Dairy producer Arla Foods, which supplies butter to a number of bakeries, has sent out one of the first signals that the dairy sector is hurting from a reduction in EU agricultural export subsidies.
As part of its agricultural reform, the EU is in the process of adjusting its subsidies for agricultural products in relation to world market prices. For butter the EU is targeting reducing theintervention price by 25 per cent over four years from 2004. The EU has cut subsidies for butter three times since April this year.
Yesterday Arla issued a warning that earnings from butter exports will be hurt by the lowering of subsidies, particularly in the Middle East.The region accounts for 85 per cent of Arla's butter exports outside the EU.
The company's strategy has been to increase the prices for its exported butter while attempting to maintain market share. In the European market the company has been able to increase prices for itsbutter due to good demand.
Butter and butter spreads account for 12 per cent of Arla' turnover, with Lurpak as its flagship export. Lurpak is market leader in the Middle East.
The EU's export subsidies - called "restitutions" - fell more rapidly than expected in the first half of the year, stated the company's overseas marketing manager, Søren Pedersen.
"We're facing a situation where Lurpak prices are continually being increased as, in addition to the fall in export subsidies, we have had to cope with a fall in the value of the dollar,"Pedersen stated. "In the short-term, however, we cannot raise prices sufficiently without affecting market position and tonnage. Our priority, therefore, is to maintain our position in themarket which means that we must accept slightly reduced short-term revenue."
Over the long term the company will try to raise prices and regain as much of the lost earnings as possible, he stated.
Lurpak is packed in Denmark and exported to markets in the Middle East, where the brand competes with locally packed butter from the Oceania region. Lurpak, as a strong brand in the area, sells ata premium price to that of its competitors.
In other markets in South America and Asia, Lurpak is regarded as a speciality for which consumers are willing to pay a premium, the company stated.
According to William Bailey, who heads the department of agriculture at Western Illinois University, European butter producers have steadily increased their prices this year.
"There has been some speculation that the recent increase in European butter prices may have been driven by expectations that Russia could be looking for some additional butter,"Bailey says in a weekly commodity report on the market. "Production this year across Europe has been reported to be better than last year, with growth driven, in part, by good Eastern Europeanproduction. The recent drop in European export subsidy levels and very limited interest in government storage programs point toward a temporary reduction of heavy European government involvement indairy markets."
Bailey noted this week that the August summer holidays have kept European dairy prices unchanged from last week's levels. High European temperatures this summer has probably had a negative impacton fluid production especially in Eastern Europe. The European Union's intervention programme, designed to take product off markets to keep prices up, closes at the end of this month.
High market prices have meant the programme has not be used as much this year as in the past, he added.
Liquid milk accounts for 40 per cent of Arla's turnover. The company's most important markets for liquid milk are the UK, Sweden and Denmark.
Arla Foods UK's unit is currently merging with Express Dairies. For the first six months of 2005, Arla Foods UK's sales from continuing operations grew to £685.2m compared to £676.1m during thesame period in 2004.
Cheese products accounting for another 25 per cent of Arla's total turnover, with its top markets in Sweden, Germany and Denmark. Saudi Arabia, Japan and US are also important markets for thecompany's cheese products.
The company's feta cheese exports to the Middle East might be hurt in 2007 when the EU bars producers outside of Greece from using the name. The company's feta exports to the Middle East are madefrom cows' milk produced in Denmark and sold under the Three Cows brand.
The company's sheep and goats' milk feta for European markets is produced in Greece.
The group has its roots in Denmark and Sweden.