With 13,300 milk suppliers, FrieslandCampina has built up strong market and brand positions in Europe, Asia and Oceania and is the sixth-largest dairy company in the world. If you take the milk from three cows, one portion stays in the Netherlands, one goes to Europe and one ends up in international markets. With sales of €11bn, it made an operating profit of €563m, and a margin of 5% in 2016.
It wants to increase worldwide consumer demand for its dairy products through its grass-to-glass concept where at least 80% of farmers apply “meadow grazing”. This is where cows graze for six hours per day for 120 days per year (the equivalent of only 30 days annually) and receive a bonus of 1.5c/l.
The guaranteed price in 2016 was 28c/l, which corresponds to the average annual prices for milk of benchmark companies in Germany, Denmark, the Netherlands and Belgium.
The final milk price paid was 32c/l, which included the guaranteed price, an annual performance payment, the outdoor grazing premium, a special milk flows premium and the distribution of member bonds.
The performance payment depends on the financial results of FrieslandCampina and the retained earnings policy adopted. In addition to the guaranteed price, Friesland paid out €371m to its dairy farmers. This is a measure of value creation and is on top of the €953m invested in acquisitions and capex in 2016.
Its strategy is threefold – protect volumes in home markets, expand leading positions in growth areas and invest in markets expected to grow where it already has profitable and leading positions.
Milk supply increased 7% to 10.4bn litres in 2016. The company’s strategy is to achieve 5% annual volume growth up to 2020 and to grow to €15bn revenue in 2020. In order to do so it is investing heavily. Since 2009, the dairy giant has invested €3.6bn in fixed assets to handle the additional milk supply coming from its dairy farmers.
In 2016, Friesland invested €518m in additional milk processing capacity and new product manufacturing capabilities. It also acquired a 51% interest in Engro Foods in Pakistan for €436m. The company expects to spend an additional €500m in further capacity expansion in 2017.
One of the biggest challenges facing FrieslandCampina is that Dutch dairy farmers must reduce the national herd by 10% due to tighter phosphate regulations. This means a reduction of 125,000 cows for FrieslandCampina.
However, despite dairy farmer numbers rapidly declining (2% per annum) yield per cow is increasing extremely fast, especially since the abolition of quotas. This gives confidence that it is unlikely to affect milk supplies for FrieslandCampina. With 7% growth in volumes, the company believes it is only capable to add value to 2-3%, meaning the other 4-5% ends up in commodities which dilutes the profit per litre of milk.
Consumer foods accounts for 60% of turnover at FrieslandCampina, and it is particularly strong in its domestic markets. Its leading brand, Campina, is the number one consumer brand in the Netherlands, even bigger than Coca-Cola. Ingredients account for 15% of its business, while commodity cheese, butter and powders account for 24%. Consumer foods sales volumes to China increased 37% in 2016.
Friesland formed a joint-venture with China Huishan Dairy in 2015 as part of a deal for greater access to China’s vast baby formula market, which saw it buy $30m worth of shares in its Chinese partner. It also paid $700m for half of Huishan Dairy’s Xiushui plant. It is now facing a paper loss of up to €46m from its holdings Huishan, whose shares on Hong Kong’s exchange suddenly plummeted 90% in March.
FrieslandCampina is owned by the co-operative. What is interesting is that there is no apparent shareholder wealth created as the shareholder’s only benefit is that his milk will be collected and it will deliver a strong milk price. Even though the value of the company is increasing, this is not returned to the shareholder in the form of an increase in the share price. If a farmer exits farming, the shares are returned to the co-op at nominal value.
Milk price fell globally in 2016
Milk Price review – focus on Fonterra
Milk price review – focus on Arla
Milk review – focus on Dairy Farmers of America
Milk Price review – focus on Valio