7 October 2011
Milkiland (WSE: MLK PW, BUY) increased its milk procurement from cooperatives to 15% of its total supplies as of October 1 from 10% at the end of the second quarter, the company reported on its website yesterday. As of 2010, Milkiland received 54% of its milk from farms and 46% from households, vs. 19% and 81% on average for Ukraine. Yegor Samusenko: The key benefit of milk from cooperatives is a lower price, with a higher quality of the milk a secondary but longer-term reason. A cooperative unites cows from households (avg. of 1.2 cows per household) and applies for a government subsidy equivalent to 20% VAT, which household cannot apply for as paper work costs exceed the potential benefits for individual farms. Cooperatives stimulate households to contribute their cows by offering a 5% milk price premium. Though the material effect of the 5 pp increase in milk supplies from cooperatives is rather negligible for Milkiland, we note the success of the initiative is a long-term positive for the company, as it could both ease cost pressure and secure a stable base of raw milk supply, which is crucial in the current Ukrainian market with raw milk output declining. For more about cost pressure facing Milkiland, please see our note dated September 28.