There has been no shortage of co-op CEOs talking about a period of consolidation coming in the dairy processing sector. It seems that has kicked off in earnest this week in Tipperary, with the two largest operations based in the county – Tipperary Co-op and Arrabawn in exclusive talks which may lead to a merger.

The reasons for the need for industry consolidation have already been well outlined on these pages, with huge investments in processing capacity coming on line just as the supply of milk – and dairy prices – peaked.

With fewer litres to profitably process, that fresh production capacity is running below the level needed to maximise efficiency.

The rising cost of business has hit all sectors of the industry, while the surge in interest rates in recent years has led to considerably higher working-capital costs for processors, and hit those with larger debt burdens particularly hard.

Looking at the financial position of Arrabawn, it is clear that the Nenagh-based operation has managed to negotiate these challenges well in recent years, growing post-tax profit from €100,000 in 2020 to €10.8m last year while reducing its bank borrowings from €36m to €21m.

The co-op has also paid one of the best milk prices in the country this year.

Tipperary Co-op

Down the road at Tipp Co-op, the financial picture appears less rosy. While the processor has yet to publish its accounts for 2023, it ended 2022 with bank borrowings of around €50m.

In 2024 it has been consistently towards or at the bottom of the Irish Farmers Journal milk league. In July a typical milk supplier would have had €953 plus VAT more in their milk cheque if they were supplying Arrabawn than if they were supplying Tipperary Co-op.

The talks between the processors are at an early stage, with plenty of hurdles to cross before any deal could be completed.

There will be a period of due diligence where both co-ops get to have a look under the bonnet of the other side to see if there are any nasty surprises lurking. Members of both co-ops will have a vote on whether to approve any tie-up.

Even if there is an agreement to move forward at that point, a merger would have to get regulatory approval.

Arrabawn has recent experience here where its agreement to sell the liquid milk business to Aurivo announced in August of 2022 took until September 2023 to be given the green light by the Competition and Consumer Protection Commission.

The Irish Farmers Journal understands that the talks between the two co-ops are exclusive, meaning that no talks are underway with any other processor.