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Over the past three weeks, we have been running a special series looking at the performance of Irish dairy co-ops. Week one showed a differential of 6c/l in the milk price paid by the top and bottom performing co-ops.
There are of course some legitimate reasons for the differential – the main one being the decision by the top-ranking co-ops to pass back a dividend through the milk price from their non-core dairy businesses, but typically this accounts for less than 2c/l.
The co-ops at the bottom of the league need to address whatever is preventing them from paying a competitive milk price – whether it be product mix or the ongoing requirement for investment – and detail the time frame involved.
Farmers should not accept the same excuses time and again as to why they are receiving €150 to €300 less per cow than those supplying the same product to an alternative co-op. A beef factory paying €300 less per finished animal wouldn’t stay in business long.
Of course, these poorer performing co-ops have traditionally had the luxury of a guaranteed supply base regardless of their performance and the milk price paid.
Week two of our analysis shone a light on board structures. More than 200 farmers sit on the boards of our dairy co-ops. There is a cost to this level of representation with each member rightly receiving a fee for their time and input. But leaving this aside, does such an unwieldy board/representative structure best serve the strategic interests of Irish dairy farming?
The fragmented nature of our dairy processing sector has been repeatedly shown to be a drain on milk price – both through elevated processing costs and an inability to extract full value from the market. Previous industry reviews have shown the impact on milk price to be in the region of 3c/l, or equivalent to €180m per annum.
We have seen within the EU and at international level that it is the co-op board and in particular the co-op chairs that drive the consolidation agenda, not the CEOs or executive teams.
Do the chairs and boards of Irish co-ops not accept the potential for consolidation to drive better prices back to farmers?
Why does the Irish dairy industry think it can reverse what is clearly a global trend where mergers and acquisitions are seen as key to delivering economies of scale and developing routes to market for new products.
It is not only a global phenomenon; we have seen it developing at pace in the Irish beef industry. Is it credible to think that a flotilla of small Irish dairy processors each crossing paths on international markets effectively selling the same product is the most efficient way to extract the maximum value from our 6bn litre milk pool?
This week, Jack Kennedy and Eoin Lowry look at how some of our main dairy co-ops compare on an international basis. It is perhaps at an international level that the fragmented nature of our processing sector is most exposed with Irish co-ops languishing at the bottom of international leagues. Again, there are a number of unique challenges that the Irish dairy sector faces when measured on an international basis – mainly our seasonal supply base and additional costs in getting to market.
We must also recognise the fact that Irish dairy farmers have not been restricted in their growth ambitions with co-ops making the necessary investment to process all additional milk produced.
Nevertheless, do we simply accept that the rightful place for milk produced by Irish farmers from a sustainable grass-based system is at the bottom of the international price league? Such an acceptance would clearly be at odds with the premiumisation message created around the Kerrygold butter brand that consumes some 15% of total dairy production.
It is incomprehensible at a time when there is a growing realisation of the superior health benefits of dairy products produced from grass that we would accept Irish prices that languish at the bottom of the international league. At the same time, we are seeing some processors in the EU pay a 1.5c/l premium for milk produced from cows that are on grass for what equates to 30 days in the year.
The current position of Ireland within the international league also exposes the flaws in how co-ops are extracting the premium from producing 16% of the world’s infant formula. Along with the quality produced, is one of the reasons that the leading players in this market are all present in Ireland merely the fact that the fragmented nature of our processing sector allows them to control the premium passed back to the farmer by having Irish co-ops compete with each other?
The potential for Ireland to extract the full value from this lucrative market through establishing a standalone infant formula brand has been repeatedly shot down on cost. Nevertheless, is there an alternative? Can we channel this product through Ornua for it to be sold on licence to the various manufacturers, therefore removing internal competition?
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