Since the difficulties of the recession in 2008 and 2009 the global dairy industry has shown a strong recovery. The much anticipated list of acquisitions has started to occur and export markets have picked up. European countries are heavily focusing on ‘life after quota’s’, and markets are buoyant in developing countries.
The market continues to consolidate, while there is still a good deal of artisanal activity and innovation entering at grass roots level. It seems like a good time to look around at how the global market is developing and how global companies are competing.
Looking at the list of top dairy companies in 2010, however, the first decision is what measure to use: volume or value? If we look at the volume picture, then the International Farm Comparison Network (IFCN) reports that Fonterra is the world’s biggest dairy, with an intake of 20.5 million tonnes annually (including 50% of the intake of Dairy Partners America, its joint venture with Nestlé), which represents 3% of the total global milk production.
By comparison, the biggest value player continues to be Nestlé, with a dairy turnover, reported by Rabobank, of $28bn (compared to Fonterra’s $12.1bn), but with a lower annual milk intake of 14.9 million tonnes.
The collective increase in turnover of the top dairies since 2009 is striking. The top 20 companies in 2010 had a collective turnover of $173.3bn compared with $155.4bn in 2009, an increase of 11.4%. The reason for the increase is due partly to price inflation, with value increasing much faster than volume, and partly the continued consolidation process, with the top 20 companies now responsible for processing nearly a quarter (23.5%) of the global milk production compared to just 20.6% of global supplies two years ago.
Fonterra’s turnover grew 19% between 2009 and 2010, particularly benefiting from the buoyant commodity markets last year and from increases in demand from Asian markets and in particular the Chinese market.
Another company showing strong growth between 2009 and 2010 is Dairy Farmers of America, with a 21% rise in turnover. The cooperative suffered badly in 2008/9 but is recovering well. The increase is the result of the higher US milk prices and the impact of acquisitions, Berkshire Dairy and Food Products and La Vaquita – the Hispanic cheese brand – as well as targeting increased turnover from export markets. However, the horizon is not entirely clear for the giant cooperative, with a big anti-trust law case which could, worst case, cost them $2bn for historic anti-competitive activities due to be decided in the second half of 2011.
Entering the top 20 list for the first time is newly formed Deutcher Milch Kontor (DMK), which came in to existence following the merger of Humana Milchindustrie and Nordmilch, which has been finalised in 2011, after working together on sales since 2009. However, although the new entity is easily the largest in the German market, it will still cover 24% of German milk production, leaving further room for consolidation.
A further example of German consolidation is Arla Food’s merger with Hansa Milch, which provides the smaller German cooperative with economies of scale required to compete in the de-regulated market.
This merger of cooperatives (where current Arla members remain as the only owners), may form the pattern for future mergers across Europe as the impact of competition in the markets post-2015 become apparent.
A second significant merger has been that of Sodiaal, the French cooperative with its debt-laden (and recently loss-making) Entremont Alliance, also from France. Sodiaal has also recently become partners with General Mills which has, in 2011, acquired a 51% controlling interest in Yoplait SAS, and a 50% interest in a related entity that holds the worldwide Yoplait brands, from PAI Partners.
This will be a strong partnership to develop the world’s second largest yogurt brand.
A further example of a European company seeking to grow through acquisition is French company Lactalis. Despite the acquisition of Forlasa, Puleva and Sanutri (in Spain), Rachel’s (in the UK) and Lemnos cheese (Australia), Lactalis is the only top 10 company that had a lower turnover in 2010 than in 2009. However, this will change in 2011 when Lactalis will have acquired Parmalat and global sales of the new Lactalis are likely to exceed $20bn (€14.7 bn), taking them to number two in the Rabobank list.
Lactalis insist that this will actually make them the biggest dairy processor in the world, claiming that baby food and ice cream do not really class as ‘dairy products’, and no doubt the debate will go on.
It’s significant that these large mergers are taking place in Europe, suggesting that European companies are rushing to gain sufficient economies of scale to compete in the further de-regulated production post-quota markets of 2015.
The other new entry to the top 20 list published by Rabobank in 2010 is Schreiber Foods, the US dairy/cheese manufacturer that claims to be the world’s largest private-label and foodservice producer of dairy products.
In 2010, Schreiber moved into South America with an acquisition in Uruguay. It has also expanded its yogurt operations by acquiring the Dean Foods yogurt business.
Despite the European mergers, Mengniu and Yili remain within the Rabobank Top 20 list, with growth in turnover of both being around 20%.
Another company from developing markets that we can perhaps expect to see on the list in future years could be Amul, which currently processed around 3.4m tonnes of milk, around 0.5% of the world supply, which is more than Schreiber Foods.
Amul has recently announced plans for establishing processing plants in US and Europe to produce ghee and paneer.
The move of Amul’s owners, Gujarat Cooperative movement, which has historically focused on local production and consumption, aimed at empowering India’s poorer classes, to expand internationally clearly shows how deeply globalisation is affecting the worldwide dairy sector.
In my view, globalisation can only accelerate.
Kevin Bellamy directs Zenith International’s wide-?ranging activities in the dairy industry. You can contact him here.
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