Sunday 19 November 2017

Cream rises to the top as dairy sector leads growth

Co-op chief says that far from being the sunset industry it was portrayed as a few years ago, agriculture will be at the forefront of our new economic model. By Peter Flanagan

AARON Forde has had a busy day, and it's only 11am. The chief executive of Connacht Gold has dealt with a line of press so far this morning, the day his company published its annual results. But the results are good, so what could have been an ordeal is now a lot more palatable.

As head of Connacht Gold since 2004, Mr Forde is responsible for the dominant co-operative in the Mayo/ Galway/Donegal region, which processes some 370 million litres of milk a year.

While it is best known for its consumer brands, Connacht Gold and Donegal, it also has extensive livestock and agri-retail interests and is involved in a timber company that supplies around a fifth of the saw log in the country. Add in passive investments in a number of companies and its reach is startlingly large.

Last year Connacht had a solid year, albeit one that reflected the issues in the industry as a whole.

The dairy sector is a low margin, high turnover business and Connacht's results amply demonstrate that. Turnover jumped 16pc to €345m but operating profit rose by only €500,000 to €3.29m. For Mr Forde, that is the nature of the industry.

"We were quite happy with the year, and our shop sales posted low single-digit growth which was very encouraging.

"There is huge competition in the dairy business though, and across the sector all eyes are looking at 2015 and the removal of quotas," he said.

The year 2015 has been marked on dairy workers' calendars for some time now. On April 1 that year EU milk quotas, which cap milk production in the Union, will be removed for the first time in more than 30 years.

"I've worked in this business all my life and this is the first time I will have seen capacity increased, so the focus is very much on adding more value.

"It's a different era now to a few years ago, there's more of a challenge to find increased raw material at a price sustainable for everybody -- suppliers, processors, retailers.

"It's a hell of a different challenge to the others we've faced over the years and it's an interesting time to be involved."

Unsurprisingly, most milk producers are looking forward to being able to increase production dramatically and co-ops across the country are surveying their suppliers to get an idea how much they plan to increase their output.

Most of the co-ops based in the South are looking at increases of up to 50 or 60pc. For Connacht, it will probably be a more modest 20pc though.

"The main reason for the difference is the land capacity is different to Cork and Kerry. We have some very good fields in Mayo, Galway and east Donegal but the capacity just isn't there compared to further south.

Planning for the event has been going on for some time, and all the big milk-processing companies are getting their ducks in a row as it were for the change. Some are spending huge money to upgrade their processing capacity, while others are frantically looking for partners with spare room. According to Mr Forde, Connacht Gold is well prepared.

"We have some capacity right now. At some point we will have to talk about significant capex but at the moment we are okay -- we have been running an operational excellence programme supported by Enterprise Ireland and have found great efficiencies through that.

Capacity

"There has been a lot of focus on getting extra processing capacity throughout the business but perhaps the most important thing has been securing markets for the milk. We can't just wake up on April 1, 2015, and say 'we've 10pc extra milk here, will you take it?' To that end, we've been following a long build, as it were, to establish markets for the product.

"There'll be a huge extra working capital requirement just to deal with extra milk so it's an important thing to be planning ahead. We're looking at fast-growing economies, growing populations with matching GDP numbers.

"West Africa, sub-Saharan Africa, the Far East and Middle East are the main areas we are focusing on and we're also doing some exploratory work in China in the nutritionals sector.

"The likes of Europe and the US are mature markets, where growth is low and populations are largely flat.

"As well as that, going in to those regions would mean taking on the big players and that would mean cutting margins to establish ourselves there. It's just not worth it."

Ireland is in a strange position in the dairy business. It is a world leader in milk production but it doesn't necessarily have the clout that its peers have internationally. Unlike New Zealand, where the Fonterra co-op is a significant driver in global milk prices, we have dozens of co-ops around the country.

That has led to suggestions that the co-ops here should look at merging into one major co-op to drive growth and economies of scale and so on.

Mr Forde acknowledges that, but while he believes there is probably scope for consolidation in the business, he's against the "single co-op" model.

"It depends on what market you want to play in. Fonterra is a huge global player but at the same time our model here has worked to our advantage because we are smaller and more nimble.

"At this point, I don't think we could hope to compete with Fonterra in that global commodities sector.

"One other issue with a big consolidation like Fonterra is where the processing centres would be. You can't have a dairy industry in the west if the processors are in the south, so that would need to be considered very carefully.

"It is the same with the talk of whether the PLC business model is better than the co-op model and vice versa. Both can work but for us the co-op model has worked very well so there doesn't seem to be much need to change it."

The attention the agriculture sector has been getting from the press and politicians recently is perhaps symptomatic of the sea change in Irish life since the bust four years ago.

The boom years were marked by a lot of things, but one of them was the very obvious movement away from agriculture and into the services industry. It was all about the "smart economy" then.

Now it's a lot different. One trend Mr Forde has seen is strong interest by younger people, who see dairy farming as a good prospect now.

A few years ago it was unlikely that so many would now be trying to get into farming.

"I suppose a few years ago they had a lot more career choices but dairy and farming in general has become a desirable path rather than the sunset industry it was seen as not so long ago.

"People are attracted to it by the prospects of growth and making a decent living. We were very far down the league table of industries at one point but that is changing, and politicians have seen that, particularly the export potential of the sector.

"Agriculture has always been a core competence for us as a nation and most of us are probably only one or two generations away from farming anyway.

"As a country, we have the knowledge, the expertise and the relationship with the land. It's something we need to understand and take pride in."

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