Prices for dairy ingredients have fallen sharply for over two years, hit by a global oversupply, squeezing the finances of farmers and producers and pushing many to consolidation in search of economies of scale.
By contrast, at the other end of the sector, the low- ingredient costs are plumping the profit margins of companies that make ‘value-added’ products like yoghurt, cream cheese and infant formula, making them attractive targets for food multinationals and private equity investors.
There is speculation about potential deals in the United States, for example, involving the likes of WhiteWave Foods, which sells premium dairy products and alternatives like soy milk, and Greek yoghurt-maker Chobani, which has rejected suitors including PepsiCo.
However, merger and acquisitions activity is increasingly focusing on emerging markets in Asia, the Middle East and eastern Europe, where expanding middleclasses are boosting demand for expensive dairy products and offering the best-growth prospects.
The dairy industry is “one of the more attractive growth markets from a long-term perspective, in terms of per capita consumption”, said Wells Fargo analyst John Baumgartner.
While there have been 876 deals in the global dairy industry since 2010, worth a total of €50bn, according to Thomson Reuters data, the sector is still highly fragmented — leaving room for further consolidation.
The top five players — France’s Danone and Lactalis, Switzerland’s Nestle, and China’s Mengniu Dairy and Inner Mongolia Yili Industrial Group — account for just 18% of the retail market for all dairy products, which was worth €394bn last year, according to Euromonitor.
The deals in the sector have included some blockbusters like Nestle’s €10.5bn purchase of Pfizer’s infant nutrition business, and Lactalis’s move to control Italian rival Parmalat. However, most have been smaller bolt-on buys.
On global commodity markets, dairy prices have fallen about half since 2013 and a quarter in the past year, said the UN food agency’s Dairy Price Index, which factors in ingredients such as milk, butter and cheese.
This has helped drive consolidation among producers; Mexico’s Grupo Lala agreed to buy certain US assets from Laguna Dairy last month, while Italy’s Parmalat bought 11 dairy plants from BRF in Brazil in 2014.
New Zealand’s a2 Milk last year rejected a joint takeover offer from Freedom Foods and Dean Foods, but remains a target, analysts say.
“There’s been severe pressure on the milk price. There is always a huge drive for ‘efficiencies’ and part of that is through consolidation and taking out additional costs where possible,” said Trefor Griffith, a food specialist at Grant Thornton.