Pressured by economic and supply constraints, the world’s largest dairy companies are battling global conditions and each other for market growth, according to a new report from Rabobank.

Against this backdrop, mergers and acquisitions have become an attractive route to growth and profitability over the past 18 months, said Tim Hunt and Saskia van Battum, writing in Rabobank’s ”Global Dairy Top 20.” Acquisitions have become a more attractive route to grow sales and, in 2013, there were 124 dairy transactions, up from 111 in 2012 and the highest since 2007.

However, despite the increase in transactions, the dairy sector saw no billion dollar deals in the 12 months ending June 30, 2014. While underlying growth will pick up in coming years, many markets will not return to the rapid growth rates seen before 2008. In this context, mergers, acquisitions and joint ventures will remain a key avenue to growth and profitability.

The situation can be described as ”paddling hard in slow-moving water,” according to authors. “Those adept at acquiring and embracing new businesses will remain well positioned to survive and thrive.”

The annual Rabobank survey also lists the “Top 20” global dairy companies, based on 2013 dairy sales (see table). The list includes four U.S. companies: Dairy Farmers of America (4); Dean Foods (9); Kraft Foods (17); and Schreiber Foods (19).

“Once again, giants Nestlé (Switzerland), Danone and Lactalis (both France) top the list, showing that the world’s largest dairy companies are reasonably entrenched,” said Hunt. “We continue to see some companies outperform their peers in sheer growth terms. In particular, the Chinese giants Yili and Mengniu, which saw their sales expand by 14% and 20% respectively, with Yili entering the top 10 for the first time ever.”

Saputo (Canada) continued its march up the list to push to eighth place, in part due to several recent acquisitions. Meiji and Morinaga (both Japan) slipped down the list, largely due to the sharp decline in the value of the Yen (in which most of their products are sold).

Positioning for maximum effectiveness in the expanding Chinese market remains prominent. In 2013, joint ventures were announced between Mengniu and Whitewave and COFCO and Danone, while Yili announced a partnership agreement with Dairy Farmers of America. Mengniu took a stake in China Modern Dairy to secure raw milk supply. A further joint venture is pending between FrieslandCampina and Huishan.

“The catch is that the number of attractive targets is shrinking and multiples have risen,” explained Hunt. “With billion dollar value deals harder to come by, dairy giants will need to acquire or tie up with more companies than in the past to sustain the same rates of growth.”

Source: Rabobank