Summary
Arla’s investment plans have a strong focus on serving growing markets for dairy products beyond the EU’s borders. One element of this is through the expansion of EU based milk powder production. This is closely linked to investments made in Ivory Coast, Nigeria, Senegal and Ghana in repackaging facilities which use imported milk powders to produce individual consumer ready portions of milk powder which can be reconstituted at home. These investments involve local partners with well-developed distribution networks. However none of these local partners are involved in local milk production. This sits uneasily with Arla’s commitment to avoiding unintended consequences for local farmers in a context where serious structural and economic constraints are faced in developing local milk-to-dairy supply chains. In the long term given the projected shortage of global milk supplies by the mid- 2030s in the face of rising global demand for dairy product and the production constraints impending in major milk exporting countries this is an important structural development issue.
At the end of January 2018 Arla announced plans to invest €527 million in realising its ‘growth ambition’. The investments identified were seen as essential to ‘long term growth and profit opportunities for the company’s 11,200 farmer owners across Europe’ (1).
Of the four areas of growth identified one of the most prominent from an ACP perspective is focussed on meeting the growing global demand for dairy products (see box for Arla’s 4 priority areas).
In making the investment announcement Arla’s Chair Ake Hantoft noted how while dairy prices may be volatile ‘dairy consumption worldwide is growing faster than it ever has’. For Arla the four key regions with the ‘fastest growing strategic growth markets are Middle East and North Africa, China and Southeast Asia, Sub-Saharan Africa, and the United States’ (1).
| Arla’s Investment Priorities
Arla, which now operates in 120 countries word wide, is focusing its investment in four key areas: · Meeting the growing demand for dairy’: focused on serving rapidly expanding global demand for dairy products; · ‘Healthy and natural products that match consumer lifestyles’: focused on an expansion of lactose free production; · ‘Leading the way in Whey’: focused on the production of high quality value added value whey ingredients; · ‘Sustainable food production that considers the future of our planet’: focused on reducing the company’s carbon footprint across a range of production sites. |
While 50% of the planned investment targets markets outside Europe the vast majority of investment (93%) will actually take place in Europe, with ‘266 million euro being invested in Denmark, 82 million in the UK, 78 million in Sweden, and 65 million in Germany’.
From an ACP perspective the most significant investment is the planned investment in milk powder and UHT milk production in Arla’s German plant at Pronsfeld. The investments in 2018 at the Pronsfeld site form part of a longer term €190 million 3 year investment plan at the site (2). This includes investment in another milk drying tower, with production ready status being attained in 2021 (3). This comes on top of total of ‘about €110 million … invested in the construction of a new milk drying tower, a new creamery and additional milk preparation and processing capacity’ up to the end of 2014. This took production capacity at the site to ‘40,000 tonnes of butter and 42,000 tonnes of milk powder annually’ (4). The investments up to the end of 2014 made Pronsfeld one of the largest milk processing facilities in Europe, with the latest round of investment consolidating this position.
As with previous investments the expanded milk powder production will largely focus on meeting growing demand in sub-Saharan Africa (3). Arla takes the view that in Sub-Saharan Africa ‘disposable income is increasing and families are increasingly demanding nutritious dairy products’ (1).
This needs to be seen in the context of Arla’s investment in innovative production facilities (5) aimed at cost effectively serving rapidly expanding household demand for powder based milk products.
This has seen the launch of joint venture arrangements with local partners in West Africa to operate Arla designed repackaging facilities capable of transforming bulk imports of milk powder into consumer ready sachets. Joint ventures involving the utilisation of the newly designed integrated mobile facilities were first launched in September 2013 in Cote d’Ivoire (6). This was then rolled out in the form of similar joint venture arrangements in Senegal and Nigeria in 2015 (7). Most recently, in August 2017 this strategy has seen the establishment of an Arla subsidiary in Ghana. This subsidiary will supply not only powdered milk but also a range of butter and cheese from value-added brands like Arla® and Lurpak® (8).
As the Arla Board has acknowledged this is ‘in line with the company’s business strategy, Good Growth 2020, which aims to develop new markets for Arla’s products outside the EU to improve the milk price for the 11,200 farmer-owners who own the company’. Arla’s aim is to ‘triple its revenue in Sub-Saharan Africa by 2020’ (8).
According to the Arla press release ‘the new subsidiary in Ghana will manage a re-packaging facility in Tema Industrial Park close to Accra as well as sales and marketing of the products’, with distribution being ‘carried out through local distributors’.
As elsewhere Arla has sought out ‘an experienced partner with a strong distribution network in the country’. The Arla facility will initially create 8 jobs in Ghana, although this number should rise over time (8).
Meanwhile on 29th January 2018 the EU Council set the quantitative limit for buying in skimmed milk powder at zero for 2018. This was in response to the level of accumulated skimmed milk powder stocks in the EU, which had reached almost 400,000 tonnes by the end of 2017. This measure does not end the EU system of intervention buying. In the face of market crisis situations in the EU skimmed milk powder can still be bought into public intervention stocks. However buying in operations will no longer be automatic and will be restricted to the placing of specific buying-in tenders where prices will be set on a case by case basis (9). In this way it is hoped to curb the production of milk powder solely for sale into intervention stocks.
| Comment and Analysis
The investment plans of companies such as Arla reflect the corporate level response to the EU’s evolving dairy sector support policies. These policies are increasingly focused on promoting a globally orientated EU dairy sector. While Arla’s investments are focussed heavily in Europe, the output generated in major areas of investment targets international markets, such as those in West Africa. Developing these and other international markets is seen as central to the interests of Arla’s 11,200 farmer owners in 7 EU member states. However with a focus on partners with distribution experience rather than dairy sector experience, it is unclear how Arla’s investment and trading activities in West Africa contribute to the development of local milk-to-dairy supply chains. Other EU companies such as Danone and Friesland Campina, while having an equal focus on local investments in Africa which expand demand for imported milk powders, are also more actively engaged in seeking to promote local African milk-to-dairy supply chains (11, 12). For example in Senegal, Danone is in partnership with Latiere De Berger to develop local milk to dairy supply chains, while also integrating imported milk powders into certain mass consumption products. Similarly in Nigeria Friesland Campina has partnered with the Nigerian Government in seeking to promote the development of local milk-to-dairy supply chains (see companion article, ‘EU dairy companies commit to help building milk-to dairy supply chains in Nigeria’, 8 May 2018). While serious infrastructural constraints have been faced in these efforts to develop local milk-to-dairy supply chains, these companies are at least actively engaged with local milk producers. Arla in contrast, despite its statement of intent, is facing severe difficulties in moving beyond its focus on distribution partnerships for the marketing of repackaged imported milk powders (10). This reflects both structural and economic constraints on the development of local milk-to-dairy supply chains in West Africa in an era of sustained low milk powder prices. This suggests a need to revisit and operationally activate the proposal contained in Arla’s final report on the Human Rights Impact of its planned investments in Senegal and Nigeria which called for the establishment of a ‘Code of Conduct for Responsible Corporate Trade and Investment in Africa Dairy Sector Development’. Such a Code of Conduct would aim to accommodate both current supply and demand realities while seeking to create conditions for the promotion of the long term aspirations for the development of African milk-to-dairy supply chains (13). This needs to be seen in a context where by 2035 the current level of global consumption growth alongside emerging production growth constraints in major dairy exporting countries will lead to acute milk shortages and much higher dairy prices. It also needs to be seen in a context where the development of local milk-to-dairy supply chains potentially has far greater employment and income creation effects in Africa than the current pattern of investment, which perpetuates West Africa’s external dependence on the supply of dairy ingredients and dairy products. |
Source:
(1) Arla, ‘Arla foods eyes further growth with €527 million investment’, 31 January 2018
https://www.arla.com/company/news-and-press/2018/pressrelease/arla-foods-eyes-further-growth-with-527-million-euro-investment-2397144/
(2) agrimoney.com, ‘Arla hikes investment to feed accelerating world demand for dairy’, 31 January 2018
https://www.agrimoney.com/commodities/commodities/arla-hikes-investment-to-feed-accelerating-world-demand-for-dairy-51541
(3) dairyreporter.com, ‘Arla Foods to Invest €527m in 2018’, 31 January 2018
https://www.dairyreporter.com/News/Manufacturers/Arla-Foods-to-invest-527m-in-2018
(4) Arla, ‘Arla inaugurates new production facilities in Pronsfeld, Germany’, 26 January 2015
https://www.arla.com/company/news-and-press/2015/pressrelease/arla-inaugurates-new-production-facilities-in-pronsfeld-germany-1109463/
(5) Arla, ‘Mobile milk powder packaging facility for Africa’, 30 July 2013
https://www.arla.com/company/news-and-press/2013/pressrelease/mobile-milk-powder-packaging-facility-for-africa-890880/
(6) Arla, ‘First joint venture partner found in Africa’, 4 September 2013
https://www.arla.com/company/news-and-press/2013/pressrelease/first-joint-venture-partner-found-in-africa-901362/
(7) Arla, ‘Two new joint-ventures to start up in West Africa’, 31 August 2015
https://www.arla.com/company/news-and-press/2015/pressrelease/two-new-joint-ventures-to-start-up-in-west-africa-1209493/
(8) Arla, ‘Launch of new business in Ghana’, 30 August 2017
https://www.arla.com/company/news-and-press/2017/pressrelease/launch-of-new-business-in-ghana-2126045/
(9) Council of the EU, ‘Skimmed milk powder: Council modifies rules on public intervention to help the market’, 29 January 2018
http://www.consilium.europa.eu/en/press/press-releases/2018/01/29/skimmed-milk-powder-council-modifies-rules-on-public-intervention-to-help-the-market/pdf
(10) Arla, ‘Arla Foods to ensure responsible approach to African markets’, 12 January 2015
https://www.arla.com/company/news-and-press/2015/pressrelease/arla-foods-to-ensure-responsible-approach-to-african-markets-1104299/
(11) Agritrade, ‘FrieslandCampina to take over Ivorian dairy business’, 6 November 2014
http://agritrade.cta.int/Agriculture/Commodities/Dairy/FrieslandCampina-to-take-over-Ivorian-dairy-business
(12) Agritrade, ‘Danone looking to expand in West Africa’, 18 January 2014
http://agritrade.cta.int/Agriculture/Commodities/Dairy/Danone-looking-to-expand-in-West-Africa
(13) Arla, ‘Human Rights Assessment in Nigeria’, Report November 2015
https://www.arla.com/globalassets/arla-global/company—overview/responsibility/human-rights/arla-human-rights-assessment-in-nigeria-november-2015_1.pdf