What looked like a very good business relationship has taken a significant turn for the worse in the last 10 days as Dairygold goes head to head on cheese with Kerrygold in the US market. The two have been doing big business for years.
Since this news has come to light, farmers have been trying to understand the reason for the split.
The question is, why is Dairygold biting the hand that feeds it?
Dairygold argues that it is not competing directly with Ornua product and will be in different stores, etc.
Ornua says it is in 94% of stores across North America
However, I understand Ornua are furious at what is happening, and that it will force it into competing on price in the US, the same as happened when the Truly Grass Fed product arrived on the US market.
Furthermore, Ornua says it is in 94% of stores across North America. Let’s take a look at key issues that may be turning the relationship sour between Ornua and Dairygold.
Let’s just stand back from this particular deal for a moment. Dairygold owns around 22% of a shareholding in Ornua. It sells around 45% of its total milk volume through Ornua (ie Ornua is marketing the product for it under the Kerrygold brand).
The volume percentage through Ornua was higher previously, but Dairygold has grown in volume, and all the new milk is not sold by Ornua. So Dairygold’s cream to make butter gets pumped into Ornua’s Kerrygold Park. The butter is sold under the Kerrygold brand. Dairygold cheese is sold under the Kerrygold brand – the links are strong, almost boyfriend-and-girlfriend material.
Ornua is banking Dairygold to some extent the same as other co-ops. So that’s the day-to-day business
Dairygold is paid an “on account” price by Ornua for product even though the product might not be sold for months after. So, effectively, Ornua is banking Dairygold to some extent the same as other co-ops. So that’s the day-to-day business.
Any other recent big deals together? In 2015, Ornua (formerly the Irish Dairy Board) bought the distribution business that Dairygold owned in Germany based at Mainz. Believe it or not, at the time, Dairygold had a cheese brand on the shop shelf called “Irish Land”.
The other big deal was the investment by Ornua in Kerrygold Park in Mitchelstown beside the Dairygold milk plant
The board of Dairygold took a decision that it was walking on Ornua toes. Dairygold subsequently pulled back from the market and sold the trade and assets to Ornua. A very different outcome to what the Dairygold board has now decided to do.
The other big deal was the investment by Ornua in Kerrygold Park in Mitchelstown beside the Dairygold milk plant. Remember, this butter plant was supposed to be a tie-up between Ornua and Glanbia in Ballyragget or Belview. However, there were a couple of twists in the road and it ended up in Dairygold’s backyard.
Kerrygold ticked a number of boxes for Dairygold
Dairygold had no play in the butter business. All it had in the butter space at the time was the “Minella” deal (a contract partnership) with Glanbia. That was running out so landing Kerrygold ticked a number of boxes for Dairygold. In the love story, it was almost as if it had signed up for a life partnership.
There have been a few lovers’ tiffs. Dairygold does have a slicing-and-dicing cheese plant in Crewe, near Manchester, that does cross over into Ornua’s space. There have been talks on working together on this, but nothing has ever happened.
Dairygold also has a soft cheese business in Leeds which it is currently investing more money in, but Ornua has nothing comparable in that space.
The Dairygold move last week well and truly means Dairygold and Ornua are on a relationship break. The undertones suggest that the reasoning behind the Dairygold move goes back to when the board was being restructured.
Dairygold tabled an option to move Ornua towards an unlisted plc, giving some shareholder value to farmers. However, reading between the lines Dairygold believes it wasn’t handled, discussed or accepted well enough and ultimately never materialised.
So, the other big gripe that Dairygold seemingly has with Ornua is that Ornua is not passing back enough of the premium it’s getting from the market to its members (the co-ops). Hence, it says comparing between the PPI and the average milk price paid by the co-ops is not fair. At the moment there is a 3c/l difference between what Ornua is getting back from the market for product sold and the base price the co-ops are paying out, allowing the co-ops a processing cost of 7c/l.
Dairygold argues that Ornua is stacking up cash, retaining excessive profits while not having to invest in primary processing facilities (ie take on debt). When we look at the books we can see Ornua’s profits are rising in real terms and percentage terms and last year was an exceptionally good year.
Over five years are they excessive compared to industry norms? Probably not. For the last five years Ornua’s EBITA (earnings) have risen from €43m to €54m, €60.5m, €71.8m and last year (2020) hit €107m. Reacting to the COVID-19 retail surge really paid dividends in 2020.
At the same time, Ornua’s net assets lifted from €500m to €603m last year.
Net cash at Ornua lifted from €57m to €144m in 2020. So, in one way, the frustrated co-op directors are right – Ornua is increasing profits and banking cash. However, returns to Ornua members have also increased. In total, in 2020 between monthly premium bonuses and year-end cash bonuses, over €68m went back to members. That’s almost double what money members got back in 2018. To date in 2021, over €54m in premium has gone out to members.
If Ornua has to defend the US market and cut the price of Kerrygold cheese on the shop shelf to keep new entrants out, then ultimately farmers are going to be losing out on margin by this shareholder move. Who is on the board that has to take responsibility?
There are 16 board members at Ornua in place to do what is right for Ornua. Six are dairy farmers
Remember, Ornua has a relatively new board. This is its first major challenge. There are 16 board members at Ornua in place to do what is right for Ornua. Six are dairy farmers – three farm organisation representatives and three from member nominations.
However, four of the six farmers supply milk to either Dairygold or Glanbia, so what are the chances of those farmers jumping up and down by this latest move? Slim, I’d say. Will they prove me wrong? Can the other farmer nominees get any traction? Some of the other non-farmer nominee representatives are working in the industry and are unlikely to rock the boat.
Dairygold is obviously not happy
So, from the outside looking in, it will be up to the two Ornua executives and the three independent non-executives to lead the debate on this. Should there be severe sanctions for shareholders who compete in the same markets? Is governance still conflicted? Dairygold is obviously not happy that it is further from the decision-making process in Ornua.
The overriding message from farmers not involved in Dairygold or Ornua is that surely this row is something that should be sorted out around the Ornua board table, not on a shop shelf in the US. Clearly, governance is still an issue with Ornua if some members see no problem competing in the same markets or not alerting Ornua to competing products. Ultimately, the Irish milk supplier loses and whatever additional €1m or €2m Dairygold might earn with this deal, it looks like dairy farmers will pay the price in the short term as margins to Ornua will be lower. In the long term it could undermine the Kerrygold brand which Dairygold has a large stake in.