The maker of the Lurpak butter brand said it expected dairy prices to remain high following a decline in global milk production and soaring costs. Arla reported a 17% rise in earnings in the first six months of the year driven by significant price increases. Shoppers have recently expressed shock as the price of a 750g tub of Lurpak exceeds £7 in some supermarkets.
Arla, the UK’s biggest supplier of fresh milk and cream, said the Ukraine war had increased costs for farmers. Russia and Ukraine are among the world’s biggest exporters of fertilizer and animal feed but the Kremlin’s incursion has disrupted supplies, causing prices to rise. Fuel prices are already rising as energy demand increases after Covid restrictions are eased. But the war has pushed them even further because of restrictions and severe disruptions in shipping.
Rising food prices pushed UK inflation – the rate at which prices rise – to a four-decade high of 10.1% in July largely due to the cost of staples such as milk, cheese, eggs and bread. Arla, which is the world’s fifth-largest dairy company, said it had increased prepaid milk prices to its farmers following significant cost increases they faced. However, it said “this has yet to see an increase in milk production due to the continued and significant increase in on-farm costs and the uncertainty posed by current global market conditions”.
It said the prices of fertilizers have increased by an average of 145%, fuel by 134%, food by 36% and energy by 346%, compared to last year. The company said it expected the second half of the year to be “more challenging” due to “inflationary pressures and ongoing political unrest”. In the first half of its financial year, revenue rose to €6.3bn (£5.3bn) which Arla said was “almost exclusively driven by price increases” as the number of products the company sold fell slightly in some markets. Pre-tax profit rose by 9% to €230m.
Arla said that global milk production is expected to continue to decline and “contribute to high dairy prices”, which is likely to reduce consumption further. After a strong performance during the pandemic driven by increased home consumption, the company said growth for its branded products such as Lurpak was flat. It said consumers were already buying less and “trading down” to cheaper products, particularly in the butter and spreadable categories.
Earlier this year, Lurpak trended on Twitter when customers complained about inflated prices. A 750g tub of spreadable butter currently costs £6.75 from Tesco online delivery and £6 from Asda. In July some shoppers shared photos of products covered in security tags, which Asda said was a decision for individual stores, who may have noticed certain products were missing.
At the time, Arla said it understood food price inflation was hitting households hard but farmers were also facing significant cost increases. While we don’t set the prices on the shelves, we do work closely with the retailers to ensure our farmers receive a fair price for the milk they produce,” the company said.