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EU dairy sector corporate restructuring under way, with shifting global demand

09 September 2012

In May 2012 the Scandinavian dairy company Arla Foods announced mergers with both German (Milch Union Hocheifel – MUH) and UK (Milk Link) dairy companies, with the aim of positioning Arla as ‘one of Europe’s leading dairy companies’. The latter merger reflects ‘Arla’s ambition to invest in and grow the UK dairy market and enter new categories’. The CEO of MUH, Rainer Sievers, argued that since MUH was already a European dairy company, the merger with Arla would support the strategy of ‘becoming an international company that is able to provide a favourable and stable milk price’.

This follows on from:

  • Arla’s purchase of an equity stake in the Chinese dairy company Mengniu;
  • Danone’s link up with Unimilk in Russia and the extension of its share ownership in Morocco’s top dairy Centrale Laitière;
  • FrieslandCampina’s takeover of the Philippines company Alaska Milk.

Global demand for milk products is shifting. According to the OECD–FAO Agricultural Outlook report, expansion of dairy product consumption is expected to be modest in developed country markets (except for cheese), but vigorous growth in demand in developing country markets is foreseen, increasing around 30% from the base period by 2021. Multiple retailers and international dairy companies are expected to lead the way in serving growing consumer demand in developing countries. The OECD–FAO analysis notes the thinly traded nature of dairy products and the dominance of the export trade by ‘a small number of players’.

In this context, the EC’s latest short-term outlook report on the dairy sector notes that in 2011 ‘the EU was not very competitive on export markets… given the existing price gap between EU and world price.’ This is seen as limiting EU export growth potential.

An additional factor increasing competition in rapidly growing developing country markets is the fact that 70% of the projected increase in milk production up to 2021 is expected to come from developing countries (particularly India and China), with total milk production in developing countries overtaking that of developed countries from 2013 onwards.

EU milk production is expected to increase by 1.5% in 2012 and 0.7% in 2013, although deliveries to dairies will increase slightly more, at 1.6% and 1% respectively. EU milk production will still however be below quotas (-4.7%) and will be down 5.5% in 2011/12 compared to 2010/11. Average EU milk yields continue to increase (+9.4% between 2009 and 2013), but at over twice the rate of yield increase in EU12 counties, compared to EU15 countries.

Despite the large increases in EU skimmed-milk powder exports in the last 2 years, exports are expected to increase by a further 12% in 2012 and 7% in 2013, following increases in production of 14.5% in 2012 and 6.5% in 2013. China and North African markets are of growing importance to EU exports. By the end of 2012, accumulated SMP intervention stocks should be depleted. 

Editorial comment

The shift in demand for dairy products mirrors a similar shift in global demand for sugar. As in the sugar sector, EU dairy companies are seeking to position themselves for post-reform realities (e.g. the scheduled abolition of milk production quotas) by first expanding their operations across Europe (in response to evolving demand and likely shifts in patterns of milk production) and secondly expanding their global operations.

However, companies face serious constraints in exporting, given the price gap between EU and world prices; the dominant role played by a limited number of companies in the export trade (many with easier access to rapidly expanding markets); and growing milk production in developing countries.

In this context, African countries may find themselves a growing focus of attention for EU dairy sector companies, both in terms of securing access to local markets for EU exports, and in terms of corporate alliances for the positioning of EU companies to serve expanding African markets. This later dimension may give rise to joint venture arrangements to assist in meeting stricter regional dairy product standards, or may be directed towards linking up with particular multiple retailers.

Either way, a critical question for African governments and regional dairy sector strategies will be how to use the evolving global dairy sector trade dynamic to boost both local milk production and local value-added processing of dairy products.


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