‘Not taking a risk is the biggest risk for business’

In the case of livestock marts, credit risk and the relatively small scale of operations of some marts are closely interrelated

Risk management is essential for any business, particularly any organisation associated with food products and consumers.

There are also market-related risks which must be managed and this was the subject of the national conference last week organised by the Irish Co-operative Organisation Society (ICOS), representing co-ops, including the dairy processors and national livestock marts.

Among the risks identified for dairy processing co-operatives were the risk associated with the growing impact of milk price volatility and the reputational risk of losing consumer confidence.

With quotas soon to be abolished in 2015, industry surveys confirm dairy farmers’ intent to expand rapidly in the post-quota era. Speakers at the conference focused on the need for farmers and processors to have a greater understanding of tools that exist, or that should exist, to provide the sector with options to manage milk price volatility. These could include back-to-back contracts between processors and their customers and hedging milk prices to reduce risk.

There were also presentations on the scope to manage volatility in farm inputs. In summary, the more expansionary a dairy farmer is and the more he has to rely on borrowed capital for that expansion, the more important it will be for him to have market tools available to dampen the inevitable impact that volatile milk prices will have on his income.

The initiative on the part of Bord Bia to introduce a rigorous audit system measuring and monitoring quality and sustainability at farm level is strongly supported by our dairy co-operatives and was welcomed at the conference.

Irish dairy co-operatives now compete in a global market where food scares are a growing feature and where loss of consumer confidence can do enormous damage to a food processor’s brand and reputation. Dairy co-ops must be able to put science and objectivity behind claims made in regard to the quality and sustainability of our dairy products.

In the case of our livestock marts, the two major risk themes identified — credit risk and the relatively small scale of operations of some marts — are closely interrelated. It has been well observed that for many of our smaller livestock marts, usually with single sales centres, the only true key point of difference in the service they offer to purchasers of stock is the scale and length of the credit facilities they offer.

For a number of years it has been ICOS policy to advocate a consolidation of our co-operative livestock marts. Where this has been achieved in the past, it has not of necessity resulted in the closing down of individual sale centres but it has resulted in a significant reduction of mart overhead costs. It has also created a scale of business that becomes less dependent on the purchasing power of any one single buyer.

Finally, there is one other important risk theme common to all co-operative businesses. That is the risk attached to co-operative leaders not being willing both to continuously challenge their understanding of the co-operative model and not being willing to make the necessary adaptations to that business model to ensure that it stays competitive in the market.

* Seamus O’Donohoe is chief executive of ICOS the Irish Co-operative Organisation Society. www.icos.ie


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