At the meeting of the Board of Representatives this week, managing director åke Modig presented a forecast indicating that the result for Arla Foods' divisions will fall approximately DKK 100 million below budget. Although all efforts are focused on limiting the shortfall, uncertainties remain about the supplementary payment for the year.
"The most dramatic change is in Denmark where the dairy market has undergone significant change within an extraordinarily short time," said åke Modig. "Cheap German milk has arrived in supermarkets and although Arla Foods' response to the German milk, DanMælk, has proved an effective answer by achieving a market share of 12 per cent, the fact remains that the milk price continues its downward trend in Danish stores."
Sweden is currently experiencing a decline in the consumption of dairy products while cheese imports are rising. The multiples are focusing strongly on own label, a trend that is affecting Arla Foods' branded products. One consequence of this is that the Sweden Division is now producing own labels for the first time.
However, the group contends that Arla Foods UK is performing well, where investments in marketing have created increased sales for products such as Lurpak. Arla Foods' filtered milk, Cravendale, is also doing well.
The group's Middle East operations have not performed as well however. The low dollar rate means that Arla Foods is seeing lower earnings from export products. This is primarily affecting the overseas division and ingredients sector. The Middle East, which accounts for half of Arla Foods' exports outside Europe, is normally a strong and profitable market, but Arla blames political turbulence for having had an adverse effect on sales.
The budget process for the next financial year is well underway although Modig claims that it is too early to predict the milk price for 2004/05.
"The markets are characterised by great uncertainty and current forecasts of a farmgate price of 2.25 Danish øre (100 øre - 1DKK) are highly uncertain," he said.
There are, however, certain signs that indicate rising international demand. These include the fact that cheese prices seem to have bottomed out, milk production in Europe is lower as well as the fact that Australia has suffered extensive droughts and consequently will be unable to maintain normal dairy production.
In addition, although the large amounts of cheese in store in the European market have resulted in dramatic price falls, milk powder and butter have become more profitable as a result.
"Perhaps we're seeing the early beginnings of an upturn in international trends," said Modig.