"70% of processors are 'cobbling together' something at home." The head of the dairy union discusses cows, butter prices, and supermarket dominance.

Over the past 15 years, milk processing volumes in Ukraine have decreased by three times. This decline is not due to factory closures or state pressure on industry representatives. The reason is quite simple and perhaps somewhat expected for the 21st century – a reduction in the number of cattle.

"Previously, the population produced over 80% of milk in Ukraine, and factories had their own raw material points, hiring collectors. Since 2014, when the cattle population among the public significantly decreased, intermediaries have entered this business to organize procurement," explains Arsen Didur, the executive director of the "Union of Dairy Enterprises."

This situation gives rise to two bad news. The first is for processing plants. In conditions of raw material shortages, they are forced to compete for milk from farmers. This can only be done by raising purchase prices and consequently minimizing the profitability of their business.

The second bad news is for consumers. Rising purchase prices and the cost of running processing plants inevitably lead to increases in the prices of dairy products on store shelves. Milk prices have increased by 19%, and butter prices have risen by 29% over the past year.

"Milk producers raised their prices by over 40% in the second half of 2024. Eventually, prices will balance: either processors will refuse raw materials, or they will negotiate prices to align product costs with the population's purchasing capacity," warns the interviewee.

In this chain, where the consumer is the final link, besides producers and processors, there is a third element whose income, judging by Didur's words, does not change under any circumstances. In fact, it is even increasing.

"Retailers even want an advance payment for marketing. That is, they haven't paid for the product yet, haven't received it, but they want to replenish their turnover with advance payments," adds the interviewee.

It seems that no one is capable of shaking supermarkets to reduce their service costs for dairy producers, and thereby, if not decrease, at least curb price increases. Even Didur himself ultimately refused to publish answers to questions about whether the Antimonopoly Committee influences retail.

On the decline of the cattle population, milk production costs, and markups

— Who are the participants in your association?

— The union consists of three categories of participants. The vast majority, about 60%, are milk processors. They process about 75% of the total volumes of dairy raw materials officially processed in Ukraine.

The second group consists of milk producers, 12 participants. They account for about 10% of milk production in the country.

The third category includes those involved in packaging and equipment, trading companies connected to the dairy business. For example, Tetra Pak, which produces packaging, or the Danish company Chr. Hansen, now called Novonesis, which manufactures starters and enzymes. This company revolutionized milk processing technology at one time.

— How much should be invested in one cow for it to start producing milk?

— A "cow place" costs about nine thousand euros. This includes a built farm and the cost of high-quality cattle like Holsteins.

— Holstein is a breed?

— Yes, it is a Dutch breed. If compared to cars, it’s like a Mercedes among cows.

— What percentage of cows in Ukraine are of foreign breed?

— Ukraine has 1.18 million cows. These are the cows that provide the base for milk production for processing. Out of these, 380 thousand are farm cows, meaning industrial production.

380 thousand farm cows represent over 50% western genetics. The part of the population remaining has our genetics, but it is not efficient enough for modern standards.

— What does "not efficient enough" mean?

— Our cows produce five to six thousand kilograms of milk per year, while western ones produce 8-12 thousand.

— Is the quality the same?

— Different. Holstein breed has fat content up to 4.2%, protein up to 3.6%. The Jersey breed is less productive but produces milk with a higher fat content of 7% and protein up to 4.5%.

— What is the cost of milk production in Ukraine?

— In December, the average price for raw milk was over 20 hryvnias per kilogram (1.03 liters) excluding VAT. By the end of January 2025, it dropped to 18.5 hryvnias. The profitability of milk production at the end of 2024 was around 35-40% and above. The cost indicator varies significantly depending on the scale of operations and the technology used for cattle maintenance.

— Is this the price at which a farmer sells milk to a producer?

— Yes. Farmers say they work hard and it’s not that profitable. Expert assessments show that the cost of milk production on a modernized and relatively modern farm is 12-13 hryvnias with VAT. In some cases, the profitability of milk production reached 70%.

— At what price do processors buy milk from the population?

— Previously, the population produced over 80% of milk in Ukraine, and factories had their own raw material points, hiring collectors.

Since 2014, when the cattle population among the public significantly decreased, intermediaries have entered this business to organize procurement. For factories to maintain competitiveness, they need to go to villages and collect a minimum of 5-10 tons to offset logistics.

Intermediaries, considering their services, sell at the same price at which processors buy directly from farmers. Perhaps there is a discount of up to 10%. The price received by a person who sells milk in the previous quarter was 7.5-8 hryvnias per kilogram depending on the region.

— What happened to the cattle population after 2014?

— Before 2014, there was a so-called VAT subsidy regime for meat and dairy processing enterprises. According to the conditions of its application, the VAT amounts payable by dairy processing enterprises to the budget from the sale of dairy products were directed to milk producers.

Moreover, from 2011, a transitional period was introduced, during which dairy processing enterprises initially directed 70% of their VAT obligations due to be paid to the state budget to special accounts, then 60%, and in 2014 – 25%.

Additionally, until 2017, a VAT accumulation regime was applied for dairy farms, according to which they did not pay VAT obligations to the budget but transferred them to a special account and used them for the development of their activities. In 2017, 80% of the VAT obligations were directed to the special account, and from 2018, this practice was abolished.

I won’t say that the special VAT collection regimes stimulated the development of dairy cattle breeding, but they at least prevented a sharp decline in the cattle population. After the special VAT regime was abolished in 2017, by 2024, Ukraine lost almost 40% of its cattle population.

— So by the end of 2024, the producer sold milk to the processor for 20 hryvnias excluding VAT, but we see significantly higher prices on the shelves. Where does such a markup occur?

— If you break down the cost structure of a bottle of milk, one third goes to the producer, that is, the price for milk. One third goes to the processor, which includes production costs. This encompasses energy, salaries, packaging, equipment depreciation, taxes. Agricultural producers also have taxes, but they have a preferential tax form – they are at a fixed rate.

And one third goes to the seller, that is, retail. Typically, retail claims to add a 10% markup, but they have two contracts: one for the supply of the bottle, and the other – the supplier pays them under a marketing contract. If you place it on the shelf – pay, if cooling on the shelf is there – pay.

— In the morning, I bought milk and noticed that retail brands also offer such products. Do they purchase milk from farmers or manufacturers?

— They do this to be less dependent on the supplier's brand, promoting their own private labels. Consumers get used to brands: "Halychyna," "Yah