Big world players show GlobalCo way to go

SIMON COLLINS catches up in Denmark with the chief of Europe's biggest dairy co-op.

"It has been very controversial. There has been enormous emotion. There have been thousands of meetings, and thousands of farmers fighting against it."

Give or take a few details and that could have been said by anyone in the debate over New Zealand's new Global Dairy Co.

In fact, the speaker was Jens Bigum, managing director of Arla Foods, Europe's biggest dairy company, formed last year by the merger of Sweden's Arla and Denmark's MD (Danish Milk) cooperatives.

"We are the third or fourth biggest in the world in milk processed," he said, "but everyone else is merging, too."

Everywhere, dairy companies are being pushed into merging by the need to create countervailing power against big supermarket chains such as the 4000-store Wal-Mart.

Arla, and Ireland's Kerry Group, which is at present bidding for another Irish group called Golden Vale, offer two very different models for where GlobalCo might go.

Arla is a similar size to GlobalCo, with 15,500 farm suppliers and sales of $11 billion.

It has gained a near-monopoly (90 per cent) of milk supply in Denmark - the result of a 30-year process of mergers which culminated in combining the two biggest Danish cooperatives in 1999. Its Swedish branch, which joined last year, holds a 65 per cent market share in Sweden.

Also like GlobalCo, Arla is wholly owned by its farmers, and pays them in proportion to their milk production.

Where it differs from its New Zealand cousin is its location in the European Union. This means its milk production is fixed by quota, and it can charge higher prices because cheaper competitors such as New Zealand are restricted.

This lucrative home market enables it to sell 53 per cent of its products in Denmark and Sweden, and to make 79 per cent of its money out of consumer foods such as milk, butter and cheese.

Ingredients made for other food manufacturers earn only 21 per cent of revenue, compared with 65 per cent for New Zealand.

The protected European market also means that it can pay farmers handsomely - around $9.83 a kg of milk solids, which includes a share of the company's profits, compared with this year's record NZ dairy payout of $5.

But Danish farmers also face higher costs because they have to keep cows inside for much of the year and feed them specially prepared supplements.

As a result, each cow produces more milk than New Zealand cows, but herds are smaller, with an average of only 51 cows each against New Zealand's 236.

A Danish farmer's milk production quota is only 500,000 litres a year, compared with the average NZ farmer's 840,000 litres.

The current system, where quotas for each country are fixed by the EU, is due to last until 2008.

Arla predicts that "based on international forecasts for increases in demand for dairy products, indications are that in the longer term we will be able to do without the quota system."

Mr Bigum said: "During the next 10 years we will need to change the Common Agricultural Policy. The protection level will be reduced.

"The problem is how to move to a more liberalised system, because the farmers have bought their farms at a high price and many farmers have bought quotas at a very high price.

"So the dairy farmers need time to change. If they don't get that time, it will be a disaster for them.

"Danish policy - and we are 100 per cent of the same opinion - is that we would liberalise and open up the economy on a clear schedule, so we can be more competitive, more world market-oriented, without destroying the farmers' position."

Even if it survives, the quota system will have to change to accommodate the EU's planned expansion to take in up to 12 new countries, including dairy producers such as Poland.

Arla plans to use the financial and technological muscle the merger has given it to expand into Eastern Europe, too.

" Arla is also expanding its organic product range, with 23 per cent of Danish milk now produced on organic farms.

"Arla is the largest producer of organic dairy products in the world," Mr Bigum said.

The company pays farmers a 20 per cent margin for organic milk, and charges consumers 15 to 20 per cent more than the standard price.





In contrast, Ireland's Kerry Group offers quite a different model. It is much smaller than both Arla and GlobalCo, with only 6000 farmers and sales of $5.6 billion. But it has become a more diversified food company than either of them, earning 70 per cent of its revenue from food ingredients.

It began with the merger of six small County Kerry cooperatives in 1974, creating what was then Ireland's sixth largest dairy co-op.

In the first few years it merged with a few other small co-ops. But it changed tack in 1979, seeing greater profits in making sophisticated food products than in basic milk production. It bought a meat company, then a snackfoods business.

In 1986 it became a public company and floated on the Dublin stock exchange. The original Kerry co-op kept a stake in the new company - currently 37.5 per cent, with co-op members and employees holding a further 20 per cent.

"Despite Kerry's profitable record, it was still felt that if it was to grow and double in size every five years, it would need access to greater funding," said corporate affairs director Frank Hayes. "The decision to go public was approved by more than 75 per cent of the co-op members at two successive meetings. It has not been contentious."

In 1988, when its own sharemarket capitalisation was only $US100 million ($242.7 million), Kerry bought the leading American food ingredient supplier, Beatreme, for $US135 million.

"It was something the group could not have done if it had not been a public company," said Mr Hayes.

"With the benefit of that experience and technology, and the confidence it obtained through growing the Beatreme business, it has been able to make more acquisitions across 15 countries."

The company now employs 350 scientists at 25 research centres around the world, including a new centre due to open in Sydney in two months.

It bought the Burns Philp ingredients business in Australia and New Zealand in 1998, and has already doubled its NZ sales.

NZ Dairy Board spokesman Neville Martin said GlobalCo would also aim to become one of the big players partly through buying up other companies, but at this stage it did not see a need to raise capital from the sharemarket.

"We are not aiming to make a profit," he said. "Our objective is to pay as much as humanly possible for the raw materials [milk]."

Links

Arla Foods

Kerry Group

Global Dairy New Zealand