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Published February 19, 2014, 10:56 AM

Squeezed French dairy makers fear worst this year

Dairy makers expect strong Asian demand will push milk prices in France to record levels in 2014 for a second year running, further squeezing their margins as price-warring retailers resist passing the higher costs on to consumers.

By: Sybille De La Hamaide, Reuters

Dairy makers expect strong Asian demand will push milk prices in France to record levels in 2014 for a second year running, further squeezing their margins as price-warring retailers resist passing the higher costs on to consumers.

Booming Chinese demand for dairy products and food safety scares has also sparked a raft of deals in the country’s dairy sector with foreign makers including the two biggest French dairy makers, family-run Lactalis and stock market-listed Danone.

“Milk markets are doing well and are on a strong upward trend, global demand is strong, Asian demand is clearly firm today,” says Olivier Picot, chairman of the FNIL dairy makers’ group at a news conference.

Milk prices in France rose 9 percent in France last year to 344 euros ($470) per 1,000 liters, while average dairy prices in supermarkets fell 1 percent and the retail price of fresh products dropped over 2 percent, FNIL figures show.

“With the underlying factors being the same, it is very likely that this rise will continue in 2014 with the same order of amplitude,” he says.

Some Chinese dairy companies are now supplying themselves directly from French milk farms.

“If you walk around France you will find SMEs (small and medium-size enterprises) making drinking milk and filling containers to China. It is frequent today,” he says.

He stressed Europe was the key supplier to meet the Asian demand currently with U.S. prices were artificially supported internally, making them uncompetitive abroad.

Margin squeeze

French makers of cheese, yoghurt and other dairy products, from the large companies like Lactalis down to farm-based family businesses, paid 730 million euros more for their milk supplies in 2013 compared with the previous year. The bill has gone up by a total of 2 billion over the past 4 years despite a price dip in 2012, Picot says.

Any rise of 10 euros per 1,000 liters in the price of milk makes the bill for the dairy industry swell by an additional 240 million euros, he says.

But higher milk prices could not be passed to their clients and French consumers last year, as retailers fought to keep prices at the lowest levels.

While competitors in Germany are able to pass rises up to three times a year, in France, talks between retailers and suppliers are annual, Picot says. There is also no obligation for retailers to accept rises in prices.

Food products account for 15 percent and of consumer spending in France while dairy accounts for 2 percent.

Dairy producers exported 37 percent of their French output in volume last year with sales totaling around 25 billion euros ($34 billion), including internal sales and exports.

Picot stressed there was also a risk for milk farmers if the dairy makers’ margins became too bad.

“At some point if dairy producers can’t find a solution downstream, they will have to look upstream,” he says.

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