Against a background of ever stronger retailer power, increased globalisation by major players with turnovers in the £billions, and a realisation that dependence on commodity markets usually means erratic profits it was becoming more and more obvious that Milk Link, a company with sales of around £700m operating in one country and without the benefit of strong brands, was unlikely to deliver the returns that investors deserve. And so it has proved. For years Milk Link’s price to farmers on a pence per litre basis has consistently languished near the bottom of the league table.
The merger with Arla means that Milk Link is allying itself with strength. Arla, as has been pointed out is big, innovative and invests heavily in the industry. It is also highly commercial and unafraid to take the tough decisions in order to provide the best returns to its farmers as shown by its announcement last week that it intends to cut its cost base by some 500 million Danish Kroner to ensure it remains competitive.
No doubt there will be tough decisions ahead in the UK as the two businesses are streamlined, eliminating over capacity in production and duplication of ack office services such as administration, finance and IT.The Arla Milk Link move follows aquisition of Wiseman by German company Mueller and it will force remaining companies in the dairy industry to examine future strategies with some urgency. First Milk will need to do some hard thinking, and even relatively strong Dairy Crest, which is publicly quoted and therefore more in the spotlight will be facing close questioning from investors.
The existence of larger, well capitalised, forward thinking processing companies selling higher added value products should result in bigger profits. With that should come increased returns to farmer owners, and not before time.