Arla highlights divide in world dairy market

Arla Foods highlighted a two-tier world dairy market, divided between high-growth developing countries and sluggish Western performance, as it acknowledged the "extremely strained" profitability at European dairy farms.

The Danish-based co-operative said that its core European markets, facing "tough" conditions, saw "low growth" in 2012, with flat turnover in countries such as Denmark and the Netherlands, and mergers boosting performance in the likes of Germany and the UK.

However, markets outside the European Union "are experiencing double-digit growth rates", with Arla restating a forecast that the greatest long-term growth rates would occur in China, the Middle East and Africa, and Russia.

In 2012, the Chinese business saw sales of consumer products rise by 57%, while Russian turnover rose by 28% to more than DKK600m, and Middle East and Africa sales by 22% to some DKK3bn.

These markers drove a rise of 2.1% in Arla's organic sales growth over the year.

'Crucial markets'

"It became clear in 2012 that future opportunities lie in new growth markets," said Peder Tuborgh, the Arla Foods chief executive.

"We have never experienced such a positive development in our profits outside the EU," he said, terming growth in other markets "explosive".

"It is evidence that our international strategy is now delivering for us in financial terms and it demonstrates that the international markets will be crucial for our future earnings."

Arla last month revealed it was accelerating its push into emerging markets, where it would achieve revenues of DKK10bn by 2017, up from a level quoted at the time at DKK3.5bn.

Many other Western dairy giants, such as New Zealand's Fonterra and Dutch-based FreislandCampina, are also expanding in developing countries to escape sluggish domestic growth prospects.

'Extremely strained'

The rosy outlook for growth in emerging countries contrasted with weak prospects for Arla's core European markets, where Denmark looked set for a year "characterised by discount products and price", while in the UK "2012 market challenges will continue through 2013".

Indeed, with Europe's dairy industry facing sluggish markets, but elevated feed costs, boosted by high grain prices, Arla underlined that many producers had operated at a loss last year.

"We fully appreciate that the ratio between our members' earnings from milk production and on-farm costs is, currently, extremely strained," Mr Tuborgh said.

"In 2012 the high cost of energy and feed for the cows meant that, for some, the milk price did not sufficiently cover the cost of operations on the farm."

Mixed results

Arla said that its earnings for last year rose 3% to DKK1.9bn, narrowly ahead of forecasts at the half-year stage, on turnover up 14.9% to DKK63.1bn, with much of the growth down to mergers, such as with the UK's Milk Link.

However, profits per kilogramme of milk supplied by the group's 12,300 members fell 3.6% to DKK2.71.

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