Reform of the European Union's milk policy will mean a drop in prices for skimmed milk powder, prompting Danish dairy group Arla to take action to counter the expected decrease.
Arla said that the price of skimmed milk powder is likely to fall by 15 per cent over the next four years as a result of EU reforms, adding that the process had already begun with the lowering of the EU's intervention price on 1 July.
But Arla's ingredients division has decided to shift production into a higher added-vale segment of the milk powder market in a bid to offset some of the decline.
Jais Valeur, sales director at the ingredients division, said that global demand for skimmed milk powder is currently strong, partly due to the fact that European milk volumes were almost 2 per cent below normal up until May, while Australian volumes fell by 2.5 per cent because of a drought in 2003.
But at the same time as demand is high, many European producers have been reducing skimmed milk powder output by as much as 20 per cent in the peak season because of the impending price cuts.
Valeur said that Arla's plant in Vimmerby, Sweden, would begin producing more profitable full-cream milk powder, allowing the company to reduce the production of skimmed milk powder by 20,000 tons.
"We also intend to discontinue sales to some markets where we sell skimmed milk powder at unsatisfactory prices and switch sales to Europe instead. To avoid dramatic price falls, we will have to look closely at our product range and costs," he added.
But even this focus on more premium products will not be enough to completely cover the impact of reforms. "Although we've done a great deal, it's not enough to offset the price falls wanted by the politicians," Valeur said.