“Lakeland Dairies has announced, as part of a new strategic direction for the co-op, the realignment of its processing footprint to maximise operational efficiencies and enhance value-add capabilities for the future.”

That’s the heading on the statement from Lakeland announcing the closure of three processing sites. Despite reading like something written by a McKinsey focus group, it is worth digging into it a bit to figure out what it is really saying and, importantly, if it is something we are going to be seeing more of from the industry.

The first thing that is worth noting about Lakeland’s move is that it hasn’t been made in haste. When the Irish Farmers Journal sat down with the co-op’s recently-appointed CEO Colin Kelly in April of this year, he signalled that the board was undertaking a strategic review of the business. That review was expected to be approved and implementation started before the end of the year. It looks like they are bang on schedule so far. In simple language, the goals of the review are to increase the value of products manufactured from milk supplied and to do that as efficiently as possible. A cynic might suggest that this is what they should be doing all the time anyway, so the question becomes why are they making a fuss about doing this now?

Firstly, any decision to cut jobs and close facilities cannot be taken lightly. The review is necessary to make sure the right decision is being made, and that they are not rushing into something that will be regretted later.

Secondly, the dairy market is going through rapid change on both the supply and demand side. The pace of the collapse of the price of dairy commodities on international markets, coupled with the outlook for milk deliveries from farms here means a strategic review, were it not already underway, would rapidly become necessary.

While Lakeland cites its 2bn-litre milk pool several times in its announcement of the changes, it also all-but admits that is as large as it’s going to get. It says the changes it is making will be carried out “against the backdrop of evolving environmental realities and regulatory direction from a milk supply perspective”. It is saying environmental legislation – such as changes to the nitrates derogation – is, at a minimum, going to put a cap on milk supply.

On the demand side, Kelly says that the next decade will be “more about value-added growth”, meaning the co-op sees its future in doing more with the milk it has, which presumably means selling as little commodity product as possible.

Wider picture

The supply and demand challenges outlined by Lakeland are the same for every processor in the country.

When faced with challenging trading situations, it is important for any company to enter the period with a strong balance sheet. Thankfully for the members, that is generally the case for the Irish co-op sector.

While Tirlán, with its more-than €1.1bn of Glanbia plc shares, is probably best placed in the industry to ride out any volatility, there is little reason to worry about any processor at present.

However, as the lesson from the announced closure of Wyeth in Limerick shows, a failure to act on changing market dynamics in time means a company’s fate can be doomed long before the last euro is spent.

Irish dairy processors generally have a strong track record in reacting positively to changing market dynamics. Figure 1 shows how Ireland has maintained the value of dairy exports to China, even as the product mix has changed. Infant formula exports have dropped by €70m in the past five years, but total dairy exports to China are only €8m lower.

This is not to say that the Irish dairy sector is not in a tough position. The whiplash commodity price moves of the past couple of years, the return of input cost inflation and the ever-increasing regulatory demands, mean that no CEO should feel too comfortable at the moment.

Without an improvement in demand and a reduction in volatility, we are likely to see more retrenchment, and possibly consolidation, in the industry.

Beyond dairy, agricultural services companies are already feeling the pinch, as farmer spending power is seriously curtailed due to lower income and higher costs.

One of the biggest cost stories of 2022 was the surge in fertiliser prices. That surge seems to be coming home to roost for manufacturers, with Yara’s most recent earnings report showing profits well short of what had been expected.

The company said it is assessing its “European footprint”, which can be read as shorthand for it is planning to close some facilities.

You’d have to be living under a very large rock not to know about the hugely difficult year the dairy sector has had. There will certainly be changes within the industry here, as processors try to maintain capacity, margin and market.

However, the co-operative structure of the industry will once again prove to be a cushion against calamity.

In 2022, when dairy market demand far outstripped supply, the co-ops passed the windfall straight on to their farm suppliers. The surge in turnover did not lead to a surge in fixed costs in the co-ops or, as would happen in banking, a surge in bonuses for the top brass.

Farmer suppliers understand this dynamic and generally are willing to accept the vagaries of the market.

The key thing the co-ops have to do is to communicate with those farmers on what is happening in the market and what they expect the future holds.

If a farmer is well informed, listened to, and understood, they, in turn, will generally be more patient with their co-operative.

For processors, those relationships can be seen as their other balance sheet. Having large financial reserves is critical, but also having large reserves of goodwill from farmers means they will be able to hold on to their suppliers through any downturn.

The processors with the strongest balance of both finance and goodwill are be the ones best placed to navigate difficult times.