Ornua continues to add value for member co-ops

Ornua, the co-operative that markets and sells dairy products on behalf of its members, announced little-changed turnover of €3.4bn for 2023.

Operating profit (before exceptional items and value payment to members) was 8.2% lower at €116.8m.

The operation paid €1.6bn to its supplier members for 374,600mt of dairy product during the year. That amount paid was €700m lower than in 2022, a reflection of the pull-back in dairy prices during the year.

In addition, the Ornua value payment to member co-ops rose by €2m to €74.5m.

There were two major developments at the operation during the year. The completion of the €40m expansion of the Kerrygold butter facility in Mitchelstown means that capacity there is now approximately one million packs per day.

CEO John Jordan stepped down. His replacement, former Dairygold CEO Conor Galvin, was announced in recent months and will take up the role in the coming weeks.

Instability

Interim CEO, Donal Buggy, said: “Ornua responded dynamically to significant instability in the global trading environment by remaining focused on our strategy and on our commitment to deliver for our customers, our member co-operatives and Irish farming families.

“Looking ahead, while there is continued uncertainty around the impact of macroeconomic factors on already challenging global market conditions, we remain optimistic about the future and focused on achieving sustainable growth in key markets.”

Ornua said that for the rest of 2024, global milk supply looks likely to remain relatively flat, which should support the market.

The co-op added that more certainty around demand is needed for commodity pricing to firm in the second half of the year.

In 2023 Ornua introduced a new five-year strategic plan “path to prosper” which aims to drive continued sustainable growth for the operation.

“Ornua was formed to create a route to market for high-value Irish dairy product and that’s what we have continued to do in 2023,” Ornua chair Aidan O’Driscoll told the Irish Farmers Journal.

“We’re seeing a lot of consolidation in global dairy, and [Ornua] is about getting scale in those global markets, which is really important.

“2023 was a solid performance, but it also has been a bit of a balancing act where we make enough money to invest in the future and at the same time make enough money to return to our members who eventually use that to support their farmer suppliers,” said interim CEO Donal Buggy “and we think we got that balancing act right in 2023”.

It’s early days yet. The expansion leaves us in a good place for the next five years

Speaking of investment, Buggy highlighted the doubling of capacity at Kerrygold Park in Mitchelstown while admitting that output from the facility has increased very little.

“It’s early days yet. The expansion leaves us in a good place for the next five years.”

He adds that sales of Kerrygold butter in the key US market have grown in the first quarter of this year.

Further, he expressed confidence that there would be no shortage of milk for the facility.

“We’re looking at flat to marginally down milk supply in Ireland for the foreseeable future. Within that, the highest returning product in Irish dairy is Kerrygold. Our view, and it’s been tested with the members, is that the first product to be satisfied out of any production is going to be Kerrygold.

“Once Kerrygold is driving value, it is going to get product.”

Looking at the performance of Kerrygold butter, Bernard Condon, managing director of global ingredients, said that while some of the trading conditions were quite difficult in key markets – with high inflation and weak consumer demand – Kerrygold managed to retain its position as the number one branded butter in Germany and the number one imported butter in the US.

“Our 250g Kerrygold pack is the single most scanned barcode across all retail categories in Germany.”

On overall business with members, Ornua purchased 374,000mt of dairy products during the year, down slightly from 2022’s 387,000mt.

“A lot of this is traded as a commodity, as a service that we supply to members that commercialises their product,” Condon said.

On the market outlook, while supply is unlikely to grow by more than 0.5% annually, consumers remain cautious.

The view is that global markets may continue to trade sideways unless there is more certainty for industry buyers

“We starting to see some pickup on the consumer sentiment side, which lower inflation is helping with. In 2023, we did see some consumers shift from brand to own-label, but we are starting to see a normalisation of that now,' Condon said.

Overall on the outlook, the view is that global markets may continue to trade sideways unless there is more certainty for industry buyers.

Ornua has a very strong brand in Kerrygold, which is of huge value to the whole Irish dairy sector. The company is using that brand to launch fresh products on to the market while also expanding its capacity for the core butter product.

This all makes sense from a tactical point of view as the costs and risks involved in expanding an already successful product are much lower than those involved in starting something new from scratch.

While this makes sense for Ornua, there is a further handicap for the company in looking to make major fresh investments or take risks, which could lead to rewards further down the line.

Balancing act

As Buggy said, Ornua has to engage in a balancing act where it provides enough money to its members, payments which naturally curtail the amount of money available for other investments.

The Ornua value payment, introduced in 2020, has been very stable across the four years, meaning it is starting to look a little like an extra cost of doing business for the organisation. The almost €300m paid since 2020 is the literal “value-added” that Ornua says it gives to members.

However, there could be an argument made that the longer-term strategic way to provide value to members would be to maximise investment in new products to ensure that Ornua is as diversified as much as possible for the future, which would help to provide stable returns to members over the much longer term.