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| Dairy products |
Rising production costs are increasingly burdening Albania's domestic raw material industry, pushing the processing sector to rely more heavily on imports. This trend is particularly evident in the milk processing industry, where multiple factors contribute to significant challenges for both farmers and processing factories, Monitor reports.
Key Issues in the Dairy Industry
Both factory managers and livestock experts highlight several critical issues affecting the industry. The abolition of the creditable VAT scheme, high informality in milk sales from farmers, and low subsidies compared to regional standards are the main problems causing difficulties not only for farmers and processing factories but also for the broader economy.
In April, due to price disputes with factories, large and medium-sized farms could not sell their milk. Only small farms managed to sell milk at 60 lek per liter without VAT. The price drop forced farmers to protest twice, demanding higher subsidies from the Albanian government.
Comparative Costs and Subsidies
Major processors in the country assert that domestically produced milk is 38 cents more expensive than imported milk from Slovenia, Serbia, or Hungary, even after including taxes and transportation costs. According to Luis Ndreka from ADG (formerly Lufra), they currently collect milk from local farmers at prices ranging from 60 to 66 lek per liter, depending on quality. However, milk from countries like Slovenia and Hungary is cheaper due to higher productivity and lower costs.
Ervin Resuli points out that low subsidies are the primary reason for high production costs in Albania. For example, in Serbia, the government subsidizes farmers with 350 euros per cow and 17 lek per liter of produced milk. In Kosovo, subsidies reach 600 euros per cow, while in North Macedonia, farmers receive 250 euros per cow and 10 lek per liter. In contrast, Albanian farmers receive only 10,000 lek per cow and free diesel, totaling approximately 120 euros per year. Such low subsidy levels make it impossible to produce milk at competitive prices.
Challenges from Tax Policy Changes
A significant issue for large farms and sector experts is the removal of the creditable VAT scheme. Most small farms sell milk without invoices, operating in informality. If a processor buys milk from an unlicensed small farm, they must issue a self-invoice, starting with a -20% margin, which is financially damaging. This situation forces processors to either engage in the black market or buy cheaper milk from abroad. The removal of the VAT credit scheme, which previously helped formalize small farmers, has exacerbated these challenges.
Consequences for the Processing Industry
The Albanian Dairy Processing Industry Association has warned that if the current situation persists, imported products will dominate the market, driving local products out and leading domestic companies towards inevitable bankruptcy. Without increased subsidies to reduce production costs, and without equalizing costs for fuel, electricity, and gas, the milk processing sector will face mounting difficulties.
Recommendations and Government Response
In 2017, the VAT reimbursement scheme allowed processors to offset VAT when buying from farmers with tax invoices. This compensation provided a significant profit margin, even when buying milk at higher prices from farmers. However, from 2019 to 2022, the creditable VAT rate decreased from 20% to 6%, and since 2022, it has been zero. The association proposed replacing the abolished VAT scheme with a system similar to regional countries, where VAT is uniformly applied at 6% or 9% for both purchases and sales. However, this proposal was not approved by the Ministry of Finance for the 2022 budget.
Additionally, the 10% VAT on agricultural inputs, zero since 2018, and a 6 lek per liter excise duty on gas since July 1, 2022, have further increased production costs for dairy factories.
Conclusion
The combination of high production costs, low subsidies, and tax policy changes has created a challenging environment for Albania's dairy industry. To ensure the sustainability and competitiveness of domestic production, it is crucial for the government to reconsider its subsidy and tax policies, aligning them more closely with regional standards. Failure to address these issues may result in an increased reliance on imports and the decline of the local dairy industry.