In 2011, Donegal Creameries, under the leadership of Ian Ireland, faced one of its biggest decisions in order to set the future direction of the business.

With quotas due to be removed, significant investment was needed to ensure processing capacity was sufficient.

It was decided this would not be an efficient use of capital, even though the group had built up its liquid milk business to be the second largest in Ireland.

In what could be seen as a brave move back then, Donegal Creameries took the decision to exit the cyclical low-margin liquid milk business and sold it, along with its agri-stores, to Aurivo (formally Connacht Gold) in a deal worth €20m. This gave Donegal the opportunity to focus on strategic growth areas and in particular, seed potatoes.

Ireland, who became CEO in 2005, has transformed the group into a more streamlined business. He has signficant experience in the food industry, having spent over 20 years with the Kerry Group. “In business you can either scale or differentiate. We opted to differentiate,” said Ireland.

Renamed Donegal Investment Group (DIG) last year, it has been a plc since 1997. Since 2009, the Donegal share price has climbed from €2.25 to highs of €7 in March 2014. Shares are trading at €6.35 this week.

Headquartered in Letterkenny, Co Donegal, and employing 225 people, it has operations in Ireland, Britain, Holland, France and Brazil. Last year, the group reported sales of €86.8m, an increase of 8.1%, while operating profit increased by 59.2% to €2.9m.

Conclusions

The story of Donegal Investment Group is unique and a lesson to Irish agribusinesses about diversification.

A plc born out of a co-op previously involved in the cyclical and low-margin liquid milk business, has transformed itself into the leading exporter of propietary seed potatoes in a few short years.

Working in partnership with Teagasc, the group has significant R&D capabilities, providing a pipeline of new varieties. Over the past 40 years, over 40 varieties have been released, with 30 of these still marketed by DIG. This has been key to maintaining its dominant position.

With the potato popular in developing countries in Africa, the company is well positioned to take advantage of the rising population and opportunities there.

It also has many assets which could be divested over time to pay down debt and fund further investment in the core seed potato business.

Produce – seed potatoes

This division is involved in the development, production and marketing of seed potatoes globally.

It also has a small organic produce operation on An Grianan estate.

Last year, Donegal’s produce division accounted for 39% of group revenue, with sales of €33.9m. Operating profit for the produce division was €1.8m, with an average profit margin of 6.2%.

Through its subsidiary, Irish Potato Marketing (IPM), a proprietary seed potato company, it is one of Ireland’s leading seed potato companies as well as the UK’s largest exporter of protected seed potato varieties.

DIG is unique in that it focuses solely on the development and production of proprietary seed varieites. In the early 1970s, Teagasc and IPM established a partnership. DIG provides finance and market access, while it gets plant breeder rights on any potato variety Teagasc develop.

The way the business works is simple. IPM develops new potato seed varieties for which it then has the exclusive license. It then works with contract growers, primarily from Scotland, who produce the seed potatoes for IPM to sell on the commercial market.

When it has developed a suitable variety, it outsources the majority of operations to grow, harvest and ship to seed potato customers globally.

Although IPM grows some seed in Ireland, Scotland is the crucial region accounting for over 70%. Ian Ireland said; “The high latitude and climate conditions make seeds grown there far more resistant to a range of diseases.”

One of IPM’s most successful varieties has been Rooster, which they have exclusively licensed to Albert Bartlett, a large packer and distributor in Britain. They will then brand and market the variety which will add value according to Ireland.

“The challenge is matching the R&D to the consumer need. This is the key driver that will give the farmer the best return. This is crucial as some markets want different things in terms of skin finishes, size or shape,” explained Ireland. “This is not a business with heavy capital expenditure and the quality of the profits is good.”

In all, the company sold 60,000t of seed potato in 2013 with key markets in northern Africa and Europe.

Food-agri

The group retained the value-added dairy business, which consists of consumer brands such as Rumblers, a health product offering made from granola and low-fat natural yogurt. The brand has 21% sales growth in its key UK market in 2013.

In 2011, Donegal acquired a controlling interest in Biogreen, a niche dairy business producing premium added milk based yoghurt smoothies. DIG has since merged the Rumblers and Biogreen brands, and Ireland sees potential for 30% growth in the coming years.

The group also has an animal feed business under the name Smyth’s Daleside Feeds. Last year the business produced in excess of 120,000t of feed.

The food-agri division recorded sales of €52.9m in 2013, an increase of 14.2% from the previous year. Operating profits in this division were €1.1m.

Associate investments

This division includes a 35% minority shareholding in Monaghan Mushrooms, the largest mushroom producer in Europe and second-largest in the world. This contributed €2.7m last year. It also owns 22.4% of a 300 acre land bank in Co Sligo through North Western Livestock holdings.

Donegal also own a 1,900 acre organic farm outside Letterkenny called Grianan Estate. Most of the estate is leased to a dairy farmer who runs a 500-cow herd. 200 acres are used to grow organic carrots and vegetables.

The average value of farmland in the area is about €9,000/ac, so the farm is worth close to €17m, which is greater than its FY 13 net debt.