The company's managing director told the Board of Representatives last week that there will have to be a significant reduction in the price that the group gives farmers for milk if it is to compete in the already overcrowded market place.
There appears to be three factors that is damaging the company's health. The group fear that the EU's enlargement will put a strain on the market, the EU's agricultural reform will lower intervention prices and the weakened dollar is encouraging dairy company's to focus in Europe.
All this factors will lead to a drop in milk prices. Ake Modig explained:"We now believe that the budget reduction in the on-account price will be insufficient and that the actual reduction may be twice what we had anticipated."
Depite this, the company says that it is performing well in the UK. The formation of the new UK group Arla Foods UK has created what the company call a "strong financial base".
It is the domestic markets which are suffering the most however, "The situation in these markets is particularly difficult", said the managing director, adding, "We are losing market share to imported products while, at the same time, the discounters are adding to the pressure on our branded products."
The company does however have a positive outlook for the future. But Knud Erik, the groups Chairman, speaking at the same meeting said: "It is important to realise that the changes stemming from the agricultural reform and other market conditions are so extensive that price falls for milk are inevitable."
He estimates that the group will have to pay in the region of DKK2 per litre of milk produced to counteract the changes in the market.
Other leading dairy companies - Glanbia and Neslé both suffered as a result the glut in cheese in Europe brought about by the overproduction of milk in the sector, and the mid term CAP review. It is thought that the weakened US dollar will encourage producers to remain in the European market.
Over production may harm the industry for some time to come. "Moreover, there is little likelihood of volume growth in the market in general - and the situation is similar in the rest of Europe", Arla's managing director concluded.