To secure its milk supply and circumvent the high volatility of global prices, Danone is seeking to finance the creation of giant cattle farms with tens of thousands of dairy cows near its processing plants.
"If we had secured our milk supply, we would have been on top in 2007," said Bernard Hours, Danone's Executive Vice President for Fresh Dairy Products, to the daily paper Les Echos.1The major firm, which registers annual sales of around 14 billion euros, did indeed suffer from increasing prices, which apparently cost 290 million euros in 2007. According to Hours, this loss was offset by productivity gains and the passing on of increased production costs to the price of yogurt.
In light of their experience, the leaders of the agrifood giant want to expand their control over the upstream steps in the process by financing the creation of giant dairy farms near the firm's processing plants.
Danone hopes to reproduce the model adopted in Saudi Arabia by Al Safi, one of its partners since 1998 and owner of the world's largest dairy farm 40 kilometers outside of Riyadh. No fewer than 32,000 cows are concentrated in a building that was airlifted into the middle of the desert and is set in the center of more than 7,500 hectares producing over 165 million liters of milk a year. The food formula, one of the main keys to productivity for the cows, was carefully developed based on imported concentrates (soy cakes) and products grown in the surrounding irrigated land.
Despite the many questions raised by setting up this type of production system in a desert region, particularly in terms of economic and environmental sustainability (water is a rare and thus expensive commodity), Danone is looking to reproduce the model in other regions of the world, from the Middle East to Algeria and South Africa and as far as India and China. According to Les Echos, the French firm is seeking investors to finance four or five such production units around the world. The same article states that one of them may come online "as early as 2008," in the words of Philippe Bassin, Danone’s Dairy Purchasing Director.
Beyond the logistical concerns and the desire to achieve economies of scale, Danone's behavior clearly illustrates the need felt by economic agents to protect themselves in any way possible against supply shortages and the volatility of agricultural prices – problems that the WTO insists should be reduced by complete, unregulated trade liberalization, although the significant movement already made toward liberalization does not appear to have had such an impact…