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End of dairy quotas leads to greater external focus of EU dairy companies

04 March 2013

In its new strategy document, the Danish farmer-owned dairy company Arla has announced an increased focus on markets outside the EU, including in ‘Russia, China and the Middle East & Africa region’. Launching the new strategy, Arla Chief Executive Peder Tuborgh said, ‘Our export to these markets is growing rapidly, and we will work hard over the next five years to build on the massive potential that these markets hold for Arla’s products.’ Arla is looking to ‘increase investment in marketing, distribution networks and co-operation with local partners in these markets’.

In a press release published in January by the website Just-food.com, the abolition of EU milk production quotas was described as ‘the main driver behind Arla’s decision to revise and extend the global strategy’, adding that ‘without EU quotas, it is anticipated that Arla’s milk farmers will produce at least one billion kilos of milk more each year than today.’ However, this milk ‘cannot be sold as profitable products in the EU due to growth stagnating’. According to the Chair of the Arla Board of Directors, increasing sales of dairy products to new consumers in emerging markets ‘will help to maintain a viable dairy business in northern Europe’.

Arla’s new strategy follows successful efforts by the company to strengthen its position on core European markets (Denmark, Sweden, Norway, Finland, Germany, Netherlands and the UK), through a process of mergers and acquisitions. Arla now ‘has a lot of unutilised potential’, which it hopes to fully exploit through its new externally focused strategy.

Significantly, one of the most profitable business arms of Arla is the food ingredients group, which sells ‘whey protein and lactose- and milk-based ingredients to the food industry’.

From an ACP perspective, this needs to be seen against the background of the convening of a Danish Confederation of Industries workshop in October 2012 on opportunities in the dairy sector in East Africa. According to an announcement on the Confederation’s website, ‘East Africa, in particular, offers favourable conditions for Danish companies since the dairy sector here has increasing consumption of milk and is in the process of modernising its market channels.’ It was argued that ‘Danish dairy-related companies can offer products, services and solutions to the East African growth markets and contribute to developing the markets in a profitable way,’ and that ‘in general, the dairy sector across the African continent has major investment potential.’

Arla’s strategy, increasingly externally oriented, mirrors that of rivals such as French-based Danone, which ‘has bought businesses in India, Morocco and Russia’, and Dutch-based FrieslandCampina which in March 2012 ‘bought Alaska Milk, one of the top dairy groups in the Philippines’.

Editorial comment

In the late 1990s, with FTA negotiations between the EU and South Africa under way, and the huge potential of the township markets in South Africa for dairy products opening up, a wave of European investment in the South African dairy sector took place. This coincided with a large-scale expansion of illicit ‘imports’ of milk powder into South Africa, which undermined the financial position of many locally established dairies. This led to two-thirds of the South African dairy sector developing some form of corporate partnership with EU companies within a 3-year period.

In broad terms, two distinct patterns for investment in the South African dairy sector emerged at this time. In KwaZulu Natal, where initially a joint venture was formed with the largest local dairy company, the focus was on developing markets for new value-added dairy products. This saw demand for locally produced milk increase, and sustained higher average prices paid to producers for milk than elsewhere in South Africa.

In the Cape region, a process of acquisition of local dairy companies by a European dairy company occurred. This provided ready access to distribution channels and saw the integration of the local dairy processing sector into global sourcing chains for dairy ingredients and products controlled by the European parent company. This saw the closure of the Cape region’s largest milk drying plant, an increase in milk price volatility and a significant decline in the number of dairy farmers in the Cape.

This experience highlights the need for careful consideration to be given to the effective regulation of trade in milk powders and other dairy sector ingredients within any government efforts to promote local dairy sector development. It also highlights the need for a nuanced approach to foreign direct investment in the dairy sector, if the aim of government policy is to support the development of local milk production, in the light of the potential impact of commercialised milk production on poverty alleviation in rural areas.


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