Over the last two weeks, we have analysed the Irish and European dairy processing sectors, comparing milk price and financial performance.

Two things stand out. Firstly, on average, European (LTO) prices are 2cpl higher than Irish prices. This amounts to €100 difference between the average Irish dairy cow and its European cousin. The second standout finding is that there is a 4c difference between the highest and lowest performers across Irish processors. This amounts to €200 per cow.

Combined, an Irish dairy cow supplying one of the weakest Irish performers is getting a milk cheque almost €300 less than the equivalent European cow supplying one of the top performing European processors. On a herd of 100 cows, this is €30,000 less over the course of a year.

But we are not seeing dairy farmers protesting in the past week over such variances. Perhaps its because price is never a problem until it drops to under 30c and the cost of production cannot be met. On top of this European dairy farmer benefit, if the Irish dairy processing industry was FrieslandCampina, it could make two-thirds or €100m more profit every year.

Star performer

But there is an exception to the above. Against all the odds of not having wealthy parents, nor the best land and largest farms, there has been a silent performer – Carbery. With its 530m litres, it certainly doesn’t win on scale. No doubt it is well invested with efficient processing- but that is not enough to explain its step apart from its peers.

So how can a co-op situated in one of the most westerly regions of Europe, furthest from a large urban centre, have the capacity to match the average European price? And how can it beat and deliver a milk price that is up to 2.5c higher per litre than its closest peers who collect and manufacture milk less than 100 miles away? It doesn’t even own any brands like its European peers. So how has it succeeded?

Most likely it is a combination of three basic factors. Firstly it is structured as a co-op, owned by the four west Cork co-ops – Bandon, Barryroe, Drinagh and Lisavaird. It therefore does not have investors focused on quarterly sales and profit figures and can take a long-term view. This is key.

Secondly it sells the majority of its output (mainly cheese) under contract to Ornua through the Dubliner brand. Furthermore, Carbery hasn’t had to invest in capacity to the same extent as others due to its scale and milk volume growth.

But the cash cow that brings home the cream is most likely its investment in its US flavours and ingredients business, Synergy.

Carbery does not disclose profit levels within this business, but if it operated at a similar level to Kerry’s flavours and ingredients business with margins of 13%, it is a highly profitable business.

One final factor that makes Carbery unique is because of its ownership structure, it doesn’t pay a dividend to shareholders, as a plc would be expected to. As a co-op it can deliver a share of the profits from this business back to its dairy farmer suppliers in the form of an improved milk price.

It is not worried about the stock market or investor returns. And every farmer receives the boosted milk price on every litre produced with no preconditions on level of trade or imaginative bonuses linked to input purchases.

Processing model

This raises the question of what model is best for primary processing in this country. While the majority of our processors are structured as co-ops, half of the country’s milk is now purchased in a structure that ties back to a plc. Glanbia Ireland (the JV between the plc and the co-op) purchases 2.7bn litres while Kerry Group plc purchases 1.1bn litres.

Interestingly, the top milk price performers last year across Europe are structured as co-ops, while the weaker performers have a plc ownership structure. It is true that plcs have the capacity to create an enormous amount of value for shareholders.

But the question must be asked – does this come at the expense of the milk price?

Furthermore, Ireland is unique in Europe, driven by a decision taken a number of years ago by the industry and farmers to drive a seasonal, grass-based model to make us one of the most efficient producers of milk (ex-farm).

However, this comes at the expense of increased investment and costs at processing level in the form of a seasonal supply curve that requires more stainless steel than our European counterparts.

Investment

Stainless steel costs money and that can only really come from one place ultimately – the milk price.

So our model explains some of the difference. It must also be remembered that 90% of our output must be exported. We don’t have a population to consume large volumes of premium consumer-branded products like some of our European neighbours, so we have never developed a large-scale consumer-branded dairy business.

The exception is Kerrygold, and while it is hugely successful, it has taken 60 years to become Ireland’s first €1bn food brand, and accounts for little more than 25%-30% of Irish butter output today. To put this in context, FrieslandCampina spent €1bn on marketing its brands over the last two years.

While Ireland does invest in marketing, in the past five years alone we have spent €1bn investing in stainless steel to process milk. This is of course a long term investment in the industry.

What Ireland has achieved is not short of amazing. And everyone in the industry should be applauded.

An extra 2.5bn litres of milk produced, processed and sold over the last five or so years is no mean feat. No other country has seen this level of growth.

From an investment point of view, the industry has chosen to drive growth and invest in capacity first while also doing some added value investment on the fringes.

Our European peers have not grown to the same extent, having the luxury of investing in adding value in order to maximise dairy farmers’ incomes.

Investing in powder

Since 2014, we have grown manufacturing milk output by 35% to 1.2m tonnes. While cheese output has grown by 22% to 224,000t, it still accounts for around 20% of all output.

Similarly, butter output has increased by 45% to 240,000t and it still makes up 20% of all output today. But the big growth in output has been in powders (SMP and WMP) which have doubled to 214,000t. This places a much greater emphasis on powders within the overall mix.

Ireland’s dairy industry continues to have a well-diversified product mix and has no over-reliance on one particular product.

Given the rapid growth in Irish milk production since the end of quotas, it’s not surprising that much of the recent capital investments made by Irish co-ops have been for added capacity at the peak milk time of the year in May and June. Much of this extra capacity has come in the form of large driers to dry milk into powders.

However, it’s also important to note that the industry has also found capital to invest in new processing capacity for cheese, butter and ingredients.

These include Dairygold’s €86m nutritionals campus in Mitchelstown and its joint venture investment with Norwegian partner Tine in a €77m Jarlsberg cheese plant, Carbery’s €78m investment in a new mozzarella plant at Ballineen and Glanbia Cheese’s €130m investment in a new 45,000t mozzarella plant in Portlaoise.

Glanbia has also invested €35m to double the capacity of its Wexford cheddar plant to 40,000t per annum, while Arrabawn recently announced it will build a new casein plant. In 2016, Ornua opened the doors on its €38m Kerrygold butter processing facility in Cork.

The industry will need to continue to invest as milk supply growth looks set to continue. Given that the Food Harvest milk growth target was hit two years ahead of schedule in 2018 and another billion litres will be added within the next two years, serious discussions need to be had around co-op board tables and farm organisations on any future investment strategy.

Restructure at Ornua

The elephant in the (board)room is Ornua. While last week’s analysis shows Irish processors pay 2c/l less than the European average, Ornua claims it paid the processors within 0.3c of the European average. So where is the extra 1.7c, because it certainly isn’t in the farmer’s pocket? And if Ornua is paying such a strong price compared to the average co-op, why are its member owners only trading half of Ireland’s dairy output with it?

The answer lies in the way the industry structure has evolved. While the members have all built their own routes to market, the price Ornua can deliver to these members appears greater than the members can achieve themselves. And given the claimed dysfunction at board level, where its members cannot agree or decide to support it, Ornua’s future looks bleak.

But the members need to be careful. Ornua delivers them €19m in dividends on top of a market price that is higher than what they can achieve themselves. It also provides them €350m in working capital. And the Kerrygold brand delivers a premium of €18m over commodities ever year.

Ornua’s value is only as strong as the business it supports. The proposal to transfer wealth onto balance sheets of co-ops may seem attractive today. But the value in Ornua may be in the value of its relationships with those co-ops in terms of supply and a single marketing strategy across key products such as Kerrygold butter into the US.

The industry has a challenge ahead to catch up with our European dairy competitors. Our industry leaders, including the farm organisations, the co-op CEOs and chairs, need to realise the real competition is not around a board table in Ireland. A single entity marketing Ireland’s milk in export markets appears to make sense. Our European rivals are much larger with more marketing clout – even if we combined all our marketing under one arm.