Voluntary Report - public distribution

**Date:** 8/27/2004

**GAIN Report Number:** IT4020

IT4020

**Italy**

**Dairy and Products**

**Parmalat: business as usual for Italian dairies**

**2004**

**Approved by:**

![](media/image1.wmf)Amy Burdett

U.S. Embassy

**Prepared by:**

Alberto Menghini

**Report Highlights:** The Parmalat Group, a multinational dairy giant
based in the Italian city of Parma, filed for bankruptcy in December
2003 after admitting a multi-billion euro shortfall in its accounts.
After eight months from the announcement of the financial scandal, the
impacts on Italian farmers have been much less severe than originally
expected, mainly thanks to the intervention of the Italian Government.
Nothing has yet been announced about the future of the 14 group
subsidiaries in the United States.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Rome \[IT1\]

\[IT\]

# Background info

The Parmalat Group, a multinational dairy giant based in the Italian
city of Parma, filed for bankruptcy in December 2003 after admitting a
multi-billion euro shortfall in its accounts. Shortly afterwards the
Italian cabinet approved a new law making bankruptcy proceedings swifter
for large companies and giving them a better chance to restructure
successfully.

The new rules for so-called \"extraordinary administration\" have
allowed for the immediate appointment of Enrico Bondi, a corporate
turnaround specialist chosen to supplant Mr Tanzi, as administrator. Mr.
Bondi developed a restructuring plan for the group that was approved by
the Italian government in late-July 2004

The government of Italy's primary concern is to minimize any wider
fall-out from Parmalat, which plays a crucial role as Italy\'s biggest
food company. When the financial scandal was announced, the company had
run up a 120 million Euro milk bill with Italian farmers and additional
bills with other European (mainly French) and non-European farmers.

# The Parmalat Group

The Parmalat Group is one of the world leaders in fluid milk, with
leading positions in other sectors such as: yogurt, desserts, fruit
juices, tomato derivatives and baked goods. The Parmalat Group controls
companies in 30 countries and employs around 37,000 people globally. In
2002 the Group reported sales of 7.6 billion euros, with Europe
accounting for 35.5%, North America 34.9%, South America 21% and the
rest of the world for 8.6%.

According to a recent AC Nielsen international survey quoted by the
group's management, Parmalat is amongst the top 23 global food brands.
The portfolio of brands owned by Parmalat includes:

+--------------+-------------------------------------------------------+
| ### In Italy | Parmalat (milk and yogurt), Santal (fruit juices and  |
|              | iced tea), Centrale di Roma, Lactis, Berna, Ala,      |
|              | Frescoblù (fluid milk).                               |
+--------------+-------------------------------------------------------+
| **In         | Kyr (yogurt), Chef (milk cream and béchamel), Pomì    |
| Europe**     | (tomato sauce), Grisbi', Mr Day, Prontoforno (snacks  |
|              | and bakery products), Acqua (water).                  |
+--------------+-------------------------------------------------------+
| **In North   | Beatrice (milk and dairy products, cheese, yogurt,    |
| and Central  | drinks), Mothers, Salerno, Archway (bakery products), |
| America**    | Esker (mineral water), Astro (yogurt), Clinton,       |
|              | Balderson, Blackdiamond, Cheestring (cheese).         |
+--------------+-------------------------------------------------------+
| **In         | Etti (tomato sauces), Batavo (milk, yogurt, creams),  |
| Brasil**     | Gloria (milk and dairy products).                     |
+--------------+-------------------------------------------------------+
| **In         | Pauls (milk and dairy products), Vaalia (yogurt),     |
| Australia**  | Skinny Milk, Phisical, Trim (special milks).          |
+--------------+-------------------------------------------------------+
| **In South   | Bonnita (milk).                                       |
| Africa**     |                                                       |
+--------------+-------------------------------------------------------+

In addition, the Group also controls the majority of other leading
Italian companies in the dairy industry such as Latte Sole Spa,
Consorzio Produttori Latte di Monza and Giglio.

The Italian subsidiaries of the Group purchase annually on average
1.1-1.2 million tons of fresh milk, of which about 0.8 million tons is
produced in Italy and the balance is imported from other EU countries.
This volume accounts for 8% of the annual fresh milk production of
Italy, with higher incidence in the southern regions.

About 330,000 tons of fluid milk are purchased annually through
contracts and agreements with 1,265 private farmers, whilst the rest of
the milk purchased in Italy (about 0.47 million tons) is supplied by
cooperatives. The overall number of Italian dairy farmers hit by the
Parmalat crisis could be between 3,000 and 4,000 including members of
cooperatives.

The Group owns 10 plants for fluid milk processing located all over
Italy, 8 of them (Genova, Bergamo, Torviscosa, Padova, Ancona, Roma,
Piana di Monteverna, Taranto) produce fresh milk (short shelf-life)
whilst 2 of them (Collecchio and Zevio) produce shelf-stable milk. So
far, there have not been interruptions in the processing activities but
payment times have increased (from the standard 60-70 days to 120-150
days after delivery to the processing facility). This delay is raising
farmers' concerns.

In 2002, Parmalat marketed about 916,000 ton of fluid milk for human
consumption in Italy with a market share of about 30%.

## Facts about Parmalat

-   About 5,000 dairy farmers impacted worldwide;

-   2.8 million liters of milk delivered every day to processing
    facilities;

-   1 million tons delivered annually (accounting for 10% of Italian
    production);

-   330 million Euros (farm gate) value of delivered milk;

-   30% market share of Italian fluid milk;

**The Parmalat scandal and the Italian dairy sector**

When the Parmalat financial scandal was announced in December 2004,
Italian milk producers feared that the financial distress of group could
have affected its ability to pay for their deliveries and to subscribe
new purchasing contracts in the future.

After eight months from the announcement of the Parmalat financial
scandal, the impacts on Italian farmers have been much less severe than
originally expected. Following the declaration of insolvency in January
2004, farmers delivering milk and other products to Parmalat gained the
right to be the first to be paid whenever liquidity is generated.
foodprocessing activities have continued; and, surprisingly, sales have
grown since January.

All the major agricultural players in Italy (farmers' organizations,
cooperatives, Ministry of Agriculture) welcomed the decision of the EU
Commission on July 14, 2004 to approve the three proposed state subsidy
programs (one of GOI, one of Lombardia region, one of French Government)
to compensate farmers that suffered losses because of Parmalat's
insolvency.

  ----------------------- ----------------------- -----------------------
  **Aid proposed by**     **Type**                **Budget**

  Government of Italy     Farmers are allowed to  Delayed payments amount
                          delay social security   to about Euros 1.32
                          payments by two years.  billion per year. All
                          It applies to payments  delayed payments in the
                          due in the three year   three years amount to
                          period 2004-2006.       Euro 3.98 billion.

  Lombardia Region        The Regional Government Up to Euro € 24 million
                          provides guarantee on   guaranteed.
                          loans for those farms   
                          that supplied milk to   
                          Parmalat and did not    
                          get cash payments for a 
                          period of at least 3    
                          months.                 

  Government of France    Aid to milk suppliers   About Euro 200,000
  ----------------------- ----------------------- -----------------------

With regard to industrial activities, including contracting with farmers
for supplies of raw materials and subsequent payments, the Parmalat
group seems to be operating business as usual situation. There haven't
been any major changes in the volumes of raw commodities (milk, citrus,
tomato) delivered by farmers to the group.

**The future of the group's industrial activities**

So far, Parmalat\'s domestic and international sales of its products
have continued without interruption. (Although Mr. Bondi predicts 2004
sales of around Euro 3.6 billion and a operating loss of euro 108
million, he hopes for a marginal profit in 2005). Nevertheless, there is
concern in the Italian agricultural sector over the effects of the
restructuring plan elaborated by the company's appointed administrator
called "Extraordinary Commissioner" Bondi.

Enrico Bondi met in February with all the major farmers' organizations,
milk industry associations, labor unions as well as with representatives
of the cooperative sector. The outcome of the meeting was that the
restructuring of the Parmalat group would not imply the sale of core
activities other than, eventually the "Centrali del Latte" (Milk
Centers). The Parmalat Group controls two Centrali del Latte, a large
one in Rome and a small one in Cuneo. The focus of the negotiation is on
the first one.

The Centrale del Latte in Rome was funded in 1938 by the Rome City
Council, that remained the majority shareholder until 1997, when it was
privatized and acquired by Cirio, the other big food Italian group that
went bankrupt in 2002. Cirio sold the Centrale del Latte of Rome to
Parmalat in 1999. The underlying idea of farmers organizations is to bid
(through a group of farmers and agribusinesses) for a takeover the
Centrale del Latte. This idea seems to be supported by the Major of
Rome. To our knowledge no follow-up meetings have taken place between
Bondi and agricultural representatives.

**Comments**

As at today, there are no large foreseeable trade changes for U.S.
agricultural products as a result of the Parmalat scandal. The company
keeps running business as usual domestically and internationally.

It has not yet been disclosed what will be the future of the 14 Parmalat
subsidiaries in the United States. (See annex 1 for a listing of these
subsidiaries) It is possible that Mr Bondi may propose the sale of some
of them, and especially of those that fall outside the core businesses
of Parmalat (dairy and processed fruit). FAS Rome will report on future
developments.

**Annex 1**

**Parmalat Group subsidiaries in the United States**

  ------------------------------------------ ----------------------------
  Company                                    Business type

  Archway Cookies, LLC                       Food processing

  BF Holdings Usa Inc.                       Finance company

  Bonlat Financing LLC                       Finance company

  Cheese Traders Inc.                        Food company

  EVH Usa Inc.                               Food processing

  Farmland Dairies LLC                       Food company

  Milk Products of Alabama, L.L.C.           Engineering company

  Mother's Cake & Cookie Co.                 Food processing

  Parmalat Gelaterie Houston, Inc.           Food processing

  Parmalat Gelaterie Miami, Inc.             Food processing

  Parmalat Gelaterie Usa Inc.                Food processing

  Parmalat Ingredients Inc.                  Food processing

  Parmalat TechHold Corp.                    Engineering company

  Parmalat Usa Corporation                   Food processing
  ------------------------------------------ ----------------------------

Source: Parmalat Group structure at 31 December 2003 in www.parmalat.com