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Monday 16 October 2017

Is Glanbia Dairy deal going sour for farmers?

Performance nutrition, not milk, is the big cash cow for Siobhan Talbot’s Glanbia plc
Performance nutrition, not milk, is the big cash cow for Siobhan Talbot’s Glanbia plc
Gavin McLoughlin

Gavin McLoughlin

In the battle between instant and delayed gratification, the former is hard to defeat.

One wonders, in light of Glanbia plc's half-year results, whether the instant hit enjoyed by farmers when their Glanbia Co-operative Society voted to buy 60pc of Glanbia's 'Dairy Ireland' agri arm last February now tastes a little like soured milk? As part of the deal, active dairy farmers in the co-op enjoyed an average €10,000 windfall.

Under the deal, Glanbia plc - led by ceo Siobhan Talbot - essentially offloaded the low margin "dirty work" of milk processing as well as consumer brands and agribusiness supplies to the farmers' co-op, whilst retaining a 40pc share in the business.

This freed up the formidable Talbot to concentrate on Glanbia plc's high margin, sexier "performance nutrition" and lucrative infant formula products. But while the plc is flying high with group profits up nearly 5pc in the first half, a 200 basis point reduction in margin in Dairy Ireland - now Glanbia Ireland - drove a near-40pc EBITA decline compared with the prior half-year.

The 4,800 dairy farmer suppliers may currently be enjoying rising milk prices. But they must be wondering if they made the right margin call at their new joint venture.

Meanwhile at Kerry Group, the key focus is also very much on the company's booming ingredients division. Kerry reported a more than 10pc jump in ingredients revenue to €419m in Asia-Pacific alone according to its interim results. By contrast, revenue growth at the consumer foods division was up a much more modest 2.3pc to €677m and has been particularly hit by the fall of sterling brought on by Brexit-related uncertainty.

This is very relevant in an Irish context because Kerry's consumer foods division is a major exporter from Ireland to the UK and not as globally diversified as the ingredients division. Kerry itself is big enough and diversified enough to avoid any major impact from a worst case Brexit scenario.

But that does not mean that rural Irish towns, who benefit from the presence of a Kerry Group facility, will not feel some impact if the company's focus shifts ever further away from exporting consumer foods from Ireland to Britain.

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