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In a 'tough' global dairy space, Arla looks to branded products

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Tough conditions in the global dairy market are prompting Arla Foods to move up the value chain.

The Danish dairy co-operative said that 2015 was "as challenging as we anticipated," and saw global milk supplies still exceeding demand in 2016.

The company has been attempting to focus on sales of its branded milk products, which saw strong growth, particularly in China where demand for commodity milk imports has plummeted.

Russia and China slow imports

"We knew 2015 would be tough on all markets, and it was," said Arla chief executive Peder Tuborgh.

"Dairy prices have been under pressure worldwide all year, and every dairy farmer has felt the consequences," he said.

"Two of the world's biggest importers of dairy products – China and Russia – took in significantly less of Europe's growing milk pool in 2015, leading to declining prices worldwide and in Europe in particular," said Arla.

Rising domestic supply

China, the world's biggest commodity milk powder importer, appears to have very high stocks in place, after a period of booming imports back in 2014.

And domestic production is growing, as Chinese buyers pay a premium for domestic product in a bid to secure local supplies.

For Russia, meanwhile, imports have been cut off due to the political tensions arising from the Ukraine crisis, with Russia boosting domestic output to make up for absent EU supplies.

As a result of this export squeeze, Arla's revenue in Europe fell by E200m, despite improved market share and sales volumes.

Branded sales rise

"Arla navigated through the global crisis by moving even more of its milk into branded dairy products and foodservice, improving market positions and driving down costs," said Mr Tuborgh.

Sales for branded products remain strong in developing world markets.

Arla's consumer products sales rose 50% in China, and by 20% in the Middle East and North Africa.

"Despite the lack of general growth in most of the markets where Arla operates, the company set the target to grow its sales in the more profitable retail and foodservice sector," Arla said.

Arla increased its milk volumes by 622m kilogrammes in 2015, to 14.19bn kilogrammes.

Declining revenues

Arla's revenues declined by 3.3 in 2015, to E10.3bn.

Net profits were E295m, or 2.8% of revenue, in line with targets.

The global market is expected to remain unpredictable and tough in 2016, but a turn for the better is anticipated towards the end of 2016.

Arla forecast revenues to remain at last year's levels for 2016, with profits equivalent to 2.8-3.2% of revenue.

By Agrimoney.com

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