Kerry plans to acquire abroad as milk prices rise

Kerry Group is to make significant acquisitions in emerging economies in 2013, and predicts a stronger milk price in global markets.

Challenged by farmers attending Teagasc’s national dairy conference in the Brandon Hotel in Tralee yesterday, Kerry CEO Stan McCarthy also defended the group’s decision to locate its global technology innovation centre in Co Kildare.

Responding to Kerry IFA dairy chairman Ken Jones’s view that milk suppliers felt “let down” by the group’s low milk price in 2012, he defended the group’s milk supplier agreement, which delivers an end-of-year bonus rather than competing on a monthly basis with changing markets.

Pat O’Donoghue, a north Cork supplier to Kerry, said dairy farmers are frustrated by the model of “the 13th month” payment. He challenged Kerry’s claim to being a market leader, and asked for specific months in which the group offered the market-leading price during 2012.

Mr McCarthy said: “We will be taking an annual look at the like-for-like price for milk with the board. We will be trying also to lead the market in any given month, in line with our business model. But we cannot just follow others each month. There is a debate about the distribution of milk price on a like-for-like basis at the end of each year. We are getting to the end of 2012, and we will look at that again with the board within the next month. We will seek to fix it all on an annual basis.”

He said the group’s milk supplier contracts and the location of its innovation centre in Kildare were part of its global growth strategy.

Mr McCarthy said: “I would have loved to have located the new centre in Kerry, but that was not possible. Kerry is a global operation, and we need to be near an international airport. In all fairness, we also looked at the UK and Holland.

“It took us a while to look at Ireland. Ireland’s image has been tarnished in the last couple of years, but locating here was the right decision taken in the best interests of the business in the long haul.

“In terms of the investment in steel and processing, Kerry Group has always accepted that responsibility. 2009 was not a good year for dairy farmers, neither was 2012. We expect 2013 to be better, and we would never want a situation in which Kerry farmers would disaggregate themselves from Kerry Group.”

He said the group already had capacity for 120% of current processing levels, and that it would make any further investment required above this.

“Milk has become a volatile commodity. In recent years, the milk supply from the southern hemisphere countries and the US has increased significantly. This drove down the price.

“But that has changed again in recent months. We expect the EU milk price to be up 3% and the US price up by 2.5% next year, but I don’t put much store by that. We must look at changing markets in Germany, the UK, and the Netherlands. We expect New Zealand to increase its milk supply output by 4% to 5% next year. The data now is somewhat conflicted.”

Kerry Group’s annual turnover stands at €5.5bn and market capitalisation at €8bn. Ingredients and flavours account for 70% of its global business, with the local Irish and UK markets making up much of the rest.

The group’s nutritional and flavouring businesses enjoyed huge growth in emerging economies in Asia. Because of this, Kerry expects to grow in 2013 via further acquisition in emerging countries.

Kerry’s cheese sales soared in Iran and Russia, while butter trade is growing in most markets. Kerry’s skim milk sales grow by over 13% in the US last year, while whole milk powder growth was encouraging in the Middle East and China. Kerry’s whole milk powder sales in China grew to 277,000 tonnes in 2011 and are likely to exceed 400,000 by the end of 2012.

Several speakers at the conference also welcomed Kerry Group’s commitment to a dual global and domestic growth strategy.

In terms of shareholder returns, Mr McCarthy gave the case study of a farmer with 50 cows over the past 10 years. His 500 co-op shares would have grown to 1,163 shares worth €44,000. He would also have 338 residual co-op shares worth €80,000, and would have gained over €129,000 in total value over the decade.

Yesterday’s conference in Kerry was the first of two days of Teagasc seminars on the post-2015 expansion ambitions of the dairy sector.

A series of dairy experts are giving in-depth analysis on the profit-focused issues facing farmers in making their decisions to expand or to stay at their present size. Teagasc.ie has link to a live webinar for those who wish to follow today’s conference in Mullingar, Co Westmeath.