Two year timetable for big co-op mergers

By Des Maguire

A two to two and a half year timetable for the rationalisation of the dairy industry has been proposed by Prospectus, the consultants commissioned by the Government to draw up a strategic development plan for the dairy industry.

The Prospectus strategic development plan was finalised at a meeting in Dublin this week and is expected to be officially launched next week.

As recently revealed in the Journal, the proposed rationalisation plan envisages the creation of a single "super" dairy company processing in excess of 70 per cent of the country's milk pool from a merger of three of the top five existing dairy processors i.e. Kerry, Glanbia and Dairygold.

Prospectus want the number of processing plants for butter, powder and casein to be cut from eleven to four plants. Two of these would be in Munster, one in Leinster and one in the "northern half of the country".

They want three to four cheese plants producing bulk cheese at efficient levels of 20,000 tonnes per annum.

They also want a major change in the product mix being produced by the Irish dairy industry - away from commodity type products and into higher value added products and a bigger spend on research and development, advertising and promotion.

In addition, they want a review of the operations of the Irish Dairy Board and of the role of centralised marketing in the years ahead.

And they wants the milk quota system changed to enable the average annual farmer quota size to move from 40,000 gallons currently to over 107,000 gallons. This implies a total of 10,000 to 11,000 dairy farmers within the present quota structure.

Prospectus are the firm of consultants who have drawn up the new strategic development plan for the dairy industry which was commissioned by the Department of Agriculture, Enterprise Ireland and the co-ops.

They carried out the plan in consultation with a UK firm of consultants Promar International.

Four phases

The consultants want the rationalisation process to be implemented over four phases.

During Phase 1, the first six month period all participants in the dairy industry would be invited to evaluate the study findings and to identify their future role and focus in a changing market environment.

The Department of Agriculture would lead the industry in an assessment of options to enable major increases to take place in the average quota size held by dairy farmers.

Teagasc would be asked to assess the necessary future scale, cost efficiency and productivity requirements of dairy farmers and the implications of implementing the changes recommended in the study on the production sector.

They would also be asked to examine potential measures to address the erosion of cost of production competitive advantage enjoyed by Irish farmers.

The options in relation to achieving industry consolidation, among the larger processors would be explored and actions commenced to start the process of industry consolidation, plant rationalisation and cost savings.

Phase 2, (the second six months) would see the development and implementation of product and market development strategies of individual processors (areas of specialisation, actions to strategically assess market opportunities and to convert opportunities into commercial business.

It would also see "the commencement of the process of disengagement by certain processors from base type products."

In addition there would be an "acceleration of the process of consolidation with at least two players engaging due diligence assessment".

During this phase there would also be a development of capital investment plans and identification of the four large scale plant sites for base product manufacture.

During Phase 3 which would embrace months 13 to 24 there would be an announcement of the first step in the industry consolidation process and commencement of the process to realise rationalisation savings and cost efficiencies.

There would also be a review of the future role of the Irish Dairy Board in light of industry and market developments.

There would be an acceleration in the level of capital investment and R and D spend (at both processor and industry levels) and the implementation of policies and plans to enable producers to increase scale.

During Phase 4 which would embrace months 25 plus there would be an acceleration of the industry consolidation process and the realisation of cost savings. There would also be an emphasis on the ramping up of R and D and market development programmes to increase value-added and exploit new product and market opportunities.

"The rationalisation of the processing of base products will involve absorbing an estimated one-off cost of €35 million and weighting of the additional capital expenditure of €43 million per annum more heavily towards the first two to three years," the report says.

"In these initial years the industry will therefore have a total capital expenditure level in the region of €150 per annum. This will facilitate the development of the four main processing sites and deliver the savings from economies of scale and processor rationalisation, estimated at €30 million per annum.

"Increasing spending on R and D by processors by €10 million per annum should be married with the use of State supports to encourage the creation of greater value by the industry in line with the strategy outlined in this report. In particular, Enterprise Ireland will play a role in providing grants support for R and D and new product development.

"Implementation of these changes by the industry will ensure that the value added by the industry increases gradually and delivers sufficient returns for the industry to repay its original investment. The key challenge is for the industry to take a long term view recognising that it will only be in the medium to long term that the industry will get positive returns on the capital invested."