It’s now five years since the ending of EU-imposed quotas on milk production and it’s not an understatement to say that the Irish dairy industry has been utterly transformed in the period. As noted in the first week of the annual KPMG milk price review, a phenomenal €1.3bn has been invested in milk processing capacity in Ireland in the last five years alone.

Since 2015, every Irish dairy co-op has invested heavily in stainless steel in some form or another to increase processing capacity and meet the milk supply surge that was always going to come following the ending of milk quotas.

As we move into a new decade, it’s a good time to take stock of just how far the industry has come but also to analyse the financial health of each individual dairy co-op and processor. While we usually scrutinise the financial performance of each co-op in isolation, for this exercise the Irish Farmers Journal has selected a number of key metrics upon which to benchmark each dairy co-op against their industry counterparts. We have also included figures for Arla, Friesland Campina and Fonterra as a comparison to the main international dairy co-ops.

Three metrics

For a straightforward comparison, the three metrics selected for this analysis are:

As mentioned already, Irish processors have invested more than €1.3bn in capacity expansion over the last five years.

This investment has allowed existing Irish dairy farmers to expand their milk production, while it has also facilitated a wave of new entrant dairy farmers to enter the sector. However, the capital investment required to meet this supply growth has placed major strain on co-op balance sheets, with net debt levels across most of the industry soaring to unprecedented levels.

As can be seen in the chart, Tipperary, Dairygold, Arrabawn and Glanbia Ireland have the largest amount of debt on their balance sheets when compared against the total volume of milk they each process.

However, this is to be expected given that these co-ops had to prepare for some of the sharpest increases in milk supply in the whole country and consequently had to make the most significant investments in capacity expansion. As a result, the debt levels of each co-op mirrors the supply growth within their catchments areas.

Milk supply for both Arrabawn and Glanbia Ireland continued to grow at a robust 8% last year, while Dairygold’s milk supply growth looks to be easing somewhat having slowed to less than 4% last year.

And while the growth in milk supply has been most acute for these co-ops, other co-ops like Carbery, Lakeland and Aurivo have also had to invest millions in new processing capacity. Carbery has recently completed a €78m investment in a new mozzarella plant in Ballineen, while Lakeland’s merger with LacPatrick now gives it considerable milk processing assets on both sides of the border.

At the same time, Aurivo recently opened its new milk powder drier at its Ballaghaderreen site, and doubled liquid milk capacity at its Killygordan plant. Kerry Agribusiness, which is not included in this analysis as we have no specific figures for debt, has invested circa €120m in upgrading processing assets at Listowel, Newmarket and Charleville.

Speaking to the CEOs of each of the Irish dairy co-ops this year, it’s clear most of the heavy lifting in terms of capacity expansion has been completed. Most of the co-ops are telling us net debt will not grow much further and the focus will now switch to paying down borrowings.

Strain

As recently noted in the report compiled by Teagasc and Cork Institute of Technology (CIT), the investment by co-ops in processing expansion has put a strain on cashflow to the tune of about 2c/l.

The report suggests that once debt levels in the industry begin to reduce, Irish dairy co-ops will have more cash to pay out in milk price, which is something farmers will be hoping to see over the next decade.

The Irish Farmers Journal has also calculated the turnover generated by each co-op for every litre of milk processed. This is a simple calculation where turnover from dairy product sales is divided by the volume of milk processed by each co-op.

As can be seen in the chart, Carbery and Tipperary generate by far the highest turnover based on its total milk pool, with almost €0.80 to €0.90 generated in sales for every litre of milk processed. However, there is an important caveat here. Carbery is overwhelmingly a cheese and whey business, while Tipperary also has a sizeable continental cheese business.

Unlike the other co-ops, Carbery does not manufacture butter so it has no exposure to lower-value dairy commodities such as skimmed milk powder (SMP), which is a byproduct of butter.

Therefore, its turnover per litre of milk is higher because its main product (cheddar) has a higher market value.

The remaining co-ops manufacture a much broader product mix of dairy products like butter, SMP, cheddar, casein, whole milk powder, fat-filled milk powder and liquid milk. As can be seen in the chart, the turnover generated is much closer for these co-ops and generally ranges from €0.48 to €0.58 for every litre of milk processed.

The obvious outlier is Centenary Thurles, which sells almost all of the milk collected from its farmer suppliers directly to Glanbia.

Farmers may ask why co-ops don’t focus solely on the high-value dairy products such as butter or cheese. However, making a high-value product like butter will always result in SMP as a co-product.

Additionally, the seasonal nature of Irish milk production results in a spike in milk supply during the peak months of April, May and June.

In general, Irish co-ops have invested in the most cost-effective options to process this seasonal peak, which happens to be milk powder dryers.

These dryers produce a lower-value product but they are by far the most cost-effective solution to processing all the milk during the peak months, particularly when many of these plants are now sitting idle during the winter months.

Dairy processing in itself is not a high-margin business. In general, we should expect to see dairy co-ops typically making an operating profit margin in the region of the low single digits. After all, it’s in the interest of farmers that co-ops pay out as much as they can in milk prices. Of course, it is important co-ops retain a decent profit every year in order to strengthen their balance sheets or to build cash reserves that can be used to support milk prices during times of weak dairy markets.

As can be seen in the chart, Carbery is once again top of the table as it generated an operating profit of 4.3c/l for every litre of milk processed last year. Again, this is undoubtedly influenced by its focus on cheese as its core business. For the big three co-ops (Glanbia Ireland, Dairygold and Lakeland Dairies), the profit generated from every litre of milk processed ranges from 1c/l to 3/l. Glanbia Ireland is at the higher end of this range thanks to its commitment to a fixed profit margin of 3.2%.

Where profitability really matters is when you begin to look at each co-op’s bank borrowings (see chart below). As stated already, Glanbia Ireland and Dairygold have some of the highest borrowings per litre of milk processed. However, because both co-ops are able to make decent profit margins the debt to profit (EBITDA) ratio is not excessive at less than three times. This is the same for Lakeland and Carbery.

The industry outliers are Arrabawn and Tipperary Co-op, where the amount of debt on the co-op’s balance sheet is about six times the level of profits. This level of debt is a risk and it will be crucial for Arrabawn and Tipperary to pay down a good chunk of these borrowings over the coming years in order to give themselves some breathing room on the balance sheet.

In the west of Ireland, Aurivo has relatively modest borrowings with net debts of almost €19m just over two times annual profits. However, the co-op was hit with hefty charges last year relating to its My Goodness Shakes business that saw Aurivo report pre-tax losses of €5.2m. As long as the charges are once-off Aurivo will remain in sturdy financial health. But if the My Goodness Shakes business continues to cause problems it could result in further value erosion on Aurivo’s balance sheet, which would be a concern.

Next decade

Overall, Ireland’s dairy industry has come through an unprecedented phase of expansion over the last five years in very good shape. Balance sheets may be loaded with borrowings but the coming years will give co-ops some much needed breathing room after a period of rapid milk supply growth.

The easing growth in milk supply should allow for more targeted investments over the next decade, particularly into more value-added areas. Additionally, the reduction in net debt and improved cashflow for processors should also help boost farmgate milk prices by a cent or two in time.

In terms of the number of dairy processors in Ireland, there was limited consolidation in the sector over recent years – the most notable case being LacPatrick’s forced merger with Lakeland Dairies. However, a clear Big Four has now emerged in Irish milk processing, namely Glanbia Ireland, Lakeland Dairies, Dairygold and Kerry Agribusiness. Between them, these four companies process three quarters of the milk on the island of Ireland.

And while it’s never easy to predict what will happen in the future, it does look as if the next decade for the Irish dairy sector is set to be defined by a new wave of investments in value-added dairy products. Additionally, the next decade is more likely to be defined by the industry’s response to meeting sustainability challenges (climate, environmental and biodiversity goals) as opposed to the expansion and growth that has defined the last decade.