The success of the Kerrygold brand in the US market is unparalleled. Sixty years of investment by farmers, coupled with the unique taste and health characteristics of Irish grass-fed dairy, has seen Kerrygold grow into the second largest butter brand and largest imported butter brand in a consumer market of over 330 million people.

It has delivered this phenomenal market share while commanding a retail price twice that of domestic butter brands. This price premium drives the Ornua value payment, which for the month of July, returned €10.5m back to processors. The success story is built on the back of a co-operative marketing model that has allowed for the necessary investment required to build and protect a premium brand within the US retail market.

The absence of this type of co-operative marketing model has seen farmers completely fail to achieve anything similar within the Irish market. Direct competition between co-ops has seen huge value destruction within liquid milk while the price of butter in Ireland is one of the lowest in the world. Similarly, a fragmented approach to the marketing of infant formula ingredients has seen the price premium harvested by secondary processors rather than farmers.

Undermining

However, rather than recognising the failings of these fragmented marketing strategies, the direction of travel within some co-ops’ boards is to instead undermine the co-operative marketing approach that has delivered so successfully.

Three years ago, US retailers seeking to stock Irish grass-fed dairy products on their shelves could only access branded product through Ornua. They now have a choice of three different Irish suppliers.

Any argument should be settled around the board table, not by competing with each other in the market at farmers’ expense

In 2018, Glanbia Ireland launched a cheese range into the US market under its Truly Grass Fed brand. It was the first time an Irish dairy processor set up in direct competition to the Kerrygold cheese brand. Since then, Glanbia Ireland has also rolled out a butter brand and, today, Truly Grass Fed competes directly with the Kerrygold product range.

The argument that growing the brand range within the market segment would increase demand has been shown to be flawed. Instead, Truly Grass Fed has competed directly with Kerrygold on price – resulting in a spiral of price discounting between the two Irish farmer-owned brands.

As detailed in this week's edition, Dairygold chair John O’Gorman defends the recent decisions by Dairygold to also enter the US retail market, selling cheese under its Pastureland brand. The move will see Norwegian dairy co-op TINE siphoning off a percentage of the price premium returned in the US market for Irish dairy products.

The processor maintains it is a necessary Brexit diversification strategy and that it remains committed to marketing 100% of its cream through Ornua. However, it is difficult to see how a retail dairy brand can be built on such a narrow product range and without a butter offering.

Regardless, it creates a scenario where the two largest shareholders in the Kerrygold brand are now also its two largest competitors in the Irish grass-fed space within the US market – and where all three competitors are owned by Irish farmers.

It is a ludicrous scenario from an Ireland Inc perspective and one that risks huge value destruction for Irish farmers. In the exact same way as we have allowed happen in our domestic butter and liquid milk markets, we risk creating the necessary internal competition to allow US retailers play three Irish competitors, all owned by Irish farmers, off against one another. The objective being simple – to erode the price premium. Claims to the contrary by Dairygold are likely to carry little weight given the price discounting strategy adopted by Truly Grass Fed.

Justification

It is equally difficult to see how at individual processor level, co-op boards can justify the move. As highlighted by the Irish Farmers Journal recently, the year-to-date milk price returned by Ornua to the processors, which includes a 7c/l processing charge, is the equivalent to €60 per cow more than what the processors are returning to farmers. The differential shines an intense light on the actual value co-ops are creating on products sold outside of Ornua. Do co-op board members receive the same insight into the margin returns from products sold directly by co-ops as that sold through Ornua?

Some will argue that the move is justified on the basis that not all of the value being created by Ornua is being passed back to the co-ops. The record profit levels being delivered by Ornua give some credence to this argument. But it is an argument that should be settled around the boardroom table – not by eroding the value returned from the market to farmers by setting up in competition.