Concentration ratio EUROSTAT, Structural Business statistics, Productschap Zuivel (Netherlands) IDF - Answers of interviewed processing companies Linkage of structural changes with CAP reform Answers from survey questions Processors survey It should be noted that the CAP reform and in particular the decrease of the intervention price for butter and SMP can have a positive effect in increasing competition among the dairy companies. This is because of the associated decrease of the gap between the EU producer prices and the world market prices. A more intense competition is suggested by a decrease in the number of firms and by an increase of the concentration ratio Results and analysis Evolution of the EU dairy processing sector In 2009 there were 5,416 dairy processing enterprises 78 in the EU, which processed 111 million tonnes of milk (Table 11.2). The majority of them are located in the EU-15 and in particularly in Italy (25% of the registered enterprises), Greece and Spain, but their production capacity is limited as they process only 13.6% of the total milk collected in the EU. France and the United Kingdom, two of EU s biggest producers of raw milk, follow in the fourth and fifth places in terms of numbers of enterprises, while Germany, which had the highest milk supply to dairies in 2009, follows in the sixth place with 194 registered enterprises. In the Netherlands in enterprises processed 9.6% of the EU s raw milk supply to dairies. In the EU-10 were located 9.8% of the EU s enterprises and processed 12% of the EU s raw milk supply. Among the EU-10, in 2009 the Polish and Czech enterprises processed 7.4% and 1.8% of the EU s raw milk supply to dairies respectively. The number of enterprises was high in Romania (337) and in Bulgaria (170) but their processing capacity was up to 1.3% of the EU s total milk supply to dairies. The total number of enterprises in the EU declined between 2003 and 2009 with the decline being higher in Italy, the UK and France. The reasons for the decline are not the same for all Member States. In some Member States also the average milk processed per enterprise decreased suggesting that fewer enterprises remained in business (case of Austria and France). In Italy the average milk processed per enterprise increased pointing out to a consolidation process towards less but bigger enterprises. In other Member States, like Spain, Portugal, Greece, Hungary, Latvia and Slovakia, the number of enterprises increased, but on average the enterprises processed less milk. One reason for this 78 In this section the term enterprise follows the definition of Council Regulation (EEC) No 696/93 and refers to milk processing firms that are identified as legal units. The reader should note that an enterprise may have one or more factories processing milk. 236

4 development can be seen in the specialisation of production (for example in Spain, in Portugal and in Greece; see also Table 11.2) but also in transformation processes (especially in EU-12 Member States). In the Netherlands and in Sweden, where the processing sector is highly consolidated, the number of enterprises increased between 2003 and 2009 but there the decrease of the average quantity of processed milk per firm was the highest. In these Member States new enterprises were established additional to the ten existing enterprises between 2003 and These developments collide favourably with the findings of the own survey among dairy processors. The survey results suggest that there is a dynamic process of consolidation in the processing sector. In some EU Member States, such as the Netherlands or Germany, dairy companies have adopted a strategy to create large scale international dairy operations so as to be able to compete with foreign companies outside the EU. Due to the capped milk production because of the milk quota, other companies followed a second strategy. They looked to gain economies of scale through the construction of larger plants to replace less efficient smaller and older ones. Finally in Italy, more restrictive health standards and food safety controls also forced some firms to quit. Table 11.2 Number of dairy enterprises and quantity of milk processed by dairy enterprises per Member State in 2003 and 2009 Number of enterprises Processed milk 1 (1,000 t) Change Change Average processed milk per enterprise (1,000 t) Change EU-15 Austria ,644 1, Belgium ,830 2, Denmark ,518 4, Finland , France ,910 6,858-4, Germany ,431 28,615 1, Greece ,362 1, Ireland 63 5, Italy 1,707 1, ,175 8, Luxembourg Netherlands ,373 11, ,8-183,1 Portugal Spain ,605 5,150-1, Sweden ,206 3, United Kingdom , EU-10 Cyprus Czech Republic ,601 1, Estonia Hungary , , Lithuania Latvia Malta Poland 190 8, Slovenia Slovakia EU-02 Bulgaria Romania Notes: 1) Milk processed refers to raw milk delivered to dairies Source: Eurostat (2011), Productschap Zuivel (2010). Table 11.3 shows the distribution of enterprises based on how much cheese they produced in 2003 and in The number of enterprises in the EU declined over this period from 4,378 up to 4,113, although cheese production increased. In Italy the number of enterprises decreased and based on the own survey this was because of changes in the processing of PDO and PGI cheeses (fewer companies processed more high added value cheese). Spain and Greece recorded the highest increase in the number of enterprises. 237

5 Table 11.3 Distribution of enterprises by volume of annual production of cheese, 2003 and 2009, number of enterprises in 1000 < 100t 101t - 1,000t 1,001t - 4,000t 4,001t - > Sum 2003 < 100t 101t - 1,000t 1,001t - 4,000t 4,001t - > Sum EU-15 Austria Belgium Denmark Finland France Germany Greece Ireland Italy 847 1, , ,839 Luxembourg Netherlands Portugal Spain Sweden UK EU-10 Cyprus Czech Rep Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia EU-02 Bulgaria Romania Note: This table is based on a survey from Eurostat on the dairy processing sector in Member States. Gaps in the data may arise from incompleteness in response or non-response. Moreover, in order to ensure anonymity of the respondents no numbers are reported when the number of responding firms in a certain size class is less than a threshold. Source: Eurostat. Table 11.4 shows the distribution of the enterprises based on how much butter they produced in 2003 and in Here noticeable are changes in the evolution of the enterprises per size classes moving from enterprises producing 100 tonnes or less to enterprises with a production capacity more than 1,000 tonnes. 238

6 Table 11.4 Distribution of enterprises by volume of annual production of butter, 2003 and 2009, number of enterprises < 100t 101t - 1,000t 1,001t - 5,000t 5,001t - > Sum 2003 < 100t 101t - 1,000t 1,001t - 5,000t 5,001t - > Sum EU-15 Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden UK EU-10 Cyprus Czech Rep Estonia Hungary Lithuania Latvia Malta Poland Slovenia 7 Slovakia EU-02 Bulgaria Romania Note: This table is based on a survey from Eurostat on the dairy processing sector in Member States. Gaps in the data may arise from incompleteness in response or non-response. Moreover, in order to ensure anonymity of the respondents no numbers are reported when the number of responding firms in a certain size class is less than a threshold. Source: Eurostat. The enterprises are organised in two general forms: in private dairy companies and in cooperatives. The main differences refer to the contractual arrangements. A dairy cooperative business is owned, operated, and controlled by the dairy farmers who benefit from its services. Members finance the cooperative and share in profits it earns in proportion to the volume of milk they market through the cooperative. In cooperatives the relations between producer and processors are based on the cooperative membership principle. Farmers are members of the cooperative. Specific is the obligation of the dairy to buy all milk delivered from the farmer. Member-farmers are obliged to deliver exclusively to the cooperative. Milk prices are determined by governing bodies of the cooperative. The prices are ex-post indicative prices and the same for all members. In private dairies the contractual relations are designed in such a way, that farmers deliver a fixed quantity of raw milk. These contracts often have an annual character and have to be renegotiated each year. Since private dairy businesses strive to maximize their own profits, they have an interest to pay a relatively low price for the raw milk. In 2009 about 58 % of raw milk produced in EU was delivered to cooperatives. About 20 % of the delivered milk was based on individual contracts to private dairies (DG AGRI, 2009). The own survey among dairy processors revealed differences between Member States. While in Latvia or Spain the share of processed milk in the total milk processed by cooperatives was 6.1% and 21% respectively, it was 239

7 almost 100% in Ireland. Cooperatives have also a high presence in the Dutch dairy industry. In terms of the amount of milk processed, their market share covers 80%. Because of their specific nature, cooperatives are a vehicle to strengthen or increase the market power of farmers vis a vis players in other stages of the supply chain (e.g. competing processors, retailers). Some of the biggest dairy companies in the EU like FrieslandCampina, Nordmilch or Arla are organised as cooperatives Market share of the EU s dairy firms in world markets The biggest European milk processors were in 2009 among the top 20 biggest milk processors worldwide and covered 7% of the world production (Table 11.5). They are located in the Netherlands, in Sweden and in Denmark. Friesland Campina from the Netherlands along with Arla from Sweden/Denmark covered 1.6% and 1.2%, respectively, of the world s processed milk. The French companies Lactalis and Danone are operating plants internationally and processed a share of 1.3% and 1.0%, respectively, of the world s milk. Other European companies like Nordmilch (Germany), Bongrain (France), Parmalat (based in Italy with plants internationally) and Glanbia (Ireland) are also included in the ranking. The ranking of the European companies in this overview shows the dominant role of cooperatives in Europe. Cooperatives like FrieslandCampina, Arla Foods and Nordmilch play an important role on the global markets. The companies listed in Table 11.5 process in total 21% of the world s milk intake. Table 11.5 The world s biggest dairy firms by milk intake in 2009 Company Legal Form Country Main location of processing plants Milk intake (million milk equivalent) Market share (% of world production) Fonterra cooperative New Zealand International Dairy Farmers of America cooperative USA USA Nestlé public Switzerland International Dean Foods - USA public USA USA FrieslandCampina cooperative Netherlands Netherlands Lactalis private France International Arla Foods cooperative Sweden Denmark/Sweden California Dairies Inc. cooperative USA USA Danone public France International Kraft public USA International Land O Lakes cooperative USA USA Saputo private Canada Canada/ USA Nordmilch cooperative Germany Germany Schreiber Foods private USA USA Bongrain private France France Parmalat public Italy International Murray Goulburm cooperative Australia Australia Northwest Dairy Assoc. cooperative USA USA Mengniu Group public China China Glanbia public Ireland Ireland/USA Sum Source: IFCN, The biggest milk processing company worldwide in terms of milk intake was in 2009 Fonterra from New Zealand, with plants located internationally and a market share of 2.7%. The ranking of Fonterra with regard to turnover was in the same year behind the European Companies Danone, Lactalis and 240

8 FrieslandCampina. This is probably due to its specialisation in producing milk powder. The European Companies are, in a relative sense, more and more focused in the production of higher valued cheese Concentration ratio The concentration ratio has been calculated depending on data availability only for the Member States where case studies have been conducted (Table 11.6). The concentration ratio increased in the selected Member States apart from Germany suggesting a restructuring process towards larger milk processing companies. The biggest increase was realised in Italy, with a change in the CR of the four biggest companies of 74% over the period (to remind the reader, Italy is the country with the highest number of milk processing enterprises). However the Italian concentration ratio is still low compared with other Member States. Table 11.6 Member State Change of concentration between 2003 and 2009 in selected Member States measure of concentration % change between 2003 and 2009 Spain CR Austria CR Italy CR Latvia CR Germany CR Netherlands 1 CR5 80 Hungary 1 CR4 55 Notes: 1) based on European Commission (2011); 2) the concentration ratio is given for the three biggest companies in Spain, the four biggest companies in Austria, Italy, Latvia and Hungary, for the five biggest companies in the Netherlands and for the six biggest companies in Germany Source: own calculations. In the Netherlands the concentration ratio was particularly high with a CR5 of 80 in Also Hungary shows a relatively high rate of concentration with a CR4 of 55 in 2008, although the number of enterprises increased between 2003 and 2009 (see Table 11.2). This can be considered as evidence that next to the four biggest enterprises, operate a great number of small and specialised enterprises Impact of dairy policy measures on structural change in the processing sector This section uses the information from the own survey among 42 processors in 10 Member States. The interviewees were asked if there was a direct impact on the structural development of the dairy processing sector because of CAP measures for milk and milk products of consumption aids for butter, SMP and cream, export subsidies, national aids as well as rural development aids. They generally confirmed that the CAP instruments had a limited impact on the structural development of their dairies. They suggested that they rather responded to market signals and that they generally try to respond to market competition and the demand of wholesalers. In many cases the degree of competitiveness was indicated to be high, especially for those not operating in a niche market. This was particularly stressed by the Italian processors, who expanded their processing units in order to respond to increasing demand for high added value cheese. Investment strategies, innovation in dairy products, quality of industrial processes and the business impact of competitors are the driving factors of any restructuring of the dairies. Having larger plants allows them to reduce production costs per unit and to increase the labour productivity. They stated that the changes in the CAP measures were not of such a big magnitude so as to result into restructuring of the processing sector. 241

9 In detail, regarding the reduction of the intervention price for butter and SMP since 2004 only in France the processors agreed that this was the most important factor affecting negatively the prices but still they did not consider that this affected price stability and recognised that price instability was mainly imported. They concluded hence that the reduction of the prices because of the CAP policies did not provoke any restructuring of the processing sector. It should be noted that several of the interviewed processors did not export outside the EU and because of this they had no direct experience with export refunds. Several other processors did not make any use of private storage. Hence the downwards adjustment of subsidised exports and private storage did not affect their production and marketing strategies. While the gradual expansion of the quota did not lead to any structural changes, according to the interviewed processors it is seen as positive because it keeps milk production in a certain region (in particular when no free quota exchange is allowed, e.g. in LFAs such as Franché Comté). For the same reason LFA payments, payments within Rural Development Programmes and national aids on milk production were considered as positive by some processors and argued to be contributing to the preservation of their resource base Conclusions The limitations mentioned in Section (notably limited response of the dairy processing industry to the own survey among dairy processors, incomplete answers, potential bias in answers due to incentives not to reveal sensitive information to third parties, non-representative and limited sample), do not allow to draw any clear and absolute conclusions as to what extent the CAP measures applicable to the dairy sector have influenced structural changes in the processing sector. Some tendencies however were observed. The first part of the analysis of this EQ (see Section ) suggests that, in general, the number of dairy enterprises declined during 2003 and 2009, while the remaining enterprises were larger and processed more milk. However, the picture is heterogeneous among the Member States. In Italy, in France and the UK a number of larger enterprises emerged and this can be because of increased competition. In already highly consolidated Member States, such as the Netherlands, the number of enterprises increased and simultaneously the milk intake per enterprise decreased. The findings confirm an increase in competition in several Member States, but it is difficult to draw any conclusion whether this is caused by the 2003 CAP Reform for milk and milk products, or whether it is the result of a more progressive structural change. The interviewed processors did not confirm any direct effect of the 2003 CAP reform on the structural development of their companies. However, it should be noted that this result is based on a small, non-representative sample and hence cannot be considered as an absolute statement. Moreover, structural change is a long-term process, implying that it might not have been easy to link changes taking place in the industry in the observation period to changes in policies or other factors. This might particularly hold for the EU-10 and EU-02, which when entering the EU started to experience a general transition process, which still might not have stopped. 242

10 Summary of findings for each indicator, EQ7 Indicator Expected result Evidence found Overview of the EU dairy processing sector - Identification of structural change Evolution of the EU dairy processing sector per Member State Market share of the EU dairy firms worldwide Concentration ratio of the biggest dairy firms per Member State Decline in the number of processing firms due to continuing consolidation process Concentration can lead to a few large processing firms coexisting alongside relatively large number of small specialist dairy product processors Concentration is expected to increase as a response to more intense competition The number of dairy enterprises declined in 11 Member States (for 8 Member States the information is incomplete). If so, the size of the remaining enterprises were larger and processed more milk. European dairy firms are listed among the biggest dairy firms worldwide and are located in France, the Netherlands, Denmark/Sweden, Germany and Italy. They still coexist with relatively smaller processors, but merging of companies lead to fewer firms which process more milk (e.g. in Italy, France and the UK) For 4 Member States(Spain, Austria, Italy, Latvia) calculated multi-annual concentration ratios increased, suggest a restructuring process towards larger milk processing companies. Linkage of structural changes with CAP reform Answers of interviewed processing companies Signals that competition has increased and that specific policy measures have had an effect on structural change in specific cases (for example butter processing firms being negatively affected by the abolition of domestic consumption aid on butter) The interviewed processors did not confirm any direct effect of the 2003 CAP reform on the structural development of their companies. Incidentally specific measures were mentioned but given the small sample size conclusion can be drawn. 243