There are a number of big changes on the horizon in the dairy sector. In our agribusiness coverage this week, Lorcan Allen reports on the latest developments in negotiations between Kerry Group and Kerry Co-op. We also look at the board and governance changes at Ornua. On both fronts, farmers are much more than just passive observers. Ensuring these changes are made for the right reason and deliver the right outcome are important to the future viability of Irish dairying.
In the case of Ornua, few would argue that change was not necessary. The board has been described as dysfunctional – largely reflecting the extent to which shareholders are competing in the marketplace. But correctly identifying the need for change does not guarantee the outcome will deliver a better result. It is critical that in rebuilding the board of Ornua that one conflict of interest is simply not replaced by another.
Under the current proposal, the enlarged board of 16 members will consist of eight nominees from each of the eight co-ops. The lens through which these eight directors view their role will be critical.
A board where 50% of directors see their role as representing the interests of those that nominated them will do little to address the conflict of interests or advance the development of the business – especially in a situation where just three of the 16 board members are independent non-executive directors. Good governance would suggest that 50% of directors should fall within this grouping.
Responsible for selling over 50% of output from Irish dairy, it is critical to farmers that the correct procedures are put in place to ensure the newly configured board of Ornua has the capacity and independence to deliver success for farmers – simply measured against the organisation’s ability to return the best market prices for dairy products, while delivering a return on capital and an annual dividend. Failure risks the reform process damaging the important connection between co-ops and Ornua – one that has served farmers well in the past.
Establishing a nominations committee to ensure the qualifications and experience of directors are aligned to the demands and strategic objectives of the business should now be a priority. Rather than appointing a director to the company, co-ops should be entitled to nominate suitable candidates. The nominations committee either accepts or rejects nominations based on the alignment of skill sets and experience required around the board table. As identified previously, the calibre of nominee put forward by co-ops will be dependent on ensuring good, well-skilled farmers recognise the need for them to get directly involved in setting the strategic vision for their sector.
Making sure the qualifications and experience of directors are aligned to the demands of the business will apply equally in Kerry. Assuming a successful outcome to negotiations, the demands on the directors of the co-op, or new entity, will be very different to the directors of a co-op who were effectively managing an investment company. The success of any new deal will be dependent on this being recognised by the existing directors of the co-op. In the case of the Kerry deal, the need for change is not as clearcut. The opportunity to deliver a tax-efficient mechanism for dry shareholders to realise the value of the co-op is clear. But we must be equally as clear as to the benefit to milk suppliers.
Similar to Ornua, the focus must be on the ability of the new joint venture to deliver to farmers a leading milk price, return on capital and a strong annual dividend. We should not lose sight of the fact that under the current arrangement, there is a route for farmers to negotiate a leading milk price with the Kerry group.
Securing an equally clear route in any joint venture will require skilful negotiation. In the Glanbia Ireland joint venture, we have seen the need to deliver a strong fixed operating margin negatively affect milk price – albeit this is topped up by the co-op through the plc dividend. In the Kerry joint venture, such a dividend is unlikely to be available. Therefore, if the new joint venture is to have the capacity to return a strong milk price, it is essential that farmers ensure no inflated margin guarantee is woven into the shareholder agreement.
EU-UK talks: keeping Brexit centre stage
It is like worrying about a leak under the sink while failing to prepare for a tsunami that could wash away the house. That is how one farmer reacted to last week’s editorial highlighting the need for political attention to be focused on Brexit. The IFA budget briefing earlier this week with Pascal Donohoe, Michael McGrath and Patrick O’Donovan will no doubt have left all three ministers with a very clear understanding of what is at stake.
The time for wondering what happens if Brexit goes badly is over. The only unknown is how bad it will be. In this week'd edition, Phelim O’Neill details the level of exposure for our main agricultural exports to Britain. A no-deal scenario will see our sector hit with a tariff wall of over €1bn to get into what will be a greatly devalued British market. Some suggest the tariff will be reflected in the end-market price but history tells us that the cost would be reflected in farmgate prices.
Despite the political wrangling, most are confident a no-deal outcome can be avoided. Speaking at the ASA conference last week, Minister for Foreign Affairs Simon Coveney described a “very basic free-trade agreement” as the best that could now be hoped for. He is correct that such an outcome would prevent the imposition of quotas and tariffs but a basic free-trade agreement would still lead to value destruction and create real pressure on Irish prices.
We cannot lay blame for Brexit at the door of the Government or the EU. But farmers can demand that both respond adequately. The Government’s €4bn Brexit fund, the EU’s €5bn fund and any corresponding increased tariff revenue on imports from Britain must be targeted at ensuring the correct market support measures are put in place – these measures must all be focused on making sure product continues to stay in front of consumers.
The Government must mount a major diplomatic effort to ensure Ireland’s share of the EU Brexit fund reflects our unique exposure.
Beef: warning bells for winter finishing
Brexit fatigue is understandable but beef finishers in particular need to wake up to the threat that is coming down the tracks.
Also this week, Adam Woods examines winter finishing. The figures he uses represent the true cost of production. The value of the store animal is based on our MartBids database and reflects the market. Assuming a high level of technical efficiency, his analysis points to a beef price of €4.50/kg being required next spring to deliver a margin. Over the last decade, spring prices have trended closer to €4/kg than €4.50/kg – and were below €4/kg in seven of the last 10 years.
If we layer Brexit over this, the scale of the gamble winter finishers are about to take is even more stark. However unpalatable, a price closer to €3/kg cannot be ruled out in a no-deal scenario or if EU market supports are not adequate. Losses could quickly surpass €250 per head.
The financial risk of winter finishing is simply too great for it to be carried solely by farmers. Processors and retailers must be forced to share the risk burden through forward price contracts. They will be slow to do so – largely in the belief that despite the warning most farmers will take the gamble and sheds will be filled. They have been proven right over the years. The only lever that will force change is the fear of not having an adequate supply base next spring.
The question is: will enough farmers be prepared to use this lever or will we see the status quo continue despite the clear warning signs.
Covid-19: Ploughing missing its week in the sun
Farming has literally missed out on its week in the sun with the cancellation of the National Ploughing Championships. Like so many things, it is only when something doesn’t happen that we appreciate its full value.
In a bid to encapsulate the determination of the sector to come through the challenges of COVID-19, we have produced a special Plough On supplement. In the same way as the sector will battle through, so too will the National Ploughing Association.
Thanks to the skilful leadership of Anna May McHugh, the NPA is in a financial position that allows for such setbacks to be absorbed without threatening its future. We look forward to what will be the World Ploughing Championships in 2021.
Read more
Leadership required in all farming sectors
Farm organisations need to park parochial politics and focus on Brexit policy
There are a number of big changes on the horizon in the dairy sector. In our agribusiness coverage this week, Lorcan Allen reports on the latest developments in negotiations between Kerry Group and Kerry Co-op. We also look at the board and governance changes at Ornua. On both fronts, farmers are much more than just passive observers. Ensuring these changes are made for the right reason and deliver the right outcome are important to the future viability of Irish dairying.
In the case of Ornua, few would argue that change was not necessary. The board has been described as dysfunctional – largely reflecting the extent to which shareholders are competing in the marketplace. But correctly identifying the need for change does not guarantee the outcome will deliver a better result. It is critical that in rebuilding the board of Ornua that one conflict of interest is simply not replaced by another.
Under the current proposal, the enlarged board of 16 members will consist of eight nominees from each of the eight co-ops. The lens through which these eight directors view their role will be critical.
A board where 50% of directors see their role as representing the interests of those that nominated them will do little to address the conflict of interests or advance the development of the business – especially in a situation where just three of the 16 board members are independent non-executive directors. Good governance would suggest that 50% of directors should fall within this grouping.
Responsible for selling over 50% of output from Irish dairy, it is critical to farmers that the correct procedures are put in place to ensure the newly configured board of Ornua has the capacity and independence to deliver success for farmers – simply measured against the organisation’s ability to return the best market prices for dairy products, while delivering a return on capital and an annual dividend. Failure risks the reform process damaging the important connection between co-ops and Ornua – one that has served farmers well in the past.
Establishing a nominations committee to ensure the qualifications and experience of directors are aligned to the demands and strategic objectives of the business should now be a priority. Rather than appointing a director to the company, co-ops should be entitled to nominate suitable candidates. The nominations committee either accepts or rejects nominations based on the alignment of skill sets and experience required around the board table. As identified previously, the calibre of nominee put forward by co-ops will be dependent on ensuring good, well-skilled farmers recognise the need for them to get directly involved in setting the strategic vision for their sector.
Making sure the qualifications and experience of directors are aligned to the demands of the business will apply equally in Kerry. Assuming a successful outcome to negotiations, the demands on the directors of the co-op, or new entity, will be very different to the directors of a co-op who were effectively managing an investment company. The success of any new deal will be dependent on this being recognised by the existing directors of the co-op. In the case of the Kerry deal, the need for change is not as clearcut. The opportunity to deliver a tax-efficient mechanism for dry shareholders to realise the value of the co-op is clear. But we must be equally as clear as to the benefit to milk suppliers.
Similar to Ornua, the focus must be on the ability of the new joint venture to deliver to farmers a leading milk price, return on capital and a strong annual dividend. We should not lose sight of the fact that under the current arrangement, there is a route for farmers to negotiate a leading milk price with the Kerry group.
Securing an equally clear route in any joint venture will require skilful negotiation. In the Glanbia Ireland joint venture, we have seen the need to deliver a strong fixed operating margin negatively affect milk price – albeit this is topped up by the co-op through the plc dividend. In the Kerry joint venture, such a dividend is unlikely to be available. Therefore, if the new joint venture is to have the capacity to return a strong milk price, it is essential that farmers ensure no inflated margin guarantee is woven into the shareholder agreement.
EU-UK talks: keeping Brexit centre stage
It is like worrying about a leak under the sink while failing to prepare for a tsunami that could wash away the house. That is how one farmer reacted to last week’s editorial highlighting the need for political attention to be focused on Brexit. The IFA budget briefing earlier this week with Pascal Donohoe, Michael McGrath and Patrick O’Donovan will no doubt have left all three ministers with a very clear understanding of what is at stake.
The time for wondering what happens if Brexit goes badly is over. The only unknown is how bad it will be. In this week'd edition, Phelim O’Neill details the level of exposure for our main agricultural exports to Britain. A no-deal scenario will see our sector hit with a tariff wall of over €1bn to get into what will be a greatly devalued British market. Some suggest the tariff will be reflected in the end-market price but history tells us that the cost would be reflected in farmgate prices.
Despite the political wrangling, most are confident a no-deal outcome can be avoided. Speaking at the ASA conference last week, Minister for Foreign Affairs Simon Coveney described a “very basic free-trade agreement” as the best that could now be hoped for. He is correct that such an outcome would prevent the imposition of quotas and tariffs but a basic free-trade agreement would still lead to value destruction and create real pressure on Irish prices.
We cannot lay blame for Brexit at the door of the Government or the EU. But farmers can demand that both respond adequately. The Government’s €4bn Brexit fund, the EU’s €5bn fund and any corresponding increased tariff revenue on imports from Britain must be targeted at ensuring the correct market support measures are put in place – these measures must all be focused on making sure product continues to stay in front of consumers.
The Government must mount a major diplomatic effort to ensure Ireland’s share of the EU Brexit fund reflects our unique exposure.
Beef: warning bells for winter finishing
Brexit fatigue is understandable but beef finishers in particular need to wake up to the threat that is coming down the tracks.
Also this week, Adam Woods examines winter finishing. The figures he uses represent the true cost of production. The value of the store animal is based on our MartBids database and reflects the market. Assuming a high level of technical efficiency, his analysis points to a beef price of €4.50/kg being required next spring to deliver a margin. Over the last decade, spring prices have trended closer to €4/kg than €4.50/kg – and were below €4/kg in seven of the last 10 years.
If we layer Brexit over this, the scale of the gamble winter finishers are about to take is even more stark. However unpalatable, a price closer to €3/kg cannot be ruled out in a no-deal scenario or if EU market supports are not adequate. Losses could quickly surpass €250 per head.
The financial risk of winter finishing is simply too great for it to be carried solely by farmers. Processors and retailers must be forced to share the risk burden through forward price contracts. They will be slow to do so – largely in the belief that despite the warning most farmers will take the gamble and sheds will be filled. They have been proven right over the years. The only lever that will force change is the fear of not having an adequate supply base next spring.
The question is: will enough farmers be prepared to use this lever or will we see the status quo continue despite the clear warning signs.
Covid-19: Ploughing missing its week in the sun
Farming has literally missed out on its week in the sun with the cancellation of the National Ploughing Championships. Like so many things, it is only when something doesn’t happen that we appreciate its full value.
In a bid to encapsulate the determination of the sector to come through the challenges of COVID-19, we have produced a special Plough On supplement. In the same way as the sector will battle through, so too will the National Ploughing Association.
Thanks to the skilful leadership of Anna May McHugh, the NPA is in a financial position that allows for such setbacks to be absorbed without threatening its future. We look forward to what will be the World Ploughing Championships in 2021.
Read more
Leadership required in all farming sectors
Farm organisations need to park parochial politics and focus on Brexit policy
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