Dairy industry consolidation the only option

EARLIER this week I shared a platform with the chairman of Fonterra, which is effectively the entire New Zealand dairy industry.

Henry Ven Der Hayden and I had been invited by a national dairy farmer group to debate the prospects for the milk industry from New Zealand and Irish perspectives.

Mr Van Der Hayden is passionate about farmers having control of the dairy industry and the need to apply truly commercial market-led policies when developing the sector in New Zealand. The results are startling. In 1984, Ireland and New Zealand had similarly sized milk pools of about five billion litres.

Since that time Ireland has operated under a quota system which kept milk volume broadly at levels produced in 1984.

New Zealand, in the same period, has grown its dairy volume to 18bn litres (of which Fonterra has 17bn).

It, like Ireland, is almost entirely dependent on exports for survival and has structured the processing industry accordingly. All the key dairy processors have been merged and the equivalent of the Irish Dairy Board has been integrated into one entity: Fonterra.

That co-op has developed key international market shares (especially in Asia) and, latterly, established a global dairy product auction system to help match demand and supply.

In Ireland we have developed with a fixed milk quota and over the course of 27 years the progress in scaling the industry has been pedestrian.

Aside from the creation of Dairygold (combining Mitchelstown and Ballyclough), the merger of Avonmore and Waterford to produce Glanbia and the purchase by Kerry of Golden Vale (and latterly Newmarket), other efforts to consolidate the industry have been limited.

The IDB remains a separate entity which carries out its marketing and distribution for various parts of the industry. The whole industry, frankly, lacks the hyper-efficiency needed to become a global player.

Things will have to change radically if Ireland is to exploit the liberalisation of quotas after 2015. In contrast to the 1970s, when Brussels funded most of the capital spending on new processing plants, this time no taxpayer money is available. The sector will have to self-finance items such as world-class powder dryers that require over €100 million each. That expenditure should only take place in the context of a fundamental overhaul of the industry.

We should collapse all the dairy co-ops on the island of Ireland in to one entity and the resources of the Irish Dairy Board should be absorbed to help finance an associated round of investment in new plants to manage an anticipated 40% surge in milk volumes after 2015.

With that structure we can eliminate wasteful overheads across manufacturing, marketing, distribution and management that currently bedevils the industry.

Equipped with such an infrastructure, Irish dairy farmers could be confidently asked for fresh equity to help fund a powerful world player that achieves standards of quality, efficiency and price competitiveness that at least match and even exceed those in New Zealand.

It is radical change like this that must be contemplated as we approach key decisions about the future of the dairy sector. Itsy bitsy spending on dairy facilities by individual processors is not sufficient to move the sector on to another level. Neither is a continuation of the IDB as a separate entity from the industry.

A Big Bang is needed to provide the scale and muscle needed to aggressively lift our milk product output.

Now is the time to learn and innovate based on an analysis of Kiwi milk. It is Ireland v the All Blacks. Are you up for the challenge?

*Joe Gill is director of research with Bloxham Stockbrokers.