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Milk and milk processing industry in Lithuania: an analysis of horizontal and vertical integration

Author

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  • Kedaitiene, Angele
  • Hockmann, Heinrich
Abstract
Despite significant progress in recent years, horizontal and vertical integration of the Lithuanian milk sector is not very much advanced. The primary sector is characterised by small-scale farming, the fragmentation of farmland and a low number of livestock per farms. These features cause severe problems regarding the restructuring and modernisation of agricultural production since only a few farmers possess the capital resources to conduct necessary investments. However, despite the unfavourable conditions Lithuanian milk producers have made significant improvements concerning milk quality. In the last decade, the processing sector was due to drastic concentration processes. These were induced by the strong competition processes on the milk market and fostered by foreign direct investors. Today, the market is dominated by three companies. About ten enterprises supply almost the entire market of dairy products. The main mode of governance in the market for raw milk is contractual arrangements. The spot market of strong vertical control are unimportant. The basic rules of the contracts like duration or payment scheme are set by the Ministry of Agriculture, others, especially prices, are negotiated individually between farmer and processor. Because of advantages in terms of transport and transaction costs processors provide better conditions to large agricultural producers. Often the processors try to strengthen their relationships with large-scale producers by providing credits for farm modernisation and/or foodstuff. Most small producers do not deliver directly to processors but to milk collection centres. In general, these are owned by processors. So far, only a few farmers co-operatives have been established in order to take this function. Contractual arrangements also dominate in the distribution channel. Small processors supply mainly to wholesalers who supply the retail market. Large processors often circumvent the wholesale stage and supply the retail stage directly. The basic means which allow this forward integration are intensive marketing activities which are intended to improve the consumer perception of their products. However, this type of exchange is mainly observed in urban areas where well established large retail chains exist. The Lithuanian milk sector is highly internationally competitive. The expansion to international markets is in the responsibility of the individual firms. However, the Lithuanian government and the food processors have established a joint marketing agency that provides infrastructure and joint marketing for international trade.

Suggested Citation

  • Kedaitiene, Angele & Hockmann, Heinrich, 2002. "Milk and milk processing industry in Lithuania: an analysis of horizontal and vertical integration," IAMO Discussion Papers 44, Leibniz Institute of Agricultural Development in Transition Economies (IAMO).
    • Handle: RePEc:zbw:iamodp:14930
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    References listed on IDEAS

    as
    1. Girgzdiene, Vilija, 1998. "Restructuring the Lithuanian food industry: problems and perspectives," IAMO Discussion Papers 9, Leibniz Institute of Agricultural Development in Transition Economies (IAMO).
    2. Frohberg, Klaus & Hartmann, Monika, 1997. "Comparing measures of competitiveness," IAMO Discussion Papers 2, Leibniz Institute of Agricultural Development in Transition Economies (IAMO).
    3. Kielyte, Julda, 2001. "Strukturwandel im baltischen Lebensmittelhandel," IAMO Discussion Papers 33, Leibniz Institute of Agricultural Development in Transition Economies (IAMO).
    4. Girgzdiene, Vilija, 1999. "Industrial organisation of the food industry in Lithuania: results of an expert survey in the dairy and sugar branch," IAMO Discussion Papers 21, Leibniz Institute of Agricultural Development in Transition Economies (IAMO).
    5. Oecd, 2000. "Lithuania: Foreign Direct Investment Impact and Policy Analysis," OECD Working Papers on International Investment 2000/3, OECD Publishing.
    6. Hartmann, Monika, 2001. "The Dairy Sector in the Central European Candidate (CEC) Countries – The Status of Restructuring and Future Challenges," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 50(06), pages 1-12.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Horizontal and vertical integration; Lithuanian milk sector; foreign trade; consumption;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L66 - Industrial Organization - - Industry Studies: Manufacturing - - - Food; Beverages; Cosmetics; Tobacco
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness

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