Dairy Ingredients business area

The prices for the raw material milk and for the products manufactured from it are moving in one direction around the world for the most part: down! The supply of milk was and is significantly higher than demand. Our business was affected by this to differing degrees depending on the site. In Switzerland, the gap between Swiss prices and international prices grew wider. In Lithuania we were greatly affected by the difficult situation because the prices for milk proteins collapsed. In Germany we were able to handle the tense market situation fairly well.

Switzerland: HOCHDORF Swiss Nutrition Ltd

The purchased and processed quantity of liquids (milk, whey and milk permeate) increased by 6.8% to 226,663 tons relative to the same period last year. In the Hochdorf and Sulgen plants, 189,535 tons of raw milk were accepted (including commissioned drying orders). This represents a 3.5% increase in quantity compared to the previous year. In addition we processed 33,714 tons of whey in Sulgen, 30% more than during this period last year. The plants in Switzerland were running at more or less full capacity from the beginning of the year to the beginning of June. The quantities were unexpectedly high in particular at the beginning of the year.

In total, the Dairy Ingredients business area in Switzerland achieved gross sales revenue of CHF 110.4 million. The amount is 6.8% below the turnover of CHF 118.4 million during this period last year. The lower turnover is largely due to the lower raw material prices, which were passed on to the customers, and the high build-up of inventory.

In comparison to the previous year, the sold quantity of roller-dried whole milk powder for the chocolate industry increased by roughly ten per cent. The reason is firstly the rising demand for milk powder in the chocolate industry; secondly, we once again expanded our market share in Switzerland slightly. In terms of exports, we saw an unusually positive impact from business with Russia. We will be able to enjoy a privileged position here as long as the import ban on EU milk products continues.

Politically, major topics in the first half of the year were the impact of low milk prices on milk production and a possible successor model for the export funding ("Schoggi law" funding). In the first half of 2016, milk prices were very low and resulted in difficult income situations for some milk producers. Milk production, however, continues to be the most competitive production area in Swiss agriculture internationally, and that is why it is important that milk-containing Swiss food can continue to be exported. This is also why we are pleased that the Federal Council [Bundesrat] clearly acknowledges the need to continue supporting Swiss milk production. It instructed the industry to develop a successor system to the "Schoggi law" funding, which will offer secure, competitive and plannable future prospects for the entire value chain – milk producers, milk processors and the food industry.

In the first half of the year, our specialists in development worked on the optimisation of our products and on various special powders – heavily caramelised milk powder, lactose-free milk powder, butter milk protein powder, heat-stabilised whey protein powder, etc. The modified milk proteins developed last year are ready for the market in the meantime. However, we have decided not to market them yet due to the current market situation.

At the beginning of June we started the project to increase capacity at the Hochdorf site. By using a reverse osmosis system and a modern high concentrator, we will be able to process a higher quantity of milk in 2017 and simultaneously reduce the consumption of energy per quantity unit.

The plant's capacity utilisation in the second half of the year will be lower than in the first half, as usual. Despite the slight rise in international listed prices for milk raw materials at the end of June, we do not anticipate a significant recovery in the price of milk this year. The development may have a positive impact on the price of B and C milk. For A milk (domestic sales), there will hardly be any increase in price, since the difference between it and international prices is still too large.

Lithuania: HOCHDORF Baltic Milk UAB

In the 2015 half-year report, we were able to announce a record amount of processed liquid quantities at 40.8 million. In the meantime, the situation has changed dramatically and we reduced the liquid intake in the first half of 2016 to 29.5 million kg (-27.8%). There are two main reasons for the decline: On the one hand, we processed a lower quantity of milk due to the difficult milk market situation; on the other, political intervention made it difficult to make the necessary adjustments to the milk prices. That is why our international competitiveness fell. In accordance with the processed liquid quantities and the price situation on the market, the gross sales revenue of HOCHDORF Baltic Milk UAB fell by 36.1% to CHF 9.7 million (previous year: CHF 15.2 million).

Thanks to the ultra filtration system installed last year, we are capable of producing casein micelle today. But also in the case of this fundamentally high added-value product, the prices are fairly low at the present time, and customers are well stocked. Our development staff continues to work on the optimisation of these products so that we will be ready for the next recovery of the market.

We also expect a difficult second half of the year, but an improvement in the situation overall. Signs of a recovery are increasing and as soon as the constellation (milk prices vs. powder/cream prices) becomes positive again, we will ramp up production accordingly.

Germany: Uckermärker Milch GmbH

In the first half of the year, Uckermärker Milch GmbH processed 159.7 million kg of milk, permeate, cream and buttermilk to make curd, butter, buttermilk and milk powder (previous year: 168.3 million kg; -5.1%). Product sales enabled the company to achieve gross sales revenues of CHF 84.2 million (previous year: 87.7 million; -4.0%). The somewhat lower turnover is due to the lower milk prices and the lower product prices.

The capacity utilisation at the plants was good despite the slightly lower liquid quantities processed. In the butter area, the ratio of the cream to butter price was consistent, and we were able to run the creamery at full capacity. The capacity utilisation in the curd area was also good. The main event in powder production was the manufacturing of powder products for the intervention. The production of skimmed milk powder (SMP) for intervention may not be a sustainable business model, but was the most sensible usage of the milk drying plant in the current market situation.

The buttermilk production begun last year is running at a solid level. The smaller filling plant used since the beginning will soon be replaced, as planned, by a larger plant. We produce buttermilk on a commissioned basis for a large international dairy.

In the first half of the year we implemented some cost reduction measures in production. For example, we invested in the further automation of the creamery. In the milk drying plant, the first high-quality milk powders were produced. This involves base powder, which can be used to produce infant formula. The "test productions" ran successfully and were sold or given to potential customers for testing purposes. We expect regular production to commence at the end of 2016 or in Q1 2017 at the latest.

In Germany, the second half of the year should be more challenging. Skimmed milk concentrate will no longer be available at very low prices and thus the intervention production of SMP will not be sensible. Development in the milk fat area is very important for us. The question is which direction the cream to butter price ratio will move in.

At the Prenzlau plant, we continue to invest in measures to increase efficiency. Furthermore, the development work for higher-margin products such as base powder and instant milk powder is running at full speed.