29/03/2011 (The Star) - The increases in dairy raw material prices may potentially drive up prices of dairy products if the high commodity bill continues.

An analyst said there had been significant increases in raw material prices in the past six months and, based on the current outlook, he expected commodity prices to stay high this year.

He said the high prices could potentially be passed on to consumers but did not give a threshold of commodity prices before milk prices would be increased.

According to reports, whole milk powder prices surged to a record at the GlobalDairyTrade auction early this month. The average price rose to US$4,958 a tonne. However, the price had dropped last week after the recent record high.

“We have seen a very sharp increase in the prices of milk in the past months. We foresee milk prices going up even further this year due to global demands and disruption in supplies,” Dutch Lady Milk Industries Bhd managing director Bas van den Berg told StarBiz.

He said food industries in general already had a very challenging 2010 with many external factors contributing to it, affecting prices of raw materials and so on.

“Milk is food and, as is evident in almost every market, prices of food are on the increase globally. It will be inevitable to increase prices despite measures to boost output and efficiency.”

Dutch Lady controls some 25% share of Malaysia's total dairy market. The dairy company is also a market leader in ambient liquid milk and grow-up milk.

“The outlook for milk supply this year does not appear favourable due to the erratic world climate and weather conditions. Hence, it will drive up the prices of skim milk powder,” F&N Dairies (M) Sdn Bhd general manager, business development and corporate affairs, Poh Eng Lip said.

He said milk prices internationally would “remain high or go even higher” due to the erratic world climate.

“With natural disasters occurring around the globe, the developed and more affluent countries may increase their stockpile position, therefore pushing up the prices of skim milk powder,” Poh said.

F&N currently dominates the canned milk industry with about 65% share for sweetened condensed milk and about 80% share for evaporated milk.

The canned milk industry is valued at more than RM2.1bil.

To a question, Poh said F&N had recently adjusted the prices of its condensed and evaporated milk products to mitigate a significant increase in production costs as a result of a further reduction in the sugar subsidies to manufacturers.

Additionally, he said, the price adjustment was inevitable due to the increase in prices of key ingredients such as palm oil, skim milk powder and butter fat. This was exacerbated by the increase in the price of packaging materials and fuel.

“While we are mindful of the impact of any price increase on consumers, the decision to effect a price adjustment is a last resort to ensure continued business viability and as part of our responsibility to our employees and stakeholders.

“We are confident that the price adjustment of our canned milk labels has not burdened the trade and consumers alike as the cost of preparing the beverages (per cuppa) on premise at coffee shops, stalls and other establishments can be maintained,” Poh said.

On the other hand, Dutch Lady has yet to revise the prices of its dairy products.

Van den Berg said with the intense market competition, coupled with the volatility of the current global climate, increases in global raw material prices were likely to materialise, resulting in adjustments in consumer prices across affected portfolios.

“Take for example, our successful launch of Growing Up Milk (GUM) recently received some response that we have increased consumer prices to RM24 from about RM19.

“To be fair, the adjustment was largely due to an additional nutrient called DHA, a very expensive nutrient but crucial in aiding brain development among young children,” he added.

On its outlook, van den Berg said: “Fortunately for Dutch Lady Malaysia, demand for milk and milk products is on the increase. We believe this is due to the heightened awareness for nutrition coupled with an increase in the number of health-conscious Malaysians.”

Analysts said although the local dairy industry was expected to grow 10% to 15% this year, challenges in the industry would remain, particularly in increases in dairy raw material prices.

“Consumer confidence is catching up and this will be reflected in consumer behaviour. At the same time, this year will also to be a challenging year for dairy players due to the world dairy raw material prices,” a local bank-backed analyst said.

Another analyst said the increased awareness of the health benefits of drinking milk, along with rising disposable income, had stimulated and increased consumption of dairy products among Malaysians.