mercy corps dairy 2001 - 2007

8/2/2019 Mercy Corps Dairy 2001 - 2007

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Photo: David SnyderPhoto: David Kahrmann

Photo: David Snyder Photo: David Kahrmann Photo: David Kahrmann

SUBMITTED:JULY 2007

USAIDGRANT 169-A-00-01-00125-00

Author:Hayden Aaronson, Agriculture & LED Program Manager

Editor:Craig Hempfling, CRDA Chief-of-Party

Assessment Coordinator:Bosiljka Vukovic, Design, Monitoring & Evaluation Coordinator


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Acknowledgements

This report would not have been possible without the valuable contributions from the followingindividuals and organizations:

All of the dairies supported by CRDA who participated in the assessment survey: Kocka dairy

in Varvarin; Stocar dairy in Brus; Lazar dairy in Blace; Doma dairy in Kursumlija; Kalca, Nidzaand Jastrebacka dairies in Prokuplje; Zornic dairy in Tutin; Beni Komerc and Tisovac dairiesin Sjenica; Integral and Zlatarka dairies in Nova Varos; Irma dairy in Prijepolje; Milkop dairy inRaska; and Ljin Dairy in Novi Pazar.

All of the other dairies, not supported previously by CRDA, who participated in theassessment survey: Nina, Eko Mlek, Pogled, and Sumice dairies in Krusevac.

All of the dairy farmers from the following producer groups who participated in the survey:Krusevac Simmental Cattle Breeders and Jastrebacka Dolina in Krusevac; BlagotinjskiPasnjaci, Bozur, Medenica and Stocar Drenovac in Trstenik; Temnic in Varvarin; GornjiKasevar, Javorac; Grgure, Toplicani, Unija Stocara Blace and Agrotim in Blace; Berda inBrus; Doma Kop, Eko Spance and Spancanin in Kursumlija; Farmer in Zitoradja; Bele Vode,

Sebecevo, Zelena Dolina and Kominje in Novi Pazar; Donja Pester, Pestersko Mlijeko,Crkvine, Leskova Gornja Pester, Jarut, Evropa-Pester and Pesterska Visoravan in Tutin;Stocara, Viline Vode, Evro Stocar and Vito in Prijepolje; Sjeverin in Priboj; Spice in NovaVaros; Trijebina, Breza, Sjenicka Ovca, Mlekari, Medjugor and Pesterski Farmer in Sjenica.

Jim Newkirk and John Howell from Opto Internationals Reka Mleka Project for the valuablecooperation in southern Serbia throughout CRDA-E and for providing excellent nationalstatistics on the Serbian dairy sector.

Mercy Corps Evaluation Team members who provided valuable feedback in the design of thesurveys and who diligently conducted, collected and compiled all survey data. In the KrusevacAOR, thanks to Danijela Nikolovski, Pedrag Micic, Bojan Trebjesanin, and Sanja Miladinovic;and in the Novi Pazar AOR to Nermin Hasanovic, Edin Kalac and Fikrija Nokic.

Special acknowledgement goes to Bosiljka Vukovic, Mercy Corps Design, Monitoring &Evaluation Coordinator, for her tireless work in coordinating the survey, translating, collectingdata, and designing and overseeing the coding system and data input.

Special acknowledgement also goes to Craig Hempfling, Mercy Corps CRDA Chief-of-Party,for his support and encouragement throughout the assessment and for his many hours spentproofing, editing and polishing numerous drafts of the report.


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Dairy Sector Value ChainSituation & CRDA Impact Assessment, Southern Serbia 2001-2007

1

Table of Contents

Summary .............................................................................................................................. 2

Introduction........................................................................................................................................

4

CRDA Background .......................................................................................................................4

Serbia Dairy Sector ......................................................................................................................5

Survey Methodology ........................................................................................................................7

Dairy Value Chain Situation Assessment ................................................................................... 8

Milk Production..............................................................................................................................8

Raw Milk Allocation ....................................................................................................................10

Raw Milk Collection ....................................................................................................................11

Dairy Processing.........................................................................................................................12

Distribution & Markets ................................................................................................................15

Enabling Environment & Cross-Cutting Issues ......................................................................16

Quality Control.............................................................................................................................16

Investment & Financing .............................................................................................................18

Information...................................................................................................................................

19

Legislation....................................................................................................................................19

Evaluation of CRDA Assistance..................................................................................................19

Producer-Level Assistance .......................................................................................................19

Producer-Level Impact...............................................................................................................20

Processor-Level Assistance......................................................................................................22

Processor-Level Impact .............................................................................................................23

Conclusions & Programming Recommendations ..................................................................24

Producers.....................................................................................................................................24

Processors...................................................................................................................................26

Annex 1: Serbia National Dairy Sector Presentation

Annex 2: Dairy Producer Group Survey

Annex 3: Agriculture Producer Group Baseline & Impact Survey

Annex 4: Dairy Processor Surveys


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Summary

Scope & Methodology: This report presents a situation assessment of the dairy sector in southern Serbia and

the impact of USAID assistance under the CRDA program. In February-March, 2007, Mercy Corps assessment

teams surveyed groups of client farmers from 100% of the dairy associations and cooperatives that received

support under CRDA-E from 2005-2007 (42 producer groups, 212 farmers); plus 19 of the 20 operational dairies

in the southern Serbia AOR covered by Mercy Corps, 15 of which were CRDA clients from 2001-2004. The goalsof this study are to i) provide a clear analysis of the southern Serbia dairy sector, ii) analyze critical gaps in value

chain and present programming recommendations, iii) assess the impact of CRDA, and iv) provide and field test

an assessment methodology that can be used for future program and sector assessments.

Milk Production: Roughly half of the 212 dairy producers surveyed achieved impressive gains in milk yield per

cow from 2004-2006 (26% increase) while the other half recorded only nominal or no gains. The most marked

increases were in the Raska and Toplica regions, both with increases over 30%. The current average yield, at

16.7 L/cow/day is now just 13% lower that the EU average of 19.3 L/cow/day. The two main factors identified by

farmers for the increases in yield were: i) improvements in cattle feed and nutrition, and ii) improvements in the

genetic stock of cattle. Impressive gains were also achieved across the AOR in herd size (57% increase),

primarily Simmental breeds, and cultivated farmland (27% increase) due to an increase in demand for raw milk

due to expanding capacity of dairy processors, partly stimulated by CRDA investments from 2001-2004.

Raw Milk Allocation: The majority of raw milk produced in southern Serbia is sold to regional dairy processors

(80% of the total). In regions with lower levels of development, however, household consumption remains high:

Zlatibor (19%) and Raska (8%). Much of the milk consumed by the household and/or sold in green markets is

sold in the form of home-processed dairy products. Dairy processors in the regions covered by this assessment

pay on average 19-20 RSD ($0.33) per liter (including a 3-4 RSD/liter MoA subsidy). Over the past three years

prices for raw milk have risen 22% in Raska and Zlatibor due mainly to the higher demand by processors.

Raw Milk Collection: Dairies collect milk on a daily basis from an average of 560 farmers per dairy, though

some serve as many as 2,000. Very few dairies have registered collection points and even fewer own

refrigerated collection trucks. A concerning 74% of dairies experience raw milk shortages during winter months,

with the most severe shortages in Raska and Zlatibor, the areas with the weakest economic infrastructure. The

most common concerns made by dairy processors are the poor quality of raw milk, a high number of very small

producers, lack of collection points, and poor roads and infrastructure.

Dairy Processing: Southern Serbia has undergone dramatic increases in dairy processing capacity: design

capacity has increased 174% and working capacity 208%. At the same time dairies are still processing

significantly below capacity, utilizing on average only 57% of their total design capacity. The three main problems

presented by the processors that result in capacity underutilization are: i) lack of working capital due to late and

delinquent payments, ii) lack of markets or access to markets, and iii) insufficient quality and/or quantity of raw

milk. The most common dairy products produced in southern Serbia are, in order, fresh milk, yogurt, yellow

cheese and white cheese. Some dairies produce small amounts of regional specialties such as peppers in

cream, kajmak, and Jardum (sheep milk cheese). While all products enjoyed significant growth since 2002,

growth rates have slowed dramatically as competition for regional markets has increased. As a result of this

growth, income from sales and profit have increased significantly since 2002 (sales - 507%, net profit - 549%).

Distribution & Markets: The largest market outlets for dairies in southern Serbia are individual small stores

(41%) and supermarkets (18%). Geographically, regional markets account for 59% of sales, with Belgrade

second at 23%. Export markets (mostly in the FYR) account for a nominal portion of overall sales. While small

dairies do not feel threatened by the increasing market share of large dairies, competition for shelf-space in

regional markets has increased significantly. The leading problems facing dairy processors with respect to sales

and distribution are i) collection of payments from sales outlets and retailers, ii) inadequate transport vehicles and

iii) poor roads. Surprisingly, most dairies find it difficult to work with supermarkets, citing bad payment and

contractual terms, payment delays, no quantity guarantees, and prohibitively expense shelf space pricing.

Quality Control: Raw milk quality is one of the most serious problems facing the industry. While the MoA has

established national milk quality standards, the lack of enforcement and an illogical subsidy program provide fewincentives for dairy farmers to invest in quality-enhancing technology; in fact, only 22% of farmers surveyed store

milk in lacto-freezers. Many dairy processors are beginning to fill this regulatory gap as they begin to undertake

measures required for HACCP compliance and focus increased attention on the quality of their raw milk supply.


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Of nineteen dairies surveyed eight have received both HACCP and ISO 9001 certifications, an additional three

are in the process of certification, and five more have plans for certification.

Investment & Financing: The use of credit among farmers in southern Serbia is low (only 22% of farmers

surveyed have ever applied for a loan). MoA credit is the most popular; however, it is much more difficult to

obtain than bank credit. Of farmers who applied for MoA credit, only 43% were approved; compared with an

approval rate of 95% from commercial banks. A higher percentage of dairies have applied for commercial loans(53%), all of which were approved. Despite this, dairies cite difficulties in obtaining outside capital, as well as

unfavorable terms.

Information: Farmers main sources of information about the dairy industry are: i) mainstream media channels

which provide news and sometimes educational programming about the dairy industry, ii) personal contacts, iii)

dairy processors, iv) milk collectors, and v) trainings and seminars organized by associations and the MoA.

Legislation: Most of the legislative constraints cited by farmers and processors were with respect to MoA

subsidies to dairy farmers. While dairies feel that subsidies provide a strong incentive to the producers, they feel

that the subsidies should be restructured based on milk quality, not fat content. MoA subsidies for HACCP

certification, whereby the MoA subsidized 80% of certification costs, were well received and utilized by dairies.

CRDA-E Producer Assistance: In addition to the increases in yield previously presented, CRDA-E production

technology investments were responsible for increasing the area of cultivated land for 25% of the clients, and

allowing 17% of them to increase their herd size by providing higher quantity feed. Additionally, 14% of Mercy

Corps clients stated that CRDA-E investments helped them improve the quality of their raw milk through training

and equipment grants. Dairy Demonstration Farmswere successful in attracting over 1,000 farmers in the past

year, while the Livestock Feed & Nutrition Programachieved nearly two liters per day increase in yield per cow

for the pilot group of 24 farmers. Farmers in all four regions achieved increases in income (41%) and profit (67%),

despite rising production costs.

CRDA Processor Assistance: Fifteenout of sixteen dairies (94%) supported by Mercy Corps through CRDA

from 2001-2004 currently remain operational three to five years later. Due to CRDA investments these dairies

increased their design capacity by 57 tons per day, accounting for 23% of the 2004 total processing capacity. At

the same time, the dairies increased their operating capacity by 27.2 tons per day (though increases in operating

capacity are subject to other variables and cannot therefore be attributed solely to CRDA). Nearly all dairies

responded that CRDA investments helped improve product quality and development of new products. Half of the

dairies responded that they had noticeable improvements in the quality and quantity of raw milk supplies due to

CRDA-E assistance to dairy farmers and associations.

Programming Recommendations: Numerous conclusions and programming recommendations are offered for

current and future donors and implementers working in the dairy sector. These recommendations are a

compilation of those drawn as conclusions to this assessment, those made by the producers and processors

themselves, and those made by outside trainers and consultants. Some of these include:

Focus on dairy farmers with high commercial potential, especially in the land rich but underperforming

Zlatibor region.

Work jointly with producer groups and dairies to establish proper, strategically positioned milk collection

points that keep milk secure in the cold chain.

Assist in developing clear financial comparative data on i) the economic benefits of Simmental versus

Holstein cattle, ii) the benefits of silage on milk production and farm profitability and iii) profitability of on-

farm cheese production.

Provide training and technical assistance for dairy processors and employees on new product

innovation, regional and export marketing, operations and human resource management, and

managerial accounting.

Facilitate credit for dairy processors and producer groups, especially for working capital, with

commercial lending institutions.

Develop regional and national level small dairy association(s) and support dairy producer associations.

Currency Exchange: Three currencies are used in this report to present results and figures for comparison:

Republic of Serbia Dinar (RSD), euro (), or the US dollar. At the time of this writing, 1 = $1.35 = 81 RSD.


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This assessment covers 17 of the 18 municipalitiesserviced by Mercy Corps under CRDA. (There wereno dairy sector interventions in Ivanjica, in theMoravica district). The municipalities reside in fouradministrative districts in southern Serbia. CRDAAORs were not, however, divided by administrativedistrict; so, for example, of the nine municipalities inZlatibor district, four are in Mercy Corps AOR, whilefive were covered by IRD.

Mercy Corps CRDA AOR& Administrative Regions

CRDA Budget & Economic Investments

This diagram shows the breakdown of the $40 million USAIDaward (not including Mercy Corps cost share and clientmatching contribution). The two offset areas represent USAIDinvestment in Economic (2001-2004) and Agriculture (2005-2007) programming. Economic programs from 2001-2004were targeted mainly at the processor level, while 2005-2007

programs targeted association level support.

Basis: $40 million USAID Investment

Administration

& ICR

01-07

$13,206,000

Community

Development

01-05

$13,409,000

MSME

Development

04-07

$1,491,000

Agriculture

05-07

$2,183,000

Economic

01-04

$3,877,000LED 05-07

$5,834,000

Introduction

Assessment Overview: This

report presents the results of an

intensive situation and impact

assessment of the Serbian dairy

value chain undertaken in March2007 to evaluate the dairy value

chain in 17 southern Serbia

municipalities covered by Mercy

Corps under the USAID-funded

CRDA program. The assessment

examines the critical links in the

value chain production, collection

& transport, processing, and sales

& marketing and presents a

situation assessment as well as the

impact, results and findings of

Mercy Corps interventions in thedairy sector from 2001-2007.

Assessment Goals: The goals of this assessment are to:

present a comprehensive, quantitative understanding of the dairy sector in southern Serbia;

identify value chain bottlenecks and the opportunities for investment and assistance that will facilitatesector growth in most cost-effective, highest impact manner;

evaluate CRDA interventions and strategies from 2001-2007 to determine the appropriateness andeffectiveness of investments;

provide and field test an assessment template and methodology that can be used for future programand sector assessments.

CRDA Background

CRDA Overview: The Community Revitalization through Democratic Action (CRDA) program, implemented

throughout Serbia from 2001-2007, was a $200 million USAID-funded program ($40 million per implementer in

five geographic regions) initially aimed at increasing citizen participation in and between communities to address

their priority needs for social and economic revitalization. In the original CRDA design, implemented from 2001-

2004, communities identified and prioritized projects in four pillars: i) civic participation, ii) civil infrastructure, iii)

environment, and iv) economic development.

Mercy Corps CRDA Economic Strategy: From 2001-

2004, Mercy Corps partner Deloitte-Touche-Thomatsu

(later Emerging Markets Group) implemented the

Economic Opportunities pillar of CRDA. The strategy

during those years focused on agriculture, and afterconducting a sub-sector assessment throughout the

AOR, the dairy and fruit sectors were selected as the

targeted sub-sectors. Furthermore, Mercy Corps

targeted investments primarily at the processor level,

under the presumption that investment at this level

would both make processors more competitive and

increase the demand for raw agricultural products (milk

and fruit). The impact, it was argued, then spread over

the entire value chain, resulting in a greater number of

beneficiaries, as demand for raw agricultural goods was

increased due to the expanded processing capacity.

Investments in processors typically ranged from$30,000-$50,000, with the majority of these in the dairy

and fruit sectors. From 2001-2004 $3.88 million of USAID funds were invested in the agriculture sector under the

economic component, compared with $13.41 million in community development initiatives.


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CRDA & CRDA-E Agriculture & EconomicBudget Breakdown

The two charts here show the breakdown of the economicand agriculture activities by sector for CRDA and CRDA-E.While the CRDA strategy targeted the fruit and dairy sectorsaccording to the 2001 sub-sector assessment, considerableinvestments were made in a variety of other sectors. UnderCRDA-E, investments were much more targeted at the twosub-sectors, with dairy sector investments accounting for49% of the total budget for agriculture development.

CRDA-E 2005-2007 Agriculture Investments

Dairy

$1,077,000

ISO/HACCP

$68,000

Other

$87,000

TradePromotion

$55,000

Fruit &

Vegetable

$896,000

CRDA 2001-2004 Economic Investments

Mushrooms

$565,000

Meat & Wool

$407,000

Fruit

$739,000Dairy

$944,000

Other

$692,000

Honey

$530,000

CRDA Transition to CRDA-E: In 2005, USAID changed

strategy and shifted programming priorities to focus almost

exclusively on economic development. As a result, CRDA

underwent a significant change, transitioning to activities

targeting job growth and creation through Local Economic

Development (LED), MSME development, and agriculture.

In the CRDA-E agriculture development strategy,investments continued to focus mainly on the fruit and dairy

sectors, but transitioned from the processor to the producer

level of the value chain, targeting agricultural associations

and cooperatives. Investments also increasingly focused on

training and development activities in addition to technology

and capital investment. Of $9.33 million invested in projects

under CRDA-E, $2.18 million was invested in agriculture

development, $275,000 of which was for training and other

developmental activities, such as dairy demonstration

farms, HACCP/ISO certification, trade fairs, and other

promotion activities.

M&E Overview: Due to the involved and complex nature of

CRDA and CRDA-E, the country team designed and

implemented a series of discrete program assessments.

The assessments include:

1. Community CRDA 2001-2004

2. Dairy & Fruit Sector Situation & Impact 2001-2007

3. Micro, Small & Medium Enterprise (MSME) 2003-2007

4. Local Economic Development (LED) 2005-2007CRDA Assessment Overview

CRDA Assessment

Community CRDA2001-2004

Activities:Community Development CouncilsCommunity Fairs

Assessment:1. Outputs & Achievements2. Community Mobilization Approach3. Group Impact & Sustainability4. Management & Organizational Issues5. Project Implementation & Impact

Dairy & Fruit Sector Assessments2001-2007

Activities:Dairy Processors & Producer AssociationsFruit Processors & Producer Associations

Assessment:1. Production Situation2. Sales & Marketing3. Collection & Distribution4. Quality Control5. Investment & Finance6. CRDA Impact

MSME Development2003-2007

Activities:Refugee & IDP Small GrantsIncome Generation GrantsEmployment Expansion Program

Assessment:1. Business & Job Sustainability2. Program & Process3. Training Programs & Services3. Application & Selection Process

CRDA Assessment Overview

CRDA Assessment

Local Economic Development (LED)2005-2007

Activities:LED 2005LED 2006LED Surplus Funding Programs

Assessment:1. LED Process2. LED Projects3. LED Institutionalization4. Municipal Capacity Index

Community CRDA2001-2004

Activities:Community Development CouncilsCommunity Fairs

Assessment:1. Outputs & Achievements2. Community Mobilization Approach3. Group Impact & Sustainability4. Management & Organizational Issues5. Project Implementation & Impact

Dairy & Fruit Sector Assessments2001-2007

Activities:Dairy Processors & Producer AssociationsFruit Processors & Producer Associations

Assessment:1. Production Situation2. Sales & Marketing3. Collection & Distribution4. Quality Control5. Investment & Finance6. CRDA Impact

MSME Development2003-2007

Activities:Refugee & IDP Small GrantsIncome Generation GrantsEmployment Expansion Program

Assessment:1. Business & Job Sustainability2. Program & Process3. Training Programs & Services3. Application & Selection Process

Local Economic Development (LED)2005-2007

Activities:LED 2005LED 2006LED Surplus Funding Programs

Assessment:1. LED Process2. LED Projects3. LED Institutionalization4. Municipal Capacity Index

Serbia Dairy Sector1

Milk Production: There are an

estimated 143,000 farms with 456,000

dairy cattle producing 1.6 million tons of

milk per year in Serbia. Of this, 84% is

produced in lowland areas and 16% in

the highland areas of southern and

southwestern Serbia. Not surprisingly

the majority of milk comes from the

more economically developed regions

of central Serbia (42%) followed by

northern Serbia (36%) and southern

Serbia (22%). There are approximately50 large farms with average herd sizes

Serbia National Dairy Production Statistics

RegionCows per

HouseholdAvg. Yield

(L/cow)

AnnualProduction

(ton/farm/year)

MilkProduction

%

Herd%

Households%

Vojvodina 4.5 12.06 16.72 36% 28% 21%

CentralSerbia

3.5 10.13 11.23 42% 40% 37%

SouthernSerbia

2.5 6.75 5.01 22% 32% 42%

National 3.5 9.65 10.99 100% 100% 100%

There are significant differences between milk production in the more economicallydeveloped regions of northern and central Serbia compared to southern Serbia. Despite

having the largest number of dairy households, southern Serbia has a much smallerpercentage of total production due to several factors such as unfavorable geographicalconditions, small landholdings, low household incomes and weak support institutions.

1Serbian national dairy sector information courtesy of Opto International Reka Mleka Project, Nis. See Annex 1.


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of 135 cattle, mostly located in Vojvodina and around Belgrade.

The average dairy farm in Serbia, however, is much smaller with an

average herd size of only 3.5 head. The average yield per cow is

9.65 L/day, compared with yields of 13.2 L/day in the large farms.

National Dairy Statistics, 2005-2006

2005 2006Raw Milk Production(tons)

1,500,000 1,600,000

Sold to Dairies814,000(54.3%)

732,000(45.8%)

Lowland 82% 84%Production Highland 18% 16%Lowland 3.8 RSD/L 3.0 RSD/L

SubsidyHighland 4.5 RSD/L 4.0 RSD/L

Raw Milk Allocation: In 2005, 54% of total milk output was sold to

dairies (814,000 tons from 70,000 producers), 26% consumed forhousehold use, and 20% home-processed into various products

and sold in village and town green markets. In 2006 sales to dairies

fell nearly 10% to 45%; only the region of Vojvodina increased the

quantity of milk sold to dairies.

Dairy Processing: The amount of raw milk processed in

Serbia in 2006 was 2,005 tons/day (732,000 tons/year)

from 72 dairies nationwide. Dairy processing in southern

Serbia represents a relatively minor portion of this national

total (160,679 tons/year, or 22%) despite being home to

38 (53%) of the operational dairies. The specific southern

Serbia municipalities covered by the Mercy Corps CRDAprogram account for 9% of the milk purchased by dairies,

yet are home to 20 (28%) of the operational dairies in the

country. These statistics support the likelihood of

consolidation of dairy processing with a potential end

result of several large dairies dominating the market.

Rasina

17,000 tonsToplica

13,000 tons

Raska/Zlatibor

34,000 tons

Southern Serbia161,000 tons

Vojvodina

261,000 tons

Central Serbia,

310,000 tons

National Dairy ProcessingMilk Sales to Dairies (tons/year)

Large Dairy Processors: Five dairies with daily processing capacity over 100 tons/day account for 47% of all

milk processed in Serbia; these large dairies operate in and around Belgrade and Vojvodina. Several of the

largest dairies belong to the Danube Food Group, a consortium of four

dairies owned by the Salford Group, a British private equity firm. The

largest dairy of the Danube Food Group is Imlek, which accounts for 30%

of all commercially processed milk in Serbia with a capacity of 700

tons/day and an annual turnover of 130 million euros. Over the last three

years Imlek has invested 30 million euros in processing capacity.

2

Regional Dairy Processing Statistics

Regions Producers CowsTons/Year

Sold to DairiesAvg. Tons/DaySold to Dairies

National Output%

AverageL/cow

Southern Serbia 27,047 64,157 160,679 440 22.0% 2,467

Rasina 3,518 8,011 17,197 47 2.3% 2,147

Toplica 2,543 5,314 12,927 35 1.8% 2,433

Raska/Zlatibor 4,841 14,937 33,537 92 4.6% 2,245

Vojvodina 13,219 58,292 260,788 714 35.6% 4,454

Central Serbia 24,111 82,569 310,435 851 42.4% 3,358

Total 64,377 205,018 731,902 2005 100% 80,931

Dairy Sizes in Serbia 2006

Dairy SizeCapacity

(tons/day)Operational

Dairies

Micro < 10 54

Small-Medium 10-50 13

Large > 100 5

Dairy Imports & Exports: The value of dairy imports from January

through September 2006 was 4.8 million euros while the value of exports was 5.3 million, representing a 13%

trade surplus for processed dairy products. This statistic is somewhat misleading however, as 53% of all dairy

exports (mostly fluid milk) are to Montenegro, which seceded from the Federation in May 2006, thus becoming an

official recipient of exports. The majority, 86%, of imports are from outside the former Yugoslavia. Five countries,

Poland, Germany, Croatia, Belgium and Italy (listed in highest import level) account for 75% of all imported dairy

products into Serbia. The most highly imported products include, in order, flavored yogurt (23% of imports), whey

products, fermented products, cheese and fluid milk.

Ministry of Agriculture & Subsidies: Agriculture in Serbia accounts for 25% of GDP and 26% of exports; the

dairy sector is one of the most important sub-sectors, and accounts for 33% of the Ministry of Agriculture (MoA)

total budget. Reflecting the importance of this sector is the subsidy program for raw milk. In 2006, MoA paid a

2Vibilia Press Clipping Service, March 26, 2007.


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subsidy of 4 dinars (RSD) per liter of milk for households in highlands selling milk to dairies, and 3 RSD/L in the

lowland areas, down from 2005 subsidies of 4.5 and 3.8 RSD respectively and representing an annual savings of

10 million euros for MoA. Despite this reduction, subsidies continue to account for a significant portion of MoAs

budget, 28 million euros in 2006 (down from 40 million in 2005) and 25% of MoAs total annual budget. As Serbia

moves politically and economically closer to the EU, milk subsidies will continue to decrease; it is also expected

that subsidies will shift from a basis of fat content to quality once the National Law on Laboratoriesis passed.

Survey Methodology

Production Survey Methodology: In February-March, 2007, three Mercy Corps assessment teams surveyed

groups of client farmers from 100% of the dairy associations and cooperatives that received support under CRDA

from 2005-2007. Each assessment team consisted of a facilitator and note taker. A total of 212 dairy farmers

from 42 producer groups in the four districts of Rasina, Toplica, Raska and Zlatibor regions were surveyed;

surveys typically included 5-6 member farmers, depending on the association or cooperative. For producer

groups with greater than 40 members Mercy Corps surveyed two separate sample groups. Participants were

randomly selected via computer while all presidents and directors of associations and cooperatives were

automatically included. This large sample population provides a statistical confidence level of 95%.

Milk Producer SurveyProducer Surveys: Survey participants were questioned on nine

topic areas about their operations and activities since 2004 (Annex

2). Survey topics included: i) organizational background; ii)

production and productivity related to herd and land; iii) sales,

marketing and relationships with buyers; iv) milk quality; v) feeding;

vi) husbandry; vii) milk collection; viii) investment & financing; and ix)

assistance under CRDA.

Sample Size & Mercy Corps Clients

RegionDairy Groups(Mercy Corps

Clients)

TotalMembers

MembersSurveyed

Rasina 8 148 45Toplica 10 118 50Raska 12 274 60Zlatibor 12 171 57

Total 42 711 212

Producer Group Baseline & Impact Surveys: Beginning in 2005

Mercy Corps conducted baseline assessments for all dairy producer groups supported during CRDA-E (Annex

3). While these surveys investigate production and productivity, they mainly focus on the organizational

development and services provided by associations to their members. Some results of the baseline and impact

surveys are presented in the Evaluation of CRDA Assistance section of this report; however, most of thisassessment focuses on economic impact data collected through the producer surveys prepared specifically for

this report.

Associations & Cooperatives: Roughly half of the producer groups surveyed are Mercy Corps emerging

associations, those formed between 2005 and 2006 (the CRDA-E period of producer group support), generally

through Mercy Corps Farmer Association Development (FAD) program. The remainders are expanding

associations, or those that pre-existed before Mercy Corps targeted assistance to producer groups. Only seven

of the client groups are registered as cooperatives. (The term association is used for the remainder of this

report to indicate both associations and cooperatives, except where cooperative is required to draw a

distinction.) Nearly all of the associations sell milk locally to small dairies in southern Serbia, most of whom were

also clients of CRDA from 2001-2004.

Processor Survey Methodology:While thereare 50 dairies registered in Mercy Corps AOR

only 20 of them are currently operational.

(These figures may exclude several very small

dairies with capacities less than 1 ton/day. Two

such examples are known, both in the Zlatibor

region.) Of those 20 dairies, 19 were surveyed

for this assessment (the remaining one, in

Zlatibor region, processes about 1 ton/day).

The dairies are located in the four

administrative districts of Rasina, Toplica,

Raska and Zlatibor regions. Fifteen of the

nineteen dairies were Mercy Corps clients ofCRDA. [More accurately, one was from Mercy Corps Southern Serbia Community Revitalization Program

(SSCRP) project in 2001.] In addition, the only operational dairies who were not Mercy Corps clients (four, all in

Dairy Processor SurveySample Size & Mercy Corps Clients

RegionRegistered

DairiesOperational

Dairies/SurveyedMercy CorpsClient Dairies

Rasina 15 6/6 2Toplica 5 5/5 5Raska/Zlatibor 30 9/8 8Mercy Corps AOR 50 20/19 16National Total 233 72

While there are fifty registered dairies in Mercy Corps southern SerbiaAOR, only 20 are operational or have a capacity greater than 1ton/day. All of these dairies in the 18 municipalities in Mercy CorpsAOR were surveyed in this assessment, except for one, Biomlek, inSjenica, representing a sample size of 95% of the population. Onlyone of all Mercy Corps client dairies supported from 2001-2004, Trosic

from Trstenik, ceased operating.


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8

Rasina district) were included in the assessment. Therefore, this assessment provides a very comprehensive

view of the dairy processing sector in southern Serbia.

Processor Surveys: Dairy processors were interviewed by two-person teams of Mercy Corps evaluators and

asked to respond to a series of questions in seven topic areas: i) organizational background; ii) production; iii)

sales, marketing & distribution; iv) raw milk collection; v) quality control; vi) investment, finance & financial

performance; and vii) assistance under CRDA (Annex 4).

AssociationProcessors: Of the dairy processors surveyed, seven were formed within the

past five years and the remainder within the past ten years. Most are

registered as Limited Liability Partnerships (DOO or OD) or as Independent

Workshops (SZR). Most of the owners had previous work experience in the

food industry, were attracted to the security of the food industry and the

demand for dairy products, and made the startup investment in response to

the collapse of the state-owned industry in the 1990s. Less than half of the

dairies surveyed (44%) are a member of any business or trade association.

MembershipMembers

Associationof Private Dairies

2

Dairy Industry Forum 1Chamber of CommerceBelgrade

1

Local LivestockAssociations

4

Total 8

Dairy Value Chain Situation AssessmentThis section of the report examines the dairy value chain in southern Serbia. Milk producers (dairy farmers) and

processors were surveyed regarding the key issues that they face in the value chain. This situation assessment

follows the dairy value chain from milk production to raw milk allocation, collection, dairy processing, and finally

distribution and markets.

Milk Production

Milk Yield: Milk yield for Mercy Corps CRDA-E clients

achieved impressive growth from 2004 through 2006.

Current yields have increased 26% overall since 2001, with

the most dramatic increases coming in the Raska and

Toplica regions, both with over 30% increases. Rasina and

Toplica remain the leaders overall in yield, though the gapbetween the regions has narrowed. Zlatibor showed the least

increase and still remains the lowest yielding region. Currentyields now average just 13% below the EU average, while in

2004 yields averaged 32% lower than the EU average.

Average Daily Milk YieldBy Mercy Corps Clients 2004 -2006

(L/cow/day)

District 20042005

(Increase)2006

(Increase)

Rasina 14.5815.69(7.6%)

17.31(10.3%)

Toplica 13.5015.38

(13.9%)17.89

(16.3%)

Raska 11.90 13.68(14.9%)

16.44(20.2%)

Zlatibor 12.8313.91(8.4%)

15.17(9.0%)

Total 13.2014.66

(11.1%)16.70

(13.9%)These data show the average yield per cow amongCRDA-E clients, along with the percent increase overthe previous year. The associations achieved markedincreases in yield during the two years of activities incooperation with CRDA-E. From 2004 through 2006,clients showed an overall increase in yield of 26.5%.For comparison purposes, average yield in the EU is19.3 L/cow/day (5,889 L/yr)3 and in Serbia is 13.2(4,026 L/yr).4

10.00

11.00

12.00

13.00

14.00

15.00

16.00

17.00

18.00

19.00

2004 2005 2006

Yield

(L/cow/day)

Rasina

Toplica

Raska

ZlatiborMercy Corps AOR

Results Deviation: While the average yield increased

significantly in all regions, the results were not uniform

among all farmers and associations. Over half of the farmers

surveyed recorded lower than average results, and a

significant number showed no increases in yield at all over

the three year period. Of the 212 farmers surveyed, two

groups emerged of roughly equal size: the first group (105

farmers) achieved an average increase in yield of 46%, while

the second group recorded an average increase of only 10%.

These results can be viewed in two ways. First, one can

argue that if farmers apply proper techniques, yield gains

upwards of 40% can be achieved through effective

programming (given a comparable starting point). On the

other hand, one might argue that only 50% of the farmers in

the program actually applied the techniques that resulted in

improvements on this scale. The recommendation might then

be to select clients more competitively, or to change the

strategy in such a way as to encourage a higher percentage

of the farmers to apply the techniques learned.

3European Commission, Eurostat and Director General for Agriculture

4Opto International, Reka Mleka Project. Data is only for farms selling to dairies.


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9

Factors for Success: Two main factors were identified

by the farmers and associations that achieved the high

increases in yield: i) improvements in cattle feed and

nutrition, and ii) improvements in the genetic stock of

cattle. This indicates positive signs that dairy associations

are making efforts to educate their members and that

many dairy farmers are open to new techniques and investments in dairy farming. It should be noted that at notime did Mercy Corps provide livestock of any kind to any farmer or farmer groups under CRDA or CRDA-E;

therefore, all investments for improving breeding stock were made by the farmers and associations themselves.

Key Reasons for Increased Milk YieldAmong Top 105 Producers

Improved Cattle Feed & Nutrition (72% of respondents) Improvement in Genetic Stock of Cattle (32%) Better Cattle Housing Facilities (8%) Increased Processor Demand for Milk (8%)

Herd Size: Herd size also increased significantly among

the dairy associations surveyed. From 2004 through 2006

the number of dairy cattle increased 57% from an average

of 3.60 cows per farm to 5.65 cows per farm. The largest

increases were observed in Toplica and Raska regions

with increases of 90% and 65% respectively. Zlatibor

associations, who showed the lowest increase, still

increased herd size by 37%.

Herd Size IncreasesBy Mercy Corps Clients 2004-2006

(cattle/farmer)

Region 20042005

(Increase)2006

(Increase)

OverallIncrease

2004-2006

Rasina 3.764.49

(19.5%)5.49

(22.3%)46.2%

Toplica 3.003.98

(32.7%)5.7

(43.2%)90.0%

Raska 3.423.93

(15.1%)

5.65

(43.6%)65.4%

Zlatibor 4.214.81

(14.2%)5.77

(20.1%)37.1%

Total 3.604.30

(19.7%5.65

(31.4%)57.2%

Results Deviation: As with the yield, herd size increases

were similarly spread among the same two groups of

farmers. The herd sizes of the top 99 farmers nearly

doubled (96% increase) while the size of the remaining 113

farmers increased only 17%.

Factors for Success: The primary reason for increasing

herd size among the top 99 farmers was increased

demand by local processors for raw milk. This reinforces

the strategy that Mercy Corps and partner Emerging

Markets Group employed in the early years of CRDA to

increase processing capacity. Though only a portion of the

increased capacity can be attributed to CRDA (presented later) it nevertheless was a factor for stimulating

farmers to expand their herd size and invest more in their dairy operations. Increased demand for raw milk also

led farmers to invest in improved breeds of cattle (see yield results), new technology, and facility upgrades.

Key Reasons for Increased Herd SizeAmong Top 99 Producers

Increased Demand for Raw Milk (34% of respondents) Better Quality Cattle Available for Purchase (19%) Better Facilities and Equipment (16%) Increases in Cattle Feed (12%)

Cattle Breeding: The dominant dairy cattle breed in

southern Serbia is the Simmental. Simmental cattle have a

long tradition in Serbia and are preferred to other breeds for

three main reasons: i) they are better suited as dual purpose

for both milk and beef, ii) they are very adaptable to

mountainous regions, and iii) they require less care and

maintenance than most other breeds. The trade-off,

however, is that Simmental cattle produce less milk than

Holsteins (20-25 liters/day), the dominant breed in the highermilk-producing region of Vojvodina. Holsteins account for

only 9% of the total cattle of farmers surveyed. Smaller

numbers of Busha, a small, local, low milk-producing variety, are bred in Raska and Zlatibor; a Busha-Simmental

mix, known as Pesterska Govece, is also somewhat popular in the region.

Dairy Cattle Varieties in Southern Serbia

Region Simmental Holstein Busha Other

Rasina 87% 11% --- 2%

Toplica 89% 9% --- 2%

Raska 74% 6% 3% 17%

Zlatibor 62% 8% 3% 27%

Total 76% 9% 2% 13%

By a significant margin, the Simmental variety is themost popular variety of dairy cow in southern Serbia. Ofthe 212 farmers surveyed, 80% are using artificialinsemination as part of their breeding practices.

Breeding Stock: While Simmental is still the breed of choice in southern Serbia, farmers are realizing the

importance of a cows genetic structure in determining milk production. Several of CRDA-Es more commercial

client farmers are improving their breeding stock by importing high quality heifers from Germany and Austria.

Furthermore, the majority of dairy farmers surveyed (80%) are using artificial insemination to impregnate their

cows, generally using the services of local veterinary stations.

Feeding & Nutrition: Only about a quarter of dairy farmers are using grass (27%) and/or corn (21%) silage tofeed their cattle. Almost all the corn silage is used in Rasina and Toplica. Farmers in the more mountainous

Raska and Zlatibor regions use mainly grass silage, as very few farms have the appropriate space or conditions

to grow corn. The main reasons cited for not using silage were the lack of mechanization (49% of respondents),


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10

high investment requirements (21%), lack of physical storage space (17%), and failure to see the need (14%).

Farms with few cows certainly do not see the economic benefits of such an investment. While silage consumption

is low, concentrate is used by a majority of dairy farmers (83%) in southern Serbia. Of these, 57% buy

concentrate from local manufacturers and distributors of international concentrate brands such as SANYO and

Pioneer. The remaining farmers buy and mix ingredients for concentrate themselves.

Cultivated Farm Land for Fodder ProductionBy Mercy Corps Clients 2004-2006

Raw Milk Allocation

Sales & Consumption Outlets

Most milk produced by association farmers in southern Serbia issold to dairies; Household consumption is generally reflected inregions with lower levels of development; Raska leads household

consumption at 19%. Much of the milk consumed by thehousehold or sold in markets and other outlets is home-processedinto other dairy products. The relatively high quantity sold throughother outlets in Zlatibor is likely attributed to production of SjenickiSir, a distinct type of cheese well regarded throughout Serbia.

0 %

2 0 %

4 0 %

6 0 %

8 0 %

1 0 0 %

Ra si na To pl ic a Ra sk a Z la ti bo r

O ther S a lesOut le t s

Green Mar k e t s

H o u s e h o l dConsum p t io n

D a i r yP r o c e s s o r s

Cultivated Fodder Land: As the herd size has increasedso has the requirement for cultivated farmland for fodder

production. In 2006 the average cultivated farmland for

Mercy Corps clients was 9.13 hectares per farm, a 28%

increase from the 2004 average of 7.15. The largest

landholdings for fodder production in the AOR are located

in the Raska and Zlatibor regions. Many of these fall on the

Pester Plateau, a large high-altitude plateau situated

between Sjenica and Tutin west of Novi Pazar that ranges

in altitude from 1,200 to 1,600 meters, an area very

suitable for fodder production and open grazing. In these

regions dairy farmers cultivate an average of 11 hectares

for fodder production. As it is estimated that one hectare offarmland is required to feed one dairy cow, there are

opportunities for farmers in these regions to double their

herd sizes. Farmers in Toplica and Rasina have less

farmland available to sustain further herd increases as

their landholdings are significantly smaller.

(hectares)

Region 20042005

(Increase)2006

(Increase)

OverallIncrease

2004-2006

Rasina 6.136.67

(8.7%)7.73

(16.0%)26.1%

Toplica 4.395.25

(19.6%)6.88

(31.0%56.7%

Raska 9.019.23

(2.4%)10.41

(12.8%)15.5%

Zlatibor 9.0610.13

(11.8%)11.49

(13.4%)26.8%

Total 7.15 7.82 9.13 27.7%

Cultivated Land: Less than 5% of the total farmland in the

four regions remains uncultivated. In Rasina and Toplica

nearly 100% of farmland is cultivated; Raska has the

highest percentage of uncultivated land at 13%.

Land Ownership: Land ownership

versus land rented is consistently

high among dairy farmers in all four

regions. Approximately two-thirds of

all utilized farm land is in household

ownership, with the remainder rented.

Not surprisingly the Zlatibor region,

which has the highest amount of

cultivated farmland and smallest

average herd size, has the least

percentage of rented farmland.

Raw Milk Allocation

Raw Milk Allocation: The vast majority of raw milk

produced by dairy farmer associations supported

through CRDA in southern Serbia is sold to regional

dairy processors (80% of the total). An additional 10% is

consumed by households, either as fluid milk or home-

processed dairy products. Interestingly, green market

sales are practically negligible, accounting for only

about 1%. The remainder is processed into dairy

products and sold through other outlets. (In some

cases, processed dairy products are sold to dairy

processors who then resell them through their outlets.)

These statistics show that the majority of association

members are undertaking dairy farming as acommercial activity and not a supplement for household

food production.

Owned vs Rented Land 2006(hectares)

Cultivated vs UncultivatedLand 2006

(hectares)

RegionOwned

Farm LandRented

Farm LandTotal

Farm LandCultivatedFarm Land

UncultivatedFarm Land

Rasina5.38

(69.5%)2.36

(30.5%)7.73 7.71 0.02

Toplica4.37

(63.5%)2.51

(36.5%)6.88 6.88 0.00

Raska6.41

(61.6%)4.00

(38.4%)10.41 9.01 1.40

Zlatibor8.89

(77.3%)2.61

(22.7%)11.49 11.28 0.21

Total6.26

(68.6%)2.87

(31.4%)9.13 8.72 0.41

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

2004 2005 2006

Cultivated

Fodder

Land

(hectares)

Rasina

Toplica

RaskaZlatibor

Total


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11

Analysis: The allocation of raw milk by region indicates

higher non-commercial utilization in the more economically

depressed regions, as one might expect. The Raska and

Zlatibor regions, home to the economically depressed

municipalities of Sjenica, Tutin, Novi Pazar, Prijepolje and

others at lower levels of development, consume 19% and

8%, respectively, in the household. Farmers in Rasina, themost economically developed region, consume only 3% of

their milk in the household. The remainder of sales outlets

includes local and town green markets and other sales

outlets. Most of the milk sold through these other outlets is

home-processed into other simple dairy products such as

white cheese, kajmak, and cream, and subsequently sold or

traded. Many farmers in Zlatibor have a long tradition of

cheese production, especially Sjenicki Sir, and sell hard white

cheeses to local dairies, green markets, and other outlets. In

total this accounts for 25% of raw milk allocation in the

Zlatibor region.

Price of Raw Milk Paid by Dairies 2004-2006(RS dinar)

Region2004

(RSD)2005

(RSD)2006(RSD)

Change2004-2006

Rasina 20.17 20.17 19.73 -2%

Toplica 19.14 19.64 20.16 +5%

Raska 16.41 18.15 19.09 +16%

Uzice 15.27 17.60 19.33 +27%

Total 17.75 18.89 19.58 +10%

Price & Demand for Raw Milk: The price of raw milk

varies little in southern Serbia. Dairies in all four

regions pay 19-20 dinars ($0.33) per liter. This price

includes the 3 dinar government subsidy for lowland

areas and 4 dinar subsidy for highland areas. While

this price has remained consistent in Rasina, prices

in the other three regions have increased over the last three years, most notably in Zlatibor (27%) and Raska

(16%). This is most likely due to the fact that several dairies expanded their production in 2003 and 2004 (in part

due to CRDA investments) creating higher demand for milk and a higher price.

Perceived Demand for Milk: Dairy farmers in southern

Serbia generally feel that the demand for raw milk has

increased over the last five years. When asked to rank the

demand change from 1-5, as described in the table, farmers

indicated an increase in demand, with the highest perceived

increases in Toplica and Raska. The main reason cited for the

increased demand was the establishment of new dairies and

expansion of existing ones. Of the 212 farmers surveyed, 65%

responded that the increased demand for raw milk had

encouraged them to invest more in milk production.

Collection Points: Dairy associations generally sell milk to one, or at most two, processors. Of the farmers

surveyed, 84% do not sell their milk through a collection point; instead the processor or a collection companypicks the milk directly from their farm. This is a clear area where associations and dairies can work together to

improve the efficiency of milk collection and overall milk quality. Proper collection points would ensure milk

remains chilled before delivery to the dairy and could significantly reduce transport and logistical costs.

Cooperation with Dairies: Only 43% of farmers responded to having signed contracts with dairies that set price

and payment terms. Despite this, farmers are generally satisfied with their cooperation with dairies (see table

above). Few of those surveyed cited areas for improvement: milk collection issues (13%), including delayed and

missed pick-ups and lack of collection points; delays in payment (8%), and inaccurate testing of milk for fat

content (7%).

Raw Milk Collection

Raw Milk Suppliers & Collection: The dairies surveyed in southern Serbia collect milk from more than 10,000dairy farming households, an average of 564 farmers per dairy, with the largest dairies serving supply networks

5USAID/Bosnia LAMP Project: Dairy Sub-Sector Market Profile and Competitiveness Inventory Report, September 2005.

Farm Gate Prices by Country (2005) 5

CountryFarm Gate Price

Raw MilkGovernment

SubsidyCost

To Dairy

Serbia 0.23 0.047 - 0.056 0.17 - 0.18 Croatia 0.33 0.078 0.25 BiH 0.34 0.074 0.26 EU Average 0.28 0 0.28 Comparing 2005 raw milk prices in Serbia with those in neighboringcountries and the EU average, Serbia has the lowest farm gateprice, as well as the lowest subsidy of FYR countries (81 RSD/).

Perceived DemandChange for Milk

2002-2006

CooperationWith Dairies

Region1 High Reduction3 No Change5 High Increase

1 Very Unsatisfied3 Neutral5 Very Satisfied

Rasina 3.38 4.33Toplica 4.46 4.81Raska 4.32 4.35Uzice 3.70 3.96

Total 3.96 4.36

15.00

16.00

17.00

18.00

19.00

20.00

21.00

2004 2005 2006

R

S

dinars

Rasina

Toplica

Raska

Zlatibor

Total


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12

of more than 2000 farmers. Very few dairies

have organized collection points; of those with

collection points only 21% are legally

registered. (Under Serbian law all collection

points must meet certain physical and

organizational specifications to ensure proper

hygiene and traceability of raw milk.)Approximately half of the dairies use their own

collection fleet (typically the larger dairies)

while the other half work under agreement with

private collection agencies. Of the 19 dairies

surveyed only one owns a refrigerated

collection truck, Eko Mlek in Krusevac; most

rely on insulated plastic or metal tanks fastened

to large flat-bed trucks.

Raw Milk Collection Statistics

Households10,000 Households100 - 2,000 Households per Dairy

Collection Service51% Dairy-Owned Transport49% Collection Service

Average Number of TrucksSize of Trucks

3 Trucks3 Tons per Truck

Refrigerated Trucks Only one of 19 dairies surveyed.Collection Points 21% Collection points are registered.

Milk Shortages74% Suffer Winter Milk ShortagesRasina/Toplica: 16% DeficitRaska/Zlatibor: 50% Deficit1. Farmers use milk for household.

Reasons for WinterMilk Shortages

2. Cows not producing in winter.3. Severe weather conditions.

Southern Serbia Dairy Processing CapacityWorking Capacity vs. Design Capacity

Southern Serbia has undergone dramatic increases in dairyprocessing capacity: design capacity has increased 174% andworking capacity 208%. At the same time, percent utilizationhas increased only slightly from 51% to 57%. Percentutilization is highest in Rasina (69%) due at least in part tomore developed collection infrastructure, particularly duringwinter months. CRDA investments directly accounted for 23%of the 2004 design capacity, as presented later.

0

50

100

150

200

250

300

350

Working

Design

Working

Design

Working

Design

Working

Design

Working

Design

2002 2003 2004 2005 2006

Tons/Day

Raska/Zlatibor

Toplica

Rasina

Collection Problems: A concerning 74% of

dairies experience raw milk shortages during

winter months, with the most severe shortages in Raska and Zlatibor regions where severe winter weather andpoor roads limit access to producers. Farmers are also typically calving their cows in the spring. The most

common concern of dairies regarding milk collection was the poor quality of raw milk, followed by small

producers, lack of collection points, and poor roads and infrastructure.

Main Problems with MilkCollection

1. Poor Quality of Raw Milk (83%)2. Small Milk Producers & Lack of

Collection Points (44%)3. Poor Road Infrastructure (39%)4. Uneducated Farmers (22%)5. Lack of Proper Equipment (17%)

Transport Infrastructure: Transport infrastructure

varies considerably between the regions and

municipalities surveyed, with the highest level of

infrastructure development in Rasina, and the

lowest levels in Raska and Zlatibor. Only 25% of

dairy farms in Raska, and 39% in Zlatibor, report

that their farms are connected to a road, while

89% of households in Rasina have access to

roads. While municipal snow clearing services are

available to nearly all Rasina farmers, only half of farms in Toplica and Zlatibor can ensure passage for milk

collection trucks during the entire winter. The poor transport infrastructure in these areas consistently results in

the inability of farmers to sell their milk during the winter season; 74% of farmers in Zlatibor and 43% in Raska

report that milk is unable to be collected during extended winter periods.

Transport Infrastructure Among Producers

RegionFarm Connected

To RoadWinter Snow

ClearingProblems Selling

Milk in Winter

Rasina 89% 100% 11%

Toplica 60% 50% 36%

Raska 25% 30% 43%

Uzice 39% 51% 74%

Total 53% 58% 41%

Dairy Processing

Introductory Notes: As previously stated, there are

20 operational dairies in the areas covered by this

assessment, 19 of which were surveyed (may not

include several very small dairies with operational

capacities of less than one ton per day). For the

purposes of presenting the processor data, theregions of Raska and Zlatibor have been combined

and are presented together since the Raska region is

home to only three processors. Note that the terms

dairy and processor are generally used

synonymously throughout the report.

Processing Capacity & Utilization: The total

processing capacity (design capacity) of the 19

dairies surveyed is 188 tons/day, of which

approximately 57% is utilized over the course of the

year (several dairies operate at significantly lower

capacity during winter months). Between 2002, whenMercy Corps began working with dairy processors,

and 2006, design capacity increased by 174% from

120 tons/day. At the same time, processors increased


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13

their actual working capacity by 208%, more effectively utilizing a higher percentage of their design capacity in

2006 than they did in 2002. The average working capacity per dairy increased from 5.1 tons/day in 2002 to 9.9

tons/day in 2006, a 95% increase across the AOR.

Regional Analysis: Rasina, the most

economically developed region, has the

highest working capacity at 84.5 tons/day,operating at 69% utilization, also the highest

among the three regions. While

Raska/Zlatibor and Toplica have lower

working capacities, they have grown

significantly over the five year period. Design

capacity in Raska/Zlatibor increased 496%

while working capacity increased 370% from

2002; in Toplica, capacity has increased

227% and 274% for design and working

capacities, respectively. These increases are

due in large part to a number of new startup

dairies, plus capital investments in newproduction equipment by existing dairies.

Since early 2002, six new dairies began

operating in Raska/Zlatibor (4) and Toplica

(2), bringing the total number of dairies in

these regions to 14. As local and regional

markets have become more saturated,

investments have slowed (growth was

extremely high from 2002 to 2003); however,

processing capacity in southern Serbia is still expanding, as evidenced by the 30% growth in design capacity in

2006.

Capacity Underutilization: While the growth in processing capacity demonstrates the rapid response of the

local private sector in filling the gaps left by failed state-owned companies, the private dairies have been less

successful at maximizing the efficiency of their operations. While working capacity has increased significantly,

when expressed as percentage of capacity utilization, there have been only slight gains, meaning that dairy

processor investments have outpaced the ability of the processor to utilize the added capacity. Capacity

underutilization is highest in Raska/Zlatibor where dairies are operating at only 46% of design capacity, even

lower than 2002 levels (the working capacity in tons/day has, however, tripled).

Dairy Processing Capacity in Southern SerbiaWorking Capacity vs. Design Capacity

(tons/day)2002 2003 2004 2005 2006

Working 40.5 46.0 53.5 62.4 84.5Design 84.0 89.0 94.0 99.0 122.0Utilization 48% 52% 57% 63% 69%

Rasina

Design Increase 5.9% 5.6% 5.3% 23.2%Working 11.5 25.0 28.5 45.5 43.1Design 22.9 45.5 69.5 70.5 75.0Utilization 50% 55% 41% 65% 57%

Toplica

Design Increase 98.7% 52.7%

Capacity Underutilization Analysis: One of the goals of this assessment is to identify the gaps and shortages

in the dairy value chain to determine where the gaps lie and whether they are related to supply or demand. The

findings show that dairies in all three regions face problems along both ends of the value chain. The three main

problems that result in capacity underutilization are: i) lack of working capital, ii) lack of markets or access tomarkets, and iii) insufficient quality and/or quantity of raw milk. One of the major reasons for lack of working

capital is the difficulty dairies often have collecting payments from their buyers. Oftentimes, small local shops do

not pay on a regular basis and larger supermarkets pay too infrequently to sustain higher outputs. The second

1.4% 6.4%Working 12.8 21.5 33.8 46.1 60.1Design 22.0 60.7 81.5 90.8 131.2Utilization 58% 35% 41% 51% 46%

Raska/Zlatibor

Design Increase 175.9% 34.3% 11.4% 44.4%Working 60.8 87.5 108.8 147.0 187.7

Design 120.0 186.7 237.0 252.3 328.2Utilization 51% 47% 46% 58% 57%

Total

Design Increase 55.6% 26.9% 6.5% 30.1%

Dairies 12 15 16 18 19

Design and working capacities of dairies in southern Serbia haveincreased annually since 2002. From 2002-2006, design capacityincreased by 174% (Rasina 45%; Toplica 227%; Raska/Uzice 496%).Dairies typically operate at 50%-60% of design capacity on an annualbasis; in 2006 dairies in Rasina led the region, operating at 69% ofdesign capacity.

RegionTop 3 Reasons for Underutilization

Top Dairy Production Problemsof Processing Capacity

Rasina

Lack of Working Capital (50%)

Competition from other Dairies (33%)

Poor Quality Raw Milk (33%)

Insufficient Supply of Raw Milk (33%)

Lack of Educated Employees (40%)


Lack of Proper Equipment (33%)

Poor Quality of Raw Milk (17%)

Toplica

Poor Access to Markets for Products (40%)

Lack of Working Capital (20%)




Bad Quality of Raw Milk (40%)

Inadequate facilities (40%)


Raska/Zlatibor

Lack of Working Capital & Payment Delays (57%)

Poor Access to Markets for Products (43%)




Expensive Electricity (43%)

Bad Quality of Raw Milk (29%)



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issue is a serious one and is due to the large number of small dairies selling similar products and trying to

compete in small local and regional markets. The third issue affecting capacity underutilization is a common

problem throughout southern Serbia as processors are forced to collect milk daily from hundreds of small dairy

farmers. To complicate this issue, milk quality is now an even more important issue as dairy processors are

brought into compliance with HACCP standards.

Production Problems: The assessment teams asked respondents to identify the greatest production problemsthey face (see table above). Over half of the 19 dairies responded that a lack of proper equipment is the greatest

impediment for production of dairy products; this seems somewhat surprising considering the underutilization of

capacity among most dairies. The need is valid, however, if investment is directed towards new products instead

of increasing production of existing products. Over one third of respondents replied that production is hampered

by the poor quantity and/or quality of raw milk from dairy farmers; over 25% cited a lack of educated employees

and teamwork within their companies.

Dairy Products: The most common dairy products produced in the

southern Serbia dairies are, in order, fresh milk, yogurt, yellow

cheese and white cheese. Dairies have begun to add further value to

these products by producing different sizes and packaging, such as

boxed and bottled yogurts and milk; and sliced, grinded, rolled andsmoked cheeses. Some dairies produce regional specialties such as

peppers in cream, kajmak (a salty, buttery spread) and Jardum

(sheep milk cheese). As competition has increased many dairies in southern Serbia are considering developing

new production lines to stay competitive; 90% of the dairies surveyed are interested in new product development,

and they cited a total of 15 new products of interest (see table).

Most Commonly CitedPotential New Dairy Products

Cream Cheese: 32%

Feta Cheese (sliced, crumbled): 32%

New Packaging for Milk & Yogurt: 26%

New Yogurts (sizes, packaging): 16%

Sour Cream, Peppers in Cream, Kajmak: 5%

Fruit Yogurt: Dairies were specifically surveyed regarding their potential interest in producing fruit yogurt, a high-

value growth product in the industry, as well as the top imported dairy product, accounting for 23% of all imported

dairy products. Ten of the 19 dairies surveyed (53%) responded positively to their interest in fruit yogurt;

however, they cited the high capital investment, lack of technological knowledge, small demand in local markets,

and short shelf-life as impediments.

Dairy Market Growth: Of the 19 dairies surveyed, 13 stated that the market for dairy products has increased

over the last five years. The main rationales for this argument were i) improved product quality, ii) improved

production technology & equipment, and iii) improved marketing.

Dairy Sales Trends by Product: The 19 dairies were

surveyed to determine the average annual growth in

sales by product and which major product categories

experienced the most market growth. While all products

enjoyed significant growth since 2002, yellow and white

cheeses had the highest growth of 769% and 528%

respectively. Growth rates slowed dramatically in 2006

as the industry has matured and competition has

increased in regional markets. Fluid milk sales remainedat 2005 levels, while sales of white cheese actually

decreased by 2.4% from 2005 to 2006.

Annual Sales of Key Dairy ProductsTop Four Product Categories

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6

Sales

(m

illiondinars)

Fluid Milk

Yogurt

Yellow Cheese

White Cheese

This diagram shows the growth in sales of the top four dairyproduct categories. The most significant year for growth inthe sector was 2003-2004: yogurt sales doubled, and yellowcheese and white cheese sales increased by a dramatic180% and 268%, respectively. Growth slowed or stoppedfor fluid milk and white cheese in 2006, with sales very closeto 2005 levels; yogurt and yellow cheese sales continued togrow in 2006, by 14% and 19% respectively.

Financial Performance: As a result of the strong

growth of dairy processing in southern Serbia, income

and operating profits have increased significantly since

2002. Income has risen 507%, with the highest annual

increase, 229%, occurring in 2004. (Note that these

figures include all dairies surveyed, so that as new

dairies were started, the numbers would logically rise

significantly. Furthermore, some of the dairies did not

have records available to report the earlier years.) Income decreased by 22% in 2006 from 2005 highs, showingsigns of market saturation and increased competition. Not surprisingly, operating costs have risen steadily due in

part to increases in energy and fuel costs and depreciation of the Serbian dinar. Profits are very likely

understated (likely to minimize tax obligations) as the net profit is well below the difference between income and


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Geographic Markets for Dairy Processors

Other

10.0% Kosovo

3.5%

Montenegro

4.7%

Belgrade

22.9%

Regional

58.9%

Sales Outlets for Dairy Products

Other

17.8%

Public

Institutions

13.0%

Supermarkets

18.3%Restaurants

Hotels

10.2%

Small Stores

(STR)

40.8%

Geographic Markets & Sales OutletsMarkets for Southern Serbia Dairy Products

Three dairies have significant markets in Kosovo,averaging 27% of their sales in the territory. While smalllocal and neighborhood shops still account for themajority of sales, supermarkets are gaining in importance.Interestingly, however, processors report problems withpayment terms and timeliness from supermarkets andprefer doing business with small shops.

operating costs (though this can be

partly explained by the fact that the

assessment team did not

specifically ask dairies to separately

report their fixed costs, capital

investments, and taxes). Despite

possible under-reporting, net profitis still impressive, averaging

$103,500 per dairy in 2006 (though

if we remove the profit leader, Lazar

Dairy in Blace, the average falls to

$57,300).

Financial Performance of Dairies in Southern Serbia1000 USD (at rate of 60 RSD/USD)

2002 2003 2004 2005 2006% Increase2002-2006

SalesIncome

$2,631$4,874(85%)

$16,022(229%)

$20,490(28%)

$15,968507%

(-22%)OperatingCosts

$2,092$2,426(16%)

$3,488(44%)

$4,769(37%)

$7,101239%

(49%)

Net SalesProfit

$239 $294(23%)

$612(108%)

$1,054(72%)

$1,552 549%(47%)

DairiesReporting

8 10 12 13 13 8

Dairy processors experienced dramatic growth in sales and profits from 2002-2006.In 2006, however, income decreased, likely due to increased competition. Itappears from this data that the dairies are under-reporting profit, as profit levels aresignificantly lower than the difference between income and operating costs (thoughthis can be partly accounted for by the survey questions, as explained in the text).

Distribution & Markets

Distribution: Thirteen of the nineteen dairies

surveyed distribute their products directly to their

market outlets, while the remaining six use private

distributors; all of the dairies in Raska/Zlatibor

distribute their own products. Of those who distributetheir own products, most have refrigerated trucks, with

an average capacity of 3 tons. All of the dairies using

private distributors are satisfied with the business

relationships with their distributors. The most common distribution problems cited among the 19 dairies are: i)

poor roads, ii) inadequate transport vehicles and iii) poor payment and cooperation with buyers.

Product Distribution StatisticsDelivery Trucks 4 trucksAverage Truck Capacity 3 tonsRefrigerated Trucks 67% of dairiesPrivate Distributors 32% of dairies

Main DistributionProblems

Bad Roads (22%)Inadequate Vehicles (17%)Bad Cooperation with Buyers (17%)High Fuel Cost (6%)

Geographic Markets & Sales Outlets: The survey

revealed that the largest market outlet for the dairies in

southern Serbia is individual small stores (STR) (41%) in

regional markets (59%). Geographically, the next largest

market is Belgrade (23%), showing that the dairies in

southern Serbia are competing with the large processors

in Vojvodina and around Belgrade. Other geographic

outlets include eastern Serbia, Vojvodina, Macedonia and

Croatia. Exports to FRY make up a small portion of sales.

It is noteworthy that three of the larger dairies in

Raska/Zlatibor, Zornic in Tutin, Milkop in Raska, and

Tisovac in Sjenica have significant sales to Kosovo, and

one of the three, Zornic Dairy in Tutin, also exports 25% of

its products to Montenegro.

Supermarkets: Over half (11 of 19) dairies distribute

some of their products to supermarkets, accounting for

18% of total sales from the 19 dairies. While supermarkets

have a much smaller market share of the food retailindustry than in other eastern European countries, several

domestic and a few international supermarket chains have

spread to nearly all medium and large towns in Serbia.

When questioned on doing business with the large

supermarkets, nearly half of the dairies complained of bad

payment and contractual conditions, citing payment

delays (sometimes as much as six months), no quantity

guarantees and prohibitively expensive shelf space

pricing.

Export Markets: While exports make up a relatively small portion of overall sales there is high interest in

international markets, most likely due to the increasing competitiveness of regional and national markets. Eight ofthe 19 dairies (42%) express interest in reaching EU markets and six (32%) are interested in export opportunities

in the FRY within the next three years.


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Market Share: Surprisingly, twelve dairies (63%) say they are not experiencing a loss of market share to larger

dairies such as Imlek of the Danube Food Groups. The respondents indicated that the reason for this is that the

large and small dairies compete for different markets. The small dairies feel that they can remain competitive on

price with cost-conscious customers, while maintaining specializations in niche products, such as kajmak and

peppers in cream (though sales of specialized products remain marginal).

Payment Problems: By a significant margin, the leading problemfacing dairy processors with respect to sales and distribution is

collection of payments from sales outlets and retailers (13 of 19 dairies

cited this as a key problem). Many dairies are unable to collect regular

payments due to the instability of the small convenient store outlets.

Many small stores are not able to pay on a regular basis, because of

low cash flow compared to earnings. Funds for payments are diverted

to rent, utilities or family emergencies leaving dairies to accumulate

large accounts receivable. Dairies in Rasina reported the highest rate

of payment problems of the three regions.

Main Problems with Sales & Distribution

Distribution Problems: The second most commonly cited problem

was inadequate transport vehicles, followed by several otherdistribution issues. These issues impact the dairies ability to service buyers located in geographically distant

locations, as well as sometimes causing spoilage of products before their expiration date. No dairies in

Raska/Zlatibor cited inadequate transport vehicles, likely because all of these dairies own their own vehicles, as

previously reported.

(19 processors surveyed)

Payment Collection 13

Inadequate Transport Vehicles 5

Other Distribution Problems 6

Price Stagnation 3

Market Competition 2

Black Market Competition 2

Supermarkets 1

Small Range/Quantity of Products 1

Lack of Skilled Employees 1

Disposable income of customers 1

Infrastructure 1

Competition Problems: With more dairies entering the market, competition for shelf-space has increased. Small

dairies are also challenged by contracts that stipulate payment will not be made for unsold products, forcing them

to produce exactly the right amount of product for each buyer. This is not the case with larger dairies in Serbia,

who are able to negotiate more favorable payment terms. Dairies also mentioned gray market competition as a

problem, citing competitors who underreport earnings and/or employees, thereby creating unfair competition.

Enabling Environment & Cross-Cutting Issues

Dairy farmers and processors were both surveyed on a number of enabling environment and cross-cutting issues

that affect the entire sector. The survey results are presented here and include the important issues of quality

control, investment & financing, information, and legislation affecting the dairy sector.

Quality Control

Raw Milk Quality: Raw milk quality is

one of the most serious problems in the

industry facing small dairy processors

and producers. While MoA has

established national milk quality

standards, the lack of enforcement andan illogical subsidy program provide

few incentives for dairy farmers to

invest in quality-enhancing technology.

Many dairy processors are beginning to

fill this regulatory gap as they start to

undertake measures required for

HACCP compliance, and therefore

focus increased attention on the quality

of their raw milk supply.

Raw Milk Quality StatisticsProcessor Data

Quality CriteriaAverageReported

DairiesReporting

SerbiaStandard

aEU

Standardb

Milk Bacteria Count 94,000/mlc

9


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is clearly the capital investment required ($2,000 - $3,000 for a 300 liter tank). Of the 46 farmers that reported

using a lacto-freezer, 63% purchased them within the past two years, many of them in cooperation with CRDA-E.

This is a positive sign that the use of lacto-freezers will continue to expand in the near future.

Milking Machines: Despite the lack of cooling equipment, a majority

of dairy farmers (66%) are using milking machines. One key reason for

this is that milking machines save time and labor on the farm and havebecome affordable for many dairy farming households. With a number

of local manufactures, milking machines start at a price of $200-$400.

Of the 66% who use milking machines, 63% reported purchasing them

in the last two years, again many of these in cooperation with CRDA-

E. It should be brought to attention here once again that all of the

farmers surveyed in this assessment are members of dairy producer associations supported by CRDA-E; as

thus, figures such as the percentage of farmers using milking machines may not be representative of the entire

area, particularly since many associations utilized CRDA-E assistance to procure some or all of their machines.

Raw Milk Quality Indicators(212 farmers surveyed)

Lacto-Freezers: 46 (21.7%) Milking Machines: 140 (66.0%)

Periodic Milk Quality Testing: 95 (44.8%)

1 x per year: 52 (24.5% of all 212)

2 x per year: 26(12.3%)

3 x per year: 6 (2.8%)

4 x per year: 11 (5.2%)

Quality Testing: With the general lack of raw milk quality control it is somewhat surprising that more than half of

the farmers surveyed routinely request milk testing for bacteria count and fat content on at least an annual basis.

(The farmers were not requested to provide test results to the survey team, however.) All farmers surveyedreported fat content at least 3.5% or higher, well over the 3.2% minimum in the Serbian By-law on Milk Quality.

The average fat content reported by the 212 dairy farmers in 2006 was 4.03%; the dairy processors reported an

average fat content of 3.89%, comparable though slightly lower, than the farmers. The main reason cited by

mercy corps dairy 2001 - 2007

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