Ukraine Dairy Sector 2023: Challenges, Growth, and Future Outlook

The dairy industry in Ukraine faced significant challenges in 2023, including raw material shortages and logistical issues exacerbated by the ongoing conflict. Despite these hurdles, the sector experienced some growth, with milk processing increasing by 5%. This article explores the key issues affecting Ukraine’s dairy industry, including market dynamics, logistical problems, and future prospects.

Issues in the Ukraine’s Dairy Sector

1. Raw Material Shortages

• Decreasing Cattle Population: Ukraine’s dairy cattle population has been in decline, resulting in a shortage of raw milk. This trend is driven by both the ongoing conflict and insufficient state support for dairy farming. The cattle population currently stands at 1.28 million, which is impacting overall milk production.
• Impact on Production: The reduction in cattle numbers has led to a decrease in milk production to approximately 6 million tons, down from previous levels. This shortage hampers the dairy industry’s ability to meet domestic and export demands.

2. War-Related Losses

• Enterprise Destruction: The ongoing conflict has severely impacted the dairy sector, with 39 dairy enterprises destroyed across various regions including Kharkiv, Luhansk, Donetsk, Kherson, Mykolaiv, Sumy, and Zaporizhia. Major facilities like the Bashtansky Cheese Plant and Kupyansk MKK have been lost, leading to reduced operational capacity.
• Logistics Challenges: The war has caused significant disruptions in logistics, with closed ports and increased transportation costs affecting dairy deliveries. Western borders, especially in Poland and Slovakia, have encountered logistical complications that further strain the dairy supply chain.

3. Market Challenges

• Counterfeit Products: The prevalence of counterfeit dairy products has increased by 20% over the past two years. Ukraine lacks a robust program to address this issue, leading to a rise in the shadow market for dairy raw materials. This undermines the integrity of the dairy market and affects the quality of products available to consumers.
• Milk Prices: The alignment of Ukrainian milk prices with those in EU countries has removed the competitive price advantage previously enjoyed. This adjustment reflects rising production costs and market dynamics, impacting both domestic consumption and export competitiveness.

4. Additional Challenges

• Regulatory and Support Deficiencies: The Ukrainian dairy sector faces regulatory challenges, including outdated policies and insufficient support for modernizing facilities. There is a need for legislative changes to support the industry, such as reducing VAT on dairy products and providing incentives for upgrading processing equipment.
• Shadow Market Expansion: The shadow market for dairy raw materials continues to grow, with approximately 1 million tons of milk diverted annually. This diversion affects the official dairy supply chain and limits the effectiveness of subsidies and support programs.

5. Domestic and Export Market Pressures

• Domestic Consumption Trends: Despite the challenges, domestic dairy consumption has grown by 7% in 2023. This growth is driven by stable prices, returning migrants, and increased demand from military families and the HoReCa sector. However, the domestic market’s expansion is not sufficient to offset the losses experienced in production and exports.
• Export Decline: The export of dairy products has seen a slight decline, particularly in butter, while the export of raw materials has increased. Despite daily exports of 70 tons of milk to Moldova, the overall trade balance for dairy products is expected to be negative, with a decrease in export revenues compared to previous years.

Economic Overview and Processing Trends

1. Milk Production and Processing

• Production Volume: Ukraine’s milk production is approximately 7.36 million tons. However, due to a shortage of raw materials and declining cattle numbers, expert estimates suggest a reduction to around 6 million tons. This positions Ukraine 32nd globally in terms of milk production.
• Processing Growth: Despite facing numerous challenges, the dairy industry saw a 5% increase in milk processing in 2023. This growth reflects resilience within the sector. Notably, the proportion of milk from the general population used in processing has decreased to 12%, with the majority (94.5%) sourced from agricultural enterprises. This shift indicates a consolidation in processing sources and highlights the sector’s reliance on large-scale agricultural producers.

2. Domestic Market and Consumption

• Market Growth: The domestic dairy market experienced a 7% growth in 2023. Contributing factors include stable milk prices, the return of approximately 1 million migrants, and increased demand from military families and the HoReCa (hotel, restaurant, and café) sector. The growth reflects a strengthening domestic consumption base amid broader economic challenges.

• Import and Export Trends:
  • Imports: In 2022, the import of dairy products into Ukraine decreased, driven by factors such as emigration and unfavourable currency exchange rates. The overall reduction in imports has been partially offset by an increase in domestic production and processing capacity.
  • Exports: The export of dairy products saw a slight decline, especially in butter, due to various market pressures. However, there was an increase in the export of dairy raw materials, with daily exports of 70 tons of milk to Moldova. Despite this, the overall trade balance for dairy products is anticipated to be negative for the year, reflecting challenges in maintaining competitive export levels.

3. Future Prospects and Industry Vision

• Processing Capacity Expansion: Looking ahead, there is optimism about the growth of milk processing. Projections for 2025 suggest that enterprises will maintain a stable number of dairy cows (around 441,000) and continue to produce approximately 3.45 million tons of milk. This indicates a potential for sustained growth in processing capacity and efficiency.
• Domestic Consumption Trends: The continued expansion of domestic consumption is expected to support the dairy industry. Increased demand from various sectors, combined with improvements in the economic environment, will likely contribute to further market growth.
• Regulatory and Policy Changes: For the dairy sector to thrive, significant legislative and policy changes are needed. Proposed reforms include reducing VAT on dairy products, updating trade laws, and improving support for innovative equipment. Such measures are crucial for enhancing the industry’s competitiveness and sustainability.

Future Vision and Strategic Needs

1. Future Projections

• Vision for 2030: Inspired by the Netherlands, the Ukrainian dairy industry aims for an annual production of up to 8 million tons by 2030, with 70% directed for processing. The number of processing plants is expected to decrease, but the focus will be on increasing the capacity of larger plants.

2. Legislative and Policy Support

• Required Changes: For the dairy industry to thrive, legislative changes are needed, including reduced VAT on dairy products, removal of VAT on imported equipment, and updates to trade laws. A proposed Packaging and Waste Law and a review of trade terms with the EU are also essential for supporting the industry.