'We have an onus to give farmers clean ball'

As thousands of cows are being dried off across the country, dairy farmers are looking forward with more optimism to 2017. And Ornua CEO Kevin Lane believes these farmers need the best information possible to help deliver on that optimism.

Lane sat down with the Irish Farmers Journal this week to discuss the year that has been, with a cautious eye on the new year.

The year that has been saw record volumes of Irish dairy product sold by Ornua. The exporter accounted for 60% of all dairy exports. This is driven by the Kerrygold brand being sold into more than 100 countries across the globe.

“It will be another year of record member purchases. We are up between 25,000t to 30,000t of purchased product in 2016 than we were in 2015,” Lane said.

Price drop

However, it has not all been perfect this year. Milk price dropped to the lowest levels seen since 2009 and farmers faced cashflow and income crises. Lane expressed concerns that some co-ops “will have dipped too deeply into balance sheets which I don’t think is healthy” in order to support milk price to farmers.

Lane generated a front-page headline two weeks ago by predicting a quarter one farmgate milk price of 30c/l.

“I’m not looking for headlines… we stand based on our annual projections and we stand on our rolling trade estimates. We have a responsibility to farmers to give our best estimates at any one time.

“My promise has always been that we will do our best estimates based on the information we have. We will give it honestly and transparently. Our best estimate is that farmers should be getting a price close to 30c/l for the spring. Can you take that to the bank? No. But it is our best estimate and it is based on very up-to-date, accurate and transparent information that we have shared with our board.

“We have onus to give farmers clean ball … we didn’t stop giving best estimates when milk price was at 22(c/l),” Lane said.

Looking at the overall strategy for the co-op in 2017, Lane said it is twofold; developing new markets while looking after the old ones.

“It will be about growth again; we’re not going to rest on our laurels,” he said.

“Irish dairy farmers are ambitious and they tell us they’re going to grow their milk supply. That’s what gets us out of bed each day; if there’s more milk coming our way, we better keep growing the business and to have the right added-value.

“We still have placed bets and we believe that while Germany and the US will do good things for us in the future and we will never underestimate them, but the future has to be around developing new markets and new territories as well simultaneously. We have commissioned our Saudi Arabia plant and by quarter one it will be up and running manufacturing product for a number of mainstream blue-chip companies.”

With Ornua taking on more product and successfully selling that product, is there a case to be made for all co-ops selling all of its product through Ornua? This way there would be a saving to the farmer by a reduction in dairy executives duplicating sales roles.

“I think it would be a very general and very irresponsible answer to say there is no route to market that our members have created that we can’t beat. There is some very high-quality business.

“For our members sitting around our table who have built high-quality, high-margin businesses outside of Ornua many years ago, why should they give them up? I don’t think that would be right for Irish farmers.

“What I do think would be right is more product should come through us which isn’t duplicative.

“A chunk of new business should be coming our way – the figures would suggest that it is gradually making its way to us.”

Trials and tribulations

The former head of flavours with Kerry Group said the Saudi plant is 12 months behind schedule due to some “trials and tribulations” as well as the bureaucracy of doing business in the region but that it will be the only player of its kind when it is operational.

As Irish spring milk production continues to fall to a natural halt this year, Fonterra in New Zealand updated its price forecast payout for the 2016/2017 season. A price equivalent of 29.9c/l means Fonterra has jumped ahead of the average Irish price.

With Ireland dealing more in the value-added product market and Fonterra in the commodity market, how does Lane explain a better price in New Zealand?

“It’s the first time in how many years they’ve been ahead of us? Fonterra beating the EU price is a sensational event because we haven’t seen anything like that for many, many years. We have consistently outperformed their price,” Lane said before adding Fonterra’s product offering has improved from just being commodity to some added value including infant formula and food services.

“All that matters is long-term performance and for many, many years Irish farmers have enjoyed significant outperformance of the Fonterra price.”

Brexit challenge

With prices on the rise and global markets looking rosier, is it all positives for Ornua? Not so, according to Lane.

“Are there challenges? You bet. Those challenges are Brexit, volatility and the third one is will demand increase. We seem to be currently having an increasing milk price due to supply correction as opposed to demand improvement.

“I for one would prefer to see growth coming from demand increases, not supply correction.”

Brexit is clearly a massive issue for him and the wider sector. It has resulted in a tumultuous currency which has affected the trading of product between the sterling and euro areas. That has been the immediate fallout from Brexit, but for Lane this might only be a minor aspect of a UK withdrawal from the EU, with the greatest impacts being yet unknown.

“Clearly currency is an issue, it has an impact on trading.

“There will be impact on sales from high food inflation and the other one is what cross-border trading arrangements will be.

“Those are unknown but they are going to cost and it won’t make it cheaper to do business. Then there will be the resources we will have to put in place for new regulatory standards [and] labelling,” said Lane.

More clean ball and a few more goals in 2017.