This week, Arla posted revenues of €10.3bn ($12.7bn), and the cooperative’s CFO, Natalie Knight, told DairyReporter the fact that profit before tax dropped 19% from 2016 was because of the increased payments made to its farmer members.
“Essentially as a cooperative our most important target is always how do you get our pre-paid price as high as possible to at least pay out to our farmers,” Knight said.
“So if you look at our 2017 numbers, what you see is we paid out almost 25% more to our farmers. The EBIT number down isn't indicative of poor performance, it's just indicative of we've chosen to pay out a higher milk price to our farmers.”
Reduced price
However, just a few days later, in the UK, Arla joined other UK companies by announcing a reduction in its price for conventional milk, by 2.16 pence for the manufacturing liter, taking it to 27.11 pence from March 1, 2018.
Arla Foods board of directors member, Johnnie Russell, said, “While this will be unwelcome news for our farmer owners, the challenge that we face is that our price, in common with those of our competitors, has been impacted by the recent dramatic falls in the commodity markets from the highs of last autumn.“
While last year’s increases were driven by fat, the long-term decline in the value of protein since the start of 2017 has had a significant impact, Arla said, adding that protein prices are now at a historical low with little prospect of recovery, due to the large stocks held by the EU.
The cooperative said cheese prices have begun to recover but are still below the levels of a year ago, while butter has also begun to increase but is still only slightly ahead of last year’s prices.
NFU ‘disappointed’
However, the NFU is urging Arla to speed up its commitments to looking at risk management options for its suppliers. The NFU is also calling on Arla to be clear as to why its current plans are not preventing steep price drops.
Since December 2017, Arla farmers have seen a total drop of 5.19ppl.
NFU dairy board chairman Michael Oakes said he was disappointed and surprised to see this level of price drop again despite a stable demand for butter and the UK Futures Market Equivalent showing a positive result on the forward curve.
“We will soon see Arla’s seasonality pricing mechanism lower the pence per liter received even more,” Oakes said.
“Just this week at the NFU Conference Arla announced a growth in revenue of £1.94bn ($2.7bn). Arla farmers don’t appear to be feeling the positive effects of this revenue or the strategy to manage risk in the market. We want to see more done at both ends of the chain to insulate farmers from such steep price drops.
“It is vital that Arla works with farmers to provide them with the ability to mitigate the effects of volatility on their businesses. We are holding Arla UK’s managing director Tomas Pietrangeli to his commitment made at NFU Conference to look into risk management options for Arla suppliers. We are calling on Arla to speed up this work so farmers can see the results.”
The NFU Dairy Board is due to meet with Arla later in the year and said it will be reinforcing this call.
Not just Arla
Arla isn't the only company in the UK dropping its prices, however. First Milk also announced that its milk price for March will be reduced by 1.25 pence per liter.
Jim Baird, vice chairman and farmer director, said the weaker dairy market has impacted revenue.
“We can only pay a milk price that relates to our returns. We know that this further milk price drop will be disappointing to our members and continue to do all we can to mitigate the market conditions."
And last month, another UK company, Dairy Crest, announced a similar move. It also reduced its milk price for March by 0.75ppl.