The Global Dairy Industry

IUF Dairy Division The Global Dairy Industry A Report prepared for the International Union of Food Workers (IUF/UITA/IUL) Jennifer Gao Nigel Haworth Preamble In late 2010, Jennifer Gao and I (both of the University of Auckland) were commissioned by the IUF to produce a report on the global dairy industry. This is the final report. The framework of the report was agreed between the IUF and the research team. The report represents a particular level of investment of resources. A far larger resource could, of course, produce an even more detailed and comprehensive analysis. However, we believe that the report captures faithfully the complex dynamics of the sector, whilst providing the IUF with a concise global overview. Jennifer has been responsible for the greater part of the report’s production. She has worked tirelessly in its preparation, and I want to put on record my sincere thanks for her commitment and quality of work. I also want to thank our colleagues in the IUF and in the NZDWU for their support in the completion of this report and for their financial support for Jennifer. We both appreciate this opportunity to contribute to the work of the IUF. Nigel Haworth Professor of Human Resource Development The University of Auckland October 2011 Contents The Global Dairy Industry ..................................................................... 1 Fonterra Co‐operative Group Limited‐ New Zealand ........................... 8 Nestlé‐ Switzerland ............................................................................ 28 The Lactalis Group ‐ France ................................................................ 48 Groupe Danone‐ France ..................................................................... 61 Unilever‐ Netherlands/ United Kingdom ........................................... 79 Arla Foods‐ Denmark/ Sweden .......................................................... 98 Dairy Farmers of America‐ USA ........................................................115 New Zealand Dairy Industry .............................................................129 Australian Dairy Industry ..................................................................141 United States of America Dairy Industry ..........................................154 Indian Dairy Industry ........................................................................167 European Union Dairy Industry ........................................................177 The Global Dairy Industry: an introduction The global dairy industry, in its own right a dynamic, sometimes volatile sector, sits as a major element in a Food and Beverage sector that now spans the globe with integrated global companies and their associated value chains. We live in a world in which “food security” has become a major concern for national governments and for international agencies. On the one, hand, developing countries face food deficits, often compounded by climate change, political upheaval, population movements and the restructuring of agricultural production in the interests of local elites or the demand of wealthier markets. On the other, in developed countries, growing social inequality is changing food consumption patterns, as is a burgeoning health crisis caused by obesity and its consequences. We know well that, for the moment, in aggregate terms, there is no reason for food security to become a global crisis. We also know that skewed incomes and consumption patterns make such a crisis more likely. Hence, the dairy industry sits in a broader sector, which increasingly confronts political as well as commercial challenges. Because of this broader context, the dairy sector is important. It produces an array of products from its basic raw material. For example, Fonterra is said to produce 1000 products from the initial efforts of New Zealand’s dairy herd, products that span the simple, raw product (still a vital part of the sector – one third of global milk production is consumed as the basic product) to highly‐ sophisticated nutriceuticals. We sometimes take the raw material – milk – for granted, but it is that essential global presence of milk as a part of the human diet in so many areas for so long that underpins the current development of the global dairy industry. And, even in areas where milk and milk products have been less important, the global reach of the dairy industry is slowly but surely weaning populations on to milk‐based products. Volatility in the sector In recent decades, the global dairy industry has been volatile. For example, in 1984, the “global herd” numbered perhaps 175 million cows. By the late 1990s, this had fallen to about 140 million. Milk production fell accordingly, from about 440 million tonnes in 1990 to 370 million tonnes in 1997. Much of this decline reflected restructuring in the sector as a consequence of changing regulations, declining profitability, improved opportunities in other types of farming, shifts in demand, shifts in export markets, climate change to name but some factors. We have seen more recent volatility, in terms of milk prices, as an effect of the 2008 global financial crisis. Initially, returns to milk fell, then rebounded dramatically. This is, therefore, a sector which has experienced both long‐term secular change and short term volatility, a difficult trajectory to negotiate when the raw material derives from investments (farms, stock, R&D and so on) that are long‐term by nature. In these circumstances, it is perhaps unsurprising that governments (especially in the European Union EU) have resorted to interventions that seek to reduce the disruption caused by short‐term volatility, even in a broader context in which trade protections and sectoral interventions by government are out of favour as economic policy tools. Page | 1 More recently, the global dairy industry has displayed a more positive trend. Between 2000 and 2010, global milk production has been expanding at about 1.7% annually, reaching 587 million tonnes in 2009.1 The global herd size is still diminishing slowly, but the herd’s productivity is rising. Here we see another important factor that permeates the sector – R&D and innovation across the sector, from milk production to the development of its many subsequent products. Basic Global Data Globally, about one third of milk is consumed as fluid milk. Two‐thirds of the total are processed. Cheese accounts for about 50% of dairy products, butter 30%, the rest consumed as powders, (skim or whole milk) and other minor (by volume) products. Table 1 presents the basic dairy industry data while Figure 1 below (from the FAO) captures the price volatility of dairy products in recent years: Basic Dairy Industry Data World Milk production (millions of tonnes) 2000 2005 2007 2008 2009 492 547 572 584 587 Cow Milk Delivery 315 351 364 371 372 Dairy Product Development (for 50 selected countries) Butter and Butteroil 6.6 7.6 8.1 8.6 8.8 Cheese 14.1 15.9 16.8 16.9 17.0 WMP 3.1 3.7 3.9 4.1 3.8 SMP 3.3 3.3 3,3 3.5 3.6 Table 1: World Milk Production and associated data (from IDF 2010) Figure 1: Price Index of Dairy Products in International Data 2 Page | 2 The Demand for Milk and Milk Products Demand for milk products is reported as growing between 1980 and 2010: • Fluid milk consumption growth has averaged 0.6% per annum (pa). • Processed milk consumption has expanded at an average rate of 0.9% pa • Cheese consumption growth has averaged 2% pa. • Butter consumption growth has averaged 0.9% pa • Whole Milk Powder consumption growth has averaged 5.9% pa. • Skim Milk Powder consumption has contracted by an average of 0.2% pa. Global per capita milk consumption grew from approximately 95kg in 2000 to 103 kg in 2009. There are a number of sources of increased demand for milk products. Three are particularly important. First, in developed, mature markets, fragmentation of markets using brands and sophisticated, new products may generate increased demand. We return to this in discussing company strategy in the sector. Second, there is the potential impact of population increases on the demand for milk:” Milk demand is highly influenced by the number of people and the amount of milk that each person is willing to drink and can afford. The world population is increasing by 78 million people per year in the past 15 years; meanwhile, the average per capita milk consumption for the year 2009 was 105 kg ME (Milk equivalents). If we assume that this per capita consumption stays constant, then we need about 8million tonnes more of milk per year to satisfy the additional demand due to population growth”.3 4 However, there is an important third source of increased demand. Developing countries are increasing their share of global milk production (see Figure 3 below). Also, changing consumption patterns are leading to increased milk and milk products consumption : “Total milk consumption in developed countries stayed more or less constant over the last twenty years, while significant increases in global milk consumption are due to population growth and per capita income growth in developing countries………. (t)he latter has led to the emergence of an affluent middle‐class in many low and middle income countries in Southeast Asia, Latin America and Central and Eastern Europe. Additional “westernization” trends leading to increasing preferences for new value‐added products in many of these economies generate additional dairy market growth”. 5 Nowhere is this more obvious than in China. China’s dairy imports doubled in the period 2005‐2010. By 2015,

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