Chapter 2 government’s role in increasing product competitiveness

Government of any state, including that of the Republic of Belarus, surely has both positive and negative effects on the competitiveness of products. To understand which levers we can use and which errors should be avoided, we turn again to the experience of other countries in this field.

Let’s start with positive Australian example. Their Government’s Green Paper on competitiveness in agriculture (a publication, which sets out proposals for public discussion) released yesterday calls for a better deal for farmers, suggesting more farmer-owned co-operatives could play a key role especially in the way that supermarkets negotiate prices.

The green paper, which cites the BCCM’s submission to the inquiry as well as the submissions of BCCM Members, says co-operatives are key to bringing much-needed competitiveness and fairness from the farm to the fork.

In launching the paper at the National Farmers Federation conference in Canberra, Agriculture Minister Barnaby Joyce said the most successful rural organisations in Australia were co-operatives and his Government would consider what it could do to foster more co-operatives in the agriculture sector.

Rural and retail co-ops have long thrived in Australia. Third and fourth place in this year’s IBIS World Top 500 Private Companies list is occupied by leading agricultural co-ops, Murray Goulburn and CBH Group.

Mr Joyce indicated his support for the co-operative model in granting CBH exemption from the new port access code for grain exporters.

The recommendations in the paper about improving relations between farmers and supermarkets come after years of talks around a voluntary code of conduct. The uneven level of market power through the supply chain was seen as a major cause for lower returns to farmers.

The green paper addresses what the Australian Government can do to foster more co-operatives in the agriculture sector, and the Government wishes to understand obstacles to establishing new co-operatives. The paper suggests states and territories should adopt a ‘co-operatives national law’ which would make it easier to run a co-operative across different jurisdictions.

The acknowledgement of the important role of co-operatives in levelling the field in terms of market power reinforces the draft findings of the Harper Competition Review on the role of co-operatives to strengthen the bargaining position of smaller businesses.

A plan for the co-operative and mutual sector which will be launched at the November BCCM Summit will provide government with a blueprint for a raft of initiatives to promote the growth and development of co-operatives and mutuals. The BCCM has renewed its call for a broad-based inquiry to help government to understand the impediments and obstacles to establishing new co-operatives.

In Belarus the process of cooperation and consolidating never stops. New forms of organization often appear, however, the practical significance of these changes is questionable. We should take Australian experience into account, as it shows how state institutions should cooperate with their subordinates. Their system allows to understand if new decisions will be useful and acceptable for majority of agricultural firms, farmers and enterprises. So there will be less restrictions for firms in providing suitable marketing policies and product portfolios which are competitive both at domestic and export markets.

Governments do not always use honest sources to achieve goals. Highly competitive products can be partly provided not only by demonstration of its advantages, but also due to pressure on competitors. It is interesting that one of such examples was recently in Russia - the main sales market for the Republic of Belarus.

Last month, Nikolai Fedorov, the Russian Minister of Agriculture, claimed publicly that dairy products manufactured by Danone­ownedUnimilk and PepsiCo business Wimm­Bill­Dann in the country are sub­standard and adulterated.

Fedorov says, that in these products a maximum of 20% comes from real milk, the rest is a processed milk mixture with coconut, palm oil and other additives.

PepsiCo rubbished the allegations and Danone the demanded a public retraction.

MaksimFasteyev, senior dairy markets analyst at INFAGRO, speculated that the “permanent battle” between SOYUZMOLOKO and the Russian Union of Dairy Enterprises (RSPMO) could be behind Fedorov's claims.

Danone and PepsiCo are former members of the Russian Union of Dairy Enterprises (RSPMO), which is, according to Fasteyev, a mouthpiece for the Russian Ministry of Agriculture. RSPMO membership has dwindled in recent year, and SOYUZMOLOKO now claims to represent more than 70% of Russian dairy stakeholders.

Fasteyev said that all dairy conflicts should be observed from the point, because this is a war for the money of union members, government programs, and subsidy redistribution. SOYUZMOLOKO chief Danilenko rubbished such suggestions. According to Danilenko, Fedorov has not met with SOYUZMOLOKO representatives since he was appointed Minister of Agriculture in May 2012. From his point of view, this issue here is that unfortunately the Ministry of Agriculture is a political appointee and his schedule is overbooked, so he refers them to his deputies.

Danilenko acknowledged, however, that the involvement of Vladimir Labinov, former executive director of RSPMO, in the situation is “very strange.” Labinov is currently head of the Ministry of Agriculture's Department of Livestock. Backing Fedorov, Labinov last week told Bloomberg that criticism of global dairy producers was justified.

We can notice that even taking into consideration the fact that the government, as well as its supported group of companies, denies direct involvement and that during the proceedings it became clear that there is no particular fault of the manufacturer, product reputation has been destroyed. As a result, its competitiveness automatically fell. Our managers should be wary of such methods, because you can always be obstructed by the same response. Our country has had such a negative experience, but, despite this, our politicians actively use these “resources”.

Now it’s time to see a bad side of state influence. Ironically, the United States will be an example for us. Despite a rather high level of business freedom, including in the field of dairy farming and agriculture as a whole, it is strange to see some very serious challenges for increasing the competitiveness of the goods. It will also be clean, at which points Belarusian government must pay attention in future.

Americans have rapidly growing global demand for their dairy products and ingredients, but they are stuck in a morass of regulations that hamper domestic markets for milk and stifle innovation. Consumption of fluid milk is falling and other fresh products are reeling from unaffordable costs, while other products are in growing demand in emerging markets. Federal Milk Marketing Orders no longer make sense, and product innovation is stymied by the straightjacket of inflexible product standards of identity.

Let’s start with the US Federal Milk Marketing Order system. Its original purpose was two-fold: to encourage Grade A milk production, which now represents over 99% of all farm milk; and to balance the market power of dairy producers and manufacturers by requiring manufacturers to pay producers no less than minimum Federal Order monthly milk prices. However, the structure of our dairy markets has changed dramatically since Federal Orders were established in 1937. There simply is no comparison to today’s sophisticated infrastructure or market demand.

United States now have a vast highway system, refrigerated trucks and train cars, and the infrastructure to ship broadly in interstate and international commerce. Emerging nations around the world are demanding more protein and dairy in their diets. And today, U.S. dairy co-ops are a potent force in the marketplace, controlling the distribution of more than 80% of the milk produced on our nation’s dairy farms. The dominance of dairy farmer co-ops and their ability to forward contract outside the minimum Federal Order price regulations have more than leveled the playing field between milk buyers and sellers. All of the facts in the marketplace have changed, yet the Federal Order system remains.

The same logic holds true for standards of identity, which are essentially recipes for how to make specific products like milk, ice cream, yogurt and various varieties of cheeses. Dairy products have one of the largest shares of all product standards of identity on the books at the federal Food and Drug Administration, and they can only be altered by a formal rulemaking process that welcomes all interested parties to participate. The process has always been cumbersome, but navigating through it in today’s world of social media and people who are anti-everything is virtually impossible.

Yet innovation in processing techniques and ingredients still finds a way to blossom, offering new ways to make better products at nearly every turn. As consumers seek healthier product choices and dairy manufacturers respond, enterprises find ourselves with terms like “dairy beverage,” “frozen dessert” or “pizza cheese” rather than the names defined in the standards that are understood and trusted by consumers. This same restraint isn’t applied to most of American competitors who also are vying for share of stomach.

These two issues – Federal Order regulations and outdated or restrictive standards of identity – are creating major impediments to growth and innovation in the U.S. dairy industry. Until now, consensus on making changes has been impossible to achieve. IDFA members would like to see changes and hope the dialogue can begin across the industry to ramp up greater understanding of the opportunities that lie ahead in a market environment where growing demand is the ruling class.

Even such experienced countries have so big problems. That’s important for Belarus not to repeat these mistakes and be ahead of other competitors. Deregulation of domestic, government-controlled pricing and greater flexibility in the use of new technologies and ingredients to create more healthful products could spawn increased competition, innovation and consumer choice in product categories where sales are lagging.

Nevertheless, product competitiveness can be based on absence of restrictions for innovations. Firstly, the innovations must exist. Analysis in chapter 3 will show which concrete instruments enterprises can use if they want their goods to stay competitive.