Tipperary Co-op reported strong sales of €168.5m for 2013, a 21% increase on the previous year, and trading profits before exceptionals of €1.8m, up from €285,000 the previous year.

The €29.7m increase in turnover was driven by a rise both in price and volume of milk. Milk intake increased by 12% from 190m litres to 213m litres, while feed and fertilizer sales were up by 30% during the year.

Trading profits as a percentage of sales rose to 1.1% in 2013, compared with an average of 0.4% for the previous four years. Operating expenses rose 5% (€1m) in the year, mainly due to fuel and electricity increase.

An exceptional charge of €572,000, due to redundancy costs as the co-op realigned its cost base to match sales in the retail and supermarket division.

When this cost is taken into account, the profit before taxation was marginally lower than 2012 at €1m.

Last year, the profits were inflated due to a €990,000 non-cash adjustment to the co-op’s pension scheme. Net debt at year end stood at €13.3m. The society continues to operate a defined benefit pension scheme, which has a deficit of €1.1m.

Speaking at the AGM this week, Matthew Quinlan, chairman, pointed out that “the strong trading and financial performance has strengthened the balance sheet at a critical juncture.”

He highlighted some challenges facing the industry, such as the demand for increased working capital and the likely occurrence of regular rather than cyclical volatility in product prices.

He also put forward the idea that the Department of Agriculture should establish a study to focus on the threats and weaknesses of an increased and unregulated milk regime, leading to strategies to deal with same.

Dairy division

The surge in global dairy demand was fuelled by demand for powders from China and emerging markets and the co-op was able to capitalise on this and deliver record levels of powders, according to general manager Ted O’Connor.

Last year, milk powders accounted for 51% of production volumes. Tipperary is the second-largest supplier to Danone infant formula business in Ireland. Due to the milk flows to alternatives, cheese stocks tightened. This led to the tonnage of cheese production falling to 22%, down from one third the year before.

The company was then able to offer increased butter and powder tonnages to core customers. Butter made up 27% of production volume last year. The decision to change the production portfolio appears to have made sense as overall cheese returns would have lagged behind alternatives.

The co-op has significant spare capacity. Almost 50% of the milk it processes annually is from other dairy processors, including Kerry, North Cork, Glanbia and Arrabawn.

“The co-op is committed to the sustainable dairy assurance scheme as it adds and meets the quality and sustainability requirements of our customers,” said O’Connor.

Tipperary has invested heavily in product development in recent years, including a hard grated cheese in Italy. It is working closely with the Irish dairy board to develop new products while also investing in R&D for its own products. O’Connor said that the co-op will have a number of new products in the next 15 to 18 months.

French cheese

Tipperary’s cheese business in France, Tippagral, performed solidly. There has been significant (€700,000) investment recently in production, packaging and storage. The business also expanded into niche markets in Spain during the year.

Established in 1990 in Burgundy, Tippagral grates, cuts and packs hard cheese to customers’ requirements. The business processes emmental, cheddar, mozzarella, edam and other cheeses. Business in France accounts for €40m of turnover.

Future outlook

O’Connor is confident in the co-op being well prepared for the dairy challenges post quota. He predicted an overall positive view for global dairy product prices.

However, he indicated that there would be short-term market weaknesses and presently we are witnessing one of these.

Quinlan said looking at the market return prospects for the year ahead, all the indications are for a weakening of price levels in the face of an unprecedented milk supply surge.

However, he did say the slackening would be modest and that the long-term outlook is solid, but with volatility.

Having introduced a new milk pricing model (A+B-C) in spring 2013, the co-op paid an average milk price of 39.75 c/litre in 2013, according to O’Connor.

The co-op paid a year end bonus of 0.25c/litre for all 2013 milk. The society is also issuing additional bonus shares to the value of €200,000 to its milk supplier shareholders, in relation to their 2013 milk supply.