Co-ops expected to cut milk price

Arrabawn is predicting a milk price of 28cpl this year, a projection likely to see other co-ops rapidly follow its 1.95c March price cut to 32.5c per litre.

On foot of a sharp 9.9% price fall unveiled by Fonterra’s latest Global Dairy Trade Index. Bloxham Stockbrokers predict the other Irish co-ops, who are mostly offering around 34cpl, will follow Arrabawn’s lead shortly.

Arrabawn members attending the co-op’s AGM in Nenagh, Co Tipperary, yesterday accepted the board’s reasons for cutting its March milk price.

Chief executive Conor Ryan said: “Everyone can see that the global milk price is downward. Our members just want guidance on where the milk price will bottom out. We are projecting 28cpl this year. Two months ago, we would have said 30cpl.

“The Fonterra drop was a shocker. We will be watching the Northern Ireland auction in two weeks from now for a good indication of where the price is going.

“In 2009, we hesitated and were forced to cut by 6c in one go. We don’t want to wait like that again, and our members understand the rationale behind the decision. They’d have liked to get another month or two out of it, but they can see for themselves where the global price is going.”

Co-op members attending yesterday’s AGM were also not surprised to hear that operating profit before exceptional items was down to €2.1m for 2011, from €4.2m in 2010. Profit before tax was €6.2m, up from €1.9m. This figure includes a non-operating exceptional item of €4.6m in relation to a share disposal.

Arrabawn had anticipated a higher profit margin, but it chose to drastically reduce its year-end milk production. This action was taken to avoid members being liable for a superlevy fine. The co-op came in 0.5% under its quota.

Mr Ryan said: “In July, we were about 18%-19% up on the previous July. We deducted early from suppliers who were over quota, and a lot of them cut back. We came in 0.5% under quota, which was a remarkable turnaround, but that reduced production also impacted upon our bottom line.”

Arrabawn predicts it will be doing well to retain its performance in 2012. Nonetheless, it also projects that its underlying production strengths bode well for the business once quota restrictions are removed in 2015.

Arrabawn recorded a turnover of €180.1m for 2011, up €16m, or 9.5%, on 2010. Its dairy division turnover was €132.6m, versus €116.7m in 2010. The trading division turnover was €52.5m, the same as in 2010. Net debt at year-end was €7.7m, a reduction of €6.3m on 2010. Shareholders’ funds amounted to €35.3m versus €30.6m in 2010.

A recent membership survey showed 75% of milk suppliers intend to increase milk output by 2015. As a result, milk volume will be up by 30%-40%. Total output could rise by 60% by 2015, lifting volumes from 260m litres to 390m.

The co-op already has capacity to deal with an extra 30%. The other 30% output will require a €15m investment in a new drier and separation equipment. The board has outlined three possible funding models: revised shareholding contributions; a revolving fund; and a mixture of internal funding and a bank loan.

Arrabawn chairman Patrick Meskell said: “There is great enthusiasm among most farmers to increase milk output and they also expect the co-op to have the processing capacity in place by then to handle this extra milk. The society is reviewing the results and will be reverting to members shortly with an action plan for 2015.”

In terms of choosing a location for the new machinery, external consultants are analysing whether Arrabawn can meet this increased production demand within its existing facilities, or whether a new plant will be needed. The board is likely to decide by August.

Mr Meskell said: “I am happy to report we have succeeded in retaining our volume share in a declining market and we believe this business will play an important part in our future growth.”

Arrabawn supplies all of Aldi’s milk under Cowbelle Irish Milk. The co-op also supplies to Musgraves, Tesco, Londis, and Spar. The bulk of Arrabawn’s retail milk output is sold under the retailers’ own private labels.

Meanwhile, Westmeath dairy farmer Patrick Guinan has been named as the winner of the Arrabawn Co-op Quality Milk Award 2011.

Based in Ballycumber Rd, Moate, Co Westmeath, Mr Guinan farms 65 acres and milks 35 cows, with an average yield of 7,500 litres per cow. He transferred to Arrabawn when they acquired Dawn Dairies from Kerry Group in 2010.

Mr Ryan said: “Patrick is a great example of a dairy farmer who gets the basics right, and the award is due recognition of his hard work and his dedication to producing quality milk from his herd. His victory sets a benchmark for other Arrabawn suppliers to achieve.”