Inventories of these basic dairy products, which were produced in previous months at higher milk prices, had to be sold at a loss. The negative trend in the added value volumes has not yet reversed itself. This underlines the importance of the transformation process initiated last year. Results of the sale of consumer products and ingredients, adjusted for currency effects, were stable, says FrieslandCampina.
CEO, Hein Schumacher notes: “In the first quarter of 2018, similar to the last quarter of 2017, FrieslandCampina faced low prices for basic dairy products, which insufficiently compensated the guaranteed price of milk paid by the company to member dairy farmers. This puts pressure on the company's results. There was a recovery in the second quarter. Strong price competition for infant nutrition in Asia is challenging us to fight for our market position. This requires additional investments and a nimble organization. Partly for this reason, the organization structure was adjusted effective on January 1, 2018 and an intensive transformation program is underway. This enables us to operate faster in the market and to structurally lower costs.”
Lower operating profit and profit
Operating profit in the first half of 2018 amounts to €177 million, 35.6 percent lower compared to the first six months of 2017. Currency effects had an adverse impact of €21 million on the operating profit. Without currency effects, the operating profit is 28.0 percent lower than in 2017.
In the first quarter of 2018, similar to the last quarter of 2017, the loss of basic dairy was substantial to the amount of approximately €135 million. In addition, severe price competition in Asia for the infant nutrition market had an adverse effect on operating profit. The trend in the second quarter results is positive, but insufficient to offset the backlog created compared to the first half of 2017.
Milk supplied by member dairy farmers
In comparison to the first six months of the previous year, the milk provided by member dairy farmers decreased in the first half-year 2018 by 79.5 million kilos (1.5 percent) to 5,356 million kilos of milk. To ensure that phosphate production in the Netherlands remains below the phosphate ceiling, the system of phosphate rights for dairy livestock went into effect on January 1, 2018. As a result of this measure, the number of dairy cattle held by member dairy farmers in the Netherlands has decreased and as a consequence also the milk supply.
Outlook
According to FrieslandCampina, the expectation is that in the second half of 2018, global milk production will once again increase due to the relatively high milk prices. The long-term drought in Northern Europe has an adverse effect on feed production and this may put the growth of milk supply somewhat under pressure in the fourth quarter.
The demand for dairy on the global market will probably remain high, thanks to strong economic growth in countries that import dairy products, such as China, and countries in Southeast Asia and the Middle East. The high oil prices throughout the world show that there is economic growth. On this basis, it is safe to assume that the demand for dairy products will continue to increase, according to FrieslandCampina.
Negative weather conditions, political developments in the European Union and possible problems in international world trade, such as creating trade barriers or higher import duties in key importing countries, could put milk prices under pressure, says the company.
