Tuesday 15 October 2019

Glanbia and Kerry blaze a trail for the co-op sector

Glanbia is making all the headlines this week as the company's likeable and capable chief John Moloney gets set to step aside.

Most of the focus has been on the stellar rise in the share price of the company since Mr Moloney took over in 2001.

Indeed, I recall farmers worrying that the company they helped set up was going down the toilet in late 2000 as shares languished at a miserable 42c. Compared to today's price, that's a 25-fold increase. Not a bad legacy by any stretch.

Kerry, led by the original doyen of Irish agri-business, Denis Brosnan, is also flying high at the moment. It has seen its share price triple over the last five years, allowing it to retain its title as the daddy of the Irish dairy industry.

In many ways, these companies are reaping the rewards of eschewing an easy life and going public many years ago.

At the time, it was anathema to farmers to allow outside investors get their hands on a slice of the co-ops they founded decades earlier and in much leaner times.

Indeed, the marriage of farmer controlled co-ops to profit-driven Plcs has continued to be an uncomfortable one, as Moloney found out after the first failed attempt to get farmers to relinquish a chunk of their shareholding of Glanbia Plc.

Farmers hate the catch-22 situation that develops as the business strives to grow – the company needs outside investment but that doesn't continue unless the farmers gradually relinquish control.

But the fact is that this model has turned modest initial investments by farm families into shareholdings worth millions. The big caveat, of course, is that the management makes all the right decisions.

It leaves one wondering if other dairy co-ops could also make the leap. Dairygold, Lakelands, Carbery, Arrabawn, Town of Monaghan and Aurivo (formerly Connacht Gold), are all big players in their own right, processing a combined total of close to 3bn litres of milk.

It could be argued these organisations are operating at the same level as their stock-market listed counterparts.

Carbery is a classic example. CEO Dan McSweeney avoids the limelight like the plague, but his company consistently pays out the highest milk price in the country to its farmer suppliers (much to the chagrin of their neighbouring Kerry suppliers). He is able to do this on the back of milk sales into premium products such as Dubliner cheese.

Cavan-based Lakeland Dairies has carved out a similarly profitable niche, providing the tiny UHT milk and butter sachets that adorn restaurant tables and airline meals all over the world.

Munster's Dairygold is the biggest of the 100pc farmer-owned co-ops with a 1bn litre milk pool. It has developed highly strategic relationships with international food giant Danone to produce highly profitable infant formula.

Prospects are bright for all of these co-ops as the EU milk quota regime that has capped production is dismantled in 2015. With global demand growing at 2pc a year, dairy processors should have no problem finding a home for the produce, provided they do their homework.

But is there a case for more of these co-ops to become public companies (plcs)? It's unlikely that any, bar Dairygold, have the scale to warrant a flotation.

The dairy sector needs to consolidate from 13 processors to what has evolved in Denmark and New Zealand. In the latter, the giant Fonterra accounts for over 90pc of production.

So Kiwi farmers have international clout when they wrestle for good prices with multinational customers. Here, it's the Irish Dairy Board which fills this role by providing an umbrella organisation to market produce for all the processors.

Is there a lesson here for the Irish co-ops?

Irish Independent

Also in Business