KEY INTERVIEW: Creating Value From By-Products, One Product At A Time

22 Jun 2015 --- The global market for infant formula is growing at a steady rate, as the middle income sector grows in developing markets, particularly in China, where manufacturers are making formula for the home market. Arla Foods Ingredients, based in Denmark, has a huge stake in the supply of good quality, safety assured lactose for infant formula and since its new €120m lactose facility opened in November 2014, capacity has increased by 80%. Luis Cubel, Commercial Director, spoke to FoodIngredientsFirst about how Arla Foods Ingredients plans to increase revenue while meeting the needs of a growing market.

Five years ago there was a sudden increase in global demand for infant formula, boosted by a rise in income from emerging markets and a particular increase in demand from China, which has seen a rise in the affluent middle class and at the same time relaxed its one-child policy. China was also at the centre of an infant formula safety scandal due to melamine contamination. The events saw Chinese parents shun locally made formula in favor of foreign imports particularly from Japan and the US, which were perceived to be safer.
 
The rise in demand came at a time when Arla Foods Ingredients, a division of Arla Foods, one of Europe’s leading dairy cooperatives, was looking at new ways to increase revenues and create value from its supply chain. The company was already supplying lactose that it produced as a by-product from permeate (a whey derivative) but it saw that there was a gap in the market to supply more, as infant formula manufacturers increased their demand for high quality ingredients.
 
The resultant production site, which opened its doors in November 2014, cost the company €120m and has seen lactose production capacity rise from 35,000 tons to 115,000 tons including the extra 25,000 tons created from a joint venture with German dairy company DMK. This more-than three-fold increase in capacity has given Arla Foods Ingredients a significant market share and a dominant market position that Cubel hopes will set it on course to compete with the biggest on the market. 
 
“The increase in demand for infant formula since 2010 has been driven by increased purchasing power in emerging markets and led to a demand for high quality ingredients in infant formula,” says Cubel.
 
The new facility for lactose production is adjacent to the existing whey production facility in Jut-land, Denmark. The big growth market for whey protein in recent years has been in sports nutri-tion products, where consumers are seeking a high value, high quality protein content. This de-mand, which Arla Foods Ingredients is catering for through whey protein production, has in-creased the possibility of lactose production, which is a natural by-product of the whey produc-tion process. By having the lactose facility adjacent, the state of the art site fulfils many require-ments.

“Recent infant formula scandals and the ongoing requirement for quality have raised the bar for lactose manufacturers,” says Cubel. “Lactose also has to be present in infant formula in specific amounts, leading to a significant requirement to invest in high quality production facilities.”
 
Infant formula manufacturers strive to make formula as close in nutritional content to human breast milk as possible, and while breast milk contains around 7% lactose, cow’s milk typically contains 4-6%. This drives the demand for high quality lactose.
 
While capacity at Arla Foods Ingredients has reached the full 115,000 tons, Cubel does recognise that demand outpaced in recent months and the whole industry is facing oversupply, which brings prices down. However, he thinks that this is a temporary situation as many manufacturers expand production in order to secure the long term supply of lactose.
 
“In the coming two years, I see short-term oversupply,” predicts Cubel. “But this will be followed in the long-term by a return to balance as global demand, particularly in Asia, will pick up again. Certainly for Arla Foods Ingredients, we can see a future in which we will invest further in this site to expand capacity.
 
“I’m not nervous about today’s oversupply. The general food industry is stagnant but as the ef-fects of the quota removal also take effect, we’ll see more investment in other areas for milk powder. This, coupled with demographic changes, will lead to a need to ensure the security of raw materials in order for food manufacturers to protect their brand status,” concludes Cubel.
 
Another stream of revenue for Arla Foods Ingredients’ lactose offering could come from its re-cent announcement that it has started to trade its lactose on the Global Dairy Trade (GDT) auc-tion site. Says Cubel: “GDT attracts more than 650 qualified buyers from more than 90 countries, and yet at present they have very little access to lactose through the platform. We can fill this gap in the market by offering our high quality lactose through GDT.”
 
So as Arla Foods Ingredients Foods Ingredients continues to make cheese from milk, whey from cheese and now lactose from whey, one can only wonder how much more value one simple, natural product like milk can bring to a food industry that is evolving and sustaina-bly using all its resources given any opportunity.

By Kelly Worgan