Announcing its 2017 financial performance last week, Dutch dairy co-op FrieslandCampina described 2017 as “the year of butter” following the phenomenal price spike which saw butter prices top €7,000/t at one point.

The farmer-owned co-op based in the Netherlands also noted the simultaneous decline in the value of milk proteins, namely skimmed milk powder (SMP), which led to significant stock building across Europe.

“This demonstrates the high volatility of the dairy market,” said FrieslandCampina in its annual report. “Minor changes in conditions and sentiment can have a major impact on the supply and demand for dairy products, and consequently on prices.”

Just a week earlier, the Danish dairy co-op Arla made similar observations about international dairy markets, describing 2017 as another volatile year for prices.

Even for Arla and FrieslandCampina, which process a combined 24bn litres of milk, three times the size of Ireland’s milk pool, the heightened volatility of dairy markets since the ending of milk quotas has been a significant challenge.

The strategy of both co-ops to manage dairy market volatility has been to push further down the branded route for consumer products. Arla, which made profits (EBIT) of €385m in 2017, said almost half (45%) of its business now comes from sales of branded dairy products.

The co-op’s three main consumer brands include its Arla range, Lurpak butter and Castello cheeses. Sales of products under the Arla brand grew 10% last year, while Lurpak sales grew more than 8% in 2017. Castello cheese sales increased 3% in the year.

Arla has prioritised growth via branded products as part of its latest five-year strategy. The co-op said branded sales will help to offset market and raw material price volatility, which has a much greater impact on non-branded products.

Similarly, FrieslandCampina holds a strong position in terms of its established consumer brands such as Peak and Campina. The farmer co-op is also in the envious position of owning its own infant formula brands – Friso and Dutch Lady.

Friso infant formula has grown rapidly in the lucrative Chinese market over recent years. The Friso brand holds a 10% share of the €30bn infant nutrition market in China, making it the third largest infant formula brand in the market.

In its latest annual report, Friesland said it wants to further leverage its brands by building on its “grass-to-glass” concept. The Dutch giant certainly has the financial muscle to pursue this strategy, with almost €540m invested last year in advertising and marketing promotions of its consumer brands. This investment in marketing and advertising is more than five times the annual profits of the combined Irish dairy industry in a good year.

Arla

Arla saw sales grow by 8% for its 2017 financial year of €10.3bn. The dairy co-op, which processed 13.5bn litres last year, said this was the single biggest increase in organic sales growth achieved in the history of the company, excluding acquisitions. Profits (EBIT) for the year fell by 24% to €385m. This was due to an exceptional payout received last year following the once-off sale of a business. Arla reported net profits of €299m for the year, which represents 2.8% of revenue. This is within its annual target range for net profits.

Arla said it increased farmgate milk prices by more than 27% in 2017 to an average payout of just over 0.38c/kg.

FrieslandCampina

FrieslandCampina reported a 37% decline in profits for its 2017 financial year to €227m. The farmer-owned co-op attributed the decline in profits to the write-down of assets in China and Germany, as well as restructuring costs. Friesland reported a 10% increase in sales for 2017 to over €12bn. This was due to improved dairy market prices and the inclusions of acquisitions made in the last year. Operating profits declined more than 20% to €444m, with profit margins falling from over 5% in 2016 to 3.7% last year. Profit margins were under pressure due to one-off costs, negative currency effects and increased raw material prices (higher milk prices). The co-op paid an average milk price of 0.40c/kg in 2017.

In a year when dairy markets witnessed sharp volatility in both directions (butter prices hit record highs, while SMP prices plunged to record lows), the comments of Europe’s two largest dairy co-ops are not to be taken for granted.

The strategy from Arla and FrieslandCampina is very clear, with both companies placing a strong emphasis on their consumer branded business. Both of these dairy giants feel that investing in their portfolio of consumer dairy brands is the right strategy as branded products tend to hold their value better in times of price fluctuation – therefore protecting milk prices and farmer incomes. No doubt the 500m consumers on their doorstep have cemented this branded strategy.

FrieslandCampina’s branded strategy has also extended into the infant formula market, where they have created their own brand, Friso. By owning their own brand, Dutch farmers have captured the full potential of the lucrative infant formula market, where profit margins can be as high as 30%. This raises a number of concerns for Ireland’s dairy industry. Firstly, for Ireland to follow a branded strategy of similar scale to these two dairy giants, it would take a marketing investment of almost €200m per annum. It is difficult to see how this could be possible given that the combined profits of Irish dairy processors is around €100m.

Secondly, it’s worrying to see FrieslandCampina promoting a “grass-to-glass” campaign, even though Dutch cows are out at grass for less than 100 days in the year. While Irish cows are out at grass for a greater period of time, the financial strength of the Dutch co-op could allow them to make more noise and capture a greater share of the grass-fed market.

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