The company's ingredients division announced today that it will spend US$20m (€13.4m) in upgrading technology at its Portena plant in the country.
Arla said the upgrade will result in greater cost efficiency in producing whey protein powders from leftover dairy waste called permeat.
With growing difficulties in ensuring profitability through Arla's European operations, the company is increasingly looking to step up its presence in emerging markets.
Henrik Andersen, a manager in group's whey protein segment, said the move would allow the company to strengthen an already profitable business segment.
"The investment will allow us to process 100 per cent of our raw materials instead of just 30 per cent," he stated. "We're expecting that the result will be a very substantial rise in revenue."
Whey protein powder is used mainly by the dairy and baking industries. With increasing commodities prices for goods like milk powder, the company expects the investment to allow for better use of its ingredients supply, by producing whey protein from the waste products left over from processing.
Only 30 per cent of the raw whey is suitable for processing because of the product's high sensitivity to humidity, the company says. The rest of the waste - permeat - is currently supplied as liquid animal feed.
However, upon completion of the construction of a new spray tower at the site to dry the permeat, the company expects to receive a better return from the operations.
"Compared to our current whey proteins, the whey permeat powder will be a standard product, but considerably more profitable than animal feed," says Andersen.
Powder produced at the site will be used to further supply whey to markets in South America by the time the permeat is available in 2009, the company added.
Arla has operated in Argentina for five years, as part of a joint venture with local group SanCor.
Besides the South-American investment, the group has also stepped up its presence in emerging markets like Asia for the products.
Last month, the company launched its Milex milk powder brand in Asia in order to tap what it claimed was "very substantial" potential in the market. The launch came after Arla ahd previously set up a representative office in the country in May.
The timing of this market shift could be pertinent for Arla foods.
The Scandinavia-based company has recently had trouble through its European operations forcing the group to restructure parts of its operations including cutting cheese output.
In September, Arla said that 187 of its members announced their intention to leave the co-operative, resulting in a reduction of 300m kg worth of milk annually.