The dairy industry in Ireland is booming – milk price is just coming off record highs, a lot of dairy farmers have plans for increasing cow numbers and proposed processing investment in the sector has never been as active.

As all farmers agree, the cow or more specifically the milk that the cow produces must pay for everything – production costs, labour, industry investment etc. Can the Irish cow pay for all this new processing steel and will it be money well spent? Is there the danger of ghost processing sites in coming years akin to the ghost estates developed during the recent building boom? At the very least could efficiency be improved with a national processing plan?

At the moment Irish processors base their individual investment decisions on the individual milk pools they have control over from the quota era. Some have initiated relatively long-term contracts to tie suppliers into a supply contract over coming years. They are also doing their sums for investment based on surveys their suppliers have completed estimating how much extra milk each farm will produce.

As long as we understand the qualifications and assumptions that’s all fine and we can’t expect the individual processors to do much else. Each processor is governed (in the main) by dairy farmers as directors on the boards of each of these entities, so responsibility lies with them.

The map of Ireland (Figure 1) shows the sites where the milk processing investment is proposed or is/has been ongoing relatively recently. A quick tot shows there is or will be over €700m spent on new processing capacity or modifying existing capacity and funding overdraft facilities for new milk. That’s €35,000 per farm for the approx 20,000 dairy herds on the island of Ireland. That’s a lot of money in an investment that will depreciate, has high running costs and will need to be replaced. Remember the cow must also pay for over €1.5bn investment inside the farm gate – bulk tanks, parlours, more stock, extra feed etc.

Individual processors

Each of these businesses are commercial entities in their own right so they need to do what’s right for their business. My argument, as it has been for a long time, is we need to do what’s right for the Irish dairy industry as a whole – has this ever happened? – is it likely to change now?

If a milk processing inspector were to just drop out of the sky and see what is happening in Ireland without any prior knowledge, local or political insight – what would the inspector see? Essentially he’d see an island producing 7 billion litres of milk with 85% of it processed on the island into butter, cheese and powders and all exported to over 100 countries around the world.

The inspector would see plans for increasing production from 5.4 billion litres in the Republic of Ireland to approx 7.4 billion litres over five years with most processor plans showing they will make powders from all the new milk.

In the North he’d see another 2 billion litres of milk produced with plans to grow this to 2.4 billion litres over coming years – again with most of it processed and exported out of Northern Ireland. So in terms of production it’s a very clear and positive picture – a growing supply pool to meet the increasing world demand for dairy product and the opportunity for dairy farmers to make more money.

The inspector would, however, get a bit more confused in terms of where the milk is processed and the plans for the coming years.

In the Republic there is existing spare processing capacity in Aurivo, Carbery, Kerry and Lakeland. In each catchment area they may or may not get extra milk to utilise the extra capacity fully. The spare capacity ranges from 30% to 50% in some of these processors mentioned.

Yes, I hear the argument that all the processing capacity is needed at peak and, processors work together at peak, but is this all about to change? Relationships between processors will become more fractured as the fight for extra milk intensifies the closer we get to the end of the quota regime. Already the scramble/milk war has started in Northern Ireland.

As the availability of UK milk quota allowed expansion of milk production in Northern Ireland in recent years, there has been a scramble among processors from South and North of the border to sign the larger milk suppliers. This has led to ‘deals’ on transport charges or other financial incentives being used to attract suppliers away from their current processor.

In the Republic, where there is mainly seasonal supply, there is obviously more investment required to handle the milk supplies at peak. So currently if we say the country is producing 5.4 billion litres then if 14% is delivered at peak the South needs 756m litres of processing capacity at peak. If the South were to produce 7.4 billion litres, with the same supply profile, then approx 1 billion litres of capacity would be needed at peak.

Extra capacity where?

Currently each co-op is developing individual plans for handling the extra milk that will come on stream or that is predicted to come on stream post 2015. This is despite the fact that industry sources have previously suggested that for some products there is substantial over-capacity already (eg butter) and even significant scope for industry consolidation.

For other products (powder, whey and casein), most of our facilities are working to capacity at peak. My questions are: given all the investment described in Figure 1, will there be surplus processing capacity in parts of Ireland in future years? What national plans are in place to process milk into the highest value products instead of churning out low-value skim milk powders at peak?

I’m not suggesting that the extra milk won’t be produced, because I think it will. However, my concern is that given the fragmented and disjointed nature of the investments and the politics that surrounds each investment, there will be spare capacity in some regions which will have to be carried by all milk delivered, hence reducing farm gate milk price.

Farmers must stage or postpone spending dependent on the business cashflow, and the same should be asked of the milk processors. Now I know all processors have stated their investments are modular in design, but my belief is that each processor has firm plans to deliver on stated plans because all these ventures take time and resources to plan, develop and deliver.

Some will think I’m strongly in favour of the bigger processors getting bigger and that I want to cut the knees from under the smaller processors, but I’m not following that line. What I do want is that any money spent is well spent with a viable future in mind. In the same way a farmer gets advice on a capital investment project, there is a need for someone to advise the Irish dairy industry.

Potential solutions

For me, an umbrella structure like that which exists in Valio in Finland is required. We have written about Valio many times over the last number of years. In Finland, processing sites can continue to exist with the processor’s own name over the door, but there is a satellite control tower which oversees spending, efficiency and new investment.

Yes this control tower would have to have control and authority to close or open a plant depending on volume flows and market returns. Plant operations and product mix would and should be driven on development of a processing model where different options could be analysed for market profits or return on investment rather than local politics, status quo, or inertia.

In my opinion, the Food Harvest 2020 report and subsequent recommendations on milk processing have failed miserably to bring together a co-ordinated approach to investment within the milk processing sector.

I know it’s not easy when ultimate control lies with each co-op, but there are farmer members in all milk processors so it’s not outside the bounds of reasonable possibility. Grant aid conditions and stipulations led by Enterprise Ireland is also another area where improvements or direction could come from to develop better national processing plans.

I want Irish dairy farmers to take some of the benefit from extra milk produced and I don’t want them to become slaves to debt with everyone else benefiting except the dairy farmer.