Dairy industry needs radical thinking in traumatic times

A PRICE collapse of almost 50% in an 18-month period is a traumatic occurrence by any standards. In round figures, this is what has happened to Irish dairy farmers since the autumn of 2007.

Market returns from the main dairy commodities have declined steeply from their peak in late 2007.

The cuts in milk price from the high 30s (cent per litre) to the lower 20s have wiped out farmers’ profits, leaving some in break-even or loss-making situations.

While commodity prices tend to go in cycles, and an upturn will eventually come, the immediate prospect for an upturn isn’t favourable.

This gloomy situation and outlook for the dairy industry brings the need for radical thinking, and the old dictum that ‘desperate situations demand desperate solutions’ may be apt right now.

ICOS are engaged with their dairy co-operatives in discussing a rationalisation programme to take out unnecessary costs and increase processing efficiency.

ICOS president Pat McLoughlin warned in December of the dire consequences for farmers and the processing sector if decisive action is not taken to consolidate and strengthen the industry. He said the real price of milk was 18 to 20 cent per litre, without co-op subsidisation of its farmer members.

He added that while we have no control over the markets, we do have control over our own processing operations. He proposed bringing the industry together in a co-ordinated, focused way, to achieve the greatest return.

Such moves have brought the focus on our biggest dairy co-op, Dairygold, which was in the news recently with its decision to part ways with chief executive Jerry Henchy.

Perhaps it’s an opportune time for Dairygold to consider rationalisation into a bigger, stronger entity with one of its neighbours.

An opportunity exists for a merger between two of our largest co-ops. Dairygold’s obvious merger partner is Glanbia, which has a similar product range, similar processing structures — and in particular, an existing agreement of sharing facilities and milk assembly to achieve efficiencies. The potential synergies look to be very significant in a combined processing entity, as well as in the agri-trading and farmer input divisions. If the merger went ahead, the combined milk pool would still be less than 50% of the Irish milk pool.

A glance at our international competitors is revealing. Arla in Denmark controls 90% of processing capacity, Campina Friesland in the Netherlands controls 75% of a milk pool twice that of Ireland’s, and Fonterra in New Zealand handles 97% of a pool three times our size.

A combined Dairygold-Glanbia would still have only half the scale of Arla, one third the scale of Campina Friesland, and one sixth the throughput of Fonterra. Perhaps some closer arrangement with the Irish Dairy Board might be possible.

Like our attachment to land, identification with our co-ops is a strong emotive and historical factor that has to be recognised and understood. Dairygold has a proud tradition of service to its suppliers and shareholders and will most likely be anxious to move onto the next phase of competing in a fiercely challenging and constantly changing world market.

Glanbia has emerged in latter years as a strong, stable entity, with a significant international processing dimension ably led at management and board level.

For Dairygold and Glanbia farmers, a larger monthly milk cheque could flow from the advantages of a combined, synergised, processing organisation, concentrating on maximising the most profitable products, especially at the shoulder milk supply periods, providing lowest cost essential farm supplies. with a lean, streamlined administrative function.

The Danish economics expert and former director of the Danish Dairy Board, Preben Mikkelsen, speaking at the Teagasc 2008 National Dairy Conferences in November, endorsed rationalisation of Irish processing facilities, saying that if Ireland wants to become a major exporter then it is necessary to join forces. “Irish dairies have to concentrate like in Denmark, Finland, Sweden, Norway and the Netherlands, to be able to lift the huge task of securing the necessary capital to invest in product development and global marketing.”

He also suggested the creation of “joint ventures with some of the top 20 dairy companies in the world to secure capital, new technology and brands.”