Arla Foods warns that global milk production is set to decline further and contribute to "sustained high dairy prices"

Arla Foods said the first half of 2022 was dominated by inflationary pressures across all areas of the supply chain.

Net revenue for Arla Foods UK in the first half 2022 was £1.15bn, a growth of 8.3 per cent when compared with the same period in 2021.

Arla, which has a large operation in Leeds, said the growth has been driven by price increases in Arla’s retail and foodservice divisions, which the company said was necessary to support farmers with cost challenges.

As a result, Arla was able to increase its pre-paid milk price by more than 30 per cent to its farmer owners. As the cost of production rises, on farm inflation has seen total costs increase around 51 per cent in the UK since the start of 2021, with feed prices increasing around 73 per cent, Arla said.

In a statement, Arla said: "During the first half of 2022, Arla Foods costs increased significantly across the supply chain on utilities, packaging and transportation, at both a total group level and in the UK."

Ash Amirahmadi, managing director of Arla Foods UK, commented: “We are facing extraordinary times in food production as both our farmers and the company face high levels of exposure to inflationary pressures and costs increasing right across the supply chain.

“We are now seeing the impact of these rising costs in reduced milk volumes. This presents a significant challenge in balancing the price consumers pay with the need to ensure our farmers are paid enough to continue producing milk and protect security of supply.

"As consumers are trying to manage household budgets, we are doing all we can to absorb as much of the costs as possible to ensure dairy remains an accessible source of food. However the unprecedented volatility and cost rises we are seeing at both farm and business level mean that consequently our customers have also determined to increase their retail prices.”

Arla said that total strategic branded revenue growth (SBRG) across the UK fell 6.3 per cent in the first half of 2022, as consumers’ shopping habits changed and stabilised following two years of significant growth, driven by in-home consumption during Covid.

The statement added: "Following a rise in baking and in-home consumption which peaked during lockdown, Lurpak has seen a 15.4 per cent fall in the first half of the year as usage occasions return to pre-pandemic levels, but remains category leader as butter continues to be a key staple in the home.

"In the yogurt category, the Arla Protein brand delivered a 58.4 per cent growth increase, driven by consumer demand for protein products, a strong mix of formats and the brand’s ability to tap into a younger audience demographic.

Arla’s Foodservice business continued to bounce back from the impacts of Covid and lockdown with a growth of 21.6 per cent as people return to eating out of the home, Arla said.

The statement added: "In the first half of 2022, Arla announced the endorsement from the Science Based Target initiative (SBTi), 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’s UK partnership with Magic Breakfast also continued across the first half of 2022 and has now provided more than 950,000 milk donations to schools across the country, enough to fill over 9.5million cereal bowls.

Commenting on the economic outlook, Arla said: "With ongoing inflationary pressure and political unrest negatively impacting global growth, Arla expects the second half of 2022 to be even more challenging as global milk production is expected to decline further and contribute to sustained high dairy prices, which will likely further diminish consumer confidence and consumption."

Peder Tuborgh, CEO of Arla Foods, said: “2022 continues to be characterised by volatility and inflation, exacerbated by Russia’s invasion of Ukraine.

"Changes in consumer behaviour 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 1.5 EURcent per kilo of milk to our farmer owners."

As the cost of producing milk rises significantly, Arla Foods will make its first ever half year supplementary payment to its farmers owners. In line with its new retainment policy, the cooperative will pay an additional 1 EURcent per kg of milk (0.85 ppkg) to all owners across Europe.

Arla employs around 450 people at its Stourton dairy site near Leeds and 400 staff at its national distribution centre, which is next to the Stourton dairy. It also employs around 400 staff at its Leeds head office.