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Photo: David SnyderPhoto: David Kahrmann

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

SUBMITTED: JULY 2007

USAID GRANT 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

Acknowledgements

This report would not have been possible without the valuable contributions from the following individuals 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, Nidza and Jastrebacka dairies in Prokuplje; Zornic dairy in Tutin; Beni Komerc and Tisovac dairies in Sjenica; Integral and Zlatarka dairies in Nova Varos; Irma dairy in Prijepolje; Milkop dairy in Raska; and Ljin Dairy in Novi Pazar.

All of the other dairies, not supported previously by CRDA, who participated in the assessment 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; Blagotinjski Pasnjaci, Bozur, Medenica and Stocar Drenovac in Trstenik; Temnic in Varvarin; Gornji Kasevar, Javorac; Grgure, Toplicani, Unija Stocara Blace and Agrotim in Blace; Berda in Brus; 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 Nova Varos; Trijebina, Breza, Sjenicka Ovca, Mlekari, Medjugor and Pesterski Farmer in Sjenica.

Jim Newkirk and John Howell from Opto International’s Reka Mleka Project for the valuable cooperation in southern Serbia throughout CRDA-E and for providing excellent national statistics on the Serbian dairy sector.

Mercy Corps Evaluation Team members who provided valuable feedback in the design of the surveys and who diligently conducted, collected and compiled all survey data. In the Krusevac AOR, 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, collecting data, 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 spent proofing, editing and polishing numerous drafts of the report.

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

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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 goals of 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 few incentives 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 Farms were successful in attracting over 1,000 farmers in the past year, while the Livestock Feed & Nutrition Program achieved 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: Fifteen out 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 municipalities serviced by Mercy Corps under CRDA. (There were no dairy sector interventions in Ivanjica, in the Moravica district). The municipalities reside in four administrative districts in southern Serbia. CRDA AORs were not, however, divided by administrative district; so, for example, of the nine municipalities in Zlatibor district, four are in Mercy Corps’ AOR, while five were covered by IRD.

Mercy Corps CRDA AOR & Administrative Regions

CRDA Budget & Economic Investments

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

Basis: $40 million USAID InvestmentAdministration

& ICR01-07

$13,206,000

Community Development

01-05$13,409,000

MSMEDevelopment

04-07$1,491,000

Agriculture05-07

$2,183,000

Economic01-04

$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 March 2007 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 the dairy 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 facilitate sector growth in most cost-effective, highest impact manner;

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

• provide and field test an assessment template and methodology that can be used for future program and 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 after conducting 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 economic and agriculture activities by sector for CRDA and CRDA-E. While the CRDA strategy targeted the fruit and dairy sectors according to the 2001 sub-sector assessment, considerable investments were made in a variety of other sectors. Under CRDA-E, investments were much more targeted at the two sub-sectors, with dairy sector investments accounting for 49% of the total budget for agriculture development.

CRDA-E 2005-2007 Agriculture Investments

Dairy$1,077,000

ISO/HACCP$68,000

Other$87,000 Trade

Promotion$55,000

Fruit & Vegetable$896,000

CRDA 2001-2004 Economic InvestmentsMushrooms

$565,000

Meat & Wool$407,000

Fruit$739,000

Dairy$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) 2005-2007

CRDA Assessment OverviewCRDA 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 OverviewCRDA 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 approximately 50 large farms with average herd sizes

Serbia National Dairy Production Statistics

Region Cows per Household

Avg. Yield(L/cow)

Annual Production

(ton/farm/year)

Milk Production

% Herd

% Households

%

Vojvodina 4.5 12.06 16.72 36% 28% 21%

Central Serbia 3.5 10.13 11.23 42% 40% 37%

Southern Serbia 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 economically developed regions of northern and central Serbia compared to southern Serbia. Despite having the largest number of dairy households, southern Serbia has a much smaller percentage of total production due to several factors such as unfavorable geographical conditions, small landholdings, low household incomes and weak support institutions.

1 Serbian 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 2006

Raw Milk Production (tons) 1,500,000 1,600,000

Sold to Dairies 814,000 (54.3%)

732,000 (45.8%)

Lowland 82% 84% Production Highland 18% 16% Lowland 3.8 RSD/L 3.0 RSD/LSubsidy Highland 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 for household 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 CRDA program 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.

Rasina17,000 tonsToplica

13,000 tonsRaska/Zlatibor

34,000 tons

Southern Serbia161,000 tons

Vojvodina261,000 tons

Central Serbia, 310,000 tons

National Dairy Processing Milk 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 Cows Tons/Year Sold to Dairies

Avg. Tons/DaySold to Dairies

National Output %

Average L/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 Size Capacity (tons/day)

OperationalDairies

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

2 Vibilia 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 MoA’s budget, 28 million euros in 2006 (down from 40 million in 2005) and 25% of MoA’s 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 Laboratories is 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 Survey Producer 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)

Total Members

MembersSurveyed

Rasina 8 148 45 Toplica 10 118 50 Raska 12 274 60 Zlatibor 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 this assessment 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 there are 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 of

CRDA. [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 Survey Sample Size & Mercy Corps Clients

Region Registered Dairies

Operational Dairies/Surveyed

Mercy Corps Client Dairies

Rasina 15 6/6 2 Toplica 5 5/5 5 Raska/Zlatibor 30 9/8 8 Mercy Corps AOR 50 20/19 16 National Total 233 72 While there are fifty registered dairies in Mercy Corps’ southern Serbia AOR, only 20 are operational or have a capacity greater than 1 ton/day. All of these dairies in the 18 municipalities in Mercy Corps’ AOR were surveyed in this assessment, except for one, Biomlek, in Sjenica, representing a sample size of 95% of the population. Only one of all Mercy Corps client dairies supported from 2001-2004, Trosic from Trstenik, ceased operating.


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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).

Association Processors: 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 1990’s. Less than half of the dairies surveyed (44%) are a member of any business or trade association.

Membership Members

Association of Private Dairies 2

Dairy Industry Forum 1 Chamber of Commerce Belgrade 1

Local Livestock Associations 4

Total 8

Dairy Value Chain Situation Assessment This 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 gap between the regions has narrowed. Zlatibor showed the least increase and still remains the lowest yielding region. Current yields now average just 13% below the EU average, while in 2004 yields averaged 32% lower than the EU average.

Average Daily Milk Yield By Mercy Corps Clients 2004 -2006

(L/cow/day)

District 2004 2005 (Increase)

2006 (Increase)

Rasina 14.58 15.69 (7.6%)

17.31 (10.3%)

Toplica 13.50 15.38 (13.9%)

17.89 (16.3%)

Raska 11.90 13.68 (14.9%)

16.44 (20.2%)

Zlatibor 12.83 13.91 (8.4%)

15.17 (9.0%)

Total 13.20 14.66 (11.1%)

16.70 (13.9%)

These data show the average yield per cow among CRDA-E clients, along with the percent increase over the previous year. The associations achieved marked increases in yield during the two years of activities in cooperation 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 is 19.3 L/cow/day (5,889 L/yr)3 and in Serbia is 13.2 (4,026 L/yr).4

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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.

3 European Commission, Eurostat and Director General for Agriculture 4 Opto International, Reka Mleka Project. Data is only for farms selling to dairies.


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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 no time 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 Yield Among 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 Increases By Mercy Corps Clients 2004-2006

(cattle/farmer)

Region 2004 2005 (Increase)

2006 (Increase)

Overall Increase

2004-2006

Rasina 3.76 4.49 (19.5%)

5.49 (22.3%) 46.2%

Toplica 3.00 3.98 (32.7%)

5.7 (43.2%) 90.0%

Raska 3.42 3.93 (15.1%)

5.65 (43.6%) 65.4%

Zlatibor 4.21 4.81 (14.2%)

5.77 (20.1%) 37.1%

Total 3.60 4.30 (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 Size Among 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 higher milk-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 the most popular variety of dairy cow in southern Serbia. Of the 212 farmers surveyed, 80% are using artificial insemination 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 cow’s genetic structure in determining milk production. Several of CRDA-E’s 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 to feed 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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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 Production By Mercy Corps Clients 2004-2006

Raw Milk Allocation Sales & Consumption Outlets

Most milk produced by association farmers in southern Serbia is sold to dairies; Household consumption is generally reflected in regions with lower levels of development; Raska leads household consumption at 19%. Much of the milk consumed by the household or sold in markets and other outlets is home-processed into other dairy products. The relatively high quantity sold through other outlets in Zlatibor is likely attributed to production of “Sjenicki Sir,” a distinct type of cheese well regarded throughout Serbia.

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Cultivated Fodder Land: As the herd size has increased so 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 of farmland 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 2004 2005 (Increase)

2006 (Increase)

Overall Increase

2004-2006

Rasina 6.13 6.67 (8.7%)

7.73 (16.0%) 26.1%

Toplica 4.39 5.25 (19.6%)

6.88 (31.0% 56.7%

Raska 9.01 9.23 (2.4%)

10.41 (12.8%) 15.5%

Zlatibor 9.06 10.13 (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 a commercial activity and not a supplement for household food production.

Owned vs Rented Land 2006 (hectares)

Cultivated vs UncultivatedLand 2006 (hectares)

Region Owned Farm Land

Rented Farm Land

Total Farm Land

Cultivated Farm Land

UncultivatedFarm Land

Rasina 5.38 (69.5%)

2.36 (30.5%) 7.73 7.71 0.02

Toplica 4.37 (63.5%)

2.51 (36.5%) 6.88 6.88 0.00

Raska 6.41 (61.6%)

4.00 (38.4%) 10.41 9.01 1.40

Zlatibor 8.89 (77.3%)

2.61 (22.7%) 11.49 11.28 0.21

Total 6.26 (68.6%)

2.87 (31.4%) 9.13 8.72 0.41

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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, the most 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)

Region 2004 (RSD)

2005 (RSD)

2006 (RSD)

Change 2004-2006

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 company picks 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 10,000 dairy farming households, an average of 564 farmers per dairy, with the largest dairies serving supply networks

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

Farm Gate Prices by Country (2005)5

Country Farm Gate PriceRaw Milk

Government Subsidy

Cost 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 neighboring countries and the EU average, Serbia has the lowest farm gate price, as well as the lowest subsidy of FYR countries (81 RSD/€).

Perceived Demand Change for Milk

2002-2006

Cooperation With Dairies

Region 1 – High Reduction 3 – No Change 5 – High Increase

1 – Very Unsatisfied 3 – Neutral 5 – Very Satisfied

Rasina 3.38 4.33 Toplica 4.46 4.81 Raska 4.32 4.35 Uzice 3.70 3.96 Total 3.96 4.36

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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

Households 10,000 Households 100 - 2,000 Households per Dairy

Collection Service 51% Dairy-Owned Transport 49% Collection Service

Average Number of Trucks Size of Trucks

3 Trucks 3 Tons per Truck

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

Milk Shortages 74% Suffer Winter Milk Shortages Rasina/Toplica: 16% Deficit Raska/Zlatibor: 50% Deficit 1. Farmers use milk for household. Reasons for Winter

Milk 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 dairy processing capacity: design capacity has increased 174% and working capacity 208%. At the same time, percent utilization has increased only slightly from 51% to 57%. Percent utilization is highest in Rasina (69%) due at least in part to more developed collection infrastructure, particularly during winter months. CRDA investments directly accounted for 23% of the 2004 design capacity, as presented later.

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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 and poor 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 Milk Collection

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

Region Farm ConnectedTo Road

Winter Snow Clearing

Problems SellingMilk 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, the regions 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, when Mercy 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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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 new production 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 Serbia Working Capacity vs. Design Capacity

(tons/day) 2002 2003 2004 2005 2006 Working 40.5 46.0 53.5 62.4 84.5 Design 84.0 89.0 94.0 99.0 122.0 Utilization 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 43.1 Design 22.9 45.5 69.5 70.5 75.0 Utilization 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 to markets, 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 60.1 Design 22.0 60.7 81.5 90.8 131.2 Utilization 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 120.0 186.7 237.0 252.3 328.2 Utilization 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 have increased annually since 2002. From 2002-2006, design capacity increased by 174% (Rasina 45%; Toplica 227%; Raska/Uzice 496%). Dairies typically operate at 50%-60% of design capacity on an annual basis; in 2006 dairies in Rasina led the region, operating at 69% of design capacity.

Region Top 3 Reasons for Underutilization Top Dairy Production Problems of 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%) Insufficient Supply of Raw Milk (33%) Lack of Proper Equipment (33%) Poor Quality of Raw Milk (17%)

Toplica

Poor Access to Markets for Products (40%) Lack of Working Capital (20%) Poor Quality of Raw Milk (20%) Insufficient Supply of Raw Milk (20%)

Lack of Proper Equipment (60%) Bad Quality of Raw Milk (40%) Inadequate facilities (40%) Lack of Educated Employees (20%)

Raska/Zlatibor

Lack of Working Capital & Payment Delays (57%) Poor Access to Markets for Products (43%) Poor Quality of Raw Milk (29%) Insufficient Supply of Raw Milk (29%)

Lack of Educated Employees (57%) Expensive Electricity (43%) Bad Quality of Raw Milk (29%) Lack of Proper Equipment (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 problems they 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 and smoked 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 Cited Potential 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 remained at 2005 levels, while sales of white cheese actually decreased by 2.4% from 2005 to 2006.

Annual Sales of Key Dairy Products Top Four Product Categories

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Fluid MilkYogurtYellow CheeseWhite Cheese

This diagram shows the growth in sales of the top four dairy product categories. The most significant year for growth in the sector was 2003-2004: yogurt sales doubled, and yellow cheese and white cheese sales increased by a dramatic 180% and 268%, respectively. Growth slowed or stopped for fluid milk and white cheese in 2006, with sales very close to 2005 levels; yogurt and yellow cheese sales continued to grow 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, showing signs 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


15

Geographic Markets for Dairy Processors

Other 10.0% Kosovo

3.5%Montenegro

4.7%

Belgrade22.9%

Regional58.9%

Sales Outlets for Dairy Products

Other17.8%

PublicInstitutions

13.0%

Supermarkets18.3%Restaurants

Hotels10.2%

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 small local and neighborhood shops still account for the majority of sales, supermarkets are gaining in importance. Interestingly, however, processors report problems with payment terms and timeliness from supermarkets and prefer 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 profit is 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 Serbia 1000 USD (at rate of 60 RSD/USD)

2002 2003 2004 2005 2006 % Increase2002-2006

Sales Income $2,631 $4,874

(85%) $16,022 (229%)

$20,490 (28%)

$15,968 507% (-22%) Operating Costs $2,092 $2,426

(16%) $3,488 (44%)

$4,769 (37%)

$7,101 239% (49%) Net Sales Profit $239 $294

(23%) $612

(108%) $1,054 (72%)

$1,552 549% (47%) Dairies Reporting 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. It appears from this data that the dairies are under-reporting profit, as profit levels are significantly lower than the difference between income and operating costs (though this 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 distribute their 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 Statistics Delivery Trucks 4 trucks Average Truck Capacity 3 tons Refrigerated Trucks 67% of dairies Private Distributors 32% of dairies

Main Distribution Problems

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 retail industry 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 of the 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 problem facing 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 other

distribution 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 and an 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 Statistics Processor Data

Quality Criteria Average Reported

Dairies Reporting

Serbia Standard a

EU Standard b

Milk Bacteria Count 94,000/ml c 9 <1,000,000/ml <100,000/ml Somatic Cell Count 900,000/ml 1 <400,000/ml <400,000/ml Protein Content 6.02% 7 >2.9% >2.8% Fat Content 3.77% 12 3.2% >3% Acidity 6.88 pH 12 <7.6 pH N/Ad

a Serbia By-Law on Milk Quality, April 2004 b EU Directive 92/46 c Excluded dairy with highest bacteria count (2.25 million per ml.) When

including this, average increases to 399,000 per ml. d There is no EU standard for acidity. Acidity can vary naturally in different

geographies and is generally handled at the local level. In most of eastern Europe and Russia this is done at the farm gate by using 70% ethanol to mix with a sample of milk. If it coagulates then the milk is too acidic and will be rejected. John C. Howells – Reka Mleka Project, Opto International.

Lacto-Freezers: A major concern regarding milk quality in southern Serbia is that only 22% of farmers surveyed have access to a lacto-freezer to cool and store their milk before it is collected. The majority of farmers store their milk in metal or plastic cans near the road awaiting pickup by the processor, who is scheduled to arrive at roughly the same time each day. However, in the heat of summer months it is impossible for the milk to remain under the 8oC benchmark stipulated in the Serbian By-Law on Milk Quality. The major impediment for using lacto-freezers


17

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 have become 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 surveyed reported 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 those farmers who do not request quality testing was the lack of access to testing equipment or a laboratory (47%). Interestingly, 32% of farmers surveyed replied that they do not see the need to have their milk tested.

Quality Results: Raw milk quality in southern Serbia, as reported by both dairies and producers, compares well against Serbian and EU standards. However, considering anecdotal evidence, the quality of laboratory equipment, and testing statistics, these results are somewhat dubious. It is concerning that only half of the dairies surveyed could report a bacteria count for their raw milk, and even more concerning that only one dairy, Zornic in Tutin, could report a result for somatic cells. Standard practice among dairies in Serbia is to test the milk they receive only for fat content and acidity. The MoA has not yet passed a Law on National Laboratories that would provide independent testing and enforcement of raw milk quality.

HACCP Overview: Hazard Analysis and Critical Control Points (HACCP) is a systematic, preventative approach to food safety that addresses physical, chemical and biological hazards as a means of prevention rather than finished product inspection. HACCP is used internationally throughout the food industry to identify and eliminate potential food safety hazards by examining the process and identifying all “Critical Control Points,” places in the process where hazards can be introduced or quality disrupted. To become certified, processors need to identify these points in the process and install the necessary controls and procedures that eliminate or minimize the risk to an acceptable level.

ISO 9000 Overview: The term ISO 9000 refers to a set of quality management standards; ISO 9000 currently includes three standards: ISO 9001:2000 presents requirements, while ISO 9000:2005 and ISO 9004:2000 present guidelines. All of these are process standards, not product standards. ISO 9000 is maintained by the ISO, the International Standards Organization and is administered by accreditation and certification bodies. ISO’s purpose is to facilitate international trade by providing a single set of standards that people everywhere will recognize and respect; the standards apply to all kinds of organizations in many different areas, including food processing.

HACCP & ISO 9000 Certified Processors: 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. Only one, Doma Dairy in Kursumlija, indicated that they have no plans for certification. These numbers are quite positive since as recently as 2005 only several dozen companies in all of Serbia had either of the two certifications. Quality certification is now a critical issue for dairies as the MoA has set a deadline for all food industry companies to be HACCP certified by January, 2009. Meeting the upcoming HACCP deadline has required dairies to invest significantly in upgrading equipment and facilities; on average, dairies have invested 24,000 € in

HACCP & ISO 9000 Certification

Status Rasina Toplica Raska Zlatibor

Certified In Process Plans No Plans

1 3 2 ---

2 1 1 1

5 1 2 0

http://en.wikipedia.org/wiki/Food_safety

http://en.wikipedia.org/wiki/Food


18

HACCP and ISO 9001 certification in addition to MoA and CRDA subsidies. (CRDA partners subsidized training costs, while MoA subsidized 80% of certification.)

Quality Problems: Despite these capital investments, dairies still cite several concerns in ensuring effective quality management and control: poor or lack of analytical equipment (42%), poor quality of raw milk (27%), and insufficient electrical supply (6%).

Investment & Financing Producer Credit: The use of credit among farmers is low in southern Serbia; only 22% of those surveyed have ever applied for a loan. Of those, the majority of applications were submitted through MoA, given their more favorable conditions than commercial banks. Despite being more affordable, MoA credit proved more difficult to obtain than bank loans: only 43% of borrowers were successful in obtaining MoA credit, compared to 95% approval with commercial banks. Credit provided through banks was typically larger on average (4,530 €) than that through the MoA (3,820 €).

Credit History in Mercy Corps AOR (212 Dairy Farmers)

Type of Credit Producers Approved Not

Approved Never

Applied 165

Applied for MoA Credit 28 12

(43%) 16

(57%) Applied

for Bank Credit 19 18 (95%)

1 (5%)

Main Reasons for Not Applying for MoA Loan • Insufficient Information (47%) • Loan Approval is Corrupt Process (20%) Farm Revenue Reinvestment: When examining revenue

reinvestment by dairy farmers, it perhaps follows logically that the farmers with lower incomes and standards of living would invest a higher percentage (though probably less amount) of their income in their dairy farming operations. On average, farmers report 37% of their revenues reinvested into their dairy operations. This average is significantly reduced by Rasina farmers, who only average 7% reinvestment. Toplica, Raska and Zlatibor average 53%, 43% and 46% respectively.

• Inability to Repay Loan (14%) • Bad Credit Terms (13%) • Application Process Complicated (12%)

Main Reasons for Not Applying for Bank Loan • Bad Credit Terms (99%) • Skeptical of Obtaining Loan (14%) • No Need for Credit (8%) Only 22% of farmers surveyed have applied for credit for their operations. While considerably more of those applied through MoA, the approval rate was lower than with commercial banks. MoA terms are 100,000-500,000 RSD, 5% APR, one year. Commercial banks vary from 1,000€ - 10,000€, 6%-17% APR, one year. (Exchange 81 CSD/€) Farmers could include more than one reason for not applying for a loan; hence, total responses are greater than 100%.

Common Farm Investments: Dairy farmers surveyed reported that they typically make the following types of investments into their farms. In addition to these, it is interesting to note that only two of the farmers surveyed (1%) indicated making an investment into education.

• Mechanization: 95% • Herd Size: 94% • Land: 49% • Construction & Facilities: 46% • Education (1%)

Processor Startups: Not surprisingly, almost all of the southern Serbia dairies began their operations using their own capital, as the banking sector and government were financially crippled after international sanctions and NATO bombing in the 1990s. Since then a majority of the dairies have applied for credit through commercial banks to expand their operations and prepare for new industry quality standards. All of the dairies surveyed that applied for loans during the past five years received credit from banks at a fairly reasonable interest rate of 12%. Despite this, dairies still complain that it is a problem to received outside capital and that the loan terms are not favorable. Survey results show that dairies in Toplica and Raska/Zlatibor regions have had to reinvest more of their profits into their businesses than in Rasina. This is most likely due to the fact

Investment & Finance Summary (19 Dairy Processors)

Start-Up Capital 18 of 19 invested own capital

Profit Reinvestment Rasina (47%) Toplica (90%) Raska/Zlatibor (78%)

MoA Credit Applied: 4 Received: 2 Pending: 1

Bank Credit Applied: 10 Received: 10

Long-Term Loan (avg.) Short-Term Loan (avg.)

30,000 EUR, 12% Annual Interest, 3 years 29,000 EUR, 2.13%/month, 6-12 months

Greatest Problems for Accessing Outside Capital

Unfavorable Terms (56%) Difficult to Acquire (39%) Banks more interested in personal loans. No MoA credit for startups. Limited to DOO and DO businesses. Too much paperwork. Difficult to obtain information.


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that dairies in Rasina are larger and the surrounding infrastructure is better.

Information Information Sources: Farmers surveyed indicted that their main sources of information about the dairy industry are through the mainstream media channels which provide news and sometimes educational programming about the dairy industry. Farmers also reported personal contacts, dairy processors, and milk collectors as important sources of information. Trainings and seminars organized by associations and MoA, as well as information disseminated through the MoA were also cited.

Main Sources of Information About the Dairy Industry

Media (81%) Personal Contacts (30%) Organized Lectures (30%) Dairies and Milk Collectors (28%) Ministry of Agriculture (17%)

Legislation Legislative Issues: Most of the legislative constraints mentioned were with respect to the MoA subsidies to dairy farmers. While dairies feel that subsidies provide a strong incentive to dairy farmers, they also believe that subsidies must be restructured around milk quality rather than fat content. It was also commonly mentioned that the Law on National Laboratories must be passed in order to set proper regulatory standards for dairy processors. Respondents also complained that the subsidy system places an additional administrative burden on dairy processors, and that this should be the responsibility of MoA or local governments.

Dairy Industry Legislation Positive Negative

• Premiums for dairy producers stimulate milk production.

• Raw milk subsidies should be made directly to farmers, not via dairies.

• Subsidies for HACCP Certification. • No Law on National Laboratories. • STZs do not need full-time laboratory

technician. • Producer subsidies paid on quantity

and fat content, not quality.

Evaluation of CRDA Assistance

Introduction: This section presents a summary of the assistance provided to the dairy sector by Mercy Corps through CRDA and CRDA-E. It is not intended to be a comprehensive overview of assistance, activities and achievements, but rather a summary to provide the reader with sufficient background so as to enable an informed perspective of the feedback from producers and processors. It should be noted that this evaluation was undertaken internally by Mercy Corps CRDA-E staff members; as such it can be argued that objectivity was sacrificed. However the team instituted measures to provide clients with an open venue to express their views and a system of checks to ensure the accurate and objective reporting of the team.

Data Accuracy & Reporting: The results presented in this section were taken directly from the survey data and Web-PRS, the project reporting system used by all implementers for CRDA. It is difficult, perhaps impossible, to directly link donor programming to quantitative changes resulting in a given sector over an extended period of time due to the contributions of other factors, such as markets, competition, value chain linkages and environmental factors. This analysis, therefore, presents the data obtained during the surveys in the form and figures reported by the respondents themselves; no verification of production, yield or financial data was attempted to be obtained through other sources.

Producer-Level Assistance Producer Group Strategy 2005-2007: In 2005, Mercy Corps’ CRDA-E assistance moved downstream in the value chain and began targeting dairy producers through “expanding” and “emerging” associations. The strategy was comprised of three key activities: i) Production Technology Investment, ii) Producer Group Formation & Development, and iii) Training & Education.

Technology Investments: Technology investments accounted for the largest share of financial resources on the part of CRDA-E, accounting for $842,000 through four separate investment programs from 2005-2006: i) Pilot Association Support, ii) Expanding Association Support, iii) Emerging Association Support (associations formed through the FAD program), iv) Value Chain Support (joint planning and contribution by both producers and processors). In each of these four programs, proposed investment projects were evaluated by the Mercy Corps agriculture team based on job growth, income generation, matching contribution (minimum 25%), community payback, project cost per beneficiary, due diligence interview and value chain linkages. CRDA-E investments primarily upgraded dairy farm mechanization by procuring milk collection and cooling equipment and tractors and other cultivating equipment. Most of the investments were jointly owned and managed by association members,


20

encouraging farmers to capitalize on production economies of scale and to strengthen the organizational capacities of the associations and cooperatives.

Producer Group Formation & Development: After the 2001-2004 CRDA investments in the dairy processors, Mercy Corps planned to strengthen the agriculture supply network by mobilizing producer groups with the support and assistance of the network of fifteen processors already assisted. In 2005, Mercy Corps hosted two Dairy Processor Round Tables (in Krusevac and Novi Pazar) to get input from the processors regarding their needs from producer groups. During the round-table the processors also identified 38 key producer groups (informal groups of farmers in a community with significant levels of productivity and cooperation with the dairy). Beginning with these identified groups, Mercy Corps designed and delivered 22 Farmer Association Development (FAD) workshops, resulting in the formation and registration of 22 “emerging” dairy associations.

CRDA Assistance to Dairy Farmers Producer

Training & Education: Through CRDA-E, Mercy Corps organized numerous training and education initiatives for dairy farmers, including:

• Dairy Feed & Nutrition: In November 2005 animal nutritionist Dr. Roy Chapin assisted 54 dairy farmers to improve livestock feeding and nutrition by providing best feed formulation ratios and basic education on dairy cattle feeding. Farmers tracked and reported the milk yield and results using the new feed formulations; the program resulted in an average increase in yield of 1.94 L/cow/day.

• Dairy Study Tour: In April 2006 thirty leaders representing 15 dairy associations participated in a three-day dairy study tour to Vojvodina and southern Hungary. The group visited model dairy farms, bio-milk producers and on-farm dairy processors. The study tour included presentations on the Hungarian agriculture extension system and the challenges before and after EU accession.

• Dairy Demo Farms: In 2006 Mercy Corps and institutional partners DeLaval, FAO, Reka Mleka and the Agricultural School in Prokuplje opened four dairy demonstration farms in Krusevac, Blace, Sjenica and Tutin. To date over 1,000 dairy farmers have visited the farms to learn about best farm management practices, new production technologies, proper hygiene and quality control techniques required by international HACCP and EUREPGAP standards.

• Training-on-Demand: Throughout 2006 Mercy Corps organized Training-on-Demand, which allowed producer groups to apply for financial assistance to support the training activities most demanded by its members by completing a relatively simple application. Training topics included organic production, cattle breeding and feeding, and complying with HACCP and EUREPGAP standards.

• Farm Information Technology: In 2007 Mercy Corps offered a computer education training course to increase computer literacy and access to information for the network of dairy associations and cooperatives. Farmer groups that successfully completed an introductory computer course for at least two members and established an office with electricity and telephone connections were eligible to receive a budget desktop computer and multi-functional printer, scanner and fax machine.

Producer-Level Impact Surveys & Data: The impact of CRDA-E assistance on dairy farmers as presented here was conducted through two measurement tools: i) Producer Group Survey, the survey used to collect most of the data in this report; and ii) Producer Group Benchmark & Impact Surveys, conducted in 2005 and repeated in 2006-2007, that aimed specifically at assessing the organization impact of CRDA-E support. The impact survey was only repeated, however, for producer groups that received all of their donated equipment before the 2006 cultivating season. In retrospect, a higher degree of assessment is needed on the organizational impact of CRDA-E to determine how the grants and assistance impacted the behavior and organizational capacity of the group.

Support Activities Groups Year

Technology Investments

$842,000 USAID/CRDA $358,000 Matching Contribution

49 2005-2006

Producer Group Mobilization 38 Farmer Association Development (FAD) Workshops

22 Producer

Group Development

Emerging Associations Formed

2005

22

Dairy Feed & Nutrition Project 54 2005 Dairy Farmer Study Tour 15 2005

Dairy Demonstration Farms >1000 Visitors 2006

Training on Demand 12 2006

Training & Education

12 Farm Information Technology 2007


21

Production Impact: With respect to production, CRDA-E investments had the greatest impact on increasing the area of cultivated land; 25% of CRDA-E clients indicated that CRDA-E investments were responsible for allowing them to increase farm land under cultivation, further allowing 17% of farmers to increase their herd size by providing a higher quantity of feed. A total of 14% of Mercy Corps clients stated that CRDA-E investments helped them improve the quality of their raw milk, primarily as a result of technology investments.

CRDA Producer-Level Impact 25% increase in cultivated land

Production 17% increase in herd size Increase 6% increase in milk production

7% increase in livestock feed Quality 14% farmers with improved milk quality

Increase 4% farmers with improved feed quality

Demonstration Farms: The four dairy demonstration farmers continue to track the number of visitors to the farms since opening nearly one year ago. At present, over 1,000 farmers have visited the demonstration farms, and several trainings and seminars have been held on the farms. USAID should continue to monitor the farms to investigate their long-term impact on the practices, behaviors and actions of both

the demonstration farmers and visitors. The real proof of impact will be if and when those farmers who have the opportunity to visit and spend time on the farms decide to make a similar investment on their own farms.

Demonstration Farms: >1,000visitors Livestock Feed Program: 1.94 L/cow; $.57/cow/day; for 24 farmers; $172.75/cow/year

Training & Education

Dairy Study Tour: 91% participants increased knowledge of dairy industry

General

Livestock Feed & Nutrition: Mercy Corps achieved impressive results with the Livestock Feed & Nutrition program: daily milk output increased by nearly two liters per day for cows that were fed the new feed rations. Unfortunately, Mercy Corps was only able to mobilize 24 interested farmers to actively take part in the program and diligently track and report their results. Nevertheless, the initiative demonstrates the possibilities for similar programs on a larger scale.

Economic Indicators: Farmers in all four regions achieved increases in income and profit despite rising production costs. The largest income changes were achieved in Raska (52%) and Toplica (55%), while the lowest income increase was in Rasina (10%). One logical explanation for these results is that farmers in Raska and Toplica have smaller incomes from their dairy operations than in Rasina, so small increases represent higher percentages. It should be noted that there is not a strong correlation between CRDA-E support and the reported increases in income; furthermore, how much of this can be attributable directly to CRDA-E remains a debate. Increased income and profit are consistent, however, with increases in herd size and yield per cow.

Results

26% farmers improved production efficiency 22 new dairy associations formed 12% farmers with improved access & infrastructure

Producer Economic Impact 2004-2006

Region IncomeChange

Production Cost Increase

Farmers with Increased Profit

Rasina 28% 53% 10% Toplica 55% 45% 92% Raska 52% 40% 82% Zlatibor 28% 17% 72% Total 41% 39%

USAID Indicators: Four indicators, shown in the table, were used by USAID to track performance among the CRDA partners. At the start of CRDA, there were discrepancies between the partners in collecting and estimating the results. In 2004 USAID released a formal memorandum outlining a standardized approach among the partners, in short, multiplying the investment by a factor to arrive at an estimate for the indicator. Mercy Corps has not attempted to verify the accuracy, integrity or margin of error of these figures. Furthermore, the indicators are

calculated by projecting the numbers over the remaining life of CRDA, and not represented on an annual basis (e.g. one full-time job created in Year 1 is equivalent to 72 person months). This reporting methodology is also subject to argument.

Producer Group Baseline & Impact Surveys: Baseline and impact surveys asked farmers in the producer groups a series of questions covering organizational performance. All members from each group completed the survey at the start of their cooperation with CRDA-E, and again after one year receiving CRDA-E assistance. Because the impact survey was repeated only for producer groups that received their donation before the 2006 cultivating season, comparative data was available only for 11 groups (26%). In addition to the performance data

67% Production cost and income both increased for producers at roughly the same percentage rate, but with significant changes between the regions. When expressed in real figures, rather than percent change, the two increases taken together result in higher real income for the household.

USAID Indicators Employment 1,560

person-months Generated Additional

Income Generated $276,000

Additional $1,620,000 Agricultural Purchases Agricultural Sales

Generated $6,907,000


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presented in the table, the limited data showed only very slight increases in membership and the number of paid employees over the one year.

Producer Group Performance (11 producer groups)

Mission Services Responsiveness Management Communication Ag Inputs 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 4.44 4.60 4.61 4.37 4.44 4.55 4.57 4.16 4.33 4.43 4.12 4.25

Farmers evaluated six performance areas on a scale of 1 to 5 (five being highest); producer group member farmers were quite positive regarding the performance of their respective organizations both before and after their cooperation with CRDA-E. Since benchmark scores were initially high in 2005, very little change was observed in the impact survey. Performance criteria improved slightly for all categories, except for management. As this data was only for 11 producer groups more data would obviously provide a more complete picture. Qualitative data should also be investigated to determine to what extent CRDA-E donated equipment is being utilized, managed and maintained as intended.

Opinion of CRDA-E Assistance: CRDA-E assistance, both in terms of the overall impact of the project and the professionalism of Mercy Corps staff, was viewed positively by clients. The only commonly-cited areas for improvement were i) too infrequent Mercy Corps staff member visits to the field, ii) poor quality of donated equipment (generally due to awarding procurements to low bidders rather than brand name providers), and iii) insufficient flexibility in the types of equipment available for donation.

Processor-Level Assistance Processor Strategy 2002-2004: As previously presented, Mercy Corps initially targeted CRDA support to the dairy sector at the processor level, operating on the presumption that by strengthening processors and increasing their capacity, the resulting demand for raw milk would provide cost-effective, downstream support to the producers. Assistance to the dairy processing sector was comprised of three activities: i) Production Technology Investments, ii) Training & Education and iii) Trade Promotion (CRDA-E sponsorship to local, national and international trade fairs).

Technology Investments: As with producer level assistance, production technology at the processor level also accounted for the largest proportion of financial resources invested by CRDA. From 2002 through 2004 Mercy Corps invested $809,000 in 15 dairies through CRDA (one was actually through the SSCRP program), leveraging $683,000 (46% of total) in matching contributions. Mercy Corps targeted small, functioning, privately-

owned dairies, evaluating proposals based on economic impact, technical feasibility of the proposed investment, and social impact. A Dairy Sector Working Group, comprised of local relevant stakeholders in dairy and business sectors assisted Mercy Corps in evaluating business plans and investment proposals. CRDA investments provided dairy processing equipment such as pasteurizers, homogenizers, packaging machines and cold storage chambers.

CRDA Assistance to Dairy Processors Support Activities Dairies Year

Technology

Training & Education: Mercy Corps training support to dairy processors was limited to three activities:

• Dairy Product Diversification & Marketing: This training initiative was delivered by Cornell University Professor of Food Science, John Sherbon, and was a joint CRDA initiative organized by ACDI/VOCA. The two-day seminar focused on dairy product marketing, niche dairy product development, small dairies in the US, and ensuring quality in dairy processing. During his two-week assignment, Dr. Sherbin visited five dairies in Mercy Corps AOR where he provided recommendations for growth, produced new dairy products on a pilot scale, and addressed special concerns of the owners.

• Supply Chain Management: The Supply Chain Management workshop brought together all dairies in Mercy Corps’ network to discuss common issues around raw milk supplies and how processors and Mercy Corps could best address their needs. The dairies presented their needs and discussed what processors and producers can do to improve the overall competitiveness of the sector. The participants also presented programming ideas on what donors can do to strengthen the sector.

• HACCP/ISO Certification: From November 2005 through April 2006 seven of the fifteen dairy processors supported through CRDA completed an eight-module ISO/HACCP training course delivered

Investments $809,000 CRDA $683,00 Matching Contribution 15 2002-2004

Dairy Product 5 2002 Diversification & Marketing

Supply Chain Management 14 2005 Training & Education

HACCP/ISO Certification Training 5 2005-2006

Trade Agriculture & Trade Fairs 3 Promotion 2005-2006


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by local partner, Qualitass (a total of 13 businesses in total were subsidized). The MoA subsidized 80% of the certification costs for companies that completed the six-month training program. Five of the dairies completed the training; two dropped out and later re-enrolled under a similar program offered by MoA. In the end, seven of the fifteen dairies supported by Mercy Corps through CRDA were certified.

Trade Promotion: Three firms participated in agriculture and trade fairs in Novi Sad and Bosnia. All stated that the experience was useful in developing new business and industry contacts; however, as of the time of this writing, no new contracts were signed as a result of their attendance. Firms which were invited, but which decided not to attend, mentioned that they felt they were not prepared or did not have the proper staff available.

Processor-Level Impact Surveys & Data: The impact of CRDA assistance on the processing sector was limited to the Processor Survey conducted specifically for this assessment, combined with the initial baseline information collected in 2001-2004. No impact survey was ever conducted for the assistance to the processors following CRDA assistance. Obviously it is very difficult to determine the exact contribution of CRDA support to performance, especially over such a long period of time (other than increase in design capacity, which is fairly straightforward). The survey results presented are an average compiled for the fifteen client dairies assisted during CRDA. The survey relied on statements and estimations made by the processors, without independent or quantifiable verification; as such the data are subject to the motivations, estimation, recollection, and reporting of the processors themselves.

CRDA Processor-Level Impact 27.2 tons/day increase in actual processing (21% of 2004 total) 56.5 tons/day increase in design capacity (22% of 2004 Total)

Processing Capacity

Quality 100% of investments impacted quality 4 dairies HACCP/ISO certified through CRDA

New Product Development 93% of investments impact new products

Raw Milk Supply(from CRDA

50% of dairies increased raw milk quantity 44% of dairies improved raw milk quality

Producer-Level 50% of dairies improved cooperation with producer networks Investments)

Infrastructure

Processing Impact: CRDA investments and processor matching contributions contributed 56.5 tons/day in dairy processor design capacity. In 2004, when CRDA transitioned to CRDA-E, this accounted for 23.8% of the total processing capacity in southern Serbia (237.0 tons/day); in 2006, these investments still account for 17.2% of the design capacity (328.2 tons/day). (Because the working capacity is dependent on many other factors, such as markets and raw milk supply, this assessment refrains from assigning any value of CRDA investments on working capacity.) Nearly all dairies responded that CRDA investments helped improve milk product quality and their development of new products. Half of all dairies responded that they achieved noticeable improvements in the quality and quantity of raw milk supplies due to CRDA-E assistance to dairy farmers and associations.

Operational Success Rate: It is important to note that 15 out of 16 dairies (94%) supported by Mercy Corps through CRDA remain in operation at this time, three to five years later. Only one dairy, the Trosic dairy from Trstenik, closed his operations in 2005 (CRDA investment was made in 2001), citing increased competition with Imlek and a lack of capital to continue the necessary upgrades to remain in competition. This is a fairly reassuring statistic and likely reflective of the effectiveness of CRDA Dairy Sector Working Group and due diligence process of the Mercy Corps team. With the inevitable consolidation in the dairy industry, however, it is not likely that this operational success rate will continue into the indefinite future.

USAID Indicators: The results for the four USAID indicators are presented in the table. Again, some of these indicators are subject to the calculations and formulas applied to investment figures and have not been verified for accuracy or margin of error. In addition to calculating the figures over the life of CRDA, as was done with the producers, these figures were estimated both for the processor, as well as to the downstream producers. While the argument that investments at the processor level result in increased sales for producers is generally valid,

the figures do not necessarily take into account the degree to which both processor and producer are impacted; moreover, it generally assumes that all producers serving the processor were affected to the same degree.

50% of dairies with improved roads and access to raw milk producers

USAID Indicators Employment 29,200

person-months Generated Additional

Income Generated $4,466,000

Additional $3,757,000 Agricultural Purchases Agricultural Sales

Generated $3,074,000

Opinion of CRDA Assistance: As with producers, CRDA assistance was again viewed very positively by clients who ranked both CRDA impact and professionalism of Mercy Corps staff very highly (4.36 and 4.86 respectively,


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on a scale of 1-5). Challenges and areas for improvement included: i) more oversight of equipment suppliers, ii) poor quality of equipment (again typically citing the low bid procurement procedures), iii) lack of technical knowledge of Mercy Corps staff members, iv) poorly organized implementation strategy, and v) insufficient number of field offices, resulting in poor service to specific regions.

Conclusions & Programming Recommendations This section summarizes the results, conclusions and recommendations of this assessment. Though this report concludes that further consolidation of the dairy sector is likely, there are areas where donor interventions can continue to provide returns. Small dairies are succeeding in an increasingly difficult market, but can help secure their position and even grow by expanding their product lines in niche products. Geographically, gains can still be achieved by targeting some activities in specific regions. Even without the goal of growth, donors can help both producers and processors prepare for the future and remain competitive as the dairy market consolidates by helping to improve operational efficiency, develop marketing strategies, and conduct product financial analysis.

Producers Introduction: Milk producers were asked what additional support they would like to see from donors, both in terms of capital and training. Most commonly-cited capital investments were equipment, herd size and genetics (livestock were never supplied by Mercy Corps through CRDA or CRDA-E), on-farm construction, and infrastructure. Most cited training needs included quality, feed & nutrition, breeding, and training in mechanization. Milk Production & Herd Size: Results were significantly higher for both of these indicators in Toplica and Raska than in Rasina and Zlatibor. Milk production increased 33% and 38% in Toplica and Raska from 2004-2006, while growth in Zlatibor and Rasina was 18% and 19% respectively. Herd size in Toplica grew by 90% and in Raska 65%; in Toplcia and Zlatibor, herd size increased by 37% and 46% respectively. Slower growth in the Rasina region might be rationalized due the fact that it already possessed the higher milk production and second highest average herd size in 2004. However, the slower growth in Zlatibor is concerning and should be investigated further.

Recommendation: If and when targeting dairy sector interventions in Serbia, a high level of impact can likely be achieved in the Zlatibor region. This region is one of the most remote and neglected regions in Serbia and has few agriculture extension services and support institutions. Donors should seek to fill the agricultural extension gap in this region and find ways to improve affordable and reliable access to credit.

Producer Results: Only roughly half of dairy farmers in southern Serbia are significantly improving results from training and development activities; the other half remain stagnant. While on average all four regions achieved double-digit growth in yield per cow, herd size, and cultivated land, most of the growth was attributable to only 50% of the farmers. These results are not surprising considering that southern Serbia has 42% of all dairy farm households in Serbia; with so many small farms, it is expected that some farms will grow faster then others. In the long-run the industry will eliminate the less serious producers from those farmers with real commercial potential. It is evident from the survey results that these two groups have already established themselves.

Dairy Farming as Viable Commercial Activity: Dairy farming is increasingly becoming a viable commercial activity rather than a household income supplement. The fact that 80% of Mercy Corps clients surveyed are selling their milk to dairies provides evidence that dairy farming is a legitimate source of income. In the more economically depressed regions of Raska and Zlatibor, household milk consumption is highest at 8% and 19%, respectively, while in Rasina it is only 3%. This would seem to indicate that as regions become more economically advanced, farmers are more willing and successful in commercializing their dairy farms for income rather than personal consumption.

Recommendation: Focus on dairy farmers with high commercial potential, as these clients are the ones that will likely have the capacity to remain competitive in the industry as increased production and quality standards become more demanding. Dairy farmers without commercial potential will be better served by helping them to transition to other rural income generating activities with greater potential for long term viability.

Recommended Support to Dairy Producers (Cited by Producers)

Capital Improvements

Capital Equipment (80%) Increase Herd Size & Genetics (73%) On-Farm Construction Works (30%) Infrastructure (26%) Production Quality Standards (56%)

Training Cattle Feed & Nutrition (46%) & Education Cattle Breeding (25%)

Agricultural Mechanization (19%)


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Forage & Fodder Production: In Raska and Zlatibor there is roughly twice the amount of farmland available for forage and fodder production as currently required to support dairy farming operations. Rasina and Toplica have much less available land and opportunities for forage and fodder production to grow their herds without purchasing or renting new land.

Recommendation: Donors working in Raska and Zlatibor should encourage serious dairy farmers to expand their herd size by increasing fodder production, using affordable credits through MoA, banks and dairies. Less serious dairy farmers should be encouraged to utilize farmland for other potential high altitude crops such as potatoes, berry fruit or medicinal and aromatic plants.

On-Farm Processing: A significant number of farmers in Zlatibor are active in on-farm dairy processing activities; a full 22% of the milk in this region is processed on-farm, primarily into cheese. While there is a strong tradition and recognition of high quality niche cheese production in the Zlatibor region, cheese production requires much more labor, potentially reducing the economic benefit. Opto International’s Reka Mleka project recently did a financial analysis of cheese production in the Nis region and provided strong statistical support that it is more profitable to sell milk to dairies than it is to process it on-farm into value-added dairy products.

Recommendation: Agriculture programs working in the Zlatibor region should conduct a financial assessment on the economic benefits of cheese production versus milk production and disseminate the results to dairy associations through extension services, media, educational materials, and the MoA.

Raw Milk Prices: Raw milk prices in Raska and Zlatibor have increased by 16% and 27% respectively over the past three years, and are now comparable to those in other parts of Serbia, such as Rasina and Toplica. The reason for this is likely due to the increased demand for raw milk spurred by new and expanding dairies, some of this due to CRDA assistance.

Organized Collection Points: A majority of farmers (84%) are not selling milk through organized collection points, but instead use the services of the processor or collection company to collect raw milk directly from their farm. This is resulting in poor storage of milk, high bacterial count and overall reduction in quality, and inefficient and expensive collection costs for dairies.

Recommendation: Donors should work jointly with producer groups and dairies to establish proper collection points that keep milk secure in the cold chain; improve logistics, collection and traceability; and improve the competitiveness of small dairies and the producers they support.

Lacto-Freezers: Most dairy farmers in southern Serbia have no access to lacto-freezers due to the high initial capital investment required. This is a serious concern for milk quality, as only 22% of farmers have access to lacto-freezers that allow them to cool and store their milk before it is collected. The majority of farmers store their milk in metal or plastic cans on the side of the road awaiting collection from a processor or collection company.

Recommendation: Donors should promote the use of lacto-freezers among dairy associations by encouraging dairies to support the investment in cooperation with the farmers and associations. The use of lacto-freezers should be shared among the farmers in the community to further reduce the capital investment per farmer and to increase the benefit and improve the competitiveness of the entire value chain.

Silage Use: Only about 25% of dairy farmers are using corn or grass silage to feed their cattle. Almost all of the corn silage is used in the Rasina and Toplica regions, while farmers in the more mountainous regions of Raska and Zlatibor use mostly grass silage.

Programming Recommendation: Disseminate information on the benefits of silage on milk production and farm profitability, and implement pilot programs similar to Mercy Corps’ Livestock Feed & Nutrition Program to demonstrate to farmers the benefits of silage practices first-hand. Once a feed program has been piloted with successful results it is much easier to promote and expand improved feeding practices.

Simmental Cattle: A majority of farmers (76%) are breeding Simmental cows for dual purposes in southern Serbia. These cows are preferable to higher milk-producing breeds such as Holstein as they are more suitable for dual purpose (milk and meat). Many farmers feel that the sale of Simmental beef compensates for the lower milk production.


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Recommendation: Develop and provide clear financial comparative data on the economic benefits of Simmental versus Holstein cattle, taking into consideration beef sales. Results of such a study should be disseminated widely among dairy associations in Serbia.

Access to Credit: Bank credit is easier to obtain than MoA credit. Farmers who applied for loans from commercial banks were twice more likely to obtain approval than those who applied for MoA loans. The likely reasons for this are that there is much more available private credit than MoA credit and the selection procedures are more transparent. A vast majority of farmers complain that bank loans are prohibitively expensive. Over the last several years, however, commercial credit has become more affordable and several banks now have agro-loan products specifically tailored to meet the needs of farmers.

Recommendation: Facilitate agricultural credit through loan guarantee funds to make credit more affordable, disseminate credit information from commercial banks, and assist farmers with loan applications and training.

Dairy Farm Investment: Significant investments are still required at the producer level. Farmers cite mechanization, cattle breeding stock and farm facilities as the most necessary investments. Lack of such investments will prohibit growth and may prevent farmers from commercializing operations.

Recommendation: Donors should seek to develop training programs, and possibly incentives, that encourage farmers to take advantage of production economies of scale by sharing mechanization and purchasing bulk quantities of inputs to reduce costs. As mentioned previously, farmers should be encouraged to utilize credit to fund new large capital investments.

Processors Introduction: This section summarizes the results and recommendations regarding dairy processors. When asked what additional support they would like to see from donors, dairies mentioned very similar interventions to the activities provided through CRDA: capital equipment, improved energy supply, and support to dairy farmers. Because of the high grant assistance available through CRDA, perhaps this is to be expected. However, dairies should now be encouraged to access private capital for these types of investments. It is somewhat concerning that very few dairies ranked further technical assistance as important to their operations.

Recommended Support to Dairy Processors (Cited by Processors)

Machinery, Lab Equipment, Cooling Tanks, Vehicles Capital Equipment (84%)

Herd Size, Milk Quality, Collection Stations Dairy Farmer Support (22%)

Energy Supply (22%) Electricity & Gas Supply Law On National Laboratories, Quality-Based Subsidy Program Policy Reform (11%)

Standardization (11%) HACCP, ISO, GMP, Organic Marketing (11%)

Future of Small Dairies: Small dairies are unsure about the future of the industry. When asked to rank on a scale of 1-5 how optimistic (5 being very optimistic) they are about their future and the future of the dairy industry in Serbia, dairies responded cautiously with an average score of 2.98. When evaluating the industry overall, dairies responded with a mix of positive and negative comments. On the positive side, dairies feel that the quantity of raw milk is increasing as farmers are becoming more educated and professional in milk production; furthermore, they feel that market opportunities are expanding. On the negative side, some feel that small dairies will disappear due to foreign competition and unstable markets, that Serbia is too small a market for the high number of dairies, and that little is being done to stop the gray economy from damaging the industry.

Trade Fairs, Study Tours, Training

Trainer Recommendations

Dairy Product

• Establish testing, incentives & education to improve milk quality from the farm.

• Establish routine to check and track milk quality and microbiology.

Diversification • Sponsor a seminar for small dairy owners to provide them with ideas, materials, and techniques for educating their small farmers in milk quality milk.

• Help form an association of small dairies to foster exchange of ideas and provide a forum for continuing technical education.

& Marketing Training

2002

• Dairies should better educate producers on their raw material requirements.

• Open regional laboratories for milk analysis. Supply Chain

• Dairies and donors should cooperate to provide assistance with milking lines, cooling equipment and transportation infrastructure.

Management Workshop

2005 • Provide education to farmers in producer

group formation, livestock breeding, nutritionand feeding and milk hygiene.

These recommendations were provided by the trainers and facilitators of the activities for dairy processors. Though the results are somewhat dated, many of the recommendations remain valid. In early 2005 two seminars, organized under CRDA-E for small dairies, the dairies themselves expressed interest in forming a small dairy processor association.


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Dairy Industry Growth: The dairy industry has experienced impressive growth in southern Serbia since 2002 as small private companies have filled the market gaps left behind by state-owned food processing companies that collapsed in the 1990s. Raw milk processing in has grown by 174% and income from sales by 507% since 2002, with the largest growth rates in Raska/Zlatibor and Toplica, respectively. The high growth in these regions is partly due to the very low capacities that existed in 2002 and before; in 2002 the combined capacity of Raska, Zlatibor and Toplica was half that of Rasina alone. Currently the design capacities of the regions are Rasina, 122 tons/day; Toplica, 75 tons/day; and Raska/Zlatibor, 131 tons/day. CRDA investments accounted for 23.8% of the 2004 design capacity and 17.2% of the current design capacity among the southern Serbia dairies surveyed.

Operational Efficiency: Dairies are currently operating at an average utilization of only 57% (working capacity as percentage of design capacity). While working capacity has also increased dramatically (209%), the rate of utilization has increased only from its 2002 level of 51% to the current level of 57%. One main reason for this underutilization is that many new small dairies have entered regional and local markets, increasing competition for similar products. The number of dairies in the 18 municipalities in southern Serbia currently represents one-third of all operational dairies in the country, yet production accounts for less than 9% of the national total.

Regional Markets: Regional markets for small dairies are becoming very competitive. Dairies in southern Serbia sell 65% of their products in regional markets and 41% to small shops. Over the past six years, the number of dairies has grown from 11 to 19. In order to remain competitive in such a marketplace dairies must either seek to develop new product lines, expand to new markets in larger cities in Serbia, or begin developing export markets in surrounding countries.

Recommendation: Donors can help small dairies expand markets outside their immediate region, where there is high competition from other nearby dairies, by providing marketing expertise for accessing new markets with lower levels of competition. Donors can assist by conducting and disseminating market analyses that assess markets based on geography, products, branding and marketing. Programs can also assist local companies with marketing their products through regional and international trade fairs.

Dairy Management: Dairy owners and operators have a high need for more professional management. A lack of skilled and educated employees was cited as the top production problem in all three regions assessed. A primary reason for the lack of skilled labor is that the dairies have resisted hiring professional mangers to handle specific functions of the business such as marketing, operations or finance. Owners prefer to leave operational decisions to themselves or their family members, restricting their ability to effectively manage, train and educate employees for management positions. Consequently, management is overburdened, lacking in numerous skill areas, and has little time to focus attention on specific business needs.

Recommendation: Training and education programs on operations and human resource management will help dairies to develop trained and educated staff within their operations, allow them to better and more efficiently utilize their existing staff, and identify areas where new skills and experience are required.

Raw Milk Quality & Quantity: Dairy processors cite poor quality and low quantities of raw milk as a major production problem and growth constraint. The average dairy in southern Serbia collects milk from over 500 individual households (some as many as 2,000) and yet 74% of dairies still face milk shortages in the winter. The two major reasons for the seasonal shortage is that cows are generally calving in the spring and therefore not producing milk in the winter, and the lack of access to farms during winter due to poor roads and inadequate snow clearing. Milk collection from small farms dramatically increases operational costs and puts a significant logistical burden on dairies. It also negatively impacts quality control as traceability and standards are harder to employ. Because of these supply problems, several dairies have begun to invest in their own farms in order to have control over the quality of their raw milk supply and to lower collection costs.

Recommendation: Improve raw milk quality and increase production levels and yield by continuing to work with farmer associations, cooperatives and agriculture stations so that dairies do not experience shortages, can collect milk from fewer collection stations or households, and have confidence in the quality of raw milk supplies. Dairies as well should support their best producers, encouraging the growth of the farms meeting their production and quality standards.

Raw Milk Collection: Dairies must either invest themselves, or hire better-equipped collection providers, to improve the on-farm cooling, storage and transport of raw milk. Only one dairy owns a refrigerated collection


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truck and only 21% of the dairies surveyed have registered collection points. If dairies are unable to afford the necessary investment, they should consider using private collectors with cooling equipment or investigating leasing options.

Recommendation: Improve raw milk collection by bringing together producers and processors to establish strategically positioned milk collection points. Furthermore, training and education on quality control, traceability, testing, and maintenance of collection points should be offered to producers, collectors and processors.

Product Diversification: Dairies must begin to innovate and diversify their products if they are to remain competitive. All of the dairies surveyed produce very similar products: fresh milk, yogurt, yellow cheese and cream cheese. Individual market share for all four of these products has dropped of late as regional markets have become more competitive. Local and specialized products make up a very low percentage of sales and there are few initiatives to diversify into more niche products. In order to continue growing their markets, small dairies should conduct the necessary market research to expand production into niche products and invest in technology, education and marketing of new products.

Recommendation: Donors can facilitate the provision of training and consulting services on new product innovation, development, and marketing. Small dairies should seek to develop competitive advantages around local specialized niche products. Donors should subsidize more training programs, such as the Dairy Product Diversification & Marketing training organized by ACDI/VOCA under CRDA in 2002.

Access to Private Capital: Dairies should seek to access private capital in order to remain competitive. With the high level of competition in the Serbian banking sector there is adequate, affordable and available capital. After several years of successful operations these small dairies are attractive borrowers for banks. Of the ten dairies in southern Serbia who have applied for commercial credit in the past five years, all were approved. Dairies can utilize credit to make the necessary investments to develop and market new product lines.

Recommendation: Facilitate credit for dairy processors, especially for working capital, with commercial lending institutions. Working capital is a serious need for many small dairies operating with low cash flows. Access to working capital is critical in order to access larger buyers with less frequent payment terms. Dialogue should be facilitated between lending institutions and small food processors to determine innovative ways to meet the needs of the businesses.

Financial Analysis: Dairies need improved financial analysis, especially profitability analysis, of their product lines. Very few, if any, dairies utilize managerial accounting systems and techniques to determine their product profit margins. Dairy owners should consider employing business and financial consultants to advise and assist them with financial and profitability analysis.

Recommendation: Donors can help by providing training and consulting services on financial planning and analysis. Dairy owners should be educated on basic managerial accounting and profit-and-loss analysis in order to maximize profits and analyze the cost-benefit of marketing initiatives and new product development. Training should clearly demonstrate the financial impact of selling to several large buyers compared with many small retailers.

Payment Collection: Dairies are constrained with a lack of working capital due to poor payment collection. Lack of working capital was cited as the most important production problem, and payment collection as the most important problem regarding product sales. The cause and effect relationship between these two problems presents a great opportunity for small dairies: the companies should begin to market their products to larger, more reliable buyers that can ensure prompt payment of larger deliveries. Currently, dairies sell over 50% of their products to small shops and restaurants; these buyers have low cash flows and short business cycles. Furthermore, small shops are being squeezed out of the market as supermarket chains expand into the provincial cities in southern Serbia; dairies should adopt marketing strategies that capitalize on this trend. Dairies should also develop strict payment terms for small shops and withhold deliveries to regularly delinquent customers.

Supermarkets: As supermarkets increase market share at the expense of small stores, small dairies will find it more difficult to complete with the larger dairies. Dairies are already concerned that they are not able to access supermarkets because payment terms and entry fees are too high. Dairies will need to find innovative methods to compete with large producers like Imlek. Possibilities include forming a regional or national dairy association to


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negotiate better payment terms, negotiating with banks for favorable working capital loans, and investing in technology to develop and market more specialized niche products.

Recommendation: Donors can assist dairy processors to develop regional or national level small dairy associations. Currently no organization exists to lobby, advocate, disseminate information or negotiate with buyers on behalf of small dairies. The recently formed Dairy Industry Forum, initiated by the SIDA-funded Reka Mleka project, aims to unite the dairy industry as a whole; however, it does not intend to focus on the specific needs of small dairies. Donor programs could help fill this gap.

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