Report Highlights:

The Bulgarian dairy industry has experienced its most challenging year in the last 5 years. Lifting of European milk quotas combined with lower milk prices, higher milk supply in the EU, limited export opportunities for dairy products, and stagnant local purchases all have negatively affected the dairy market development. Dairy inventory has continued to shrink at small farms. Medium and larger sized dairy farmers were highly motivated to continue to invest in productivity, technology and genetics improvements as well as in better management practices. A number of domestic support programs were introduced to provide more direct or indirect aid to struggling farmers. Several key changes in the veterinary and animal health regulations were introduced and are expected to have a positive effect on the sector in the medium to long term.

Overview

The Bulgarian dairy sector has experienced a critical 2014/2015 year with the end of the fourth derogation for EU milk quality requirements (December 2015), removal of milk quotas (April 2015), and decline in milk prices since 2014.

The end of the EU milk quality derogation this month will see the sector split in two distinctive parts - the commercial dairy farms which meet the EU requirements, operate for the market and able to invest in upgrading and productivity improvements, and the non-commercial sector of small farms which are gradually pushed off the market and switch to direct sales, beef production or on-farm subsistence.

In early 2015 Bulgaria had 32,000 very small farms with 1-2 dairy cows. The number of these farms has been constantly declining over the years. However, these farms still accounted for 70% of all farms in the country and raised 14% of all dairy cow inventory. It is estimated that their share in total milk production is around 10%-15% due to lower milk productivity.

Farms producing non-compliant milk were reported to number 9,585, most of them in the category of small subsistence farms. Non-complaint milk in mid-2015 was reported at 4% of all milk. It should be noted, however, that the size of the dairy farms is not always correlated with their compliance with the EU milk quality standards. For example, as of late 2014 there were 235 farms with up to 10 cows which were compliant while there were also dozens of bigger farms with more than 50 cows which were not compliant.

As of January 1st, 2016 non-compliant farms must stop selling their product on the market. The MinAg encourages non-compliant farms to switch to beef production, and also plans new national legislation which will allow processing of non-complaint milk into dairy products with more than 60 days of aging.

Additionally, a number of smaller farms are switching to beef, sheep, or goat production. In 2014 the growth in beef cattle numbers was impressive at 23.8% to 50,000 animals. Some of these beef cattle numbers are dairy cows registered as “for meat". For smaller farmers this is a way to avoid closing their farms due to the expiring milk quality derogation and milk quotas.

As of November 2015, the number of dairy farms complaint with the EU milk quality standard was 3,980, with a total inventory of 157,000 dairy cows (53% of all dairy cows). These farms used to have a quota for milk deliveries of 551,000 MT which they almost fully used (490,000 MT per latest available data). However, this was only half of the national quota assigned to Bulgaria (1,049,518 MT). The current forecast is that these farms have the potential to grow faster in the near/medium term and to increase the herd to 200,000 dairy cows by investing mainly in better genetics.

Dairy Farms and Dairy Cows Inventory

In 2014 the number of dairy farms declined by 26%, and the dairy cow inventory decreased by 3.8%. The reduction was concentrated in small farms with up to 10 dairy cows. The number of farms with 1-2 cows decreased by 33%, and the inventory by 30%; for farms with 3-9 cows, the respective reductions were by 12% and 11% . On the other hand, there was growth in the category of commercial farms, especially those with over 50 dairy cows. Their number in 2014 was 9.1% higher and they raised 11% more dairy cows. Similarly, the largest farms also progressed well with 6% more farms and 9% more cows in this category. As of today, 7.4% of all farms have over 20 dairy cows and account for 60% of dairy inventory.

In retrospect, the data show that the local dairy sector has not adjusted nor reformed on time to meet the challenges of the common dairy market despite ongoing restructuring. As of early 2015, the number of dairy farms was 63% lower compared to 2007 (EU accession year), and dairy cow inventory dropped by 12%. The average number of dairy cows per farm increased from 2.7 in 2007 to 6.5 in 2014.

The biggest challenge for the industry remains still lower, uncompetitive productivity (milk yield). It varies widely up to 40% between small and large farms and averages at 3.75 MT/dairy cow which is under 60% of the EU average (6.66 MT/cow) (source: Ag Economics Research Institute, Sofia Bulgaria).

In addition, Bulgarian dairy farmers met the first no-quota year with significant indebtedness as a result of undertaken the upgrading of farms in recent years to meet new EU requirements. This limits their ability to manage market risks and to invest the necessary resources in improved competitiveness. Another increasingly important challenge is the lack of labor, an issue which may lead to higher labor costs in the near term.

The projection for 2015 is for dairy cow inventory to stagnate or decline marginally towards the end of 2015 supported by favorable feed costs and new subsidies for the dairy sector. Average milk productivity has the potential to grow, especially in commercial farms, due to investment in new genetics and animal selection. On the other hand, hot and dry summer weather and lower milk prices have forced smaller farmers to reduce feeding costs and average milk yield reportedly declined as compared to 2014.

Fluid Milk Production

In 2014 fluid milk production declined by 5.7% including 4% less for cow milk year-on-year. Lower milk production was a result of decreased inventory (3.8%) and lack of substantial growth in average milk yields which could not make up for the lower number of dairy cows. Since 2007, the milk supply has a downward tendency and in 2014 it was 6.5% lower than in 2007. For cow milk the reduction was 4%, but much less compared to the drop in inventory of 12% due to improving productivity over this period. The projection for 2015 is for a similar production level of 1.0-1.1 MMT.

Milk Deliveries

The biggest concern for the industry has been the steep decline in milk deliveries for processing. While cow milk production shrunk by 4% between 2007 and 2014, milk deliveries had a pronounced decline of 34%. The reasons for this trend are complex and related to the introduction of EU milk quality and hygiene requirements, inconsistent milk quality among farms, high milk collection cost for a big number of smaller farms, lack of dairy farm coops and collection points, and market demand for consistent, quality dairy products. In 2014 cow milk deliveries continued to decrease (by 3.3%) and accounted for 45% of supply. Industry data for January-April 2015 shows that milk deliveries were at 280,000 MT, 7.4% less compared to 2014.

Despite the trend for lower milk deliveries, however, the total output of processed dairy products has remained relatively stable (see the next section in the report). This raised doubts that the actual delivered and processed milk might be higher due to grey sector sales. The dairy industry has appealed for more stringent control over milk sales and for policy decisions which direct domestic support only to legitimate dairy farmers who can justify milk sales with sales documents.

The trend for lower milk deliveries has been behind the demand for increased imports of fluid milk and milk substitutes such as whole and non-fat powder milk, concentrated and non-concentrated milk and cream and whey (see the Trade section).

Milk for Direct Sales

Milk for direct sales and on-farm cow milk consumption followed a different pattern. After the initial decline during 2009-2011, direct sales have increased since 2012 although they dropped again in 2014 by 4.5% as compared to the previous year.

The amount of milk for direct sales was substantial at 600,000 MT in 2014 while the quota for direct sales was at only 70,000 MT. This leaves a large amount of milk for on-farm and feed use and is another reason for questioning the actual amount of processed milk (source: Ag Economics Institute study December 2014 and Institute for Market Economy study October 2014).

Direct sales usually are in a form of home-made cheeses traded in rural areas and a much smaller amount is delivered as fresh fluid milk. Only 3 farms were registered for direct sales as per EU regulations in 2014 but the number grew quickly to 89 in July 2015. Direct sales of fluid milk via vending milk machines became more popular and as of August 2015 there were 47 such machines in six towns.

In late September, the Bulgarian Food Safety Agency made 525 unexpected checks on milk sales. A total of 95 violations were found and 450 liters of milk and 200 kilograms of cheese were confiscated as having with no documents justifying safety and origin. Violations were made mainly by small subsistence dairy farmers who were selling milk without being registered under direct sales regulations.

In November 2015, the MinAg amended the major regulation about direct sales (Ordinance #26) by introducing more liberal requirements which are expected to help smaller farmers to legitimize their sales. Farmers will be required to sell not more than 50% of their fresh milk through direct sales but if the farmers produce home-made dairy products then all produced milk can be used for this purpose. Farmers will be able to supply up to 150,000 MT of milk annually via direct sales. The MinAg allocated 3 million Euro (U.S. $3.15 million) of State aid 2015-2010 for farmers who want to purchase coolers for direct sales of their dairy products.

Milk Cost and Prices

Milk prices declined since late 2014 and in 2015 and varied at 0.25-0.30 Euro/liter (U.S. $0.26-0.32). In July 2015 the price was 0.26 Euro/liter (U.S. $0.27), or 22% lower than in July 2014.

Feed continued to account for 70% of milk production costs. In 2015 grains and compound feed formulas for dairy cows were less expensive when compared to 2014. However, lower milk prices forced some farmers, usually at smaller farms, to save on feed quality. Lack of pasturing due to hot and dry summer was also negative for the dairy farmers. As a result, milk yield and production are forecast to decline in 2015.

Factory Use/Milk Processing

Cow milk deliveries in 2014 were 3.3% lower when compared to 2013 and the share of processed (delivered) cow milk in total milk output was at 45%. Direct sales and on-farm cow milk consumption was also lower by 4.5% and its share was at 55% of cow milk. Cow milk accounted for 93% of all factory use, followed by sheep milk at 4.9%, goat milk at 1.5% and buffalo milk at 0.6% . The quantities of processed non-cow milk increased in 2014 compare to the previous year.

In 2014 production of most dairy products moderately increased compared to 2013. Cheeses enjoyed a good growth of 14.5%, including better growth for white cheese (21%) especially the sub-type produced with palm oils (34% more), while the yellow cheese output slightly declined (-2.2%). Fresh cheeses also had a double digit growth of 17.8%. Packaged fresh milk output declined (-5.6%) while yogurt stagnated (-0.2%). In 2015 the old controversial regulation about producing cheese with and without vegetable oils at two different plants was revoked in support of cheese manufacturing.

In general, the production level for processed dairy products has remained relatively stable around 250,000 MT since 2007 despite lower milk supply due to increased imports of fresh milk and milk substitutes. The mix of dairy products is relatively constant with major volume shares for traditional products such as white cheese and yogurt.

Consumption

In 2014 the market faced a temporary drop in average annual consumption of dairy products from 67.7 kg/per capita in 2013 to 64.7 kg per capita or by 4.5%. Consumption of drinking milk, yogurt and white cheese registered lower consumption.

Since 2000 consumption trends have been towards higher cheese consumption and lower consumption of drinking milk while yogurt use has remained stable. Cheeses consumption per capita in 2014 was 42% more than in 2000 at 15.8 kg. The peak was in 2013 with 16.4 kilos/capita.

Trade

Imports of dairy products (volume) consist of mainly fresh milk for processing as well as milk substitutes such as milk and cream, NFDM and WHM, and whey. In 2014 imports of these products accounted for 74% of all dairy imports while cheese imports were at 17%.

The opposite is the structure of dairy exports. It is heavily dominated by cheeses at 59%, followed by buttermilk and yogurt with 18%.

Fluid Milk (HS#040110), mainly packaged ready to drink milk:

Imported volume in 2014 was at 1,996 MT, most of it from Poland. This is 37% more than in the previous year. In 2015 until August, imports declined by 27% to below 1,000 MT.

Fluid Milk (HS#040120):

Imports in 2014 reached 23,500 MT or 9.6% more than the previous year, with major suppliers Romania, Hungary and Poland. In 2015 until August, imports skyrocketed by 49% to 23,000 MT. In addition to the traditional suppliers, Czech Republic was also a source of milk. However, unlike in the previous years, almost 9,000 MT were exported to Greece.

Non Fat Dried Milk (NFDM, HS#040210/ PSD):

Imports in 2014 declined to 17,500 MT by sharp 52% year-over-year. The trend continued in 2015 until August with further 20% reduction to 10,200 MT. Poland, Germany and Greece are the major exporters.

Dairy, Whole Milk Powder (WMP, HS#040221 and HS#040229/PSD):

Imported volume for 2014 was at 8,400 MT or doubled (111%) compared to 2013. In 2015 until August, imports have been stagnant, sourced mainly from Romania.

Whey (HS#0404):

Imports have been stable in recent years at 10-11,000 MT with major exporters France, Slovakia and Poland.

Butter (HS#040510 and HS#040590/PSD Butter):

Combined imported volume in 2014 peaked to 6,393 BET (15.5% more than in 2013), sourced mainly from Germany and Poland. However, unusually high volume of 4,409 MT was exported to Romania. In 2015 until August, imports continued to increase to 5,061 BET or 35% more than in 2014, exports were also much higher at 1,373 BET, again to Romania.

Cheese (HS#040620, 040630, 040640, 040690- PSD Cheese):

Combined imports in 2014 were at 12,172 MT or 3.8% more year-over-year. In 2015 until August imports had a similar growth of 2.8% to 8,400 MT. Imported cheeses are sourced mainly from Germany, Poland, and the Netherlands. Cheese remains a major export product of Bulgaria. Export volume in 2014 totaled 21,534 MT (15% more than in 2013), mainly to Greece, Germany and USA. In 2015 until August, exports decreased by 6% to 14,000 MT, of which about 5,000 MT went to non-EU countries.

Cheese trade has been the most dynamic compared to other dairy products. Both imports and exports have grown since 2007. However, imports increase has been more pronounced by 338% compared to 68% growth for exports between 2007 and 2014. Bulgaria keeps a positive balance in this trade but it has been consistently shrinking in recent years.

Promotional Programs

The Association of Milk Processors is actively working on EU-funded promotional programs for Australia, United Arab Emirates, Kazakhstan, and Azerbaijan. The programs target Balkan ethnic market niches as well as wider audiences. They include exchanges and media outreach. The first dairy promotional program for Bulgarian cheese was completed successfully in August 2012. Total 1.5 million Euros (U.S. $1.6 million) were spent over the 3 year period to promote the product in Russia and Ukraine. In 2015 the association undertook its third promotion program for 3.97 million Euro (U.S. $4.2 million). The Association of Dairy Processors, another industry group, has promotional programs for Spain and Germany with similar goals.

In 2015 the MinAg made efforts to promote dairy exports to Asian markets. High level delegations to China and Vietnam discussed opportunities for joint ventures for dairy production (yogurt) and for intensified dairy trade. Trade negotiations were also reportedly held with Cuba.

Agricultural Policy

Current coupled subsidies are provided per each animal and will be kept through 2014-2020 period with the growing rates. The MinAg paid subsidies to dairy and livestock farmers in late 2015 at their full amount.

The coupled support of 13% for several sectors including dairy and livestock ncludes subsidies as follows:

• For dairy cows: requirement for minimum 10 dairy cows at the farm; the farms should produce EU quality and hygiene complaint milk; rate of about 100 Euro/head (U.S. $105); total allocation of 31.1 million Euro (U.S. $32.0 million) at a rate of 125 Euro/head (U.S. $131) for estimated 254,000 head per year. The estimated rate paid per animal in the fall of 2015 is 130 Euro/animal (U.S. $137).

• For beef cows and heifers: minimum 5 animals per farm; estimated subsidies at about 123 Euro/head (U.S. $129); total allocation of 13.7 million Euro (U.S. $14.4 million) for support of total 112,000 animals per year. The estimated rate paid per animal in the fall of 2015 is 128 Euro/animal (U.S. $134);

• For dairy and beef cows under selection/breeding control: minimum 10 animals per farm; estimated subsidies at about 75 Euro/head (U.S. $79); total allocation of 4.9 million Euro (U.S. $5.1 million) for support of total 65,000 animals annually. The estimated rate paid per animal in the fall of 2015 is 189 Euro/animal (U.S. $198). The latest available data shows that the number of cows under selection control has increased from 52,000 in 2012 to 91,000 in 2015 of about 30% of all dairy cows.

In addition, 99 Euro/head (U.S. $104) of dairy animal subsidy was paid in November 2015 for cattle under a transitional nation aid. De minimis was also paid to dairy farmers, 10 million Euro (U.S. $10.5 million). Finally, Bulgaria was allocated 6.0 million Euro (U.S. $6.3 million) under the EU emergency aid package announced in late September 2015. According to the MinAg full domestic support paid to dairy farmers in 2015 will reach 128 million Euro (U.S. $134 million) compared to 84 million Euro (U.S. $88 million) paid in 2014.

The emergency EU aid released in late 2015 sparked heated debates in the industry about the philosophy of domestic support for the dairy sector. Medium and larger-sized farms insisted on subsidies to be paid per a liter of milk in order to motivate higher milk productivity since this is the major barrier for competitiveness and a way to control the grey sector. On the other hand, the MinAg political decision has been to provide subsidies per a head of dairy animal with 50% of the new EU aid, and the other 50% to be paid per milk productivity. The MinAg plans for the new support programs starting from 2017 to be based exclusively on milk productivity.

Veterinary Service Animal Health Reform

A major reform in animal health legislation was announced in August 2015 due to the recent outbreaks of brucellosis, anthrax and Bluetongue in 2014/2015. The reform focuses on more stringent controls on implementation of the mandatory health program by private vets and their oversight control by the official vets, establishment of a special fund for compensations of losses, and introduction of so called emergency vet teams in cases of outbreaks. Farmers who do not take proper animal health care of their animals will not be eligible for subsidies. The animal health prevention program will be planned for 3 years instead of one and will be better funded. In the fall of 2015, more than 2,500 vets and dairy farmers participated in a nationwide outreach and training campaign about the new animal health legislation and health prevention program. Each of 28 regions has established so called regional consultative councils on animal husbandry issues which are planned to improve the communication between the farm industry and the authorities.

There were three brucellosis outbreaks in 2015, mainly in sheep but also in cattle, in Kyustendil, Pleven and Blagoevgrad regions. The vet office investigation showed that the main reason for the outbreaks was the illegal movement of live animals. Several anthrax outbreaks were also registered this year (Varna and Turgovishe regions). Tuberculosis in cattle was found in several villages in the Razgrad area.

Pasture Land Use New Regulation

The MinAg initiated amendments to the Agricultural Land Law to allow dairy farmers to have easier and preferential access to municipal pasture land. Availability of pasture land is an issue for dairy farmers. Most of them do not own land and need to compete for municipally rented land with crop farmers who usually can afford to pay higher rents. Grain/crop farmers manage pastures under agro-ecological subsidy schemes and in fact, often do not use pastures for pasture animals. A regulative change was introduced to not allow payments of subsidies for pastures if the beneficiaries do not raise pasture animals.

School Milk Program

The school milk program for 2015 will buy 2,400 MT fluid milk and 2,000 MT yogurt as well as 310 MT of cheeses. The MinAg allocated U.S. $4.6 million budget to cover logistical and admin expenses for the program. The 2015/2016 program will cover 2,115 schools and 302,000 children.

Dairy cattle farms and dairy herd, 2014 -2013

Changes in the number of dairy cattle farms and dairy herd, 2014 vs. 2013

Number of dairy cows per farm

Number of farms

as of end-2014

Change 2014/2013

Dairy cows, 1000 head

Change 2014/2013

1-2

31,598

-32.3%

40.9

-29.7%

3-9

6,649

-12.0%

29.8

-10.8%

10-19

3,574

3.8%

46.4

3.8%

20-49

2,369

-3.9%

72.9

-2.9%

50-99

740

9.1%

49.1

11.3%

100 and above

278

6.1%

56.3

9.1%

Total

45,208

-26.0%

295.4

-3.8%

Milk Production, 2008-2014, MT

Years

Cow milk

Buffalo milk

Sheep milk

Goat milk

Total milk

2008

1,143,190

7,173

88,243

77,465

1,316,071

2009

1,073,401

7,022

87,247

64,090

1,231,760

2010

1,124,360

7,933

85,001

60,410

1,277,704

2011

1,125,824

8,868

89,296

61,543

1,285,531

2012

1,093,034

8,081

87,403

53,333

1,241,851

2013

1,147,418

8,704

93,814

54,425

1,304,362

2014

1,102,100

8,850

74,615

44,565

1,230,762

Share, %

89.6%

0.7%

6.1%

3.6%

100.0%

2013/2012

Percent Change

(-4.0%)

(1.6%)

(-20.5%)

(-18.2)

(-5.7%)

Produced and Processed Milk in 2012-2014, MT

Produced and Processed milk in 2012

Total milk

Including cow milk

Processed at dairies

548,069 MT

513,482 MT

Other use: direct sales, on-farm and feed use

692,189 MT

578,490 MT

Total milk

1,240,258 MT

1,091,972 MT

Produced and processed milk in 2013

Total milk

Including cow milk

Processed at dairies

545,267 MT

510,994 MT

Other use: direct sales, on-farm and feed use

759,095 MT

636,920 MT

Total milk

1,304,362 MT

1,147,418 MT

Change 2013/2012

0.5% less processed total milk

0.5% less processed cow milk

Produced and processed milk in 2014

Total milk

Including cow milk

Processed at dairies

531,549 MT

494,534 MT

Other use: direct sales, on-farm and feed use

699,213 MT

608,196 MT

Total milk

1,230,762 MT

1,102,731 MT

Change 2014/2013

2.6% less processed total milk

3.3% less processed cow milk

Production and processing on milk, 2012-2014

Type of milk

2012

2013

2014

Change 2014/2013

000 liters

% of total processed milk

000 liters

% of total processed milk

000 liters

% of total processed milk

Cow milk

499,011

93.7%

496,111

93.6%

480,131

93.0%

-3.3%

Sheep

24,390

4.6%

24,218

4.6%

25,180

4.9%

4.0%

Goat

6,925

1.3%

7,037

1.3%

7,926

1.5%

12.6%

Buffalo

2,297

0.4%

2,534

0.5%

2,830

0.6%

11.7%

Total

532,623

100%

529,900

100.0%

516,067

100.0%

-2.6%

Production of processed dairy products in 2013 and 2014

2013

2014

Change 2014 vs.2013

Packaged fresh milk, thousand liters

68,452

64,614

-5.6%

Packaged cream, MT

2,135

2,316

8.5%

Yogurt made from different types of milk

120,881

120,678

-0.2%

Flavored yogurt or milk desserts

15,043

12,512

-16.8%

Cheese, total

67,620

77,403

14.5%

-White cheese

42,344

51,225

21.0%

--incl. cheese with plant fats

14,409

19,330

34.1%

-Yellow cheese

20,138

19,692

-2.2%

-Other cheeses (fresh, soft)

6,283

1,967

17.8%