The Irish dairy industry is on a high. It’s investing, growing, moving upwards in scale, it’s employing more workers and keeping dairy farmers happy as they grow output and achieve more margin. We must recognise all of these and recognise the payback into rural Ireland and all the people and businesses that are dependent on dairy farms. So, what about the future?

Blue ocean strategy is a concept which forces companies and industries to think about new ideas rather than fight with neighbouring businesses, which results in nothing but a bloody red ocean of rivals fighting over a shrinking profit pool.

At the moment on retail shelves all around Ireland we see clear examples of Irish dairy businesses swimming in a red ocean. The liquid milk market is the most obvious. Companies undercutting each other, contracts surrendered, and the farmer loses out. The most recent example is the absence of Kerrygold butter from Dunnes Stores shelves, as the supermarket fights to retain lower butter prices. While Kerrygold is back in cold storage, a competing butter from another Irish dairy company takes its place.

Of course most Irish product is exported out of Ireland so what happens on the internal market doesn’t really set the price the farmer receives. However, we see signs of competition outside of Ireland. Something similar is happening on infant formula margins. While we only produce 1% of the global milk pool, we supply over 15% of the world’s infant milk formula. Key global companies can source product from any number of Irish processors, hence margins are squeezed down, and once again the farmer loses out. Baby powder continues to retail at very high prices in Asia etc, but, because farmers are only selling the raw material, the big money goes to those who own the brand – and that’s not Irish farmers.

At a crossroads

The global dairy industry is at a crossroads. Some of the big players have evolved and grown to their maximum over the last number of years. Speaking at Dairy Day New Zealand, farmer Greg Gent asks if the New Zealand dairy industry has peaked. Dutch dairy farmer Harm Holman asks a similar question – is producing milk in the Netherlands worthwhile or not? He suggests producing more milk in Holland at the moment leaves nothing but more debt to pay for the Dutch farmer. These countries not that long ago were powerhouses of a growing global dairy engine.

The Irish dairy industry is at a crossroads. Stand back and think about what is happening. We have Northern Ireland dairy producers producing about 2m litres of high-cost milk using too much input, and not utilising enough forage. Most of the milk, similar to that in the Republic, is converted into commodity products and exported off the island. Yes, there is a flatter milk supply pattern than the seasonal production in the Republic. It’s not clear if the value premium on the off-season products can sustain this higher-cost model. Soon Northern dairy farmers will be forced due to environmental constraints to reduce inputs. The first step will be to reduce the amount of phosphorus in feed fed to cows. This will reduce output per cow. Their challenge is can they produce better-quality milk (more fat and protein), use more forage and establish better genetics.

Growth

In the Republic in round figures the industry has grown from 5bn litres to 7bn litres and, should the growth continue along these lines, farmers are indicating we can expect to produce maybe 9bn litres or 10bn litres by 2025 (see AgriBusiness for more). Milk quality has improved (more fat and protein), herd fertility has improved, and most of the milk is still produced from grazed grass. However, the easy expansion has taken place – further expansion will be higher cost. We’ll have the full costs of additional labour, leased land, building soil fertility on more marginal land, and the costs of large herd management.

In terms of processing, we have some spare capacity at peak in some regions but in the south and east we will need to start another round of investment very soon. We have spent around €1bn over the last five years allowing us the capacity to process the additional milk on the island. It might take another €1bn to put steel in place to cover the processing capacity required. Do we know what product to make and do we know where we are going to sell this product in five years’ time? I’m sure the processors have a vision.

The big difference in the New Zealand dairy industry to ours at the moment is that if you want to increase milk production the true cost of the extra processing capacity is pushed directly on to the farmer. At $3/kg milk solids fair share value it is a sizable investment by the farmer (€800/cow). This represents the cost of putting that extra steel in place. Is that the right way to do it? Do we keep investing as individual dairy companies or is that just the easy option? Will investment for this incremental milk be worthwhile? Removal of EU quotas – will this fundamentally change how milk is sold in Europe?

So, while the industry grows and gets more powerful, we must be aware that there are a number of competing industries – animal welfare activists, environmentalists, and urban dwellers – looking at dairy farmers through another lens.

They are asking different questions. What do you do with your calves? Do the calves get to stay with their mothers? What are benefits of milk with A2 protein only? Is the packaging used to transport dairy product environmentally friendly? What about dairy and GMOs? Can I get GMO-free milk? Have you a retirement home for your old cows? Do you really leave cows outside for most of the year? What hormones or antibiotics are you using with cows? What traceability is in the supplement you are feeding your cows?

Challenge everything

The concept around blue ocean strategy is to challenge everything you thought you knew about the requirements for strategic success. Where is the strategy for farmers to be competing on markets home and away for shrinking profits? Lasting success won’t come from battling competitors – we need a new market space that sets us apart from competitors? As an industry, can we consider thinking about creating uncontested market space and making the competition irrelevant? If nothing else, Dairy Day allows us celebrate the growth we have achieved but also shine a light on the questions that need to be asked for the future of the industry. All we need now is someone to take on the roadmap for a blue ocean strategy that answers the questions above to underpin the future of the Irish dairy industry.

In Brief:

  • A growing island of Ireland dairy industry with potential for more growth but potentially a rebalancing of where milk is produced on the Island.
  • Examples of red ocean thinking (competing for a shrinking profit margin) can be seen in the industry at the moment. Can we move away from this to developing a blue ocean strategy for Ireland?
  • More investment required in the Republic in coming years. Is is right that dairy farmers should pay for this with a lower milk price? Is it the best strategy?
  • Has the industry answers to animal welfare, environmental and big questions on exactly what’s in our milk?