Blog: Dean BestHow the milk has turned sour in Europe

Dean Best | 2 June 2008

Growing up, we're all told that there is no point crying over spilt milk.

Looking across the English Channel, however, it seems that no-one told our Continental cousins.

Thousands of farmers across Western Europe, from France, through the Benelux and Germany and down to Austria, are protesting about the price of milk. Last week, strikes were called in Germany and the Netherlands and gallons of milk were poured, literally, down the drain. Fears of a milk shortage across Europe are now very real.

European farmers are feeling the pinch from the EU's decision this spring to increase milk production quotas. For the EU, the move was necessary to meet growing global demand and to ease milk prices, which soared last year. For farmers, who are facing rising fuel and feed costs, the policy means their livelihoods are under threat.

For consumers, however, the strikes and the threat of a milk shortage come at a time when they too are facing higher food and fuel costs. Sympathy for the farmers has been in short supply. But, with the farmers digging in, and more milk being thrown away, European supermarkets and food manufacturers could soon start feeling the effects of the protests.

In the US last week, there was a warning that rising commodity costs could spark a "structural change" in the country's food industry. Debt ratings agency Fitch claimed that higher costs could lead to "financial stress" for companies already struggling with heavy debts. Companies including ailing US baker Interstate Bakeries Corp. and banana giant Chiquita Brands International were cited, with Fitch describing them as "fallen angels". No doubt much of the US food industry will be praying for respite from rising costs.

However, one blue-chip name, Heinz, is bucking the trend. "From a food stock perspective, Heinz is the place to be," one analyst told a US newspaper last week after the US food giant posted an 8.5% rise in annual profits and a 12% jump in sales.

Bullish Heinz CEO Bill Johnson then unveiled a plan to drive earnings over the next two years. More products will be launched, more money will go on marketing and more attention will be given to emerging markets as Heinz looks to build further growth.

Two years ago, activist investor Nelson Peltz, tired of what he described as a "clubby caretaker board" at Heinz, outlined where he thought the company was going wrong in an acrimonious boardroom battle.

For some, Peltz should take the credit for the rejuvenated Heinz. What is certain, however, is that Heinz, unlike some of its rivals in the US, currently has the right ingredients for success.


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