Voluntary Report - public distribution

**Date:** 7/23/2007

**GAIN Report Number:** BU7023

BU7023

**Bulgaria**

**Dairy and Products**

**A cup of hot milk for Bulgarian dairy reform**

**2007**

**Approved by:**

![](media/image1.wmf)Susan Reid

U.S. Embassy

**Prepared by:**

Mila Boshnakova

**Report Highlights:**

Dairy reform is one of the most serious challenges in 2007 for Bulgarian
agriculture policy makers. It is causing economic, social and political
complications, especially in rural areas. Bulgaria is negotiating with
the EC an extended grace period for milk quality until 2010, a decision
perceived with mixed feelings by the industry. In addition, the newly
approved major legislation is still far from the European and
international approach and preserves the government functions in
selection and breeding work, thus restricting the development of
breeding associations and potentially hurting U.S. genetics exports.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Sofia \[BU1\]

\[BU\]

#  

[Summary 3](#summary)

[Legislation and Policy 3](#legislation-and-policy)

[Dairy sector development 3](#dairy-sector-development)

[Table 1. Structure of the dairy farm sector in Bulgaria in 2006
4](#table-1.-structure-of-the-dairy-farm-sector-in-bulgaria-in-2006)

[Milk supply 4](#milk-supply)

[Table 2. Milk production in Bulgaria in 2006
4](#table-2.-milk-production-in-bulgaria-in-2006)

[Milk quotas 5](#milk-quotas)

[Milk deliveries quota 5](#milk-deliveries-quota)

[Milk direct sales quota 6](#milk-direct-sales-quota)

[Dairy manufacturers response 6](#dairy-manufacturers-response)

[Milk quality 7](#milk-quality)

[A new extended grace period 7](#a-new-extended-grace-period)

[Laboratory capacity 8](#laboratory-capacity)

[Dairy products market 8](#dairy-products-market)

[Trade 10](#trade)

[Table 3. Dairy products trade in Bulgaria, 2006
10](#table-3.-dairy-products-trade-in-bulgaria-2006)

#   {#section-1 .unnumbered}

# Summary

The dairy sector reform turned out to be a much more serious challenge
for the local industry and policy makers then they initially thought.
The reform had lots of economic, social and political implications.
Politicians had to take difficult decisions, not always based on the
best market approach. Gray sector, red tape practices and lack of trust
between various private and public players further complicate reform
implementation.

# Legislation and Policy

In June, the Bulgarian Parliament passed the major legislation covering
the livestock sector -- the 2007 Livestock Act. The new law aimed to
support the development of the breeding associations, and to accelerate
dairy/livestock sector investment in land, genetics and capital.

The debate over the law was focused on the role and functions of the
Executive Agency for Selection and Reproduction in Animal Husbandry
(EASRAB). Most farmers and dairy industry groups insisted on a clear
definition of Agency's role as not performing selection and/or breeding
programs, which should be implemented by the local Breeding
Associations. Experts were unanimous that the Agency should have
exclusively and only control functions. However, the EASRAB insisted on
keeping management and control on genetic resources.

In the final version, EASRAB responsibilities were not clearly
formulated -- the Agency will not privatize the artificial insemination
stations; will continue to manage genetic resources and execute
selection and breeding work in cases when the Minister authorizes it (by
virtue of annual ordinances). Thus, state intervention and control in
genetics work is preserved. Newly established local Breeding
Associations have to compete under unequal terms with a state
institution which has much bigger resources, assets and power. At the
same time, the Agency will not only fulfill the identical functions/role
as the breeding associations, but will also control them.

One of the most egregious of provisions in the Law is the new article
(art. 44 b) that gives the EASRAB control of imports of breeding
livestock, semen, eggs and embryos from third countries. Many experts
are concerned that the Agency will use this right to stop or restrict
imports of quality genetic resources to weaker the local Breeding
Associations in a disadvantaged position, and allow EASRAB to benefit
from its monopoly status. Thus, the new legislation may slow imports,
including U.S. origin, and limit use of imported genetics and investment
at dairy farms.

# Dairy sector development

Restructuring of the dairy sector has continued in 2006 and 2007 with
further commercialization, consolidation and enlargement of bigger
farms, and decline in the number and role of smaller family-type farms.

In 2006/07, there is a significant growth in the number of farms with
10-20 cows, 32 percent, and for farms with 20-30 cows, 15 percent.
Similarly, the number of farms with more than 100 dairy cows rose 18.3
percent although they still account for only 7 percent of all cows.
Farms with only one cow (backyard rural semi-subsistence farms) in 2006
were 10.2 percent fewer than in 2005 and accounted for 25 percent of
Bulgaria's dairy cows. The number of small farms raising up to 9 dairy
cows has also fallen by 8.4 percent.

## Table 1. Structure of the dairy farm sector in Bulgaria in 2006

  -------------- -------------- -------------- -------------- --------------
  **Dairy cows   **Farms**                     **Dairy Cows** 
  per a farm**                                                

                 Number         Change 06/05   Number         Change 06/05

  1-2            113,328        -9.9 percent   140,500        -9.6 percent

  3-9            21,470         0.5 percent    92,400         2.6 percent

  10-19          3,552          31.8 percent   44,700         28.1 percent

  20 and more    1,578          2.5 percent    72,500         7.9 percent

  Total          139,928        -7.5 percent   350,100        0.7 percent

  Source: MinAg                                               
  bulletin #105                                               
  -------------- -------------- -------------- -------------- --------------

According to the National Dairy Board (NDB) data, as of March 2007,
Bulgaria had 96,595 registered dairy farms which were grouped in three
categories depending on their compliance with the EC hygiene and milk
quality standards:

First category (fully responding to EC standards) -- 1,125 farms;

Second category (meeting EC equipment and hygiene standards but not
fully covering milk quality standards) -- 1,238 farms;

Third category (not responding to EC standards) -- 94,232 farms

Out of total registered farms, small ones with up to 10 cows are 90,415;
average size (10-50 cows) are 5,749, and large farms (more than 50 cows)
are only 431. According to another industry source, Association of Milk
Processors (AMP), 78 percent of farmers have 1-9 cows. Milk is collected
at 4,200 milk collection stations.

# Milk supply

Total milk produced in 2006 was 1.515 million MT (1.471 million in
liters) of which 1,298 million MT (86 percent) cow milk, 107,000 MT (7
percent) sheep milk and 102,000 MT (6.7 percent) goat milk. The 2006
milk supply was slightly (0.5 percent) higher than in 2005 with a stable
growth for buffalo and sheep milk, decline for goat milk and very slight
increase in cow milk. The average milk yield in 2006 was 3,600 liters
per a cow, 1,428 liters for buffalo; 87.3 liters for ewes; and 221
liters for she-goats.

Production of processed dairy products was 12.6 percent less than in
2005. About 50 percent of all fresh milk produced at farms was delivered
to dairies.

## Table 2. Milk production in Bulgaria in 2006

+-----------+-----------+-----------+-----------+-----------+-----------+
| # Produ   |           |           |           |           |           |
| ction of  |           |           |           |           |           |
| milk at f |           |           |           |           |           |
| arms by t |           |           |           |           |           |
| ypes of d |           |           |           |           |           |
| airy live |           |           |           |           |           |
| stock, in |           |           |           |           |           |
|  MT, for  |           |           |           |           |           |
| 2002-2006 |           |           |           |           |           |
+-----------+-----------+-----------+-----------+-----------+-----------+
| Year      | Cow       | Buffalo   | Sheep     | Goat      | Total     |
+-----------+-----------+-----------+-----------+-----------+-----------+
| 2002      | 1,305,912 | 4,410     | 93,479    | 104,820   | 1,508,621 |
+-----------+-----------+-----------+-----------+-----------+-----------+
| 2003      | 1,308,525 | 5,276     | 88,679    | 101,530   | 1,504,010 |
+-----------+-----------+-----------+-----------+-----------+-----------+
| 2004      | 1,344,750 | 6,229     | 117,682   | 129,381   | 1,598,042 |
+-----------+-----------+-----------+-----------+-----------+-----------+
| 2005      | 1,286,909 | 6,989     | 105,057   | 109,114   | 1,508,069 |
+-----------+-----------+-----------+-----------+-----------+-----------+
| 2006      | 1,298,709 | 7,132     | 107,535   | 102,297   | 1,515,673 |
+-----------+-----------+-----------+-----------+-----------+-----------+
| 2006 in   | 1,260,883 | 6,891     | 104,201   | 99,414    | 1,471,389 |
| thousand  |           |           |           |           | thousand  |
| liters    |           |           |           |           | liters    |
+-----------+-----------+-----------+-----------+-----------+-----------+
| Change 06 | 0.9       | 2.0       | 2.4       | -6.2      | 0.5       |
| vs. 05    | percent   | percent   | percent   | percent   | percent   |
+-----------+-----------+-----------+-----------+-----------+-----------+
| Source:   |           |           |           |           |           |
| MinAg     |           |           |           |           |           |
| bulletin  |           |           |           |           |           |
| #105      |           |           |           |           |           |
+-----------+-----------+-----------+-----------+-----------+-----------+

# Milk quotas

Introduction and distribution of milk quotas in May-July caused lots of
economic and political turmoil. The dairy industry was split over the
issue. The two major industry organizations, the NDB and AMP, expressed
very different positions and had heated media debates. These differences
were conceptual, sometimes politicized, or related to certain economic
interests. The NDB has 8 regional dairy boards. It is supportive of
faster market reforms and concentration despite the negative
social/political effects. The AMP has 120 members. It is more concerned
about the social and political effects in rural areas and the goal is to
continue life of smaller dairy farms as a backbone of the dairy industry
(see a summary of these different positions in Table A).

The national reference quantity for milk set for Bulgaria in 07/08 is
979,000 MT, of which 722,000 MT for deliveries and 257,000 MT for direct
sales, much less than the traditional production of 1.2-1.3 MMT. To
this, a "Reserve" quota of 39,180 MT may be added in 2009 (counting
current on-farm consumption). The referent average fat content is 3.91
percent.

The Government has requested 167,000 MT from the direct sales quota to
be transferred to the milk deliveries quota, but there is has been no EC
response yet.

As of June/July, total 96,572 farmers had individual dairy quotas. The
average dairy farm has a quota for 7.0 MT for deliveries and 3.0 MT for
direct sales. According to the NDB, farms with more than 10 cows are
5,100 (5.25 percent of all dairy farms) and can produce under quota
220,000 MT of milk. Large farms (more than 50 cows) are 446 and their
milk quota is 189,000 MT. These figures are disputable, according to
processors, who claim that only 35 percent of the total milk quota is
produced by the large farms while the remaining 65 percent is collected
from small family type farms.

## Milk deliveries quota

The demand for milk deliveries quota was exceeding the limit by more
than 200,000 MT (NDB data). Thus, the NDB had to reduce the quantity of
requested milk to the size of the quota. The reduction was done mainly
for farms which produce sub-standard quality milk (the third category,
see above) based on methodology approved by the MinAg in Decree #51.

A special reserve within the milk deliveries of 92,463 MT was set based
on MinAg information about investment projects. This decision was
approved by the Agricultural Minister in Ordinance 09-231/ April 13,
2007. The AMP, however, protested against the nature of this decision,
the way the amount was set, and blamed the NDB in lack of transparency
about collected requests.

Thus, the quantity of milk deliveries remained for actual distribution
was 630,000 MT. It was distributed as follows: 192,400 MT to all farms
in the first category (1,125) meeting 100percent of their applications;
94,600 MT to all farms in the second category (1,238) also meeting
100percent of their applications; and 342,500 MT to farms in the third
category (94,209) which means 47 percent reduction compared to the
applications. By regions, the regional dairy boards in Plovdiv and
Rousse received the highest shares, 22 percent and 17 percent,
respectively.

Reduction in quotas for the third category farms, the most numerous
group, caused protests and dissatisfaction. Although there is clear
legislation (Decree #51) about quota distribution, the lack of a public
register of farms and their individual quotas resulted in speculations
about NDB justification for its decision.

At some of the reduced quota farms, the quota is lower than the average
milk yield. For example, in Yambol area, there are 3,606 dairy farms in
the third category compared to 48 in the first and 123 farms in the
second. Most of these farms will not be able to go to the second
category at the end of 2007 which means that in 2008, many will be shut
down and dairy cattle should be either slaughtered or sold. In region of
Dobrich, farmers started to sell cows at a low price of 250 Euro or
slaughter them due to reduced quotas (140,000 MT requested and 90,000 MT
approved). A farmer reported an annual production of 12,000 MT white his
quota was set at 5,000 MT. There are already voices that some farmers
who may exceed their quotas will try to record the excess cow milk as
sheep or goat milk (which is not limited by quotas). Processors are
concerned that it is possible due to still strong gray sector, at up to
30 percent share in total dairy production.

Farmers who are not satisfied about their reduced quotas protested to
pick up quota certificates. As of end-June, three months after the milk
quotas were introduced, about 30 percent of individual milk quota
certificates (190,000 MT) were not yet received by farmers.

Without quota documents, farmers can not legally operate on the market.
Delayed quota certification distribution can easily block milk
deliveries and trade later in the year. Milk processors still do not
face milk shortages, however, if farmers don't get their certificates,
processors may encounter a deficit. The milk quota distribution process
may add to gray market activity and cause problems with the monitoring
of quotas, milk quality and safety. In the medium term, it may
complicate the fragile status of local dairy processors, who are
struggling to trade their products on the single EU market.

## Milk direct sales quota

Milk direct sales quotas did not attract many farm applications -- all
requests were fully met since farms applied for only 77,600 MT. Out of
that, 10,213 MT were distributed to the first category farms; 6,176 MT
to the second category, and 61,202 MT to the third category. By regions,
the highest share of quotas was received by Blagoevgrad, 30 percent and
Sliven, 26 percent. Thus, 186,000 MT remained unused.

The MinAg has requested 167,000 MT of this quantity to be transferred to
the milk deliveries quota. Despite lack of clarity on EC response, the
dairy industry has already made plans. The NDB proposes to use the same
methodology applied to date (Decree #51) which means that these
quantities will be directed to farms in the first and second category
meeting EU milk quality criteria. Larger farmers feel discriminated
against, in favor of small farmers - they think the milk reserve quotas
should be given to those who have prospects to grow and progress on the
market. Small farms cannot improve despite quotas which they will be
forced to sell anyway in 1-2 years. On the other hand, the AMP suggests
the bulk of milk reserve be given to farmers with reduced quotas (third
category) since they have already suffered from reduced deliveries
quotas.

## Dairy manufacturers response

Currently, dairy manufacturers evaluate their fixed expenses for
registration, reporting, monitoring and traceability for milk from
smaller farms as much higher than their profit from milk processing.
Many will try to optimize milk purchases by switching to a smaller
number of larger suppliers, and/or imports of powder milk/whey as a
substitute for fresh milk. The industry estimates that Bulgarian milk
production will be efficient only when most farms produce 6-7,000 liters
average milk yield with a potential for 10,000 liters (currently, it is
about 3,600 liters) which means not more than 170,000-200,000 cows for
meeting the current ceiling of 979,000 MT.

# Milk quality

In 2006/07, 70-80 percent of milk was produced by small farms in the
third category. Various estimates show that only 10-40 percent of milk
on the market meets EC standards. Today, the milk quality issue
represents the major challenge for the dairy industry.

According to the current policy, the third category farms (see above)
should improve their barns, equipment and hygiene until Dec. 31, 2007.
Starting from January 1, 2008, these farms should be either shut down or
they should join the second category. Despite active promotional and
educational campaign, many such farms do not have the will and/or
ability to upgrade. Often, the vet authorities do not provide the
necessary recommendations. Milk is still illegally purchased by
non-approved intermediaries. Milk traders often do not provide a
feedback to farms about the quality tests of their milk. Not all farmers
are interested in rightful and legal recording and milk quality
monitoring.

Although Bulgaria has a grace period for production of sub standard
quality milk, many processors have already refused to purchase and
process such milk.

## A new extended grace period

In January 2007, the GOB agreed with the EC for one year grace period
for dairy processing establishments. At that time, the majority of dairy
plants and the meat industry did not want a longer grace period due to
their strong investment efforts and plans to start trading on the EU
market as fast as possible. The one year ban was imposed by the EC due
to deficiencies in the food safety system, and due to strong Russian
concerns about safety and animal health issues in both Bulgaria and
Romania.

Later in the year, however, certain veterinary officials, politicians
and representatives of the dairy industry (AMP), realized that the
complexity of the dairy reform would require much higher administrative
and infrastructure capacity, more stringent safety and milk quality
control, and last but not least, will adversely affect many small/medium
size dairy farms, thus leading to undesirable social and political
effects.

According to the AMP, Bulgaria needs a longer grace period for
introduction of EC quality milk standards. It estimated that by 2008
when milk purchases from the third category farms should be terminated,
it will affect about 500,000 rural families and their social status. The
annual loss from milk produced but not purchased is estimated at 175
million Euro. The decline in production may lead to not filling
country's milk quota and therefore, a gradual reduction in the quota.
The AMP advocated for a longer grace period until 2010 and insisted on
additional government resources to introduce modern milking equipment,
cooling tanks etc. at a cost of 75 million Euro.

Based on a recent political decision, on July 9, at a technical meeting
in Brussels, Bulgaria requested an extension of the grace period for all
meat and dairy establishments until the end of 2009, or for two more
years. Brussels agreed to revise current Decision 2007/31/EC and final
official decision is expected by early September.

According to the new procedure, meat and dairy establishments will be
categorized in two lists -- positive (trading with the EU) and negative
(trading on the local market only).

Every two months the Bulgarian vet office will review establishments:
those who meet the EU criteria will be added to the positive list
(currently 63 meat and dairy plants; the last change was made on July 19
when 19 dairy and meat establishments were added to the positive list);
those who have no prospects to meet the requirements in the next 1-2
years, will be shut down. Newly established plants will be put in
operation only if they fully meet the EU norms and will be automatically
added to the positive list. No approvals will be left for last-minute
inspections, as was the situation at the end of 2006.

A new element is the formation of so called group "60+". It consists of
dairies which use sub-standard quality milk but produce cheeses that
mature/age at least 60 days, thus eliminating safety risks. These plants
are included in the positive list and will be able to trade in cheeses
on the EU market. The EC, however, did not agree with the Bulgarian
proposal about the composite products, butter and curd, produced at
these plants, to be sold at the local market. Current EC decision bans
any trade in these products.

According to the new derogation plan, the requirements for the
safety/quality of milk change as follows:

2007 - max. 750,000 microorganisms/liter; less than 600,000 somatic
cells;

2008 -- max. 500,000 microorganisms/liter; less than 500,000 somatic
cells;

2009 -- max. 500,000 microorganisms/liter; less than 500,000 somatic
cells;

2010 -- max. 100,000 microorganisms/liter; less than 400,000 somatic
cells or the EU standard.

The new decision was perceived with mixed feelings by the industry. It
was not supported by the meat industry and by larger, market oriented
dairy plants. The dairy industry was split in its reactions expressed by
the two industry organizations, NDB and AMP. Differences were
conceptual. The NDB considered the grace period extension as a long and
painful postponement which would not help the sector. They thought small
farms were a major gray market generator and a longer grace period would
preserve this trend. The AMP fully supported the new grace period (see
above) as a more gradual adjustment for smaller farms with slower and
less negative economic sacrifices.

## Laboratory capacity

There is a lack of sufficient lab capacities for testing of milk quality
under the quotas. Currently, there are 22 state vet labs which should
test for the content of microorganisms, somatic cells, and fat content.
Fifteen of these labs are in process of introduction of the required ISO
17025/2006 for dairy products. At the end of May, MinAg approved an
establishment of four new independent milk testing labs, with the
financial support of EC-PHARE program. The availability of many small
fragmented milk suppliers makes lab testing more difficult, resource
intensive, not cost efficient and often, inaccurate.

# Dairy products market

The issue with milk quality is tightly related to the dynamism of the
dairy products market.

\- Commercial supply of major dairy products (fluid milk, yogurt and
cheese) has slowly increased since 2003 at the expense of home
production although it still remains high.

\- Over the past 5 years, distribution and sales of dairy products have
steadily moved from traditional smaller retail outlets to supermarkets
and hypermarkets where quality and hygiene requirements are more
stringent. For example, in 2006/07, 48percent - 89percent of various
types of fluid milk were sold in super/hypermarkets.

\- Retail quality and safety requirements for dairy products become
increasingly stringent. In early July, major retailers announced that
they would require a new certification - IFS (International Food
Standard, introduced by German and French retailers, recently accepted
by Italy) standards from local suppliers. Since only a few have such a
standard in place, the pressure for more investment is likely to
increase, which in turn will affect the purchases of raw milk. If
Bulgarian companies are not fast enough to respond to retailers' demand,
imports from EU MS can quickly replace local supply.

The dairy processing sector continues to attract foreign investors.
After a Greek company purchased one of the largest dairies in April this
year, in June, a Spanish investor (GED Capital Development) purchased
the leading dairy company Fama for 9.0 million Euro. Fama is in the top
three dairy companies and a market leader in North East Bulgaria. It is
located close to the Romanian market, has well developed milk purchasing
and collection system; well known brands and an experience to work under
a private label; loyal clients; and good distribution. In 2006, Fama
grew by acquiring Dobrich dairy processing company (Serdika 90) and thus
expanded its market share. Current Fama capacity is 180 MT milk for
processing daily. Reportedly, the Spanish investors value the stable and
steady growth of the local dairy market: 5percent-6percent annually in
value, and 2percent-3percent, in tonnage; proximity to the Romanian
market; local traditions in production of high quality products and the
potential for diversification.

The ice cream market also attracted several major investors over the
past year. Currently, the market size is estimated at 40 million Euro or
11,000 MT with the prospect to grow to 15,000 MT or 20 percent in the
next 1-2 years. Top companies on this market are Nestle (via Delta) 35
percent market share, and Darko, recently purchased by the Balkan
Accession Fund, 22 percent market share. The remaining 45 percent is
split among several local companies with about 10 percent share each
(Karil, Izida, Deni). In 2006, players registered a growth of
5percent-20percent vs. 2005, and the same upward trend is foreseen for
2007.

# Trade

## Table 3. Dairy products trade in Bulgaria, 2006

+---------+--------+--------+---------+--------+--------+-----------+
| **HS    | **Imp  |        |         | **Exp  |        |           |
| n       | orts** |        |         | orts** |        |           |
| umber** |        |        |         |        |        |           |
+---------+--------+--------+---------+--------+--------+-----------+
|         | MT     | M      | Major   | MT     | M      | Major     |
|         |        | illion | su      |        | illion | des       |
|         |        | USD    | ppliers |        |        | tinations |
|         |        |        |         |        | USD    |           |
+---------+--------+--------+---------+--------+--------+-----------+
| 0401    | 294    | 0.295  | EU      | 316    | 0.439  | Various   |
+---------+--------+--------+---------+--------+--------+-----------+
| 0402    | 8,183  | 16.5   | Czech   | 79     | 0.119  | Various   |
|         |        |        | Re      |        |        |           |
|         |        |        | public, |        |        |           |
|         |        |        |         |        |        |           |
|         |        |        | U       |        |        |           |
|         |        |        | kraine, |        |        |           |
|         |        |        |         |        |        |           |
|         |        |        | Poland  |        |        |           |
+---------+--------+--------+---------+--------+--------+-----------+
| 0403    | 167    | 0.270  | Germany | 1,100  | 1.09   | M         |
|         |        |        |         |        |        | acedonia, |
|         |        |        |         |        |        | Romania   |
+---------+--------+--------+---------+--------+--------+-----------+
| 0404    | 7,299  | 6.5    | Greece, | 4      | 0.013  | Various   |
|         |        |        | France, |        |        |           |
|         |        |        | Holland |        |        |           |
+---------+--------+--------+---------+--------+--------+-----------+
| 0405    | 1,360  | 3.15   | G       | 570    | 0.93   | Greece    |
|         |        |        | ermany, |        |        |           |
|         |        |        | France  |        |        |           |
+---------+--------+--------+---------+--------+--------+-----------+
| 0406    | 3,597  | 12.98  | G       | 13,784 | 45.0   | Greece,   |
|         |        |        | ermany, |        |        | USA,      |
|         |        |        | Poland  |        |        |           |
|         |        |        |         |        |        | A         |
|         |        |        |         |        |        | ustralia, |
|         |        |        |         |        |        |           |
|         |        |        |         |        |        | Lebanon   |
+---------+--------+--------+---------+--------+--------+-----------+
| Total   |        | 39.69  |         |        | 47.6   |           |
+---------+--------+--------+---------+--------+--------+-----------+
| Source: |        |        |         |        |        |           |
| Bu      |        |        |         |        |        |           |
| lgarian |        |        |         |        |        |           |
| Customs |        |        |         |        |        |           |
+---------+--------+--------+---------+--------+--------+-----------+

In 2006, imports of dairy products remained stable in tonnage but
increased by \$7.3 million in value. Exports were at about the same
level as in 2005, however, at 12percent lower value. Still, Bulgaria
remains a net exporter of dairy products with about \$8.0 million
positive trade balance. The trade product structure is steady - more
than 50 percent of imports are milk substitutes for processing (powder
milk and whey), followed by cheeses.

In 2006 and in 2007, over 95 percent of dairy exports are cheeses and
over 55 percent of them are made of sheep milk. About 80 percent of
produced white type "feta" sheep cheese and 40 percent of yellow sheep
cheese are exported. Due to good export potential and lack of
quantitative restrictions, it is expected that sheep milk production and
processing will be slowly but steadily developed in the future.

Recently, the MinAg appealed to the dairy industry to put more efforts
to add value to local dairy products, to preserve their identity and
authenticity. The Ag Minister was concerned that Bulgarian cheese was
sold to Greece, packaged, labeled and traded as "feta" in the EU.
Another issue was the identity of the traditional Bulgarian yogurt. Most
processors add whey or powder milk as a substitute of fresh milk, and
call the final product yogurt which is a violation of the traditional
recipe and technology. Therefore, more efforts might be needed to
differentiate local traditional product with live bacteria from the
internationally adopted term.

**Table A. Major differences in positions and policies pursued by the
National Dairy Board and the Association of Milk Processors**

+-----------------------------------+-----------------------------------+
| **Association of Milk             | **National Dairy Board**          |
| Processors**                      |                                   |
+-----------------------------------+-----------------------------------+
| Grace period:                     | Grace period:                     |
|                                   |                                   |
| Longer grace period is needed     | Longer grace period is not        |
| since 80percent of milk produced  | needed. Small farms will remain   |
| is sub-standard, and at small     | off the market since they have no |
| farms (1-2 cows). Thus, rural     | chance to improve enough to meet  |
| areas will lose 150 million Euro  | EU requirements. Those who wanted |
| from 2008 on, if the grace period | to progress have already invested |
| is not extended. This will        | with the help of pre-accession    |
| negatively affect about 500,000   | programs (SAPARD). Extended grace |
| people in villages.               | period is a more painful and      |
|                                   | longer agony.                     |
+-----------------------------------+-----------------------------------+
| Quotas and milk reserve:          | Quotas and milk reserve:          |
|                                   |                                   |
| Milk quotas are distributed by    | Milk quotas are distributed based |
| NDB in secrecy, based on hidden   | on the methodology approved by    |
| economic interests and hurt small | the MinAg in Decree #51. The      |
| producers. Larger farmers get     | AgMinister approved and signed a  |
| higher quotas in order to profit  | decision about milk quotas        |
| from their future sales in 2008.  | distribution - Ordinance          |
| Milk reserve should be            | 09-231/April 13, 2007. According  |
| distributed among all farmers and | to this regulation, the quota for |
| a preference should be given to   | direct sales is 70,770 MT and the |
| smaller farmers with reduced      | quota for deliveries is 629,537   |
| quotas.                           | MT. The law for the organization  |
|                                   | of the common market, art. 49 (1) |
|                                   | says that the national dairy      |
|                                   | quota and the national dairy      |
|                                   | reserve are managed by the MinAg. |
|                                   | The milk reserve should be        |
|                                   | distributed based on current      |
|                                   | regulations to farms with more 10 |
|                                   | cows.                             |
+-----------------------------------+-----------------------------------+
| Trade in quotas:                  | Trade in quotas:                  |
|                                   |                                   |
| It is not clear if the country    | The NDB hopes that the milk quota |
| needs a milk quota exchange. The  | exchange will be the accelerator  |
| exchange may motivate hidden      | which can help larger and more    |
| economic interests and            | progressive farms to strengthen.  |
| corruption.                       | Smaller ones can specialize in a  |
|                                   | non-dairy, most likely meat,      |
|                                   | production.                       |
+-----------------------------------+-----------------------------------+
| Lab tests:                        | Lab tests:                        |
|                                   |                                   |
| Milk tests for fat content and    | Milk tests should be done at only |
| other milk characteristics can be | accredited labs and 2.5 Euro fee  |
| done at own labs at dairies. No   | is paid per a sample test.        |
| need to pay extra for tests at    | Independent tests should be done  |
| independent labs, about 6 million | at non-government accredited      |
| Euro total. Ring tests are        | labs.                             |
| sufficient.                       |                                   |
+-----------------------------------+-----------------------------------+
| Re the NDB                        | Re the NDB                        |
|                                   |                                   |
| Bulgaria does not need a NDB.     | The NDB exists is several EU MS-  |
| Such organization exists in       | Denmark, Greece and Holland. The  |
| Denmark where the dairy sector is | industry should work in close     |
| very different from Bulgarian.    | coordination with the MinAg but   |
| Quotas and other dairy reform     | also should undertake its         |
| decisions should be taken by the  | responsibilities.                 |
| MinAg which is politically        |                                   |
| responsible for eventual          |                                   |
| deficiencies. This will eliminate |                                   |
| potential conflict of interests.  |                                   |
| Industry organizations should     |                                   |
| play only an                      |                                   |
| advisory/consultative role.       |                                   |
| Bulgaria should take lessons from |                                   |
| Romania and Poland where the      |                                   |
| dairy farming is similar -- small |                                   |
| and fragmented.                   |                                   |
+-----------------------------------+-----------------------------------+
| The NDB illegally requests 10     | The NDB collects only its         |
| leva per each milk quota          | membership fee. Quota             |
| certificate and 3 leva/cow. This  | certificates are free.            |
| mean total 11 million Euro        | Certificates are distributed not  |
| collected from 100,000 dairy      | by the regional dairy boards but  |
| producers for 340,000 cows.       | by MinAg regional offices.        |
+-----------------------------------+-----------------------------------+