Business Farming

Wednesday 17 September 2014

'This really is a case of taking away two legs of the three-legged milking stool'

Thomas Cooke

Published 31/10/2012 | 06:00

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Farmers are known for their common- sense approach to life and business. This trait is not confined to the farming community by any means, but farming is a business that requires common sense decisions on a constant basis.

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The consequences of making uninformed or unthinking decisions are often immediately apparent when the lives of our animals and the wellbeing of our business or our families are affected by such bad decisions.

What are farmers to make of the Glanbia PLC proposal to separate the core Irish milk manufacturing part of the Glanbia business from the global dairy and food ingredients parent?

The proposal and subsequent presentations, with its figures, jargon and corporate-speak, are almost mind-numbing to experience. Before we dive into the detail of any proposal, we must first decide if this is the correct strategy or direction. What is the overall strategy and does it make common sense to do this?

Farmers are being asked to separate the milk manufacturing business from the Dairy Ireland part of the PLC and put this component into a specially formed limited company which will be jointly owned by Glanbia Co-op and the PLC in a 60:40 joint venture called Glanbia Ingredients Ireland Limited (GII). In addition to this we are being asked to reduce the Co-op ownership of the Plc from 54.4pc to 41.4pc. This 13pc ratio change equates to an almost 24pc reduction by the Co-op of its share of the PLC.

Glanbia PLC is a very successful company. It had total earnings before tax, depreciation and amortisation (EBITDA) in 2011 of €212.2m on a turnover of €2,734.6m. The Dairy Ireland division had an EBITDA of €77.4m from its combined businesses of milk manufacturing, agribusiness and consumer foods.

Last year the milk manufacturing section, which is proposed to form the basis for the joint venture, yielded €44m EBITDA.

Income

However, the average over the previous five years is reported to be €24.2m, including a loss of €18m in 2009.

It is on this single component of the Glanbia business that farmers will solely depend on for their manufacturing milk income over the next generation. This really is a case of taking away two legs of the three-legged milking stool.

Does it make sense to do this in an era when there will be volatility in milk price, a reduction in single-farm payments (on the most productive farms), when farmers are borrowing heavily to invest on farms and all this in a world economy in the midst of recession?

Why is this proposal coming at this time? Glanbia state there will be a 60pc growth in milk output in the post-quota era and this necessitates a major investment in a new plant. This assertion is based on a survey of farmers carried out in 2010. I know from my fellow farmers this survey is not a sound basis to project milk output growth in the coming years.

Many farmers have completely revised their expansion plans because of the weather and high input costs of 2012.

We will always have weather issues, but it is universally accepted that there will be milk price volatility in the quota transition period. I believe it should have been a prerequisite to have fully evaluated the survey findings to establish the true basis of projected milk output growth before even considering such an investment.

The majority of the board of Glanbia PLC has decided that it will not fund the investment in a new plant, because the return on the investment is below the PLC target. To put this investment in the context of Glanbia's global business, the new investment is in the order of €150m over a period of three to five years in a company with total revenue of €2,734m in 2011.

The joint venture proposal is simple in its objective; put the entire burden of the investment in processing expansion and responsibility for existing processing on the single milk processing component of the Glanbia business because the PLC says it cannot justify the investment. Does it make sense that the farmers would take on this direct investment in processing while at the same time the total on-farm investment in milk expansion would be in the order of €640m?

To secure the future growth and development of the dairy industry, farmers need finan-cially robust purchasers with efficient milk processing capacity and leading edge research and development facilities.

We need global marketing ability to sell top-end commodities, consumer, nutritional and food ingredient products. We need the optimisation of buying and selling power on a global scale. We need to maintain the benefits of the security of the structures we have built over the past decades under a single parent company structure where farmers are the majority shareholder.

The portrayal of the joint venture as a co-op is a myth, and like all myths we would like to believe that it may at least be partially true. The PLC partner in the proposed joint venture would still retain all the legal rights and responsibilities to fully assert its position and obligations as a publicly quoted company at the board table even though it is a minority partner in the business.

Decisions on milk price etc would be made in that joint venture on the very same basic principles as they are made today in the PLC board. While the business is legally independent, in reality it is only as independent as its financial situation dictates.

global

This is a massive decision for dairy farmers and people who believe in the co-op ethos. Glanbia PLC was founded by the Co-op and built up through the Co-op majority stake.

PLC share investors see Glanbia as a solid, well-grounded company with a global outlook and have put their money into shares in Glanbia precisely because it is what it is, a farmer led business with a PLC approach on the global food ingredients market.

Farmers with a majority on the PLC board are often portrayed as a hindrance to PLC development and growth -- this is wrong. Stock investors now want to see real people, do real business, doing real things with real products in real markets. Investors have been badly burned by virtual companies over the past five years. Need I mention Anglo Irish Bank?

Glanbia is a leading global food company with products and brands that are the envy of competitors. The company has management and employees that are at the highest level of performance globally. I am very proud to be associated with the company and looked forward to the benefits that the years of struggle have achieved.

Why then, are we changing the entire structure and ownership of Glanbia and its relationship with farmers, our agribusiness, our consumer foods and all the strategic investment the farmer-led board has made over the years because of a relatively small one-off investment in a milk drying plant?

At the end of the day, the responsibility lies with each Glanbia Co-op shareholder. Believe nothing -- no matter where you read it or who said it -- unless it agrees with your own reasoning and your own common sense.

Then vote accordingly.

Thomas Cooke is a Glanbia milk supplier who farms at Grange, Barna, Thurles, Co Tipperary

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