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March 31, 2014

Editor’s viewpoint: Milking emerging market demand

Arla Foods, The Irish Dairy Board and Fonterra have all in the last week announced investments - or hinted at expansion to come - with growing demand for dairy products in emerging markets in mind.

By Dean Best

This morning came news of yet another move by one of Europe’s dairy majors to expand ahead of the end of EU quotas on production next year – with an eye on growing demand in emerging markets.

Arla Foods, the Scandinavian co-op already the world’s seventh-largest dairy producer, announced plans to merge with Belgium-based co-op EMG Walhorn.

Arla chairman Åke Hantoft said the company hopes the deal will expand its milk pool as it works to drive growth in emerging markets. The dairy giant hopes to double exports of European products to growth markets outside the EU by 2017.

The move reflected part of the strategy Arla CFO Frederik Lotz outlined to us to in last month’s just-food interview. Put simply, Arla hopes to increase its European milk supply, turn it into value-added dairy products and then export these to meet growing demand in global markets where there is a supply shortfall.

Of course, Arla is not the only Western dairy group preparing to expand with the end of EU quotas on the horizon. Last week, The Irish Dairy Board signalled its ambitions for expansion with a new finance deal.

The co-op said a new, five-year syndicated bank facility of EUR420m (US$579.4m) gave it “significant funds to meet domestic and international growth requirements” ahead of the end of EU milk quotas.

The cash could, the IDB indicated, be used for M&A or other investments inside emerging markets – another tactic used by the co-op – and peers like Arla – in recent years.

Another example of such moves in emerging markets came last week from Fonterra, the world’s largest dairy exporter. The company said on Wednesday it had started building its first production plant in Indonesia.

Fonterra is hoping to tap into growing demand for dairy products in Indonesia, where, it said, per capita consumption lags behind levels in neighbouring markets.

However, of course, investing in emerging markets should no longer be just about boosting the top line – but also looking to grow profitably. Competition in such markets is intensifying, which, when combined with the complexity of doing business in these economies and other factors like commodity inflation, could weigh on profits.

Arla’s Lotz told just-food its profitability in emerging markets often comes in ahead of European margins – which will make the co-op a fearsome competitor as the world’s dairy giants seek to milk demand in faster-growing economies.

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