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To what extent have the CAP measures applicable to the dairy sector influenced structural changes in the processing sector?
CRm = S i
m
(1)
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.
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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.
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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
Indicator
- 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 Concentration ratio
Information sources
EUROSTAT, Structural Business statistics, Productschap Zuivel (Netherlands) IDF
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.
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
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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.
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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 2009. 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 2003 2009 Change 20032009
-7 -19 1 -7 -54 -7 166 -268 7 -10 46 4 -166
Processed milk1 (1,000 t) 2003 EU-15 2,644 2,830 4,518 2,398 10,910 27,431 1,362 5,310 9,175 176 10,373 666 6,605 3,206 14,195 EU-10
2,601 485 1,719 954 436 40 499 973 EU-02
2009
Change 20032009
-984 115 198 -4,052 1,184 23 -548 1340 -1,455 766
Average processed milk per enterprise (1,000 t) Change 2003 2009 20032009
30.7 41.0 173.8 104.3 23.3 136.5 2.1 84.3 5.4 58.7 740.9 3.5 11.6 320.6 22.8 21.0 58.9 174.7 16.6 147.5 1.7 6.0 557,8 8.4 283.7 -9.7 17.9 0.9 -6.7 11.0 -0.4 0.6 -183,1 -3.2 -36.9
Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom Cyprus Czech Republic Estonia Hungary Lithuania Latvia Malta Poland Slovenia Slovakia
1,660 2,945 4,716 6,858 28,615 1,385 8,627 11,713 5,150 3,972
55 23 53 20 43 1 95 32
-17 -5 22 -9 22
49
17
-380
-18.3
Bulgaria 170 Romania 337 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 2009. 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.
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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 - 4,001t 4,000t 10,000t 2003 8 8 10 6 65 17 21 172 1 8 32 5 24 6 > 10,000t Sum 2003 < 100t 101t 1,000t 1,001t - 4,001t 4,000t 10,000t 2009 8 4 7 67 16 29 195 8 5 3 34 14 4 41 > 10,000t Sum 2009
EU-15
Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden UK Cyprus Czech Rep. Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia Bulgaria Romania 27 48 17 16 125 27 319 847 0 0 150 266 4 45 43 86 57 30 23 581 150 562 2,066 2 8 213 462 12 112 EU-10 45 22 44 36 20 1 258 13 31 EU-02 26 0 6 10 106 44 340 733 32 0 7 7 277 31 229 860 4 52 154 1 19 12 9 5 11 13 4 0 80 10 75 188 91 129
3 40 48 3 10 6
39 14 3 33 0 5 5
7 34 4 14 2 14 3 9 7 3 0 55 9 18 12
4 6 2 5 1 6 4 1 3 0 27
7 2 8 0 0 0 3 0 12 0 0 0
15 15 24 14 29 0 37 8
117 13
28 7 15 7 5 1 70 5 15
25
6 20 0 3 0 13
330
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 2009. 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.
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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 - 5,001t 5,000t 10,000t 2003 7 8 5 2 20 17 0 14 1 3 0 > 10,000t Sum 2003 < 100t 101t 1,000t 1,001t - 5,001t 5,000t 10,000t 2009 5 3 1 2 17 12 0 14 > 10,000t Sum 2009
EU-15
Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden UK Cyprus Czech Rep. Estonia Hungary Lithuania Latvia Malta Poland Slovenia Slovakia 54 35 9 11 162 30 73 865 1 0 8 22 0 56 8 70 48 15 14 222 109 76 976 2 3 17 40 3 68 EU-10 29 11 20 23 14 3 0 205 7 25 EU-02 47 19 10 3 130 35 85 499 4 6 4 14 16 3 64 34 16 8 173 85 88 582 2 0 0 1 30 4 53 1 17 14 15 9 0 140 17
0 0 6 0
1 11 16 0
23 38 3 91 0 0 5 10
4 9 0 5 0 0 0
8 19 1 44 1
3 0
3 2
16 8 16 9 68 7 104 13
12 3 4 5 27 5
7 7 8 0 50 3
0 5 4 8 5 3 0 68 11
0 9 3 2 5 0 15 3
0 0 0 0 0 0 5 0
0 0 0 0 0 0 0 2 0
48 3 0 0 0 51 Bulgaria 44 8 3 0 0 55 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
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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.
Denmark. Friesland Campina from the Netherlands along with Arla from Sweden/Denmark covered 1.6% and 1.2%, respectively, of the worlds 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 worlds 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 worlds milk intake. Table 11.5 Company The worlds biggest dairy firms by milk intake in 2009 Legal Form Country Main location of processing plants International USA International USA Netherlands International Denmark/Sweden USA International International USA Canada/ USA Germany USA France International Australia USA China Ireland/USA Milk intake (million milk equivalent) 18.6 16.2 12 11.8 11.3 8.9 8.3 7.7 7.3 6.7 5.5 4.3 4.2 3.7 3.6 3.5 3.2 3.1 2.9 2.8 145.6 Market share (% of world production) 2.7 2.3 1.7 1.7 1.6 1.3 1.2 1.1 1 1 0.8 0.6 0.6 0.5 0.5 0.5 0.5 0.4 0.4 0.4 20.8
Fonterra Dairy Farmers America Nestl Dean Foods - USA FrieslandCampina Lactalis Arla Foods California Dairies Inc. Danone Kraft Land OLakes Saputo Nordmilch Schreiber Foods Bongrain Parmalat Murray Goulburm
cooperative of cooperative public public cooperative private cooperative cooperative public public cooperative private cooperative private private public cooperative cooperative public public
New Zealand USA Switzerland USA Netherlands France Sweden USA France USA USA Canada Germany USA France Italy Australia USA China Ireland
Northwest Dairy Assoc. Mengniu Group Glanbia Sum Source: IFCN, 2009.
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
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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.
Change of concentration between 2003 and 2009 in selected Member States measure of concentration2 CR3 CR4 CR4 CR4 CR6 CR5 CR4 2003 27.5 40 7.7 57.3 31.5 80 55 2008 2009 30.4 42.6 13.4 66.6 26.6 % change between 2003 and 2009 10.5 6.5 74 16.2 -15.6
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 2008. 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.
11.6 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
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 Franch Comt). 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.
11.7 Conclusions
The limitations mentioned in Section 11.2.2 (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 11.4.1) 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.
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Summary of findings for each indicator, EQ7 Indicator Evolution of the EU dairy processing sector per Member State Expected result Decline in the number of processing firms due to continuing consolidation process Evidence found 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.
Concentration can lead to a few large processing firms coexisting alongside relatively large number of small specialist dairy product processors
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.
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