Croatia's Dairy Sector-Can It Compete in the European Market?

Article excerpt

Abstract Croatia is very close to meeting the requirements for becoming a member of the European Union (EU). Obviously, the agricultural sector and food processing chain are core issues within the negotiation process. This paper discusses the competitiveness of Croatia's agro-food sector, specifically dairy products, within the EU-25 market. Two analytical methods are employed: (1) the domestic resource costs (DRC) and (2) the revealed comparative export advantage index (RXA). The DRC analysis is based on a 2007 survey of dairy farms. Primary data was complemented with trade figures from 2000 to 2007. The analyses indicate that Croatia's dairy production is not competitive in its present structure. This lack of competitiveness at the farm level can be compensated somewhat at the processing level.

Keywords Trade analysis Dairy sector EU enlargement Croatia

JEL Q17-F14-052

Introduction

Croatia submitted its application for full membership in the European Union (EU) in February 2003. In March 2005, the European Council adopted the Negotiating Framework for Croatia (Butkovic ct al. 2007). Today, the country is very close to meeting the requirements for becoming an EU member. As in all new member states (NMS) that recently joined the EU, the agricultural sector and food processing chain are core issues within the negotiation process. Farmers in Croatia fear that they will not be capable of successfully competing in the single market after joining the EU, a sentiment which has been expressed by other farmers prior to accession of the NMS. Therefore, this assessment of the trade competitiveness of Croatia within the single European market is important both for the ongoing negotiations between Croatia and the EU and also for the Croatian farm sector that must undergo substantial adjustments.

The Croatian agricultural sector is dominated by small-scale family farms of three hectares or less. Few family farms exceed ten hectares. The dairy sector is extremely important for Croatian agriculture; it is the largest sub-sector producing roughly 25% of the total revenue. 95% of dairy cows are kept on family farms, with an average of about three heads per farm. Currently, dairy farmers are highly subsidized in Croatia, which makes milk production an interesting business. However, the introduction of the Common Agricultural Policy (CAP) will not only demand significant investments to meet the EU hygiene and animal welfare regulations, but may also lead to lower milk prices which could be a threat to small-scale dairy farms.

Adoption and application the EU requirements for hygiene standards, animal welfare, and environmental protection are among the biggest challenges for all candidate countries. In the dairy sector, regulations set the rules for the quality of milk and the hygienic means of production including guidance and requirements for production, farm specification, milk handling, animal health, and milk composition (especially antibiotics, cell count, and bacterial content). The legislation in Croatia is already harmonized in some areas. (1) Nonetheless, most Croatian farms currently do not comply with European regulations, and considerable investments are needed to be able to produce and sell within the EU and fulfill the cross-compliance requirements of the CAP. (2) The 2006 Screening Report (EC 2006) stresses that there is still no harmonization in terms of market regulations (especially the quota system of the EU and market intervention). At the farm level, milk production in Croatia is currently highly subsidized through direct aid measures which lift the producer price even higher above the EU level. When Croatia joins the EU, these subsidies will be terminated and single farm payments will be introduced. Dairy processing companies have, compared to the farm level, a relatively good standing. Although large investments generally are required to meet technical, technological, and sanitary European standards, in Croatia about two-thirds of all milk is processed in the two largest Croatian dairy companies, Dukat and Vindija, with modern production technology (EC 2006; Kovacic and Bozic 2009). …