Analyst sounds death knell for quotas
Paul Meade, NCB Stockbrokers, also claimed the proposed expansion of dairy quotas signals higher milk volumes for processing leading to their eventual elimination.
He said the EU is removing support from the bulk commodities like skim milk powder and butter which will force the sector to produce more added-value products like cheese and casein. The Commission is proposing to extend the quota system until 2015.
He said the plan envisages gradually increasing the EU’s dairy quota volume by 1% in 2007 and 2008 and reducing support prices for skim milk powder by 3.5% and 7% for butter over a five year period.
Mr Meade said this process will increase EU milk supplies, and reduce the institutionally guaranteed market price by 28% over a five-year period in line with the EU’s world trade negotiating position.
Corresponding producer-compensation payments, including additional ones in respect of changes in 2007 and 2008 for the price reductions, will be calculated along the already agreed mechanism and included in the annual farm payment system proposed.
Mr Meade was assessing the likely impact of EU Farm Commissioner Franz Fischler’s proposed CAP reform on Irish food producing plcs.
He said the impact may well be neutral for Glanbia given its diversified manufacturing capabilities, increased availability of milk for processing and the possibility of some margin improvements in its consumer milk-based products.
Mr Meade noted dairy is less than 10% of Kerry’s cost of sales and less than 2% of its profits following disposals last year. Kerry has already provisioned for new investment in the Golden Vale dairy business to add in manufacturing capability.
Regarding Greencore, he said sugar is excluded from the reforms. Savings over time on the existing farm spending will be channelled into reforming sectors like sugar, cotton, olive oil.
Mr Meade said it will be at least 2009 before the first substantial savings (€400m) are available for any additional reforms.
But since sugar is not a budgetary cost item, it is not top of the EU’s reform agenda and the existing regime will continue for some time yet. The group’s malt division is already operating at or near world prices.
IAWS currently generates about 30% of group earnings, before interest and tax from animal feed and fertiliser.
With EU policy shifting towards decoupling and environmental friendly farming systems, the size of the national beef herd will decline reducing demand for animal feed and fertiliser requirements.
Mr Meade said the key issue for IAWS is whether it will expedite a restructuring/sale of these businesses, possibly to its founding co-op, ahead of any significant reduction in profitability.
