The success of a dairy co-op is often viewed solely through the lens of milk price. Being in a position to pay a competitive price back to farmer shareholders will always be a key benchmark against which to assess the performance of board and management, but it is also important to look much wider.

In this week's edition, we profile the financial performance of two co-ops, Lakeland Dairies and Dairygold. Similar to the financial performance of Aurivo, reported last week, both co-ops delivered a strong performance in 2021. The added challenges faced by management in delivering this performance in the face of COVID-19 challenges should be recognised.

It is a trend that we are likely to see continue as more co-ops release details of their 2021 financial performance in the coming weeks. It should come as no real surprise considering the significant differential that existed throughout 2021 between the milk price paid to farmers and the Ornua Purchase Price Index (PPI).

Additional costs

Processors argue that PPI is only one measure of market returns and that additional costs are incurred beyond the processing charge included in the PPI calculation. While valid, the price differential in 2021 was at a record level and has continued into 2022.

But the focus must also go beyond milk price and financial performance. As well as performing on both fronts, the long-term strategy developed by the board and executed by management must deliver on the purpose of the organisation – for example, the reason why it was established by its shareholders.

Diarygold

Newly appointed Dairygold CEO Conor Galvin is clear on why the co-op exists, stating that its purpose is to process members’ milk. He told the Irish Farmers Journal that “the lifeblood of the co-op is to be able to take in new entrants while allowing their members continue to grow”.

Galvin also reaffirmed the co-op’s commitment to the seasonal grass-based model, acknowledging that while it may lead to inefficiencies in processing, it was the most economic production system for farmers. According to the annual report, Dairygold’s recent capital investments have provided the necessary capacity to manage forecast peak week volume to at least 2025.

Lakeland

In contrast, farmers supplying Lakeland Dairies are facing a much more uncertain outlook on growth capacity. Few can dispute the determination and ambition of the board and management of Lakeland Dairies in recent years. The acquisition of Fane Valley’s dairy business in 2016 followed by a merger with LacPatrick three years later transformed the business into the largest dairy processing co-op on the island of Ireland. Alongside this, a major capital investment project was rolled out across existing facilities, including a €48m milk dryer at Bailieboro in 2017. It has generally been viewed as a hugely successful period in the co-op’s history. But questions are starting to emerge following the recent decision by the board to introduce a peak milk price penalty, pause new entrants and introduce a bonus payment to reward farmers to produce more milk from an indoor system – while the same time heavily engaged in third-party processing. Management argues that third-party processing is a zero-sum game for the co-op but it is unclear the extent to which it adds increased pressure during peak processing months.

Prioritising shareholders

Did the farmer shareholders in Killeshandra and Lough Egish co-ops establish Lakeland Dairies with the purpose of becoming the biggest milk processor on the island of Ireland? Or was the purpose similar to that of Dairygold: to establish a co-op that prioritised the processing of the milk produced and supplied by its shareholders from the most efficient production systems?

Ultimately it is down to the shareholders to express their views to the board on what they believe the purpose of the co-op to be. Some of these shareholders are going to see their growth ambitions curtailed by a peak milk price penalty linked to processing capacity, despite having watched their co-op expand rapidly through an M&A strategy while at the same time taking on numerous larger scale non-shareholding suppliers.

Post-quota world

Ten years ago, Lakeland and Dairygold set out on similar journeys as they developed strategies to allow their farmers respond to the abolition of quotas. Over the course of this journey, each adopted different funding models and deployed different growth strategies. Dairygold farmers were required to make significant investment in processing capacity while Lakeland suppliers were not required to make the same investment directly. Perhaps a peak milk price penalty is a step in this direction.

When assessing the financial performance of both co-ops, farmers should also ask which board and management team have put in place a structure that is closer aligned to allowing their farm businesses continue to develop in the decade ahead.