FrieslandCampina forecast a poor start to the year for Western European milk production as it cautioned of further tough industry conditions ahead, which will drive yet further dairy mergers.

The Dutch dairy giant said that world milk output would increase "slightly" over 2013, implying some balance with demand, which is also said would show a "slight" rise.

However, in Western Europe, milk output "is expected to be lower in the first half of 2013 than it was in the first half of 2012", the group said, blaming the poor quality of on-farm feed and the high cost of buying in rations.

The forecast comes days after the European Commission forecast Western European milk output falling by 200,000 tonnes to 124.1m tonnes.

"Climatic conditions - in some cases, drought, in others, too much moisture - are still impacting milk supply and margins in certain regions," the commission said, warning that a trend of declining deliveries in France, Ireland, Italy and the UK looks set to continue.

In November, the last month for which full data are available, EU deliveries fell 1.5% year on year, with output in the rain-beset UK tumbling 5.9%, and French production by 3.7%.

The first half of the calendar year is particularly important  for northern hemisphere dairy producing countries as it includes the so-called spring flush, when the turnout of cows onto pasture prompts a surge in milk output, which typically peaks in May in Europe.

More deals ahead

FrieslandCampina added that with European demand soft too, and "the market for dairy-based beverages and deserts expected to shrink even further due to the economic crisis", dairy groups will extend their round of consolidation.

"The upscaling of the European diary industry will continue through mergers and acquisitions so that cost efficiencies can continue to be effective," the co-operative said.

In 2012, industry deals including Arla's mergers with co-operatives in Germany and the UK, and the acquisition of the UK's Robert Wiseman Dairies by German-based Theo Muller.

FrieslandCampina said it was continuing with a strategy which aims to boost profitability through focusing on upmarket, and higher margin, dairy products, while also exploring emerging markets which have better growth prospects.

'Shift away from commodities'

Last year, this strategy helped the group report a 27% rise to E274m in profits, on revenues up 7.1% at E10.3bn.

"The key reason for the higher revenue was the shift in volumes from commodities to products within the growth categories of infant and toddler nutrition, dairy-based beverages and branded cheese," FrieslandCampina said.

Infant nutrition is "the segment in which the most robust growth is being achieved by responding to the increasing demand from Asia for high-quality dairy products", Cees 't Hart, the FrieslandCampina chief executive, said.