Dairy co-operatives adapt to a global market

As the Danish dairy market looks eastwards for growth, will the dominant co-operative business model create barriers?

The Danish dairy industry is anticipating huge growth in the years to come, largely fuelled by export to new markets, such as China.

Globalised market
The market in Denmark is dominated by co-operatives, owned by the farmers who deliver their milk to the dairies for an agreed price. 

The co-operative has historically proved itself to be well-suited to dairy production on the national scale, but some experts question its suitability to a truly globalised market.

Barriers to expansion
Henning Otte Hansen is a senior advisor at the Copenhagen University Institute of Food and Resource Economics. “Being a co-operative can sometimes be a barrier for overseas expansion,” he said.

“For example, it can be difficult to attract the funding to invest in foreign activities. Unlike companies, co-operatives only have the members, the farmers, to provide such funding.”

“Another issue is providing farmers with an incentive to invest abroad. To them it might seem like investing in a competitor. The main thing the Danish farmer is concerned about is getting a hard price for the milk he delivers.”

Jørgen Hald Christensen, the CEO of the Danish Dairy Board, Mejeriforeningen, doesn’t think that the co-operative business model hinders growth abroad. “As the recent expansion of Arla Foods into other European countries has shown, the co-operative model is well-suited for expansion,” he said.

An international co-operative
Indeed, according to Theis Brøgger, the chief press officer at Arla, the business-model hasn’t been a barrier.

“The owners took the decision a long time ago that Arla was to be a company of growth. For many years there has been the mentality to pursue international growth,” he said, pointing to mergers with other European dairy co-operatives.

In 2012 Arla signed a strategic partnership agreement with the Chinese dairy company Mengniu, whereby Arla exports European dairy products that are marketed and distributed by Mengniu. In addition, Arla made a 1.7 billion kroner investment in Mengniu, becoming a shareholder of the Chinese company.

Long-term investment
CO-OPERATIVE owners need to see a business case for future increases in the price of the milk they deliver.

“For them to feel an incentive to expand into China, it needs to be seen as a long-term investment, a step towards creating an export market and gaining entry to that market,” Hansen said.

China worth it
Brøgger is in no doubt that the case for investment in China is sufficiently strong. “The owners see how important the market in China is. It is growing at such a rate that we need to have a presence there,” he said.

Co-operative benefits
Christensen sees other benefits. “European politicians are encouraginging dairy farmers to work together in producer organisations or in interprofessional organisations.

This is in order for producers to increase their negotiating power in the supply chain and get better prices from the dairies. Such initiatives are superfluous in co-operatives, where the dairies are owned by the milk producers,” he said.

The farmers decide
Hansen highlights that assent to expansion plans is not always guaranteed.  “Arla came very close to merging with Campina in 2005, but the farmers said no. So they have previously shown that they have the power,” he said.

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