Experts: despite existing problems, the dairy industry has a high development potential

March 22, 2016

Riga, 22nd of March, LETA. Despite the complicated situation in dairy sector, the industry has a potential to produce at least three times more milk than it is produced at the moment, to build an efficient processing factory and to allow generate profits within every part of the production chain, although new high quality brands and products are needed in order to reach this goal, as well as collaboration between producers and processing entities.

It was acknowledged today by the participants in the discussion devoted to dairy industry development.

As indicated by Ģirts Rungainis, a banker from investment firm “Prudentia”, at the moment Latvian dairy sector cannot reproduce itself, because the subsidies exceed revenues. Although the long run situation will change due to existing demand effect, and dairy farmers will be required to learn how to sell high value added products with an appropriate brand, which demonstrates specific values.

“It is the end of “lifestyle farming” in Latvia, and the beginning of “industrialized farming” in dairy sector. It is not enough anymore to sell a bare milk or adding good bacteria to it. Something additional is necessary – new brands and products with high added value, which can be distributed worldwide and sold profitably,” said Rungainis.

He also added, that at the moment in Lithuania three times more milk is produced than in Latvia, therefore Latvia has a potential to produce three times more milk than is produced now, and even ten times more in the future.

“Changes in the production chain take place at the moment worldwide, but it cannot function with underdeveloped processing. Therefore, if production quantity increases, processing sector has a potential to create a large capacity of processing. Instead of competing, milk producers, processing entities and sellers must collaborate,” indicated the banker.

Similarly, Pēteris Strautiņš, an expert in “DNB Banka”, said, that dairy farmers still have great opportunities in production process and profit generation, although production scale should be expanded only if milk is processed in the respective region.

“Latvia is very suitable for milk production based on its geography and topography, but a construction of processing factory would be necessary in order to ensure efficient processing, for example, in the region of Gulbene or Madona. The costs for such a factory would be approximately 35-40 million euros,” noted Strautiņš.

Furthermore, he stated that farmers should still anticipate problems regarding the price of the milk, because even slight percentage changes in demand result in more extensive fluctuations in milk prices. Milk producers must wait and endure this period in order to generate profits after this crisis.

 

Kārlis Krastiņš, chairman of the board in “Prudentia”, said, that last year there occurred many essential merger and acquisition deals in the dairy market in the Baltics. For example, an announcement was made on the insolvency of “Trikāta KS”, a cooperative and shareholder of “Latvijas piens”, a potential investor has been found for the purchase of their shares. Moreover, “Tere”, the largest processing company in Estonia, has problems with their creditors – they are unable to meet their payments to “Nordea” bank, and in Lithuania “East Capital” sold their shares in “Pieno žvaigždės”, at the same time suing Lithuanian company “Rokiškio sūris”.

Krastiņš forecasted, that consolidation process within food and drink industry will continue this year in the Baltics, while Lithuania will be still the biggest competitor to Latvia in the dairy industry, as well as Estonia.

“There are 24 000 cow farms and 48 processing firms in Latvia, in Estonia – 2000 farms and only 27 firms. In Lithuania the proportion is 65 000 and 47, respectively, with more efficient processing. Latvia is the weakest in terms of processing compared to other Baltic countries,” said Krastiņš.

He also summarized, that Baltic milk processing firms are forced to switch their export destinations (e.g. Asia, China and Japan) due to activities in Russia. Many processing firms will experience vital decrease in revenues, which will motivate them to consider a merger option.

 

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