Farm Ireland
Independent.ie

Saturday 23 September 2017

Can our dairy co-ops afford to stay small?

Does Ireland need a Fonterra-type model?

This question has dominated much commentary on the domestic dairy sector here over the last number of years.

Ever since over 90pc of the Kiwi milk pool merged to form the biggest dairy company in the world, Fonterra has been a massive success story. The recent announcement that Arla are to merge with Milk Link in the UK to form one of the biggest dairy companies in Europe has brought the issue to the fore once again.

So it's certainly refreshing to hear one of the most respected analysts on the international dairy scene warn us not to get bogged down in whether we have a giant processor or not.

Rabobank's Kevin Bellamy believes the Irish Dairy Board should be able to market our product and, provided it remains low-cost, it will find a ready market.

He even believes that our massive seasonal peak is a perfect fit, coming as it does at the opposite time of the year from the other big exporters' peak in the southern hemisphere.

But our seasonal production model will always be a double-edged sword. Granted, by focusing on low-cost milk from grass, we are well-placed to be the cheapest source of milk in the north.

But it also forces us to produce long-life commodities such as butter, cheese and powders. And it's in this commodity game that size counts.

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However, we've come up with an Irish solution to this increasingly Irish problem.

specialisation

Rather than crowbar our local co-ops into a Fonterra-type mega co-op, the co-ops have developed processing specialisation in different commodity products.

This has allowed a nice little line in inter-co-op trading to develop, where processors will often process each other's milk, depending on what the supply/demand situation is for each type of commodity.

In theory, this gives us the best of both worlds. Processing scale alongside local independence.

But there is an Achilles' heel in this arrangement. Irish dairy farmers expect their co-op to always be able to return the same milk price as their neighbours.

But if co-ops continue specialising, the market returns that determine milk prices will become ever more divergent. We've already seen butter head off on a different trajectory from proteins over the last year.

And can a single co-op or even pair of co-ops deal with the capital requirement when there's a big surge in milk production, such as we are expecting in the next eight years?

These are big questions, and ones that dairy farmers cannot afford to leave to analysts alone to muse over.

Indo Farming