Irish dairy product mix slow to change

By Pat O'Keeffe

Ireland's dairy industry remains dependent on commodity type products such as skim milk powder and butter and our pace of product mix evolution over the last four years is much slower than that of Holland and Denmark.

This was one of the main points in a paper due to be presented at last night's (Wednesday's) IFA dairy seminar "Challenging our co-ops to pay viable milk prices'' in Cork by Diarmuid O'Corbhui of consultancy firm Prospectus.

Ironically, O'Corbhui's paper also shows that Irish milk prices have declined since 2001 but the rate of decline is not as great as that in Holland and Denmark. In percentage terms, the gap has closed from about 14% in 2001 to 8% in 2004, he suggested. The simple explanation for the narrowing gap is that Irish prices were cut by 5.1% between 2001 and 2004, compared to cuts of 8.9% in Denmark and over 10% in Holland.

The author of the 2003 Prospectus report on the Irish industry examined the changes that have taken place between 2001 and 2004 and compares them with changes in Holland and Denmark.

While Irish plants continue to operate at lower scale and with an apparently greater dependence on commodities, on price we are gaining ground.

O'Corbhui produced an interesting graphic to illustrate the estimated changes in product mix that have taken place between 2001 and 2004. He suggests that Ireland's competitors have been rapidly changing their product mix in response to changing market conditions and EU reforms.

All three countries have made sharp cuts in skim milk powder production, but he highlights that butter production in Ireland actually increased by 6% between 2001 and 2004. Butter remains heavily dependent on EU subsidy support.

For example, the Dutch industry is twice the size of Ireland's dairy industry but produced 26% less butter and 26% less skim milk powder in 2004. In contrast, the Dutch have a far higher cheese output; in 2004, their production was approximately 674,300 tonnes, while Ireland's total cheese output was roughly 117,000 tonnes.

O'Corbhui also suggests that average plant throughput in Ireland remains well behind that of our competitors. For example, the average annual production at an Irish cheese plant is estimated to be 13,000 tonnes, compared to 17,800 tonnes in Denmark and over 25,000 tonnes in the Netherlands.

O'Corbhui's paper also examines operating margins in five major dairy processors and it is interesting to note that Glanbia, at 4.6%, had the highest margin in 2004.

Meanwhile, a paper by Catherine Lascurettes, executive secretary of the IFA dairy committee, showed the price cost squeeze being faced by Irish dairy farmers. Using figures produced by Teagasc economist Billy Fingleton, she estimated that net margin in cent per litre available to the producer will fall from 12.8 in 2001 to an estimated 10.8 in 2005. Excluding the Dairy Premium, she suggested that net margin will fall to 5.7 cent per litre in 2007.

Ahead of the seminar IFA president, John Dillon, said there was a strong obligation on industry leaders, co-op chairmen and chief executives, and on the Irish Dairy Board, to deliver the radical overhaul necessary to secure the future of dairy farmers and their industry. "Industry leaders have still to tackle major shortcomings identified years ago. Despite some recent welcome initiatives, the Irish dairy industry remains internationally uncompetitive and it has done far less than its main EU competitors to increase the value of its product mix,'' Dillon said.

"Processors would be making a fatal mistake to believe that any comparative advantage we have at producer level is enough to win the battle for survival in the European dairy industry. It is not,'' he added.

"Viable producer prices can only be built on an internationally cost-competitive processing sector that adds more value to milk,'' he said.