Infant formula giants import dairy ingredients at expense of Irish farmers

Wyeth Nutritionals, the infant formula company which is owned by Nestlé, is importing significant volumes of skimmed milk powder (SMP) from cheaper sources in Europe for use in its Askeaton manufacturing plant, the Irish Farmers Journal can reveal.

Nestlé-Wyeth is understood to be actively importing as much as 30% of its SMP needs at Askeaton, Co Limerick, from countries such as France and Poland. The company manufactures more than 40,000t of high-grade infant formula powders at the Askeaton plant every year.

French dairy giant Danone is also understood to be importing SMP for use in its facilities in Macroom and Wexford. It is estimated the large infant formula companies operating in Ireland (Nestlé-Wyeth, Danone and Abbott) import a combined 50,000t of dairy ingredients every year for use in their manufacturing facilities.

Part of this is because there is a necessity to import ingredients such as lactose and other highly specialised ingredients that are simply not made in Ireland.

However, infant-grade SMP is a dairy ingredient that is readily available from most Irish dairy co-ops, many of which have invested heavily in advanced processing technology and safety standards to meet the spec required for infant formula ingredients.

Unforgiving

Speaking to dairy industry sources this week, the Irish Farmers Journal understands that the large infant formula multinationals are becoming increasingly unforgiving in how they do business in Ireland.

Through monthly tenders and other mechanisms, the infant formula companies are playing Irish dairy co-ops off one another in terms of who gets to supply them with ingredients. Inevitably, co-ops are competing on price to win these contracts.

The Irish Farmers Journal understands the infant formula giants are increasingly using the threat of importing greater volumes of cheaper SMP from Europe to drive down prices on Irish dairy co-ops.

The business models of these companies are no different to any other business, in that they seek to source raw materials and ingredients at the lowest cost possible.

The market overhang created by the 380,000t of SMP sitting in the European Commission’s intervention stores over the last two years almost certainly played into the hands of the infant formula giants, allowing them to source low-cost SMP from all over Europe and drive prices down in Ireland.

Nestlé-Wyeth, Danone and Abbott are entitled to source raw materials from wherever they see fit. After all, Irish dairy ingredients made by the co-ops are shipped for further processing to infant formula to markets all over Europe, such as the Netherlands, France and Germany.

Bord Bia

It’s only a few months since Nestlé-Wyeth announced at a high-profile event in China that it had signed a memorandum of understanding with Bord Bia, to source all of its dairy ingredient needs for its Illuma infant formula brand exclusively from milk from Irish farms participating in Bord Bia’s Sustainable Dairy Assurance Scheme (SDAS). Bord Bia estimated the value of this agreement to be worth €110m to the Irish dairy industry every year.

The Irish Farmers Journal understands that this is not the case as Nestlé-Wyeth currently purchases nowhere near €110m worth of Irish dairy ingredients to make its Illuma brand at Askeaton.

In fact, industry sources estimate the value of Irish dairy ingredients going into Nestlé-Wyeth’s Askeaton plant to be less than €50m. When contacted by the Irish Farmers Journal, Nestlé-Wyeth said it does not comment on commercial or pricing arrangements as this is commercially sensitive information.

Irish dairy farmers may feel aggrieved to see companies like Neslté-Wyeth and Danone importing SMP ingredients from cheaper sources in Europe rather than dealing directly with farmer co-ops.

Almost all of the Irish dairy co-ops have invested in processing technology to meet infant-grade standards for SMP.

However, the reality is that we live in a free and single European market and companies are free to source raw materials from wherever they see fit.

After all, Irish dairy co-ops ship ingredients to markets all over Europe and further afield.

The biggest problem with the business models of the infant formula players in Ireland boils down to fairness.

Irish farmers, through their co-ops, are not being rewarded fairly for the dairy ingredients they produce, that are being used to market these infant formula products, which are often selling with huge profit margins of more than 40%.

Farmers and co-ops have invested heavily in traceability, sustainability and safety standards under programmes such as SDAS and Origin Green.

Premiums

Yet there is almost no premium being paid for the milk and dairy ingredients being produced to these standards.

At the same time, Nestlé-Wyeth, Danone and Abbott are able to sell infant formula products for huge premiums in markets such as China because they can claim the product is produced to the highest safety standards in the world with the seal of approval of the Irish State (Origin Green).

By importing a significant volume of their dairy ingredient requirements from outside of Ireland, farmers may question whether these companies should continue using the green image of Ireland in their marketing.

If the infant formula multinationals want to make a real commitment to Ireland then they need to start paying a fair premium to farmer co-ops for the dairy ingredients that allow them to make such hefty profit margins further along the chain.