Poland under pressure
Polish dairy products bought from a Warsaw supermarket. Credit: Jo Harper (Harper’s Editing, Warsaw)
Retail prices of manufactured dairy products in Poland are falling, while the costs of production and processing are rising. Market insiders say this is already pushing many small dairy farmers and manufacturers to the edge.
“Production costs for farmers and milk processors have increased dramatically,” said Agnieszka Maliszewska, director of the Polish Chamber of Milk (PIM, Polska Izba Mleka).
A range of costs are constantly increasing, including production costs such as packaging and labour, plus fertilisers, electricity and gas, she said. However, while this has caused an increase in milk prices as producers try to keep ahead of costs, tough negotiations by retailers on shop prices have depressed profits. And that is especially tough for finished product manufacturers such as cheese companies, who cannot control the price of their key raw material.
In the first quarter of 2023, the average purchase price of milk in Poland was Polish Zloty PLN2.32 (€0.53 per litre, 23.2% higher than in the first quarter of 2022, according to the PIM. But meanwhile, milk and finished dairy product producers have seen hefty rises in energy bills (+27.7%), external services (+18.9%) and salaries (+13.6%). Sales have also fallen in the key neighbouring export market of Ukraine, as Russia continues its invasion – which has killed 9,511 civilians as of 28 August (United Nations figures) and many more military deaths.
“Combined with the loss of the market in Ukraine and turbulence in global exports this has led to a serious crisis in the Polish dairy sector,” Maliszewska said. The situation is especially difficult for cheese producers, she added.
In the first quarter of 2023, the financial results of the domestic dairy industry deteriorated, with enterprises generating net profits of 43.2%, compared to 80.8% in the same period of 2022, she stated.
With Polish inflation still high – 10.1% annual general rate in August 2023 – retail chains have been pushing hard to limit finished product sticker price increases and simultaneously increase margins, which is worsening the dairy sector’s profitability problem. A key problem for producers is that major chains account for almost 60% of the Polish FMCG (fast moving consumer goods) market, so these big retail players command a lot of market power, according to the PIM.
“Retail chains have recently been an extremely aggressive player on the market. Their expansion into smaller towns makes them gradually strengthen their position. The result is increasingly difficult negotiations,” said Maliszewska.
That is despite government intervention, with the Polish Office of Competition and Consumer Protection (UOKiK, Urząd Ochrony Konkurencji i Konsumentów) imposing heavy fines on retail chains for abusing their advantage, she noted: “The situation is paradoxical, since neither farmer nor dairy processor benefits from the growth in retail prices, while the intermediary and the retailer do. And consumers feel the pressure of the price changes.”
Crunch time for some
Large dairy companies with a recognisable brand are better able to defend themselves, but small-and-medium-sized dairies may not.
Dairy cooperative Mlekovita is the main player on the Polish dairy market, according to a ranking of Polish dairies by dairy industry quarterly Forum Mleczarskie.
Last year, it generated PLN6.3 billion (€1.3 billion) in sales revenue, including exports and domestic sales; the dairy company Polmlek Group PLN5.1 billion; Mlekpol Dairy Cooperative PLN5.1 billion; another cooperative Piątnica PLN1.6 billion; and cooperative Łowicz PLN1.5 billion.
At the same time, with Polish unemployment low at 5%, the dairy sector’s financial crunch is being exacerbated by a labour crisis, worsened by young people leaving agricultural work, with dairy farms suffering the worst labour attrition in Poland’s agribusiness.
“More and more companies will have to seek help in the form of consolidation or look for external investors, or they will close their business,” warned Maliszewska.
For example, the Polmlek Group bought CEKO, a cheese producer from Goliszew, in 2022. Polish press reports have also said Polmlek is eyeing milk cooperative OSM Końskie for a takeover.
The government has not been idle amidst this dairy sector disruption – but the industry says it has received less help than other agricultural sectors, who continued to receive a wide variety of government aid: “It is surprising in particular [given] that it is one of the most affected by price drops,” said Jakub Olipra, senior economist at Credit Agricole Bank Polska.
Additional aid has been paid because of Russia’s invasion of Ukraine, with subsidies for fertilisers, seeds, wheat, buckwheat and maize.
In August 2023, companies in the dairy sector were added to the list of energy-intensive companies, enabling them to receive subsidies to cover increased operating costs associated with increases in electricity or natural gas prices. In 2023-2024, PLN5.5 billion (€1.23 billion) will be allocated to the programme.
“But in our opinion, these are not instruments that can significantly change the situation of the dairy sector,” said Pawel Wierzykowski, strategic client bureau director for the international food and agri hub at BNP Paribas Poland.
The war in Ukraine
One action the government has taken came in April 2023, when it temporarily banned Ukraine-sourced milk and other dairy product imports (along with other foodstuffs, including grain, a key dairy input) from Polish markets, although it has allowed their transit across Poland. The move was an attempt to calm the rising anger of Polish farmers ahead of October 15 parliamentary elections about Poland being flooded with Ukraine food, whose export had been diverted from Black Sea ports because of Russian military attacks. The problem has been intensified by the harm caused to Ukraine’s economy by the invasion. In 2021, Poland was the largest EU exporter dairy products to Ukraine, with 44% of EU producer sales in its neighbour, said the PIM.
In 2022, following Russia’s invasion, the Polish dairy product revenues from Ukraine fell by 13% year-on-year to €108 million. The PIM says that while import restrictions on Ukrainian grain are justified to prevent Polish farmers from suffering losses, they do not make sense in the dairy market, given livestock feed prices have increased as a result.
In the longer term, however, should Ukraine successfully defend its independence against Russian aggression, it may then join the European Union, which would pose the biggest challenge that Polish agriculture has faced since Poland’s accession to the EU in 2004, said Maliszewska.
Ukraine’s rich fertile soils, lower costs and warm weather means it would challenge Poland’s strong position within the EU agricultural market and pose a challenge internationally.
“This will be forced by economic mechanisms and competitive advantages on the side of our eastern neighbour. Ukraine has a huge potential in the form of very good soils and a favourable climate. It is possible to achieve very high grain yields there, while not using such a high level of fertilisation as in Poland, which translates into lower production costs,” she warned.