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Globalisation of EU dairy companies under way

16 December 2012

According to online press reports, the Nordic dairy cooperative Arla is facing difficult operating conditions due to ‘global overproduction of milk’ and ‘European consumers’ sensitivity to high prices’, which have given rise to ‘a price war and increased demand for private label products’. The company has stated that it is expecting a significant improvement in dairy prices in the second half of 2012. However, Netherlands-based FrieslandCampina and Fonterra of New Zealand have both declined to comment on likely global dairy price trends.

According to an article on website Agrimoney.com, ‘Arla flagged a long-term trend of growth in developing markets’ as a driving force behind a possible price recovery. According to Arla representatives, ‘across all [non-European] markets we are witnessing growing demand for high-quality dairy products and those of European origin.’ China in particular is ‘looking for quality products where food safety is paramount’. In the article, Arla affirms its strategy of expanding globally into markets where demand for higher-quality and high-value dairy products is strong, going beyond China, the Middle East and Russia, where it already claims a ‘strong presence’, to other non-European markets. (For details of Arla’s intra-EU strategy, see Agritrade article ‘ EU dairy sector corporate restructuring under way, with shifting global...’, 9 September 2012.)

At the beginning of September 2012, the National Farmers’ Unions (NFU) of both Scotland and England and Wales, and Dairy UK reported that they had reached agreement on ‘a voluntary code of best practice on contractual relationships between milk buyers and dairy farmers’. The code seeks to provide ‘additional safeguards that will assure farmers that their contracts are not putting them at a disadvantage in the marketplace’. The NFU is to work ‘with farmers and processors to see the many beneficial terms of this code translated into beneficial terms in milk supply contracts’. This includes relations with processors beyond the Dairy UK group. (For background to this initiative, see Agritrade article ‘ National moves to strengthen functioning of dairy supply chains’, 28 October 2012). In September 2012, press reports indicated that the code of practice was already being used to identify ‘new ways of valuing farm-gate milk’, with some UK processors expressing optimism over the prospects of being able to deliver higher milk prices in the autumn.

Spanish dairy farmers for their part have taken to the streets in protest at the financial difficulties facing milk producers, as they reportedly face costs of over 32 euro cents/litre but receive a price of only 27 cents/litre, and have called for government action to regulate relations within the sector. COAG, a coordination body for Spanish farmers’ organisations, ‘believes that domestic production controlled by French and German companies is pushing the price of milk down, and is calling on the government to take back control of Spanish production’.

Editorial comment

It is unclear what implications the growing interest of EU dairy companies in global markets will have for the future development of ACP dairy sectors. In South Africa and the wider Southern Africa region, the French company Danone and Italian company Parmalat already have extensive interests, with significant variations in the patterns of their engagement. Danone’s focus has been on the development of strategic partnerships (primarily with KwaZulunatal-based Clover Dairies) to expand the range of higher-value dairy products placed on the market. This has led to an expansion of demand for locally produced milk to be used in high-value dairy-based food and drink products.

In contrast, Parmalat’s engagement saw the takeover of many smaller dairies, which provided access to distribution networks for Parmalat products. It also initially led to the closure of skimmed-milk powder (SMP) production lines and an expansion of SMP imports as a means of leveraging better prices for the processing company in dealings with milk producers. This strategy resulted in a substantial reduction of the number of milk producers operating in regions served by Parmalat-controlled dairies.

With efforts under way to expand and modernise the dairy sector in Eastern Africa, in the context of the promotion of increased intra-regional trade in dairy products at both the EAC and COMESA levels, the patterns of foreign investment to be encouraged could carry important implications for the future trajectory for the development of milk production across the Eastern and Southern African region.

Against this background, efforts in the EU to ensure transparency and strengthen the functioning of dairy supply chains could potentially carry important lessons for ACP governments seeking to further develop their local dairy sectors.

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