Energy costs eat away at the margin of milk powders

The fact is that the energy costs and in particular the drying costs per tonne of milk or whey powder have risen enormously in recent months. While until mid-2020, drying costs of €200 to €300 per ton were calculated for skimmed milk powder, for example, some powder dryers already charge up to €500 per ton in drying costs.

Relative returns will shift
Such cost increases do not involve using the old, well-known return calculations, as is often the case. Sometimes processing milk into powder and cream may seem more profitable at first glance than processing it into cheese and whey, but it may be slightly different. Drying requires much more energy than other processing methods. The sharply increased transport costs also make it necessary to adjust return calculations. 

It may be that one processor has concluded a slightly better energy contract than the other. Or there is slightly smarter hedging on the futures market, but sooner or later all processors will have to deal with the extra energy costs. In a sense, they are partly in the same situation as dairy farmers, who also suffer from high production costs. 

Freezing towers as an option
Each player then chooses their own solution. Those who are not bound by delivery contracts sometimes choose to sell the milk as concentrate. The prices for these are also favorable and, relatively speaking, there is more margin left after selling them than after an expensive drying process. The powder towers are then simply stopped. There are various examples of this across the border. Large processors with multiple divisions have the luxury of choosing the most profitable valuation method internally.

Contract dryers are looking for other raw materials
So-called contract dryers, which operate entirely or largely on external supplies, avoid the purchase of expensive milk concentrate where possible and prefer to use regular skimmed milk. The disadvantage of this is that more volume has to be supplied, which makes transport costs considerably higher. Milk must also be thickened on site before the product can be dried into powder. 

It is impossible to say exactly how the cost increases will affect the various dairy companies. It is also not possible to indicate whether the powder makers will, on balance, perform better or worse than, for example, cheese makers. It is clear that not all dairy price increases mean more profit for the processors. Their margins are also being nibbled extra.