Profitability Development of Dairy Farms in Slovenia

The importance of the dairy industry for the regional and national economy is essential. This paper highlights the financial performance and profitable development of dairy farms in Slovenia by examining milk production. In this study, the correlation of variables representing the number of cows, forage area and milk production were found to be very strong with values of R = 0.85; R – 0.95; R = 0.79. The farm size has an impact on cost ratios, liquidity, return on assets, and debt. The interactions of these significant factors are evaluated as return on investments.


Introduction
Since 1961 the growth rate of global food production has increased by 170%. This growth emerged from improving agricultural produce by breeding, application of pesticides, synthetic fertilizers, and the cultivation of high yielding crops, monocultures, and intensive tillage with an effective mechanism. This conventional farming method incurs environmental costs and affects farmland due to the loss of organic matter, soil erosion, eutrophication, and water pollution by loss of biodiversity (Kurz, 2018). Implementing organic farming and a self-regulating agricultural unit helps to minimize the adverse effects of agriculture on the ecosystem, it will also enunciate environmental sustainability for the long term.
Numerous studies have demonstrated the advantages of organic farming to soil structure, microbial diversity, and organic matter that support long term soil productivity. Organic farming mitigates low pollutions on terrestrial and aquatic ecosystems and improves biodiversity (Kurz, 2018); it is a sustainable agricultural approach that focuses on utilizing biological fertilizers and ecologically based pest controls, instead of chemical-based fertilizers. More healthy crops are produced with Organic agriculture, with little or no adverse effect on the environment (Madhusudhan, 2016). Besides these, the dairy industry has flourished globally, been of tremendous value to economies; however, most of the milk produced is not exported to other countries. The European economic and social committee stated that 8% of dairy productions are traded globally. A sm all change in global production will affect the world market; two percent difference between worldwide consumption and production rate equals 25% of the world dairy market (Zakova Kroupova, 2016). The global economic growth indicator doesn't solely depend on the performance of international agricultural trade. Based on the data gathered by this report, a change in profitability was positive for the period under review. The technical shift in output price and mark up component are significant indicators for profitability. The main aim of this research paper is to evaluate the profitable development of dairy farms in Slovenia. Berkum (2007) analyzed the dairy chain in Slovenia and highlighted some roadblocks to profitability in the industry. Firstly, is the loss in market share to competitors in the international market due to increasing unmet demands for milk and the establishment of unfavorable policies in the region. Muminović & Pavlović also evaluated the dairy industry's profitability compared to Slovenia, Serbia, and Croatia (Muminović & Pavlović, 2012). The authors' primarily identified the requirements of the EU for membership as a challenge.

Empirical Review
The EU's assertion affects the communication between the farmers and the industry and increases the international market (Muminović & Pavlović, 2012). Nevertheless, the Serbia dairy market is more profitable than Slovenia and Croatia despite that the countries share similar challenges in the industry. A careful study of the Serbia dairy industry showed that the state maintains profit in the industry due to its low cost of production,  (1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007), the milk yield in Slovenia increased by 50%. Compared to Serbia, sources of funding in Slovenia are the cheapest. The interest rates on term loans varied from2.5% to 5.6% (Bakucs et al., 2013).

Performance of the Diary Sector in Slovenia
The dairy farm is mostly operated by small scale farmers with many inefficiencies, averaging 6.6 cows, and 4,500 literss of milk per cow in a year. In 2005, Slovenia was among the least producing European countries alongside Lithuania and Lativa, with 4,200 liters each. At the same time, the Netherlands and Scandinavian countries were the highest producing in the dairy sector. A contributory factor to this low milk yield in Slovenia is the breed of cow predominantly used in the hilly regions. On the one hand, Simmwntal breed of cows is adapted to survive in hilly areas, but their milk production is low. On the other hand, Holstein-Friesian breed of cows produce more milk content, but can't stay in the hilly areas.
Land availability is another challenge the small scale farmer encounter in rearing cows for milk and meat production. Not only is the land hilly, but they are also fragmented in small pieces making usage unproductive for the cows. Therefore, leaving the farmers to travel up to 5 to 8 kilometers to get an arable land for their animals.

Gross Margin and Turnover
The gross margin assesses if the dairy farms are making a profit from their sales. The table below compares the gross margin for a different level of farmlands as a competitive element.  Source: Kuhar (2006).

Material and Method
Financial statements gathered from the stock exchanges web pages and financial internet database Ibon (Slovenia) informed this study. The non-consolidated financial account also helped to determine the state of dairy companies in Slovenia. The subject of analysis is about consolidating market leaders' financial statements due to their cross border business and size. Consolidated data is used to build a clear picture of the dairy industry in a particular country. The companies employ 1000 persons in Slovenia, so it is an essential industry for local economies (Kurz, 2018). The diary industry covers about 90% of added value, total assets, EBITDA, and the net result of the dairy industry's segregated companies. The dairy industry representatives in Slovenia are Planika, Ljubljanske Mlrkarne, Mlekarna Celeia, Pomurske mlekarne.

Profitability in Slovenia
The analysis of dairy plants in Slovenia shows that Slovenia's dairy industry is not an attractive one. The industry did not observe the financial change and profits of joining the European Union; hence, it challenged its profitability. The return on equity measures profit and how equity capital was invested in Slovenia dairy plants.
The accumulated loss of four years was 35 million euros. The number of employees decreased to 20%. This circumstance has been compared with splitting former Yugoslavia (Prišenk, 2016). The difference is that the government did not control the negative influence. After joining the European Union, Slovenia dairy plants experienced tough competition from European Union dairies in milk collection, which led farmers to make agreements with foreign dairies.
Based on the Slovenian Ministry of agriculture, food, and forest statistics, 13.5 thousand tons of milk were sold to Italy in 2016 (Madhusudhan, 2016 found that the dairy industry in Slovenia is not as profitable as in Croatia and Serbia (Popović & Panić, 2018). The average profitability of the dairy industry decreased in 2009. According to individual financial statements and consolidated data, Slovenia indicates a high level of ROA.

Policy Recommendations
The development of government policies has a significant influence on the outcome of the milk processing companies in Slovenia so that the market can overcome all challenges it will encounter at the primary and processing level of the industry. Some areas that government policies will be of significant help to the Slovenia Dairy industry are discussed below: Land Policies: obtaining arable land for cow grazing has been one of the challenges of small scale farmers. Being that small scale farmer's make more returns than the large scale farmers, the government can promote their activities by creating land transfer policies, especially for the areas with flat land.
Regional policies: this policy is also directed to favor the small scale farmers based in the hilly regions and thus can't breed the Holstein-Friesian breed of cows for more milk production. Austria's regional policy can be adopted in Slovenia since both countries have similar less-favored land areas. Austria implements a variety of measures and programs in the CAP, to compensate for less-favored land areas. Austria's regional policies target small scale farmers in the mountainous regions by providing them direct payments for farming according to environmental protection and nature conservation requirements. Slovenia can adopt this same policy to assist small-scale farmers in the hilly regions.
Research and Modernization policies: there are several activities that the government can take to support Slovenia's farming processes. For instance, providing funds for research purposes in the agricultural sector could bring about a novel approach to breeding cows and milk production. Secondly, researching other international markets could also result in the development of strategic market systems to improve Slovenia milk sales in the global market. Further steps can be taken by the government to ensure market transparency and provide genuine information about Slovenia milk supply and demand. The prices and trade of milk, milk quota, land, and other agricultural inputs in Slovenia.