Rising disposable income and consumption patterns converging with those in Western Europe will drive growth of Ukraine’s dairy industry in the mid-term.
Domestic market: Growth driven by value-added products
Ukraine’s dairy market is poised for healthy growth, which we project at 10% CAGR in 2007-2012. The growth will be driven by high value-added products like cheese, yogurt and ice cream, demand for which is the most responsive to increases in disposable income (expected at 15% CAGR in 2007-2012).
Exports: Ukraine snatches the moment
After banning imports of Ukrainian dairy early in 2006, Russia has reopened its borders to ten producers, and we believe more will follow. In the interim, exporters have diversified deliveries and lessened their dependence on the Russian market. Low exports of dairy by Australia and the EU have allowed Ukraine to recapture its export positions. We expect Ukraine’s share of global exports of the three major dairy products – butter, cheese and skimmed milk powder to increase to 7% in 2012.
Large players best positioned to deal with raw milk problem
The poor quality of raw milk and seasonal fluctuations in deliveries are major issues in Ukraine’s dairy industry. The reason for this is small-scale production: 80% of raw milk is produced by rural households with up to five cows each. Western Milk Group, the majority shareholder of Kovelmoloko, and Shostka Milk this year announced intentions to step into farming. Large players, which are able to make this investment, will get a secure supply of inputs and a competitive advantage over smaller players.
In the middle of consolidation
We see room for further consolidation in Ukraine’s dairy industry, as the ten largest dairy groups jointly account for only 40% of raw milk processed in Ukraine. Concentration is higher inside individual product segments, though nowhere do the top three players produce over half of the total. We expect consolidation particularly in whole milk products, milk powder and butter. Out of the five traded dairy stocks, we view independent Ukrproduct and Zhytomyr Dairy as potential acquisition targets.
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