Rising yoghurt imports became one of the most hotly debated issues in Polish agro-food sector bringing about a variety ‘protective’ reactions both at the policy and business levels. It has been estimated that the two market leaders (Danone and Bakoma) ‘lost’ some 20%-30% of their market shares66 (Rzeczpospolita, 17.04.1999). Most affected has been the group of small-scale producers, who mainly relied on favourable demand trend rather than active marketing strategy (Boss rolnictwo, 1999). In April 1999 the tariff rate for yoghurt was increased.
5.3.1 Increased tariff rates
Already in 1998 about 60 dairy co-operatives associated in the Union of Domestic Dairy Co-operatives (KPSM) asked the MAFE for a ‘relevant’ regulations to limit import competition on the yoghurt market (Rzeczpospolita, 17.04.1999). Two kinds of rationale were put forward. The first indicated the importance of profits generated in yoghurt production for: (i) modernisation investments and (ii) the ability of dairy co-operatives to pay adequate remuneration for quality farm milk, both being considered as fundamental for adjustments to the EU accession requirements. The consequences of the ‘lost’ profits from yoghurt were exacerbated by the tightened situation in 1998 after losing export outlets in FSU markets (the results of the Russian ‘crisis’) and decreased exports to the EU (mainly a consequence of the EU ban on Polish imports due to sanitary reasons). The second were complaints about: (i) the apparent ‘dumping’ price level of imports and (ii) the EU subsidies to the dairy exports to Poland. The 1998 trade report by SAEPR/FAPA (1999) shows that in the first months of expansion on the Polish market unit values of imported yoghurt were about one third below those for the last month of 1997, while at the end of 1998 they increased by 20%. Figure 5.2 presents this effect with the data for half-year periods in the years 1997-1999.
66 In most available press reports the term market ‘loses‘ is used in reference to the alternative without imports.
In fact, sales by domestic producers in 1998 increased relative to 1997 (Figure 5.1). However, cost increases may have appeared if the attainable sales were reduced below the expected level for which the production capacities have been expanded.
5 Broadened View of Dynamic Comparative Advantage - A Case Study of the Yoghurt Market 123 Figure 5.2. Volume and unit value of yoghurt imports to Poland, 1997-1999.
2.6 5.5
1st half 1997 2nd half 1997 1st half 1998 2nd half 1998 1st half 1999 000' tons
Import volume (left-hand scale) Unit value (right-hand scale) Source: IERiGŻ (1999) and author’s calculations.
In April 1999 Poland pushed up import tariffs on EU flavoured yoghurts with a fat content of 3%-6% (CN 040310930) from 9% to 35%. The category of yoghurt affected was that which accounted for more than 90% of 1998 imports (Table 5.2). This policy change initiated a dispute between Poland and the EU about the consistency of the new tariffs with the Europe Agreement. While the Polish party referred to articles 30 and 33 of the Agreement,67 the EU Commission claimed that tariff rises on yoghurts and other products introduced by Poland in 1999 were against the ‘spirit of the Agreement.68 Partial settlement of the dispute was communicated in September 1999 after a series of bilateral meetings. Poland was ready to revert to the original 9% preferential tariff for deliveries from the EU but, however, within a quota of 16 thousand tons (set as the average from the previous 3-years’ import volume). Beyond this volume a higher tariff of 29% would apply. Preferences towards the EU importers would apply in that the autonomous tariff rates, applicable to third countries, would be elevated up to 175% (the maximum limit under UR GATT). These new arrangements would apply to all categories of yoghurts and only for two years (2000 and 2001) (Agra Europe East Europe, 1999, and Rzeczpospolita, 03.09.1999).
67 Poland also referred to the precedence of using these articles by the EU to limit imports of Polish cherries in 1992 (Rzeczpospolita, 11.05.1999 and Rzeczposplita 24.03.1999).
68 The complaints from the EU side also indicated the unfortunate momentous of this policy change, in particular because the talks on renewing the trade protocol with the purpose of further liberalising trade between Poland and the EU within the Europe Agreement were due to begin in October 1999. In turn Poland, as far as political argumentation is concerned, stressed that the tariff rises were (apart from any other economic reasons) needed to give Poland the maximum possible margin for negotiation when the next round of WTO talks got underway in Seattle in November 1999 (Agra-Europe, East Europe, September 1999).
5 Broadened View of Dynamic Comparative Advantage - A Case Study of the Yoghurt Market 124 5.3.2 Response of the major importer (Zott) to the new tariff rates
In response to the increased tariff rates for the specified yoghurt category (CN 040310930) Zott adjusted by switching to imports of yoghurts with a lower fat content (CN 040310910). In this way, as indicated by the records for first months of 1999 (Figure 5.2), the rate of import increases was not affected in a significant (if any) way. In August 1999 Zott announced intentions to take over a dairy co-operative in Opole, one of the best performing medium-size yoghurt producers. As the future strategic investor, it made a commitment to invest about 30 Mio DM to modernise and expand processing capacity. The offer was accepted by the members of the Co-operative at the end of September 1999.
5.3.3 Response of domestic leaders (Danone and Bakoma)
Already in 1995 Danone tried to take over its main competitor on the Polish market by offering 90 Mio USD for its shares. However, only in spring 1999 did the commitment to the concept of capital integration of the two competitors come from the side of Bakoma. By purchasing 35% of Bakoma’s shares for 35-40 million USD, Danone became its second major shareholder. According to Z. Komorowski, founder of the firm and holder of the majority of Bakoma’s shares, this merger was a response to the concentration processes in the European food-processing industry and, in particular, to the growing competition on the domestic yoghurt market. He also pointed out the areas of planned co-operation of the two firms: joint input purchases and use of a joint distribution network – both aimed at cost reduction (Rzeczpospolita, 20.09.1999). Nevertheless, it is also obvious that the merger of the two firms is bound to substantially enhance their market power.
5.3.4 Reaction of other producers to new competitive situation
Apart from effective lobbying for tariff increases, the smaller scale producers also tried to carry out real adjustments in order to cope with the growing competition. This involved plans to co-operate by launching a joint yoghurt trademark together with a relevant promotional campaign. However, according to several announcements (e.g. Boss Rolnictwo, 1999), only ten co-operative producers and two private firms (Szaflary and Fromako) have been able to make a commitment to enter such a joint-venture - a firm had to meet the minimum technological standards imposed. Such a defence strategy was already successfully applied by a group of dairy co-operatives in 1996 when a joint brand of butter ‘Dobre’ was launched as a reaction to advertisement-driven growth in margarine consumption (major substitute for butter). Figure 5.3 summarises reactions of various firms.
5 Broadened View of Dynamic Comparative Advantage - A Case Study of the Yoghurt Market 125 Figure 5.3. Concentration of yoghurt producers as a response to changing competitive conditions.
P1998 P 1999
P2002
Small-scale producers
Co-operating medium-scale producers
Merger of market leaders Unit total
costs and price
Firm size
Interpretation of arrows.
Vertical upward: rise in unit costs experienced by domestic producers due to the increased competition from imports in 1998. This involves the cost associated with lower capacity utilisation.
Sloping rightward: rise in the size of enterprise due to merger or another form of integration conducive to decline in unit costs (decline in the scale inefficiency).
Vertical downward: decline in real prices associated with the increased competition and exchange rate real appreciation (effect of real appreciation on cost is neglected).
Source: author‘s compilation based on information described in the text.