Arla Foods is to step up both the amount of payouts to its suppliers and organic production in an attempt to adapt to a rapidly changing global dairy market.
The Danish co-operative group said yesterday that the current increase in world commodity prices stemming from dwindling supply had encouraged it to increase payments. It will also attempt to step up organic production to ensure supply could meet the predicted growth in demand over the coming years.
The decision comes as dairy processors are being put under pressure from both a dwindling supply of dairy products like milk powder, and the need to adapt their production to meet growing demand for specialised products like organic goods.
The dairy supply has proven to be a particular problem for Arla, with prices rising drastically amongst increasing demand from emerging markets like China, exacerbating lower outputs from major dairy suppliers like Australia.
As such, from 30 July this year, Arla said it now would pay its members an additional 0.128 DKK per kg of milk supplied, with the possibility of further rises in the future, depending on the market.
"It can't be excluded that this is just a first step and that we may announce further price increases to customers soon as a result of the milk shortage in Europe," stated group chief executive officer Peder Tuborgh.
The announcement comes on the back of a similar move last month by New-Zealand-based rival Fonterra, which announced that it too would be raising payouts to its suppliers to reflect the current situation in the world commodity markets.
Payouts are the amount of money a co-operative's member-farmers receive for supplying it with milk.
Along with increasing payouts for its dairy supply, the company also said it was preparing to boost organic production in both Sweden and its native Denmark to prepare itself for an expected surge in demand.
The company said it had taken the decision due to increasing demand amongst consumers in many of its key Western European markets like the UK and Germany for organic products.
With this increase in mind, come Autumn, Arla estimates it will have reached a point where it will have collected and used 97 per cent of the total organic output from its Danish milk suppliers, though demand would continue to grow. To sustain organic supply the company said it requires a further 75m kg of organic milk on top of the 300m kg of the product currently being produced in Denmark.
With the company keen to promote itself as a leading producer of organic goods, Tuborgh said it was vital to ensure it could meet its growth targets.
"Interest in organic milk is increasing among our customers and consumers," he stated. "We have a clear ambition to contribute to organic development in Denmark and Sweden and to fulfil the responsibility that goes with our role as the world's leading organic dairy company."
With a two-year transition period required for all suppliers to attain organic status for their produce, Arla said that it would begin recruiting organic producers as soon as possible, though it added it had already started the process in Sweden a few years ago.
The group added that 35 of its milk producers have registered an interest in becoming organic suppliers, accounting for about 37m kg worth of milk production.
The company said it hoped to step up production of organic milk by 25m kg by 2009 with a further 50m kg to be added a year later.
