Food giants reveal milk supply concerns

By Neil Merrett

- Last updated on GMT

Related tags Milk Kraft Eu

A number of the world's leading food manufacturers have revealed
their concern this week at the current high prices for milk supply,
as they move to offset the adverse affects of increased production

Over the last seven days, Danone, Kraft, Cadbury, and New Zealand-based group Fonterra have all commented that the unprecedented lull in milk production is forcing them to review their strategies for the future. The comments reflect the increasing pressure on food and beverage processors as a dwindling supply of milk and the resulting higher prices continues to put pressure on margins. Due to these concerns, Danone today confirmed that it would be enacting price hikes in its fresh dairy segment. A spokesperson for the company told that the price increases were the best way to "integrate​" and "offset​" the continuing hikes in milk costs, though it does not expect to extend the policy to its other brands at the present. In the space of the same 24 hours, rivals Kraft and Cadbury Schweppes also revealed that their production costs had been hit by current conditions in the dairy supply chain. Kraft said yesterday that operating income for its core US cheese division had declined by 20.5 per cent during the second quarter of the current fiscal year. The company attributed this primarily to increases in the cost of milk. Irene Rosenfeld, chief executive of Kraft, revealed that the industry as a whole was facing unique challenges over raw material costs, speaking Wednesday to the Financial Times newspaper. "2007 is shaping up to have the highest average dairy prices on record,"​ she was quoted as saying. "The high cost of milk is beginning to slow consumption."​ Over the last year, Kraft has twice increased prices for its cheese products. Margins were also under pressure for confectioner Cadbury Schweppes, which is dependent on milk for production of many of its leading chocolate brands. The company said the high input costs, particularly for dairy products, would ensure operating margins will not improve throughout 2007, though it said it would continue to aim for mid-teens margins by 2011. Dairy group Fonterra last week added that it too was struggling amidst increased dairy prices, as the total cost of goods sold for the full fiscal year, excluding payouts it makes to supplier-owners, increased by AUS$259m (€166m) to AUS$6.1bn (€3.9bn). Current gloom amongst processors may be lifted in the short term though, with the publication of an EU report into prospects for agricultural markets and income between 2007 and 2014, promising a slight upturn in the market. Milk production in the 27 EU member states is expected to expand at a "modest rate"​ during the short term following an increase in production quotas for 11 countries in the bloc. However, as reforms to the EU's Common Agricultural Policy (CAP) continue to take hold, a decrease in subsidized production is expected to result in medium term production declines for milk. Likewise, cheese production is expected to increase in the long term, though skim milk powder and butter will undergo production declines as a result, the report added. While EU dairy production remains important, the problem of dairy supply remains a global concern. As such, production declines of about 11 per cent are expected for the current season from the Oceania region, which includes some of the world's leading producers, like Australia and New Zealand. Australia alone accounts for 13 per cent of dairy global production, according to industry association Dairy Australia. With the global supply under continued pressure from dwindling production, some industry experts believe the dairy industry must look in new directions for their operations Joop Kleibeuker told in June that processors, particularly in dairy production, may have to shift their focus towards production of more high-end added value products, to get better returns. In this sense, Kleibuker believed Europe was well placed to lead the industry. "The EU has strong experience of producingadded-valueproducts in dairy production,"​ he said. "This will be important in shifting towards producing whey proteins and other nutritious goods, and moving away from more basic consumer products."

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