Milk merger promises big benefits for members

Paul Spackman 25 May 2012

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The proposed merger between Arla Foods and Milk Link marks a major milestone for the UK dairy sector.

If the merger goes ahead the new business will be the biggest player in the UK market and bring together two successful farmer-owned milk processing businesses with complementary positions in a number of markets.

It is also the biggest headline so far in a period of significant rationalisation of the dairy sector, which recently saw Robert Wiseman Dairies taken over by Muller, significant restructuring at Dairy Crest and the collapse of Farmright and Rock Farm Dairies.

Milk Link chief executive Neil Kennedy said the merger would improve returns for members and, after a three-and-a-half year transitional period, see them get the same return as Arla owners – typically 2-3p/litre more. Details of what the merger means for individual businesses were due to arrive with members today (25 May) and a series of meetings will be held over the next month. Farmers on direct supply contracts with Milk Link are not involved in the merger.

Below is a summary of the key areas.

Complex transition to better prices

If the merger is approved an additional 1p/litre will be paid on Milk Link’s standard litre price (currently 27p/litre) for three months. This can only be paid out once the merger is approved by members, the Arla Foods amba board and regulatory authorities, but will be backdated to 1 July.

From October 2012, Milk Link’s price will then be based on a complex mechanism that uses Arla’s “On-account” milk price as a baseline, as part of the transitional period to full Arla amba terms. Members will receive the higher of the On-account price less up to 1.2p/litre; or a price based on an agreed basket of prices from major UK milk buyers, plus a minimum of 0.8p/litre. The Arla Milk Link price will not be allowed to exceed the Arla On-account price.

From 1 January 2016 Arla Milk Link members will be entitled to the same elements as full Arla amba members, which includes price, the “13th payment” bonus and contributed capital. This total return (price + bonus) for Arla amba members is said to have averaged 10% more than Milk Link’s total return over the past five years, equivalent to 2-3p/litre.

In order to convert Arla’s price – set in Danish krone per kilo of milk – into pence per litre terms, a currency smoothing mechanism will be used, based on the rolling two-year average exchange rate, updated quarterly.

Member capital to be transferred to Arla

Existing Milk Link member capital will be transferred across to Arla Foods amba, up to a maximum level of 5p/litre. Terms of repayment on retirement from or leaving Milk Link will be relatively unchanged, with money paid out in three equal installments after three, four and five years.

No member qualifying interest payment can be made during the transition period between 1 July 2012 and 31 December 2015, so each Milk Link member will receive a one-off compensatory cash payment of 57p for every £1 invested in their capital account. Any member that has invested more than 5p/litre will have the excess bought back on a £1 for £1 basis. Typically this will mean a 1m litre a year Milk Link member who has invested 5p/litre in the co-op (a total of £50,000) receiving a one- off cash bonus of £28,500.

Founder members of Milk Link with so-called “double rights” will receive a cash payment of around £1.14 per £1 of qualifying loan.

Contract notice periods will remain unchanged at 12 months should the merger go ahead.

Positive but cautious response – devil is in the detail

Kite Consulting’s John Allen said the planned merger was very positive for the UK dairy industry, although a lot of the detail was still to be examined. “As always, the devil is in the detail, but the fundamentals behind the merger are sound, so hopefully any issues can be ironed out easily.”

One of the main areas would be exactly how the merger would affect existing pricing schedules geared towards the domestic market, Nick Holt-Martyn of The Dairy Group said. “European prices tend to be more responsive to the market, so we will see whether that come through here, where prices can be slower to react, but then sometimes do slightly better when dairy markets are on a downslope.”

Mr Kennedy said Milk Link’s corporate membership of Arla amba would give some flexibility on the payment regime in the UK, although the details were still to be confirmed.

Another issue will be what the merger means for existing Arla Foods Milk Partnership members in the UK, who are not full Arla amba members.

“There will no doubt be some disappointment that AFMP members won’t be members of Arla amba, but it is possible – we just have to work out how and when this can happen,” Arla Foods UK chief executive Peter Lauritzen said. “Milk Link members have invested more in their co-op to date, but hopefully the merger will be the catalyst for them [AFMP] to become members also.”