The company says that due to the increase in member dairy farmers’ milk production (up 11.9%), basic dairy products such as milk powder, foil cheese and butter were produced that had to be sold below cost.
On the positive side, there was volume growth in infant nutrition in China and South-East Asia, dairy-based beverages in South-East Asia and Eastern Europe, and ingredients.
The milk price for member dairy farmers decreased to €30.24 ($33.69) per 100kg of milk, compared to €36.68 ($40.86) in the first half of 2015.
September milk price up
Two days prior to releasing its first-half financial results, FrieslandCampina announced its guaranteed price for raw milk for September 2016 at €26.25 ($29.24) per 100kg of milk, an increase of €1.25 ($1.39) compared to August.
The guaranteed price applies to 100kg of milk with a protein content of 3.47%, a fat content of 4.41%, and a lactose content of 4.51%, and is exclusive of VAT. The amounts shown apply to an average supply of 600,000kg of milk annually.
Higher milk production goes into basic products
Over the first half-year of 2016, 5.488bn kilograms of milk were supplied, a 583m kilogram increase compared to the same period last year.
Roelof Joosten, CEO of Royal FrieslandCampina, said that due to increased milk production, the company had to process significantly higher volumes of milk into basic dairy products that could not be sold at a profit in the market.
Revenue down as volume goes up
Revenue decreased by 2.2% to €5.522bn ($6.15bn).
Joosten said that FrieslandCampina is doing well with sales of added value products, including infant nutrition, ingredients for infant nutrition, and condensed milk, with 2.3% growth in volume.
Lower operating profit
The company’s operating profit decreased from €314m ($350m) in the first half of 2015 to €255m ($284m) in the first six months of 2016.
The company noted that sales increased in volume, however, margins were at a lower level than in the first half year of 2015.
Due to the high milk supply and the lagging demand, basic products were mostly sold under cost. Direct sales of raw milk in the spot market also showed a loss.
FrieslandCampina says that in the second half of 2016, worldwide milk supply is expected to decrease compared to the first half.
The company says it expects demand for dairy products will only show a modest increase over the second half year of 2016.
It cites factors such as limited purchasing power in oil-exporting countries, political instability in many nations, the limited demand for dairy materials in China, and Russia continuing to block EU dairy products.
Uncertainty over regulations
The effect of the European Commission’s measures to reduce EU milk production is unclear, the company says. It adds that the impact of possible voluntary restriction of production of cooperatives or producer associations is also unknown at present.
Also, the Netherlands is expected to impose measures to reduce phosphate production in cattle farms to fall below the level of July 2, 2015, and FrieslandCampina says that it does not know if this will lead to a further reduction in milk production in the rest of 2016.
The company has said that it “does not express any concrete outlooks relating to the results of the entire year 2016.”