Irish Dairy Board profits fall sharply

By Pat O'Keeffe

Profits for 2008 at the Irish Dairy Board (IDB) will be sharply down on previous years and the traditional bonus payment to processors is now in serious doubt, the co-operative's chief executive confirmed to the Irish Farmers Journal this week.

The IDB paid a bonus of €6m to milk processors for 2007, while the 2006 bonus was €11m.

Noel Coakley warned that a combination of poorer market returns, higher financing costs and exchange rates will have "a serious impact'' on the IDB's performance in the current year. Furthermore, consumer reaction to 2007's higher prices has adversely affected returns, with sales of Kerrygold butter in the crucial German market down 12% on previous year levels. This has traditionally been one of the IDB's main profit centres.

Noel Coakley explained that the IDB's financial performance was severely impacted in the first half by the carryover of expensive product purchased in 2007. This was sold into depressed markets at a substantial loss. The IDB has now changed their procurement policy to avoid a repeat occurrence.

The timing of the announcement will inevitably be seen as preparing farmers for a milk price cut. However, Coakley said: "It is important that all dairy industry participants are aware of the market realities''.

"Market conditions across all products have weakened considerably from the extraordinary heights of 2007,'' he said. From their 2007 peak, he said that official quoted price for butter is down 39%; skim milk powder 45% and whole milk powder 35%.

Noel Coakley said that the IDB's large DPI subsidiary in the USA is performing in line with dollar budget, but in euro terms, it will make a reduced contribution back to Dublin. Sales of Kerrygold in the US are behind target due to exchange rates making them more expensive.

In the face of free markets, Coakley suggested that some new tools were required. "We need some risk management measure in the EU to allow proper hedging,'' he said. Tentative discussions have been held but Coakley said that it would need to be a Europe-wide initative.

Germany a lucrative market for Kerrygold

The German market for Kerrygold butter has traditionally been a lucrative destination for the Irish Dairy Board, but 2008 has seen it turn sour.

Kerrygold has been on the market in Germany for 35 years and sales have grown steadily to over 30,000 tonnes per annum selling at a premium price. In 2007, the surge in dairy prices tested the consumer's willingness to pay the premium price, which is generally 35c per 250g pack higher than other brands.

The availability of 'Irish' butter from Lidl this year and Aldi (for the past three years) is also having a severe impact.

The economic downturn is further exacerbating the problem.

Overall butter sales in the German market are down 1%.

However, sales of cheaper 'own-label' butter is up 3% as part what Noel Coakley called the 'flight to value'.

Some analysts believe that the IDB were naÝve to expect consumers to continue to pay a high premium for Kerrygold as prices spiraled upwards.

Coakley acknowledged that, as the premium brand, Kerrygold was 'most exposed' and that a revised marketing strategy is required for 2009. "We need to be more tactical,'' he said.

IDB struggling to adapt to new era

"It's all bad news in there,'' one dairy co-op chief executive joked as I made my way into Grattan House on Tuesday. As I entered at 2pm, board members were departing after their monthly meeting. In the good old days, IDB lunches were reputed to consume a good part of the afternoon, but these are different and difficult times.

With the cushion of intervention and export refunds now gone, the IDB has to survive in the harsh reality of the free market. The true strength of their Kerrygold brand was tested by 2007's high prices and the results are not pretty to date.

The one positive story emerging from the IDB this week is that cheese production in Ireland has significantly increased this year. Overall, cheddar production is expected to be about 20,000 higher, while production of other cheese types will be up by 3,000 tonnes.

Overall, the IDB expects to trade 110,000 tonnes of cheese this year.

Small swings tip dairy markets

Last week's cut in butter and skim price from the IDB has brought the skim/butter index to a frightening 28.7c/litre. Just 12 months ago, the same index was around the 40c mark.

When asked to explain how dairy markets could swing from boom to bust so quickly, Noel Coakley pointed to the fact that just 7% of dairy goods are traded internationally. "It doesn't take a lot to tip it,'' he said.

Demand

"2007 was the year when supply failed to keep pace with demand growth. The resulting high prices generated a reversal in 2008, with supply expansion in the US and across Europe,'' he said. "With New Zealand now forecasting a 9% production increase for the current season, buyers are sitting on their hands.''

"The US were the dominant force on world markets in the early part of 2008 due to the weak dollar and increased production,'' Coakley said.

'Demand burn off' caused by high prices is also a factor. "We have seen some re-formulation of recipes in food ingredients,'' he added.

Irish dairy farmers can only hope that the recent strengthening of the dollar and slowdown in US production growth may help our position. Without wishing our fellow farmers ill, we probably need a drought or flood in New Zealand to bring about better prices.