VADYM CHAGAROVSKY, Chair Board of Directors, Dairy Union of Ukraine: ideas, people and money in dairy industry

I would like to start with some figures that eloquently testify on the way Ukrainian milk processing has passed since 1990.

If in 1990, 24 million tons of milk were produced, of which 18.5 million tons were recycled, in 2017 the total milk production in Ukraine amounted to 10.3 million tons. The plants processed only 4 million tons, of which 2, 7 million were received fr om agricultural enterprises and 1.3 million from households.

The production of basic dairy products is as follows:

Butter: 1990 – 440 thousand tons, 2017 – about 100 thousand tons
Fresh milk products: 1990 – 6 million tons, 2017 – 1 million tons

Production growth occurred only in the category of cheeses. In 1990, 120,000 tons of cheese were produced, and in 2017 this figure was 160,000 tons. But, according to my estimates, only 60,000 tons is really cheese, and 100,000 tons is a cheese product.

The number of milk processing plants decreased from 447 in 1990 to just over 200 in 2017.

Separately, I would note the positive, perhaps the only one over the years that gave enterprises an impetus for development: the appearance in Ukraine of large foreign companies that brought competition to the market. With their approach to doing business, they raised the bar and forced the rest of the dairies strive to meet the high standards that the giants of the world’s dairy business, Danone, Lactalis, Savencia and others, showed. Although before them there had also been dairies in Ukraine trying to maintain high level of production, but just international companies made clear that it was necessary to offer new products to the market. And this meant innovation – in technology and marketing. There also became clear that there was the need to monitor market trends and actions of competitors.

In early 2000s it seemed to me that the situation in the industry was changing, the dairies were being technically reequipped and the whole industry started to develop. But, unfortunately, this did not happen. Not all Ukrainian enterprises managed to cope with the new tasks, some simply did not realize that the situation had changed. Less and less dairies remained operating. In 2017 a little more than 200 enterprises reported on their economic activities. But now, apart from international dairy companies, among the leaders there are Ukrainian companies that can boast high level of technology and hight quality products, the ones that care about technical modernization, technological innovations and modern marketing.

It is also important to remember that on the wave of privatization of the 1990s, the dairy processing enterprises moved into private hands and the fate of both the dairies and the industry as a whole began to depend on the goals pursued by the owners and the way they achieved them.

Along with the new business environment, dairy market got some “dirty” technologies, for example, falsification of products with labeling that did not correspond to the real composition of the product, or replacement of the milk components with other, cheaper substitutes, etc. This happened because some owners considered fraud as a way of doing business, but not effective business management, innovation or marketing. So, the “development” went exactly in this direction. If earlier the main method of falsification was replacement of milk fat by non-dairy fats, now there appeared others. For example, the replacement of milk protein. There are our domestic “inventors”, who manage to produce a ton of cottage cheese from 3 tons of milk. Such products are made using Russian technologies based on use of special dietary fiber. And these technologies came first to the East border area, first of all to Kharkiv. Such technologies are used, for example, by Bogodukhivsky and Zmievsky dairies.

Do such products have the right to exist? They do. But they should be given other names not to mislead the consumer. If the products get labeled as “imitating product” and “natural product”, buyers will decide themselves what to buy. After all, it is well known that in Ukraine we now have the lowest salaries in Europe and some buyers, unfortunately, are forced to buy imitation products. In addition, the buyer’s choice can also depend on his knowledge of the difference between such products. As consumer’s awareness increases, consumer behavior will also be changing. Let us take spreads as example. Now the demand for spreads has plummeted and the buyer prefers to buy natural oil, despite its high price. Spreads can now be sold, mainly in places where people do not really understand the difference between spread and butter. I think the time will come when the attitude to other categories of products will change. This will happen when the purchasing power of our people grows.

I am an optimist by nature, but still I have to say that the situation with falsifications is sad. Over the years owners of dairy enterprises have not been doing anything to ensure that dairy industry could work in a normal legal field. There is lack of trust between the owners. There is no understanding that apart from competition, there are general industry interests to defend together. To make the market civilized, we need general, recognized by everyone rules of the game. And this is what we have to do together. The disunity and lack of trust does not allow the industry to move towards creating a civilized market and eliminate the shadow market of dairy products.

Our dairy industry continues to operate under difficult conditions. Apart from the economic difficulties common to the whole country, the issue of quality raw milk remains acute. The capacities of many existing plants are not capable to process milk to produce competitive high-quality products, because they have not changed and still remain “USSR-type”.

What’s stopping us?

Let us turn to the question of what prevents the industry from active development to narrow the gap in the level of technology, say, with Poland which in my opinion is the best example for us.

The dairy industry in Poland has been completely modernized. Undoubtedly, Poland got assistance from the EU, and it made possible for Polish dairies to get 50% of the funds for re-equipment from the European Union.

But there are other examples. Bulgaria is also a member of the EU, and also had the opportunity to receive European funds, but it cannot even be compared with Poland in terms of development of dairy industry. In Bulgaria there are still no large dairies, no large dairy cooperatives. Why did the industry move forward in Poland, but not in Bulgaria? It was because the Poles did not have to think about raw milk issues. The processing plants, together with their milk suppliers, created cooperatives, and the problem of milk quality has become a problem for those involved in milk production, not dairy enterprises. And it brought good results. In Poland, 90% of dairy processing plants are parts of dairy cooperatives.

In Ukraine, there are no dairy cooperatives. For dairies the main problem is still raw milk, both quantity and quality. Why? Who can change the situation?

In my opinion, it is just dairy processing plant that must be interested in establishing the dairy cooperative. But mentality of the majority of owners of our dairies shows that they are not ready to share property, even if this gives an additional stimulus to development. Owners want to be their own masters. Therefore, the idea of ​​cooperatives has not received proper development.

The main obstacle to the development of the industry

I am sure that one of the determining factors of the development of the industry is the moral qualities of the owners of enterprises. They determine the vector of the enterprise development.

Now it’s been a long time since privatization of dairies occurred, and now we can clearly see how much the fate of the company depends on what its owner is primarily concerned with. Is he interested in the prospects of business development? Does he understand how the enterprise should be developing? Are the people who work at his dairy important to him? The mistakes of the owners, their unsound view of the management of complex dairy production, have already brought some Ukrainian companies to the crisis. Everyone knows examples of large Ukrainian cheese companies.

At the same time, there are companies that are developing in difficult Ukrainian conditions. They are interested in new technologies, find opportunities for modernization and follow market demands and the right strategy – Loostdorf, KOMO, Molokiya and others can be examples. Their success only confirms my opinion about the influence of the owner’s position and his attitude to the company’s development prospects.

A successful business can only be built where there are moral principles. For some time any company can develop at the expense of some other factors, but ultimately such a business will never become successful. And the direction of development, corporate culture of the company is always set by the owner. In this respect, it was easy for me at JSC Galacton, with advanced owners who set clear tasks. They did not hide that they had bought the business to develop and then sell it. And in order to successfully sell, you need to build a business correctly and transparently.

Speaking about what hinders the development of the dairy industry, I would like to mention the recent initiative of the state, which for some reason is presented as an incentive for the development of the industry. I am referring to the initiative to defer payment of VAT on imported equipment for 1 year. I would say this approach can cause only perplexity. This “donated”, unjustified 1 year term does not solve the problem, because any modernization, which costs several million dollars, cannot be paid off in such a short time. Therefore, I think that there will be no one willing to modernize its dairy facilities on such terms.

Another topic of the same sort is the forthcoming decision to oblige dairies to build local sewage treatment facilities at each enterprise (in March the Ministry of Regional Development is going to issue the Order). Ordinary local treatment facilities cost more than $ 1 million, sometimes several million. And enterprises will have to construct these facilities despite the crisis and lack of money. There is no financing for the industry in crisis conditions, so, enterprises will have to withdraw money from working capital. This is not an option, because a shortage of working capital can lead to simply the company’s disappearance from the market.

I have given suggestions on VAT on imported equipment. Namely – I proposed that it was necessary to cancel VAT, or it should be postponed not for a year, but for a period of depreciation. If the depreciation period is 10 years, the company will be able to pay the VAT amount during this time.

In whose hands is the initiative?

What is going on now? Once again, there resumed the talks about the need to create cooperatives in Ukraine – real dairy cooperatives, where milk producers and processing companies must become shareholders.

From what I can observe, I conclude that the initiative to create such cooperatives now comes from milk producers. Increasing production of high-quality milk, large modern farms with highly profitable production want to have the guaranteed and stable sales, market prices and share in profits from milk processing.

Dairy processors, of course, are also interested in providing their capacities with high-quality milk. But not everyone is ready to change the usual business approach and the owners are not ready to share property and profit. In addition, creation of a cooperative with a processing plant and milk producers as shareholders requires considerable efforts to overcome legislative obstacles. There are many of them. One is the imperfection of legislation related to cooperatives. Not everyone is ready to persevere in finding solutions to problems.

 Idea, people, money

I have often said that in order to implement a project, you need three things: an idea, people and money. The idea of ​​creating real dairy cooperatives in Ukraine did not appear yesterday, it has been discussed for a long time. If previously processors were concerned with low quality and insufficient quantity of raw milk, now, with the growing number of modern dairy farms which increase production of quality milk, it is the milk producers who are active in creating a cooperative together with “their own” processor.

I also think that for success of any project, it is very important that professional people are ready to participate. How to determine who is a good technologist? The criterion for evaluating a specialist is the stability of quality of the products manufactured by the dairy where he works. In my opinion KOMO and Zvenigorod Cheese-Making Plant (Savencia) can be examples. And in the category of fresh milk products there are multinational companies and Ukrainian company Loostdorf.

Probably, it is also necessary to mention the disastrous situation in training of specialists for our dairy industry. For many years universities had no opportunity to provide students with knowledge on advanced dairy technologies and give them the opportunity to take modern courses at universities in Europe, which stepped far ahead in this area. Lecturers themselves do not have the opportunity to visit modern factories and constantly keep abreast of innovations, give students knowledge and skills that they really need when they come to real production sites.

The situation of the discrepancy between the preparation of future specialists and the requirements of the industry has been going on for a very long time. For the last 20 years, universities have not upgraded the material and technical base. In addition, the students are now taught the same technologies that I was taught in due time. But dairy science and technologies went far ahead! So now, when I think about how many high-quality dairy technologists we have, I can name a maximum of 5 specialists. In addition, the qualification of the so-called middle level – the foremen, technologists, masters who ensure stability and reliability of production – is very important. High qualification of these people makes the work of top-managers easier. Nevertheless, speaking about the industry in general, I believe that the problem of qualification can be solved.

Now let me mention the third component for the implementation of projects – money. I have no doubt about the possibility of financing new projects in the dairy sector, especially dairy cooperatives. This is a promising business, and I think that for such a project there is no problem to find financing.

I believe that the situation that we are seeing now in the industry will inevitably lead to forced changes. Any crisis entails qualitative changes. The flawed and immoral corporate culture that has already led many companies to financial problems will have gone. There will appear new players in the market. Small dairies producing good quality products have already appeared. As a positive example, I can mention the company “Gormolzavod No. 1” in Odesa. Owners did not have large funds, so this company processes only 25-30 tons of milk per day. But this is a modern dairy plant, which is successfully developing.

I think that on the one hand, small enterprises will continue to appear, on the other hand, there will be an increase in processing capacity at existing large and medium-sized factories, which are now underutilized.

And, of course, in Ukraine there will definitely be established real powerful dairy cooperatives, which will combine both modern farms for milk production and modern processing enterprises. It will occur when people for whom the word “reputation” is not an empty sound unite their efforts.

Latest news: