Heady days as dairy giants face new challenge

GETTING the operational formula right in the Irish dairy sector has been a constant challenge.

In the 1980s, co-ops such as Avonmore, Waterford, Kerry and finally Golden Vale all went the plc route.

The idea was to achieve better returns for farmer shareholders who retained control of the new plcs through their co-ops, while creating a platform from which to develop the Irish dairy sector internationally.

There were exceptions to that rule, like Mitchelstown and Ballyclough, that eventually became Dairygold.

Others like the merged Lakeland, toyed with the plc route but never got that far.

In the end, the primary concern was to give the sector deeper roots and more flexibility to build strong consumer markets evolving through the growing presence of multiple stores mainly in Britain but also with an eye to the US market that set the benchmarks on consumer foods.

Both Avonmore and Waterford paid a high price for that expansion and suffered as they got too involved in the meat sector as well as paying prices for dairies in the British market, all of which proved costly.

It’s important to recognise however that these were pioneering days for the Irish co-op sector, which injected a new lease of life into the Irish stock market.

Kerry Group became a darling of the sector while IAWS, though born out of the co-op movement, was focused on cattle feed, fertilisers, fish oil, etc until it embraced the evolving par-baked bread market when it bought Cuisine de France in the mid 1990s.

Since then IAWS, which was never involved directly in dairying, has had a clear run at becoming a major player in convenience foods, but the rest have not had such an easy ride.

Waterford and Avonmore merged to form Glanbia and today is a more focused dairy combine with huge involvement in the US dairy sector with a growing presence also in the growing niche health and wellness end of the dairy market.

It is interesting that until last year, Dairygold managed to sustain its evolution as a food group without recourse to the stock market.

That started to change last year with the formation of Reox Holdings to house its non-dairy activities including consumer foods, property and DIY.

These are now two distinct and separate companies with Dairygold comprising milk processing and agri-trading and all other aspects of the group incorporated into Reox in which the co-op holds a 25% stake, with the rest held directly by farmers.

Reox has a separate board to Dairygold and its shares trade in the grey market.

Dairygold’s separation of its two operations was driven by the desire to protect farm incomes.

Last year the co-op paid back its farmer shareholders over €4 million in additional milk prices and is committed to ensuring as many farmers as possible stay in milk production.

Just last week Glanbia was forced to find ways of remunerating farmers coming to terms with falling incomes and lower milk prices.

Glanbia is proposing to pay farmers over €41m out of the value that has ben built up in the co-op that has gone from €60m to €550m since 2001 due to the increased rating enjoyed by the company under chief executive. John Moloney.

This process will involve cutting the number of shares held by the co-op in the plc from 54.7% to closer to 51%, which will result in €41m going to farmers.

It’s a hefty payback, but it dilutes the co-op’s share of the plc for good.

However, for farmers to continue to do well both Reox and Glanbia will have to continue to deliver good results.

At this stage it could be said that Glanbia farmers are much better off at the end of this phase of the evolution as the diary sector heads for unchartered waters.