Dairy industry is set for further consolidation

By Guy Montague-Jones

- Last updated on GMT

Related tags Dairy industry Economics Dairy Milk

A recent flurry of merger and acquisition activity in the dairy industry could be a sign of things to come as companies look to adjust to a more volatile marketplace.

In Europe Ebro Puleva has recently sold off its dairy business to Lactalis for €630m while Glanbia has just announced its intention to sell its Dairy Ireland business.

These are two of the biggest M&A moves in a year that has so far been marked by a spurt of deals in the dairy industry and the food sector more generally.

Financial market recovery

Mark Voorbergen, an analyst at Rabobank, told DairyReporter.com that the financial crisis paralysed much potential activity last year as financing became harder to secure and sellers backed away from poor valuations.

Now that the financial markets have got back on their feet and the economy has stabilised somewhat, Voorbergen said M&A deals are back on the table.

This is the case throughout the business world but the dairy industry is also facing a specific set of challenges that are creating pressure for consolidation. Voorbergen said the almost unprecedented volatility in the dairy market last year created a crisis management mentality that is only now starting to lift.

Consolidation benefits

As markets start to stabalise, the analyst said management teams in the dairy industry are really starting to focus on setting up structures that will make their businesses more resilient to volatility and reduce exposure to dairy weak spots like commodity cheese that came to the surface last year.

And consolidation is a particularly attractive avenue. It can offer opportunities to tap into faster growing niches and markets, widen portfolios to spread risk, team up with stronger partners, increase negotiating power with customers, and reduce production costs.

Voorbergen said the Friesland and Campina merger has set a standard in the dairy industry, revealing the benefits of consolidation and putting pressure on other firms to follow suit.

FrieslandCampina can now take advantage of bigger economies of scale, enjoy greater negotiating power with customers, and play around with the milk pool to flexibly target the best market opportunities.

Elimination of quota system

Looking to the long term, Voorbergen said the termination of the milk quota system in Europe could also drive consolidation in dairy processing.

The elimination of quotas is likely to result in a shift in milk production from places like Northern Scandinavia and Southern Europe to more favourable regions in Europe. This will create opportunities for processors in places like Germany, Poland, and the British Isles but threaten companies based in the Mediterranean. The disassembly of the quota system could be a consolidation driver to watch in the future.

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