Arla makes first ever half year supplementary payment to farmer owners

The first half of 2022 was dominated by inflation and uncertainty throughout the global dairy supply chain that accelerated late spring and through the summer. The European dairy cooperative was able to make increases to its pre-paid milk price to farmer owners as they face significant production cost increases in feed, fertilizer, and fuel. But the continued global volatility has resulted in a declining global milk supply despite a stable demand.

Total Arla group revenue was EUR 6.38 billion for first half of 2022 (up 17 per cent compared to EUR 5.44 billion in first half of 2021) driven almost exclusively by significant price increases in Arla’s retail and food service and commodity trading businesses. Following two years of exceptional branded growth in retail, as expected, branded volume revenue growth slowed down to –0.1 per cent. Arla’s performance price – which measures the value created per kilogram of owner milk – was 49.6 EUR-cent. Profit share was 3 per cent and in line with the cooperative’s new retainment policy, Arla will pay out its first ever half year supplementary payment to farmer owners of 1 EUR-cent per kg of milk based on the milk volumes delivered in the first half of 2022.

Much needed increases in pre-paid milk price

Arla’s average pre-paid milk price to farmer owners increased 30.9 per cent in the first half of 2022 compared to the same period in 2021 with further increases over the summer. However, this has yet to secure an increase in milk production due to the continued and significant increase in on-farm costs and uncertainty created by the current global market conditions. As examples, the prices of fertilizer have increased 145%, fuel by 134% and feed by 36% on average while global inflation is forecasted at 7.7 per cent for 2022. Arla’s milk volume decreased to 6.8 billion kg compared to 7.0 billion kg in the same period last year, in line with global trends.

“It is an extraordinary time for both our farmer owners and the company as food and farming industries experience high levels of exposure to inflationary pressure. I am pleased that we have been able to move the pre-paid milk price up for our farmer owners to help them with their increased production costs. We are now also able to deliver on our first ever half year supplementary payment to support future investments in sustainable actions on their farms,” says Arla Foods CEO, Peder Tuborgh.

Expected slowdown in brand performance

In the first half of 2022, Arla’s strategic brands delivered revenue growth of 12.7 per cent to EUR 2,985 million mainly due to price increases. As expected, branded volume growth declined –0.1 percent in retail as consumers adjust their purchasing. The Arla® brand maintained its performance with -0.1 per cent volume growth, delivering a revenue of EUR 1,775 million. After 2 years of very high performance, Lurpak® delivered increased revenue of EUR 347 million, but volumes were negatively impacted with a –5.9 per cent decline.
Starbucks® outperformed expectations at 19.5 per cent due to growing in-home and on-the-go consumption and new market opportunities.

“The impact of Russia’s invasion of Ukraine has, in addition to the humanitarian costs, added substantial pressure on global markets, supply chains and businesses, leading to an accelerated inflationary environment for our and many other industries. The current global milk supply shortage resulted in a market situation where the dairy commodity markets put significant pressure on our retail product margins in the first half of 2022, ” says CFO of Arla Foods, Torben Dahl Nyholm.

Arla’s food service business continued to bounce back from the pandemic in both its Europe and International zones and delivered branded volume growth above pre-Covid levels of 19 per cent mainly driven by the Danish and UK markets and by the Arla® Pro and Lurpak® brands.

In Arla’s European and UK business segment, revenue increased to EUR 3,535 million compared to EUR 3,199 million in the same period last year. Arla continued to maintain its competitiveness despite branded volume driven growth declining -2.1 per cent as result of the current market conditions.

Arla’s International business segment increased revenue to EUR 1,226 compared to EUR 1,037 million in the same period last year, seeing healthy growth of strategic brands of 3,8 per cent driven mainly by markets such as Middle East and North Africa (MENA), Southeast Asia (SEA) and Rest of World (RoW). AFI experienced a continued high demand for its specialised whey protein and lactose products and delivered a robust first half year performance. Revenue was at EUR 460 million compared to EUR 387 million in the same period last year.

Global Industry Sales division grew strongly fuelled by high commodity prices delivering revenue of EUR 1,161 million compared to EUR 818 million in the first half of 2021. Arla’s transformation and efficiencies programme called Fund our Future delivered net savings of EUR 72 million.

Arla stays committed to lead sustainable dairy production

In the first half of 2022, Arla announced the endorsement from the Science Based Target initiative, confirming that its sustainability targets and plans are consistent with what is required to meet the Paris Agreement target of limiting global warming to below 1.5 degrees. Arla also signed its first major Power Purchase Agreement to build four new solar parks with an expected capacity of 250 GWh. On-farm, Arla started a large-scale pilot with the methane reducing feed additive Bovaer® with 10,000 dairy cows across more than 50 farms in three countries.

Outlook for 2022

With on-going inflationary pressure and political unrest negatively impacting global growth, Arla expects the second half of 2022 to be even more challenging as the global milk production is expected to decline further and contribute to sustained high dairy prices, which will likely further diminish consumer confidence and consumption. Arla is adjusting its expectations for full year 2022 with revenue in the range of 13.5-14-0, its branded sales volumes growth to -2.0 to -3.0 per cent. Year-end leverage expectations are 2.7-3.1 and net profit share 2.8-3.0 per cent.

“2022 continues to be characterised by volatility and inflation, exacerbated by Russia’s invasion of Ukraine. Changes in consumer behavior continue to be multifaceted and difficult to predict and we expect our branded growth will slow down further. As a cooperative, we remain committed to be in a position to pay out the second instalment of our planned full year supplementary payment of a total of at least 1.5 EUR-cent per kilo of milk to our farmer owners ,” says Peder Tuborgh.