Dairy farmers must get bigger to survive

Journal exclusive by Des Maguire and Paul Mooney

Irish dairy farmers will have to get bigger and more productive extremely quickly or face a sustained period of falling real incomes.

The quota system needs to be changed to enable the average annual quota size, currently at 40,400 gallons to move closer to 107,000 gallons (implying a base of 10,000 to 11,000 dairy farmers)

That’s according to the full version of the new strategic development plan for the Irish dairy-processing sector that has come into the Journal's possession.

A meeting of the overall consultative group set up to monitor the report is due to be held in Dublin tomorrow (Friday). Efforts will be made at this meeting to sign off the new plan.

The group is drawn from the major co-ops, the Department of Agriculture, Enterprise Ireland, the Irish Dairy Board, ICOS and IBEC. The farm organisations have also been invited to tomorrow's meeting.

The strategic development plan has been prepared by two firms of consultants, Prospectus and Promar International and runs to 168 pages. It is being jointly financed by the Department of Agriculture, Enterprise Ireland and the co-ops.

It says that the future economic viability of Irish dairy farmers will largely depend on their ability to substantially increase productivity and improve cost efficiency. Irish dairy farmers need to achieve the same scale of production as their Danish and Dutch competitors.

"The stayers in the industry must be facilitiated in obtaining the substantial increase in quota at an economic cost. Changes to the quota management system will need to allow for freer movement of milk quota to areas where it is economically more efficient to produce milk and for a greater clustering of production around processing locations. This will have the benefit of improving both the cost of production and the cost of assembly."

The consultants claim that the Irish dairy industry is starting to fall behind its competitors and risks serious erosion.

However if their recommendations are adopted they claim than an extra €250 million in revenue a year to the industry is achievable on the basis of increased value added and "portfolio revitalisation."

The net benefit to the industry, after the costs of achieving change in the product mix are estimated at €55 million per annum.

The main recommended actions are:

• The creation of a single consolidated player capable of getting quickly to a scale where it is processing in excess of 70 per cent of the proposed milk. This signficant player would be expected to come from a merger of among the top five dairy companies.

• Rationalising the number of processing plants for butter, powder and casein down from eleven to four plants. Two of these would be based in Munster, one in Leinster and one in the northern half of the country. This implies that there would be no such plant in the Connacht Gold, Arrabawn area in the West of Ireland.

• Retain the three to four cheese plants producing bulk cheese at efficient levels of 20,000 tonnes per annum.

• Increased focus by smaller processors on innovation, niche opportunitiesd and product specialisation.

• Increased co-operation will involve contracting of primary processing requirements to large scale processors and the establishment of joint venture operations.

• Ensure cost efficiency in production of base products (butter, powders, casein) and increase the levels of secondary processing and added value of these products. Eliminate, duplicate or inefficient costs of overhead from milk assembly, processing overhead costs such as energy, quality controls, environmental compliance, administration right through to marketing and distribution costs.

• Increase and leverage the spending levels by processors and the industry as a whole on R and D and new product development. Improving the value-added content of the dairy products will also involve adopting a solutions based approach to product development.

• Maintain and defend a solid base in the home market with a full product range.

• Target other geographic areas beyond the home market with a selected range of products specifically targeted at the needs and opportunities in those markets.

• A review of the role of the Irish Dairy Board within two years.

Irish companies competing against each other abroad

The consultants say that since its foundation, the IDB has played a key role in promoting a positive image of the industry internationally.

"However the export marketing of Irish dairy produce has evolved to a position at present where Ireland has a sales, marketing and distribution structure that involves significant duplication of effort between processors and the IDB.

"The reality of the current position is that in many instances, Irish processors and the Dairy Board are directly competing in the same markets.

"There are several reasons why this structure has negative implications for the Irish dairy processing sector. The duplication of effort creates inefficiencies and puts Ireland at a disadvantage to its main competitors who have integrated marketing and distribution systems.

"In fact, the creation of Fonterra, joining New Zealand's two largest dairy processors and the New Zealand Dairy Board was justified to shareholders as it was expected to lead to significant savings through minimising the duplication of resources between the parties involved.

"There is also a danger that this structure can negatively impact communication between buyers/consumers and processors and delay market signals back to processors.

"However potentially the most damaging aspect of this structure is the negative impact of numerous Irish brands and similar product offerings competing against each other in export markets.

"This adds extra competition in markets where Irish products are already facing stiff competition from local producers and the other major exporters such as Denmark and New Zealand. It also can potentially dilute the image of Irish produce."

The consultants say that the marketing of base products can still benefit from the economies that a centralised marketing agency like the Irish Dairy Board can offer.

"The benefits and cost effectiveness however from centralised marketing and distribution must be demonstrated so that it is clear and transparent to the users of the centralised service.

"However if the recommended strategy is implemented fully it is likely that the percentage of base products in the overall mix will fall and the volumes of product going through the IDB would be reduced which may necessitate a refocusing of the role and the structure of the IDB

"Another factor that may require a refocusing of the IDB role may arise from the scale and individual capacity of the remaining base product manufacturers to conduct their own market and distribution if base production is concentrated in four plant sites."

The report identifies Ireland's seasonality pattern of milk production as an obstacle to development and says that addressing the seasonality of milk supply has the potential not only to increase capacity utilisation but would also deliver more opportunities for the industry to add further value to Irish dairy products.

The consultants call for the introduction of differential pricing that penalises peak production and pays a premium for off-peak - i.e. paying a higher milk price to contribute to the higher production costs of non peak milk supply.