Lurpak butter maker hit by rising oil costs

Lurpak butter maker Arla Foods admitted today that it had lost the battle to protect its profits from rising utility bills.

Shares in Arla slumped 12% after the company said it expected profits to miss expectations because it was struggling to raise the prices of its products to recover the fuel costs.

In a statement, Arla said: “Continued exceptional inflationary pressures resulting from higher oil and utility prices are adversely impacting our margins. Market recovery of cost increases, particularly in the middle ground, has been difficult in the short term.”

Arla is the UK’s largest supplier of milk and has supply deals with many of the major supermarkets including Asda and Tesco. It also makes Anchor butter and Cravendale milk.

A consensus of eight investment banks were expecting Arla to post pre-tax profits of £49.1m (€71m) for the year to September 30, but were now redrawing their charts and forecasts.

Oil prices matter to Arla because they determine how much the company pays for its packaging and fuel, while parallel rises in electricity and gas push up the cost of powering its machines.

The cost of crude oil is currently 43% higher than a year ago and hit a new record of more than 65 US dollars a barrel in overnight trading today.

Problems for Arla were compounded by the fact that the second phase of European farm reform had not yet impacted on the price that farmers charge for their milk.

“Whilst none of these factors on its own would have a significant impact, the combined effect is such that the board anticipates that profits for the current year will now be below its expectations,” the Leeds-based company said.