Lurpak maker Arla warns dairy prices will remain high

A 750g tub of Lurpak was on sale in this Sainsbury's store for £7.25 in July

The maker of butter brand Lurpak has said it expects dairy prices to remain high due to a decline in global milk production and soaring costs.

Arla reported a 17% rise in revenues during the first six months of the year driven by significant price increases.

Shoppers recently expressed shock that the price of a 750g tub of Lurpak surpassed £7 in some supermarkets.

Arla, the UK's largest supplier of fresh milk and cream, said the Ukraine war had pushed up farmers' costs.

Russia and Ukraine are among the world's biggest exporters of fertiliser and animal feed but the Kremlin's invasion has disrupted supplies, leading to increased prices.

Fuel prices were already rising as demand for energy increased after Covid restrictions were eased. But the war has pushed them up further because of sanctions and severe disruptions to shipments.

Soaring food prices drove the UK's inflation rate - the pace at which prices rise - to a four decade-high of 10.1% in July largely due to the cost of staples such as milk, cheese, eggs and bread.

• Cost of living: Why are prices rising so quickly?

Arla, which is the fifth-biggest dairy company in the world, said it had increased the pre-paid milk price to its farmers due to the significant cost increases they faced.

However, it said "this has yet to secure an increase in milk production due to the continued and significant increase in on-farm costs and uncertainty created by the current global market conditions".

It said the price of fertiliser had increased by an average of 145%, fuel by 134%, feed by 36% and energy by 346%, compared to last year.

The company said it expected the second half of the year to be "even more challenging" due to "on-going inflationary pressure and political unrest".

During the first half of its financial year, revenues rose to €6.3bn (£5.3bn) which Arla said was "almost exclusively driven by increased prices" as the volume of products the company sold dipped slightly in some markets.

Pre-tax profit grew by 9% to €230m.

Arla said that global milk production was expected to decline further and "contribute to sustained high dairy prices", which was likely to further reduce consumption.

After a strong performance during the pandemic fuelled by increased at-home consumption, the company said growth for its branded products like Lurpak was flat.

It said consumers were already buying less and "trading down" to cheaper products, most notably in the butter and spreadable category.

Earlier this year, Lurpak trended on Twitter as customers complained of soaring prices. A 750g tub of the spreadable butter currently costs £6.75 from Tesco's online delivery and £6 from Asda.

In July some shoppers shared photos of the product covered in security tags, which Asda said was a decision for individual stores, who may have noticed a certain product going missing.

At the time, Arla said it understood food price inflation was hitting households hard but farmers were also facing significant cost increases.

"While we don't set the prices on the shelves, we do work closely with the retailers to ensure our farmers receive a fair price for the milk they produce," the company said.