Editorial: Kerry opportunity must not be squandered

There are two major changes taking place within the dairy sector. Globally, the rollout of tighter environmental restrictions plus higher demands for animal welfare is limiting the capacity of the world’s leading dairy producers to ramp up production. The impact on the global supply and demand balance is already evident with demand forecast to outstrip growth by 0.3% in 2021.

Closer to home, the environmental agenda is now affecting the future development of the dairy sector by impeding the development of further processing capacity in Ireland. While the objection by An Taisce to the proposed new cheese plant by Glanbia was subsequently rejected, the situation signals increased scrutiny and regulations pertaining to further planning applications.

Both point to a future where there will be potential to significantly add value to milk pools where existing processing capacity is in place. While the changing landscape affects all dairy farmers, it has particular relevance when assessing the importance of Kerry Co-op reaching a deal with the Kerry plc for its dairy and consumer foods business in Ireland.

Confirmation by Kerry plc that the talks between the two had been suspended brought confirmation that a strategic decision has been taken by the plc to sell the business – effectively putting the Kerry milk pool and processing assets on the market. As Jack Kennedy details, there are significant risks for milk suppliers attached to such assets being acquired by entities focused primarily on dividends for shareholders.

The board did not have the skills necessary to create a vision and communicate a plan that would bind its shareholders

The merits of securing a deal should not be influenced by the discussions to date or the recent tactical manoeuvres by either party. The way negotiations have been handled in recent months exposed an inevitable skillset deficit in the co-op board. The outcome reinforced the extent to which the board did not have the skills necessary to create a vision and communicate a plan that would bind its shareholders. Instead, an environment of suspicion and division was created.

There are now reports of shareholders moving against the board. Caution is required. Instead of rushing to criticise, the pause button should be pressed. Kerry plc should be informed of the co-op’s intention to re-engage but with a different approach.

Time required

A time window will be required, but given the historic links and the commercial reality that any potential suitor will value the business on the cohesiveness of the raw material supply base, it is likely to be granted by the plc. In addition, Kerry Group owe the co-op that built the original business an extended opportunity to regain an interest in it.

The co-op faces a crucial moment in its storied history. The challenge is to develop a coalition of support among shareholders for their strategic goals. COVID-19 prevented the opportunity for an internal dialogue in recent months but a board without a mandate does not make an attractive business partner for Kerry Group. Simply changing the personnel on the board won’t change that imperative.

The initial focus must be on putting a governance review in place that addresses the clear structural issues at board level and the skillset deficit that exists. An experienced management team should then be put in place around the co-op board that is not bogged down by historic squabbles. This management team can then assess and execute a board mandate with clarity of vision. Even if only short term, this team can ensure that board members have the capacity to provide the necessary leadership and strategic vision to rigorously assess the business proposition presented by Kerry Group.

No room for emotion

There should be no room for emotion or personalities. The assessment of the opportunity should be firmly rooted in having ascertained a deep understanding of the historic and existing business performance, with a clear view on the challenges and opportunities that lie ahead.

But as well as establishing the business proposition, the board must present a vision that delivers unity of purpose among shareholders. A model that not only protects milk suppliers, but reflects the desires of the wider shareholder base will be necessary. It must be trustworthy, credible and business-focused. While its development will be a challenge, it is achievable if the approach is correct.

The foundation of Kerry Co-op dates back to a desire to secure a future for milk production and processing in the region. That remains as relevant today as it was 47 years ago. It may be that the co-op has to evolve to fulfil that ambition for its farmers. The resources are there to allow a restructuring – every original £1 co-op share now has a see-through value of over €600 – so all co-op shareholders can realise a massive return on their investment while leaving enough wealth in the co-op to assist the next generation of dairy farmers in Kerry, Limerick and Clare to gain control of their own destinies. The opportunity should not be squandered.