Co-op leaders told to lead the way in restructuring

DAIRY co-op leaders have been told they must lead the way towards the restructuring of their industry, worth almost €12 billion in total sales.

The industry is comprised of 30 co-ops with almost 35,000 employees and 20,000 milk producers countrywide.

But experts say there is a growing urgency to restructure the sector so that it can successfully compete with markets worldwide.

Ireland’s milk pool of 5.2 billion litres (1.1 billion gallons) is just 1% of world production and is processed by 11 co-ops in a network of plants.

The dairy industry, which accounts for up to 30% of agricultural output and €2.5bn in exports, has a high dependence on commodity products which exposes it to the volatility of world market prices.

It is also facing changes in Europe and globally – including the phasing out of milk quotes, fewer and larger competitors, declining market supports and consolidation of retail multiples. Competitors in Denmark, Holland and elsewhere are already consolidating in order to achieve market strength and operational efficiency.

The Irish Co-operative Organisation Society (ICOS), the umbrella body for the co-ops, which have existed in Ireland for over 100 years, has launched an initiative to develop a new structure, Milk Ireland, to prepare for the future.

Milk Ireland would make the best use of the most efficient plants, avoid duplication of investment, utilise factories to manufacture products that give the best return, make the best use of facilities off peak, stimulate development in products and incorporate the activities of the Irish Dairy Board.

The new body would take collection control of all milk destined for processing into major commodities. It would contract the processors to manufacture products for an agreed fee.

Milk would be allocated to particular plants on the basis of product return, plant efficiency and geography, although during the key peak months, it is likely all current plants will be needed.

The concept, now being discussed at meetings of co-op leaders, also involves Milk Ireland taking control of the marketing of the major commodities by merging its business with that of the Irish Dairy Board.

Milk Ireland would pay the member co-ops a commercial milk price reflecting the returns in the market place for the basket of commodity products. It would also pay a manufacturing charge.

Individual co-ops would then decide the price they would pay their suppliers based on the commodity milk price plus the income from manufacturing for Milk Ireland, plus any other revenue streams or investments.

Under the new structure, plants which are less efficient, or have undergone less investment, could be closed during the shoulder period, with their milk diverted to more efficient plants.

ICOS says this process, with centralised planning, would allow for an orderly series of investments in new plants, and the ultimate closure of less efficient operations. It has invited European dairy co-op leaders to address their Irish counterparts on how they are positioning their businesses.

Bent Juul Sorensen, chairman of the Danish Dairy Board, told the first of these strategy seminars in Dublin that this is an opportune time, with milk prices low, to speak with farmers to make changes in their co-op structure.

He said co-ops must co-operate rather than compete with each other, and provide full transparent information to farmers on milk price.

Andreas Lundby, deputy chief executive of Arla Foods, the €6.8bn Swedish-Danish group, said a focus on the marketplace, production efficiency, research and development, and effective marketing are critical.

ICOS president Pat McLoughlin said Arla Foods has evolved over the decades from dozens of small co-ops by a process of far sighted but sometimes painful mergers into a strong multinational co-op, owned and controlled by farmers.

“We have a vision for an Irish dairy industry which can match our competitors and can, in our own marketplace, challenge the dominant position of the multiples and secure the livelihoods of its members,” he said.

Noting that the Irish dairy industry has some very difficult choices to make, Mr McLoughlin said ICOS hopes to inform, support and guide co-op board members who have to make the tough calls.

Irish Farmers Association (IFA) president Padraig Walshe said all Irish co-op board members need to take inspiration from their European competitors.

“Substantial savings and value can be delivered, in the best long-term interest of Irish dairy farmers, if decisive action is taken by co-op boards to fundamentally restructure,” he said.

Mr Walshe warned that farmers, who face a year of low or no income, need to see action right away.