Many foreign investors working in Ukraine envy colleagues who are in the nation’s food-processing sector, one of the last oligarch-free sectors of Ukraine’s economy.
In contrast to tycoon-dominated sectors such as steel and energy, Ukraine’s food business is much more governed by free-market principles and competition, where the success of companies depends less on closeness to the government.
Yet for U.K.-native Fredrick Aherne, who recently became CEO of Milkiland, a Dutch-registered leading Ukrainian dairy producer, such impressions come as a surprise.
For Aherne, a two-decade veteran of top world food producer Nestle, producing a simple food such as milk in Ukraine has proven unexpectedly difficult.
With control over nearly 2 percent of the combined $16 billion Ukrainian and Russian markets, Milkiland is not only suffering from the typical red tape that haunts businesses in Ukraine, it is struggling to find enough cows to milk in Ukraine.
According to Aherne, Ukraine’s stock of cows has in the past two decades decreased tenfold.
Typically, dairy product prices fall in the summer. But for the first time in years, they are skyrocketing this summer.
Prices on dairy products have sharply risen this year on top of a 20 percent increase last year, according to Kyiv-based investment bank Dragon Capital.
Speaking with the Kyiv Post, Aherne discussed the difficult situation in Ukraine’s dairy business, pointing out that investing in food manufacturing is not as trouble-free as many think.
Kyiv Post: What challenges have you encountered as head of Milkiland in Ukraine?
Frederick Aherne:It’s challenging to do anything in Ukraine. The regulatory framework, particularly for the food industry, is complex. The laws are framed in an interesting way. You face challenges with each particular set of regulations.
KP: We have heard from your colleagues that the food industry is the place to be in Ukraine, that those who work in the area face fewer problems than in other sectors.
FA: I haven’t worked in other industries in Ukraine, so I can’t compare.
Frederick Aherne (Alex Furman)
What I can compare is the food industry here with other countries, where the legislation is much more regular, much more widely understood and framed in such a way that it allows you to make your product yourself.
I will give you an example. Every food product in Ukraine is governed by state standards. If I want to develop a new product, I have to do it under the state standards and publish the recipe.
If I want to make a new product in any other country, provided that I used legal ingredients, I take the personal risk that this product is suitable for human consumption.
I don’t have to ask permission from a government agency and build a product according to their requirements in order to sell it. That’s a huge difference.
Legislation is incredibly confusing. The EU laws may be stricter at times, but they are clear. They don’t vary. It’s easy to know where you are. Your product is your product. You take the decision to make it or not.
KP: But on the other hand, aren’t Ukraine’s regulations tight to protect consumers? There has been enough research that some of the so-called “milk products” sold in Ukraine contain zero percent milk, relying heavily instead on palm oil and soy ingredients.
FA: But the state, supposedly, does govern it strictly. There supposedly are rules about labeling, which everybody tends to ignore. This is one of the challenges. I don’t want to say that I am against the way the state manages the food industry, but the reality is that all the members of European Business Association dairy committee are pushing for the labeling legislation that is strictly controlled, where you have to clearly say if this is a milk product, the raw material comes from a cow and there is nothing else.
Everybody knows that many companies ignore it. The reality is that we use milk and that’s the biggest challenge in Ukraine today.
We are one of the country’s biggest milk buyers, buying something like 11 million liters a week in a highly competitive market.
There is simply not enough milk in the country. There are two million cows in the country now, versus 20 million in 1991-1992. This is a key problem for the state.
– Frederick Aherne
If you talk to anybody in the dairy industry, you will find out that because of the weather, there is less milk available. Prices are going up.
There are all sorts of reasons why other companies would need to add other substances just to stretch the milk available.
KP: That’s why you are launching the program of establishing milk cooperatives?
FA: We believe it’s the only way village households [which provide 50 percent of Milkiland’s milk] can survive in the future. The economics are simple.
If you’ve got one or two cows, for sure you can supply milk, but you are never going to get enough money to plow back into proper veterinary services, proper feeding, and other things which come with the husbandry. If you join 200 or 300 others, the cooperative can provide the funding for those needs.
We are pushing for it very hard. It’s tough, because there are all sorts of suspicions from villagers. They ask: “Why should I lease my cow to the cooperative?” Some villagers believe their cows will be stolen.
It’s only in the medium and longer term that these people will see that their neighbors are better off, looked after by the cooperative, that they actually get more money in their pocket and that the cooperative hasn’t stolen their cows.
Today, less than one percent of my milk is coming from more efficient cooperatives – 84,000 liters, a tiny amount every week. But I believe there is no other solution for Ukraine.
KP: Why would a household want to join a cooperative?
FA: As an individual you won’t be make enough extra money to do any development at all. If you join with others, you can always decide to not take all of the money from your milk check and leave a bit back to do your veterinary support, to buy milking machines, to do all those things that will make a higher yield and better quality milk.
And for sure, we pay on quality and pay on volume. The more milk and of better quality you can give me, the more hryvnia per liter they are going to earn. So, it’s a route to getting richer and a route for security. We will add two farms this year to our network for 2,000-3,000 cows each [investing around $10 million], which would also be the breeding places.
We will be improving the breeding and offer these young cows to the cooperatives, which will be better breeds than they currently have.
KP: What exactly happened to make this milk season one of the toughest?
FA: Milk prices haven’t dropped because the [VAT-related] subsidies previously given by the government are no longer there. Although the final price isn’t much different, the price formula is. The farmer used to get cash partially made by VAT-flow [refund by the government] and partly made by companies like us.
The VAT flow has been stopped and hasn’t been balanced by any other system. So, all of the companies are paying more [for the milk] to have topped up that difference.
Secondly, there is generally less milk available. Companies have to pay more to get it. The reality is that we will for sure, like all the other companies, find the costs in our structure to reduce, so that we can still make a margin and put products on the shelves that people are willing to pay for.
But inevitably, they will be more expensive. In previous years, the milk products price would drop in summer, because the milk price would. This year it didn’t.
KP: But Ukrainian cheese has been relatively expensive for a while now, even mid-range segments. I recently came across a comparison that shows that Ukrainian cheese is the most expensive in Eastern Europe.
FA: The explanation is simple. Milk in Ukraine is more expensive than milk in the EU, believe it or not.
The cost of milk in the EU should be the highest as they have the highest labor and feed costs, but the cost of milk to process is the highest here.
The reason why we are pushing for the cooperatives is to improve the quality of milk that we receive. Here we do not get the cheese yield that we would if it was top-quality milk in terms of protein and fat content.
We are fighting every day to get the best cheese yield that we can, but we take what we get.
Here, we pay on the average Hr 3 [$0.38] per liter. My colleagues in the U.K. are currently paying around 19 pence [$0.30].
KP: Is it the farmers who get this money in Ukraine?
FA: Yes, but their cost structure is not the same. An average cow in Ukraine yields about 4 tons of milk per year. This is because of breed selection, and because you haven’t done much animal husbandry for the last 25-30 years.
In Europe, farmers get up to 8 tons of milk per cow. That’s a huge difference.
And so, in our cooperatives, we try to teach the farmers about husbandry to develop the yield.
There is simply not enough milk in the country. There are two million cows in the country now, versus 20 million in 1991-1992.
This is a key problem for the state.
Kyiv Post staff writer Vlad Lavrov can be reached at [email protected]
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