Despite the challenging weather conditions last year, milk volumes at Dairygold increased by 2.7% to 1.34bn litres in 2018. This brings milk volume growth over the last 10 years to 60% or 500m litres, while milk solids have increased 70% over the period.

There is no sign of the growth abating anytime soon, with Dairygold milk suppliers planning to produce an extra 300m litres over the next five years bringing its total milk pool to 1.65m litres by 2023. That would see Dairygold’s milk pool almost double in size over the 10-year period.

What makes Dairygold somewhat different is not only the scale of the growth but that it has mainly been from existing suppliers with no sight of any mergers in the near future either.

Jim Woulfe, who has led the co-op for the past 10 years, along with the board who had the challenge of ensuring there was enough processing capacity to meet the demands of the co-op’s farmers.

In order to do this, the business has invested almost €190m over the last five years and it is committing a further €130m over the next two years, bringing the total investment to more than €300m since 2012.

It has seen these partners invest €120m in value added equipment, while Dairygold provides the facility services and attains a direct market for its milk

This has been no small feat, Dairygold has been astute with its more recent investments – partnering with the Norwegian cheese business, Tine at Mogeely and its supply contract with Ornua’s Kerrygold facility in Mitchelstown.

It has seen these partners invest €120m in value added equipment, while Dairygold provides the facility services and attains a direct market for its milk.

So, as the wall of milk continues to flow it is a very effective use of capital that makes a return for the co-op and allows it to invest in stainless steel to process the extra milk.

However, this continued demand to meet farmers processing needs looks set to reopen one of the more controversial aspects of Dairygold’s expansion post-quota.

That is the funding model and who finances it. It will again raise the question of whether the business or the members or even a hybrid model should stump up the cash to fund any future growth this time round.

2018 performance

Operating profits fell 11% (€3.5m) to €28.9m last year at Dairygold as a direct result of supporting the milk and grain price to the tune of €15m last year.

Turnover increased 2.8% (€27.4m) to €992.9m. This was due to a reduction in protein product prices and lower cheese and butter returns.

As a result, operating margins fell from 3.4% to 2.9%. Profit after tax more than halved and was down €12m to €9.2m.

Its food ingredients business had sales of €569m last year. Its overseas business, which includes a cheese formatting business in the UK and Germany, recorded sales of €156m.

The agribusiness recorded sales of €262m, up €40m on the prior year. Retail sales increased 6%, while feed sales increased 40%.

Bank debt at year end increased from €31.8m to €111.4m, driven by investment in the business of €58.7m during the year

Grain harvest volumes were down circa 40%. However, the grain price paid to farmers was around 40% higher than the 2017 harvest.

The co-op generated €48.6m in cash (EBITDA) last year – down €4.2m on the prior year as a result of the lower returns.

Bank debt at year end increased from €31.8m to €111.4m, driven by investment in the business of €58.7m during the year.

Although net debt to earnings has increased from 1.5 times in 2017 to 2.28 times today, the co-op maintains this is satisfactory. Despite generating almost €49m in cash, the net asset value of the business (shareholders equity) only increased by €2.4m to €338m.

Over the last 10 years, Dairygold has disposed of around 70% of its holding in Aryzta and at year end it held a total of €20m in quoted stocks

This was mainly as a result of a paper loss of almost €15m relating to the fall in value of its shareholding in Aryzta and IPL Plastics (One51).

Overall the portfolio lost 40% of its value during the year as it progressed through a planned divestment strategy of its Aryzta and IPL shareholdings.

Over the last 10 years, Dairygold has disposed of around 70% of its holding in Aryzta and at year end it held a total of €20m in quoted stocks.

In the last two years, the co-op has sold €15m worth of its Aryzta and IPL shares and has reinvested this money through a managed fund into a more diversified portfolio of shares.

The co-op also has a property portfolio, valued at €51m, which it inherited from its Reox spin off.

Earlier this year, it sold its Trinity quarter property for €17m to UCC. The co-op’s strategy around these non-core assets is to maximise value and divest over time.

Financing growth

A future consideration for the next phase of processing investment has to be the funding model and who finances it, the society and/or the members.

Dairygold introduced members funding six years ago. The background to this was a different Dairygold to today. It was over-borrowed with debts of some €80m – almost five times earnings, while the balance sheet was €220m.

Today bank debt is marginally higher – €110m but it is only 2.8 times earnings while the milk pool is 60% larger and the balance sheet is a third larger.

The Dairygold expansion programme was questioned at the time, mainly because of the funding model.

The plan was to move processing capacity from 29m litres/week to 53m litres/week by 2020. The funding plan was to invest €225m, with €50m funded by members and €175m from bank debts and cashflow.

There were four member funding mechanisms – an optional loan note; a revolving fund; a minimum shareholding and; deferred payment (which was never introduced).

Since 2013, the co-op has received €23m from members, with €20m coming from the revolving fund and almost €3m in loan notes.

These loan notes started to be returned last year in full and all investments will be returned by the end of 2020.

The voluntary loan notes were for five years, where investors received an interest rate of 4% (on top of the three-month Euribor rate) annually.

These loan notes started to be returned last year in full and all investments will be returned by the end of 2020.

The revolving fund was compulsory and saw members make 60 contributions of 0.5cpl per month (once price at or above 27c/l) over seven years between 2013 to 2019 and the money is repaid in full with interest of 2.5% (on top of the Euribor rate) annually . The repayments are due to start in 2020.

Since 2013, all milk suppliers have also been required to buy and maintain a minimum shareholding in the co-op of 4c/l of supply (4,000 shares per 100,000 litres of milk supply).

Since then members have purchased almost €12m shares in the co-op, while Dairygold has redeemed almost €9m shares mainly from retired members.

Worked example

A typical milk supplier with 300,000 litres of milk in 2011, who was to expand by 60% to 500,000 litres by 2020, would be required to invest €6,000 into a revolving fund over seven years and also increase their shareholding by around €8,000.

They will receive back in excess of €7,000 from the revolving fund including interest over the next five years.

Dairygold has delivered on what it said it would do. There will be years where profits will dip or rise.

This is the nature of the co-op model and its ability to flex margins to support milk prices.

Once the expansion phase is done Dairygold will have allowed farmers effectively double in size

Dairygold must be commended for the simplicity of its model and the transparency around its numbers.

The bottom line for farmers is the milk price and a processor that is not draining its resources to pay it.

Once the expansion phase is done Dairygold will have allowed farmers effectively double in size.

Yes farmers financed some of this at co-op level but they received a solid return on the money invested. The next phase of investment needs to ask how additional value can be added to the milk.