Dairygold seeks 1c/l in cost savings

The board of Dairygold have approved a plan to target €14m of cost savings across the business between now and 2027.

The co-op said that as part of the organisational restructuring, there would be “an additional headcount reduction of circa 70 positions”.

The job losses would be across the dairy Ireland and agribusiness divisions as well as in business support and management functions.

The reduction in employee numbers would be achieved through natural attrition, redeployments and voluntary redundancy.

Dairygold CEO Michael Harte said that “a period of significant labour, energy and materials price inflation together with interest rate changes have increased the cost base of our business,” and that “it is timely now that we take stock, review our structures, and right size our business and optimise our performance while maintaining the flexibility to manage fluctuations in milk production when necessary”.

He also said that Dairygold’s forecast for milk supply confirmed that milk production is stabilising at 1.4bn litres per year.

Savings

With milk delivered for processing at that level, the €14m cost savings projected from the business optimisation programme would amount to exactly 1c/l on milk supplied.

Dairygold’s most recent annual report (for 2023) showed that payroll costs, including social welfare costs and retirement benefit costs, per employee averaged €66,785 in the year, implying that a reduction of 70 employees could directly save the co-op €4.675m in payroll costs.

However, there appears to be little correlation between the average number of employees and operating costs expressed as a percentage of turnover going back as far as 2015 (see Figure 1).

In 2023, the co-op had 1,340 employees on average while its operating costs amounted to just under 16% of turnover, a figure that was a little lower than the average 16.5% cost seen between 2015-2023.

Across that period the average number of employees grew by 200, with the majority of those in the food ingredients business.

In 2023, and more than likely again in 2024, Dairygold had substantial interest payments due to the increase in borrowing costs in the economy driven by European Central Bank policy.

Interest payments are not included in operating costs.

Interest

The interest bill in 2023 was €22.5m, up from €10m in 2022 and €6.85m in 2021. To put that another way, interest payments increased for Dairygold by almost 1c/l between 2021 and 2023.

While market interest rates remained high for the first half of last year they reduced significantly in the latter months of 2024 and have fallen further since the start of this year.

While they are unlikely to fall back to the level of 2021, and are something the co-op has no direct control over, the drop will mean lower costs for the co-op for this year.

Dairy processing at co-ops is, by its very nature, an extremely low-margin business.

The aim of all co-ops is to provide the best milk price possible to its members which means keeping costs under control while making sure the business is best positioned to take advantage of opportunities to maximise the value it adds to every litre of milk processed.

Dairygold’s announcement this week is, fundamentally, what every co-op should be doing – managing costs and planning for the future. If the cost savings amount to the 1c/l planned, and if that saving is passed back to farmers, then that certainly would be good news for those suppliers.

Overheads

The reduction in headcount, while obviously significant for those directly impacted, is not huge in the overall scheme of things and would only undo the increase in employment that was seen between 2021 and 2023.

The levels of interest rates, and prices for energy and other raw materials are almost completely out of the control of management.

However savings are possible here through increased efficiency and reduced debt levels – something management should be focused on all the time.

Dairygold is set to publish its annual report for 2024 in the coming weeks, which will show how well management performed those key tasks last year.