When the Irish Farmers Journal sat down with the CEOs and leadership of Irish co-ops in the late spring of 2024 to discuss annual results and the outlook for the industry, the mood was generally fairly glum.

Understandable, coming off the back of a very difficult global trading situation 2023 and following a very wet start to 2024, which saw low milk volumes in the early part of the year. On the outlook, all the concerns centred on the future of milk supplies.

While 2024 did end on a strong note for milk deliveries, with the milder, dryer autumn and the rapid improvement in global dairy markets encouraging farmers to milk on later into the year, there is no doubt that total milk production for the year will again be below 2022’s level.

It just won’t be as bad as was feared early in the year, where at one stage a drop below 8bn litres looked like a real possibility (see Figure 1).

The industry still faces headwinds for security of milk supply – with the derogation decision the biggest factor in the short term, and issues around succession, labour and costs likely to weigh on the longer-term prospects inside the farm gate.

No wonder then that the view from the CEOs we spoke to was that a period of consolidation among processors was coming. As Colin Kelly, CEO of Lakeland Dairies said in April: “I think there has to be fewer processors on the island as a whole.”

Merger, takeover

That process started only months later, with the announcement that Arrabawn and Tipperary Co-op had entered merger talks, with the deal eventually being passed by an overwhelming majority of members of both processors. While this was described as a merger, it was very much like a takeover of Tipperary in all but name.

The smaller processor had found itself in financial difficulty due to mistimed investments in capacity and a rapid drop in milk supply. The strong financial position of its neighbour to the north of the county means the deal will lead to a larger processor which should be on a sound financial footing for the future.

The biggest deal of the year was the buyout of Kerry Dairy Ireland by Kerry Co-op, a deal which has been years in gestation, but which only finalised and voted on in the dying weeks of 2024. Once it is completed, it will put more than 1bn litres of processing capacity back in the hands of Irish farmers.

While both of these deals are hugely significant in the landscape of Irish dairy processing, neither of them will directly lead to a drop in processing capacity on the island.

There have been moves on that side elsewhere, with other processors in the country announcing job cuts and some closure of facilities. Tirlán engaged in a cost-reduction exercise in 2024 which, while not reducing processing capacity, should reduce the co-op’s cost base, which in turn should increase overall efficiency at the country’s largest milk processor.

Lakeland announced a restructuring of its processing footprint in 2023, which included the closure of sites at Monaghan, Lough Egish and Banbridge.

When Kelly said there would be fewer processors on the island, he did say he expected that the changes would happen in the medium- to longer-term rather than in the next few years.

The global picture

Changes in milk supplies and price volatility has also seen processors in major dairy regions around the world make changes to their operations. In New Zealand, Fonterra announced in May that it was going to sell “some or all” of its consumer business as well as its operations in Australia and Sri Lanka.

The co-op, one of the world’s largest dairy processors, said that the sale of the units would streamline operations and allow it to concentrate on those areas where the most value is created and there is the most room for further growth.

Closer to home, Dutch co-op FrieslandCampina saw a better performance in 2024 after a very difficult 2023 – a year which saw disappointing financial results and resulted in the cutting of 1,800 jobs. In December of 2024 we got the news that the co-op planned to merge with its much smaller Belgian neighbour, Milcobel. That co-op has also suffered in recent years and had agreed to sell its ice-cream business a few months before the merger talks were announced.

China remained a source for extreme volatility for dairy markets with local production climbing further, while processors in the country continue to struggle to turn the milk into profit. The supply of milk powders from the country has kept a lid on prices for those commodities throughout 2024, even as other dairy prices rose significantly.

Chinese demographics and consumer demands have also played a role in global markets with imports of infant formula falling far below their peak in recent years. That drop was a direct factor in the 2023 decision by Nestlé to close the Wyeth Nutritional’s plant in Askeaton Co. Limerick. Production at the plant will be wound down through 2025 with the loss of over 500 jobs.

Overall, both nationally and globally, dairy processors face a diverse range of challenges. The good news for farmers at the moment is that dairy market prices ended the year on a strong note. For processors, particularly in Ireland, these strong prices should give them room to make the production changes that are needed to successfully face the coming challenges from both supply and demand.

Comment

If Ireland’s dairy production remains between 8bn and 8.5bn litres over the coming years, then there is no doubt that the country has too much processing capacity and if milk production does happen to fall further, then that over-capacity will become an issue faster than Kelly has outlined.

The problem with Ireland’s processor capacity is that all of it is needed for only a few peak weeks during the year, the rest of the time that capacity runs well below optimum levels, with plants even being shut down during the quieter winter months.

It is also notable that in 2024, despite the overall small drop in milk supply, the reduction was largest across the peak months (see Figure 2) which means that capacity on the island was utilised less than in 2023 despite the year as a whole only being slightly behind 2023’s level. This is because more milk was delivered at the back end of 2024, giving a smoother production profile than previously might have been the case.

It has been suggested that a mixture of derogation and consolidation at the farm level – where there are fewer, but larger, dairy farms in the country, could lead to Ireland developing a more continental (or Northern Irish) style of milk production where more grain is fed to cows who are housed for longer periods of the year. This would have the effect of further flattening the milk supply curve, which again would see a reduction in the need for overall processing capacity, despite a possible increase in milk supply.

It seems that whatever the scenario, a drop in milk processing capacity is on the cards for the island as a whole. What we will find out over the coming years is whether that can be achieved in as smooth a way as possible, or whether it will be chaotic as individual processors try to wait each other out, or start a milk price war among themselves for the milk that farmers will be producing.