Serbia’s association of milk producers has organized a protest against very low milk prices in the country. The association, which brings together more than 150 milk producers, is demanding RSD 31.5 (€ 0.33) per litre for prime quality milk versus the current RSD 20 per litre (€ 0.21) and wants to apply a similar methodology for other milk quality categories. According to the association’s statistics, the meat industry purchased 60,000 milking cows last year due to the low milk price and the inability of farmers to make the business profitable. Producers are also demanding that the Serbian government provides a more efficient and timely subsidy payment and premium for milk. With no specific regulations in place, the privatization of Serbia’s dairy industry has seriously damaged domestic farming.
Our view:
This latest protest by Serbian farmers and farmers across Europe could result in lower milk supplies and cause upward pressure on raw milk prices. We expect raw milk prices in Serbia to increase towards the end of the year to preserve minimum profitability for Serbian farmers and stop the decline in the number of milk cows in the country. Low milk prices are likely to have a positive impact on Imlek’s profitability in 2009, while rising milk prices could have an adverse impact on the firm’s operating margin from 2010 onwards. Imlek has only limited ability to pass on the cost of raw material to final consumers, which will put the firm’s margin under pressure. According to our valuation model, each 1% increase in the price of raw milk will lower Imlek’s net profit by 6.9%. Imlek currently trades at RSD 1,600, while our target price implies 10.9% upside.