Food sector faces home strife but global ease
It is, however, surprisingly positive about how well the publicly quoted sector has adopted to the major changes that continue to dictate how the global food market is evolving.
It says also that due to their relative small scale, the likes of Kerry, IAWS, Greencore, Donegal Creameries, Norish, Glanbia and Fyffes all look well positioned in the context of the evolving global food market.
Itās a view that should encourage those who have been strong advocates of the added value end of the market where margins tend to be better.
In his review of the sector, Liam Igoe of Goodbody Stockbrokers, reaches two basic conclusions.
For him the ultimate test of any strategy is the return on invested capital and the Irish publicly quoted companies have been best served in that regard when they ventured into high growth niche markets.
In the case of the Irish dairy sector the report concludes that a āfederation style approach to each of the basic commodities may be more appropriate than full scale mergersā.
Indeed that viewpoint has been raised before. Jim Murphy, the last chief executive of Golden Vale, now owned by Kerry Group,
argued that the capital costs already in place were so significant that plant closures would come at a very high price and would be only marginally beneficial.
Where then does that leave the Prospectus report that argues for the merger of the processing capabilities of the top three dairy groups in order to cut costs and leave a bit more in profit terms for farmers and the dairy processors.
In his review Mr Igoe is forgiving of the mistakes of the past by Waterford and Avonmore, now known as Glanbia.
Glanbia is positioning itself better to exploit niche market segments in nutritional ingredients as well as fresh dairy products.
But it isnāt that long ago that the two companies combined were worth less than each individually when they were Waterford Plc and Avonmore Plc.
Indeed Greencore, which comes in for strong praise, has had an up and down few years before it got its act together through the acquisition of Hazlewood.
And Mr Igoe believes the group, is in the process of resuming sustainable earnings growth.
If return on investment is to be the guiding feature of the sector going forward the report suggests the Irish dairy sector ought to consider setting up a new company for each of the main commodity lines for butter, powders and cheese.
Over time each of the new companies would facilitate use of excess capacity during shoulder periods,
allow for greater use of the better plants while avoiding complex rationalisation issues.
And as Mr Igoe observes, it would also avoid āpoliticalā issues about which part would have to go in any shakeout.
Bearing in mind the difficulties faced in the rationalisation of the beef sector Mr Igoeās suggestion sounds imminently sensible and deserves consideration.
But his overall view of the food sector is too benign.
His basic premise is that the industry has used niche markets to boost return on capital.
But in that context Kerry and IAWS have done this better than the rest.
His own study showing the two as the best earnings performers over a decade in the global food sector highlights what the Irish food sector can achieve.
It can be equally argued that the food industry in this country, including the beef end of the business, has promised a lot, but failed to deliver.
Both IAWS and Kerry have been highly focused in their niche markets but the sector has failed to produce one global brand despite the massive support from Brussels down through the years and the unstinting support for the farm sector from successive governments.
