Having looked at the financial performance of Irish dairy co-operatives and processers in last week’s Irish Farmers Journal/KPMG Milk price review, this week we examine how the major international dairy processors fared in 2015, particularly with almost 90% of our dairy production exported.

Fonterra

Annual sales for the New Zealand dairy processor Fonterra fell 15% in 2015 to NZ$18.8bn (€12.4bn), reflecting the fall in dairy commodity prices. Despite this, Fonterra managed to increase operating profits by a massive 87% to $942m (€620m) with margins widening 270 basis points to 5% last year.

After a difficult first half to its trading year, the group rebounded strongly in the second half with greater milk volumes pushed into branded products for its consumer and foodservice division. Earnings for Fonterra’s consumer and foodservice division more than tripled to $408m (€269m) for the year with sales volumes up 27%.

The remainder of Fonterra’s earnings came from its ingredients division, which delivered a solid performance. In the second half of the year, Fonterra adjusted its product mix to produce more products with higher returns like cheese and casein and produced less whole milk powder.

With milk collections increasing 3% to almost 23bn litres, the group has invested significantly in added capacity. The co-op’s net debt position rose 55% to $7.6bn (€5bn). This means debt is now very high and close to eight times earnings (EBITDA).

Fonterra paid an average milk price of 19c/litre in 2015 to its 10,700 suppliers.

Arla

Danish dairy processor Arla reported a slight drop in sales (-3%) to €10.3bn, while operating profits actually increased almost 9% to €400m for its 2015 financial year. As 45% of sales come from branded products, the group was more insulated from the sharp decline in dairy commodity prices.

However, the co-op’s net profits at year end were down almost 8% to €295m as Arla took the decision to support farmgate milk prices. Under the milk price support scheme, Arla management chose to reduce the group’s profit margin from 3% to a range between 2.7% and 3%.

Milk collections increased 6% over the year to almost 14bn litres following the abolition of quotas and Arla says it is aiming to increase supply to 16bn litres by 2020. Just eight years ago, the group was processing only 7bn litres with 19,000 employees. Today it has the same number of employees processing twice the milk pool. Arla paid an average milk price to its suppliers of 32.7c/l in 2015.

FrieslandCampina

The Dutch dairy giant FrieslandCampina performed strongly in 2015. Despite a slight fall in turnover (-1%) to €11.3bn, the co-operative was able to increase operating profits 18% last year to €576m, with margins expanding 80 basis points to 5.1%.

Retained profits for the year increased 13% to €343m, despite the co-op supporting milk prices and paying an average farmgate price of 35.6c/l to its 13,500 suppliers. Friesland’s product mix is extremely diversified, with no more than a third of sales coming from any of its business divisions.

Strong profit growth across Friesland’s ingredients (+35%), European (+14%) and Asian consumer brands (+44%) divisions was more than enough to offset a drop in returns from its cheese, butter and milk powder unit (-5%).

In volume terms, Dutch farmers increased milk production the most in Europe following the removal of quotas, with an extra 860m litres delivered to creameries in 2015. Friesland handled the majority of this extra milk as it processed an additional 607m litres last year for a total milk pool of 10.7bn litres.

While the group’s net debt position increased almost €130m by year end to stand at €1.1bn, it remains a manageable 3.5 times earnings following significant capital investment in processing capacity in recent years.

DMK

DMK is Germany’s largest dairy processor and processed more than 6.5bn litres last year, a slight decline (-1.5%) compared to the previous year. The German co-op reported a 13% drop in sales last year to €4.6bn, reflecting global dairy market declines.

Despite operating margins at DMK being maintained at a slender 1.6% last year, operating profits still declined 11% to €75m. However, much of this can be attributed to the group’s decision to support farmer milk prices to the tune of €30m last year, paying out an average farmgate price of 28.4c/l.

The group has invested close to €500m in the last few years. A new milk dryer was completed in 2015 with an annual production capacity of 65,000t of milk powder. The investment in powder capacity suggests DMK is focusing its growth on export markets. It already derives 40% of sales from exports.

Dairy Farmers of America

Dairy Farmers of America reported net profits of $94m (€85m) in 2015, a significant improvement on the $43m (€39m) profits earned the previous year. The co-operatives net sales actually fell almost 23% during 2015 to $13.8bn (€12.5bn) as a result of falling dairy commodity prices.

In total, DFA markets more than 27.3bn litres of milk on behalf of its own farmer members as well as others. This equates to about 30% of the US milk pool. DFA paid an average milk price of €0.30c/l in 2015 to suppliers as strong domestic demand for butter and cheese in the US helped insulate US farmgate milk prices from the worst of the global downturn in dairy markets.

First Milk

Processing about 1.8bn litres of milk per annum, 2015 was a difficult year for First Milk. With sales falling almost 30% last year to £442m (€530m), the co-operative racked up pre-tax losses of £25m (€30m) which it blamed on the loss of a major customer contract. It is understood the contract was to supply Morrison’s with own-label cheddar. The group also said the farmgate milk prices it was paying to suppliers had been too high and out of kilter with market returns.

Since then First Milk has slashed prices paid to farmers and is now one of the lowest paying processors in the UK. First Milk’s average price paid out to farmers in 2015 was 22.7c/l.

Dairy Crest

In contrast, Dairy Crest in the UK had a strong year in 2015. Despite sales falling 6% to £422m (€505m), operating profits for the group increased over 16% to £54m (€65m) with margins widening 250 basis points to 12.9%.

Dairy Crest is significantly invested in its branded offerings, with 55% of profits last year coming from its two main cheese brands. The remaining 45% of profit is derived from its branded range of butters, spreads and cooking oils.

The group pays two milk prices to farmer suppliers. Dairy Crest paid a basic milk price of 27.4c/l on average in 2015, with some farmers receiving 31c/l for supplying its Davidstow cheese plant.

There is a huge variation in the performance of the major international processors. In a year of falling dairy commodity prices, brands insulated profit margins. In the main, debt levels increased due to added capacity as supply expanded. This has pushed gearing in some cases to uncomfortably high levels.