Milk hunger drives Arla and DMK into each other's arms

It does not mean that they are poorly thought out or that there is no good business case behind them. On the contrary. Due to a shrinking number of farmers and also a decreasing total milk supply, dairy companies have to ensure that their milk volume remains at the same level. This fuels the hunger for milk and thus the battle for the dairy farmer, with numerous enticements, ranging from a relatively high milk price and more special milk flows to the abolition of entry barriers. It also fuels the urge for mergers, because this is a quantum step in this battle, and with cooperatives this can also be done with closed purses. At least, initially.

Yield follows milk
Once you have the milk, you can expect to get an increasing return from it in the coming years. Dairy is becoming scarcer with a still growing world population. There is a kind of parallel with what is currently happening in the (beef) meat market. Livestock farmers are now getting meat prices that they could not have dreamed of two years ago. Tariff wars and the like can of course turn a lot upside down, but in principle the idea behind the dairy mergers is good.

Arla 2.0 and competition
The merger of Arla with DMK is of course a record merger. At least in terms of milk pool and number of farmers involved. The end product of this merger, let's call it Arla 2.0, will be almost twice as big in terms of milk pool as FrieslandCampina after the merger with Milcobel.

This is on condition that the merger passes the competition authorities unscathed. There are certainly two authorities that could cause problems: the German Bundeskartellamt, which is known to be quite strict. See for example how it handled the takeover of the German consumer activities of FrieslandCampina by UTM (Müller) tackled. Secondly, there is the European DG Competition, which will investigate whether there is no market-distorting effect. For the investigation, all customers and competitors of the two partners are asked to give their views. Such an investigation can lead to 'remedies', as is known from the merger between Friesland Foods and Campina. At the time, they had to divest two factories (now De Graafstroom and Arla Nijkerk) and 1,2 billion milk had to be made available to third parties, among other things so that the divested factories would not run dry.

Dominances under the microscope
What follows from this is speculation, but it could be that Arla/DMK would then have to divest cheese or whey activities, for example by selling holdings. The fact is that the merger between Arla and DMK makes the new Arla even stronger in whey, at least in whey that it owns itself. Arla is already very strong in high-quality and very profitable whey products. The European Commission could find that Arla is becoming too dominant in this area. In addition, the two partners will soon have enormous cheese capacity. That could also be a hurdle. Another point of attention may be the fact that the merger will shift Arla's centre of gravity to the German market and especially that Arla will then become the largest individual dairy player in Germany. The Kartellamt will then look very carefully at positions on sub-markets.

It may be expected that lawyers from Arla and DMK have already carefully considered possible complications, but a merger of this size is difficult to fully foresee.

This merger also costs milk money
For the merger partners and their members, the idea behind the merger is positive, but it does not mean that it will immediately lead to more profit and higher milk prices for the farmers. What Fitch has said about the merger of FrieslandCampina and Milcobel, also applies to Arla and DMK: the merger will first cost (milk) money, because at DMK in particular there is still some organizational maintenance to be done. This cooperative unfortunately has a history of difficult results since its inception in 2011; a generally below-average milk price and meager operating results. In that sense, Arla is the prince on the white horse, although the German BDM (Bund Deutscher Milchviehhalter) is against the merger because of the alleged excessive concentration of power.

Arla will therefore let a new wind blow through the existing DMK and divest or stop lower-yielding activities. It has to do that, otherwise the merger makes little sense. It does mean that there will be substantial reorganization costs. Of course, there will also be synergy benefits, but they often take a little more time.

Consequences for cooperative
With the merger, Arla's geographical focus will also shift to Germany, because of the 19 billion kilos of milk in total, more than 35%, or more than 6,8 billion kilos, will soon come from Germany (5,3 + 1,55 billion kilos). The number of German members will also increase. What that will do to the traditionally Danish-run cooperative and dairy company is still an open question.