Samantha McCaughren: 'Dairy sector be warned, China's not always a land of milk and honey'
The Irish dairy industry recently got a sharp reminder that Brexit is not its only area of vulnerability. Fonterra, the huge New Zealand dairy cooperative that has long been admired by the Irish dairy industry, issued its second profit warning in three months and announced plans to sell some of its overseas businesses as well as closing processing plants internationally.
Last year the dairy giant reported the first annual loss in its 17-year history. Unsuccessful investments made in pursuit of the Chinese market are partly the source of its problems.
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Its shares have dipped to all-time lows and credit rating agencies have warned of possible downgrades in its debt rating.
Although Fonterra's milk volumes in New Zealand alone are several times larger than the total Irish milk volumes, Irish dairy processors have for many years seen Fonterra as an efficient and innovative exporter and they have studied its business carefully.
Irish dairy farmers have also sought to learn from their New Zealand counterparts which supply milk to Fonterra.
The difficulties experienced by Fonterra underline the precarious nature of trading in international dairy markets. When rapid expansion in markets such as China does not go according to plan, the thin margins of dairy processors leave little room to absorb the losses.
While Irish processors have been cautious in their overseas expansion and are well served by Ornua in their export operations, Brexit means they are under pressure to seek new markets. But as Fonterra's experience demonstrates, even the most streamlined and well-resourced milk-processing operations can come under strain very quickly.
Separately, some people in Irish dairy co-ops may be relieved that another recent development in Fonterra is unlikely to set a precedent here. Last Thursday, the New Zealand Agriculture Minister, Damien O'Connor, announced new rules whereby he will be able to appoint one person to sit on Fonterra's milk price panel, which oversees the price that Fonterra pays to farmers for milk.
Notwithstanding what some Irish dairy farmers may wish for, it's unlikely that Ireland's Minister for Agriculture, Michael Creed, will be rushing to explore that idea.
Aryzta's Project Renew
It's hard not to root for Kevin Toland, CEO of Aryzta. On a media day earlier this year, when he opened the doors to the company's Grangecastle facility in Dublin, the affable former-DAA boss enthusiastically detailed Aryzta's Project Renew, which includes cutting costs and selling non-core businesses. He readily admitted that the problems he inherited were deeper than he expected, which in turn led to a series of profit warnings.
So how is Project Renew going? A market update last week revealed that there is good news and bad news.
The good news was revenue growth of 1.3pc for the three months ended April 30, 2019. The tone of the company statement was one of stabilisation. But as the day wore on, the markets focused on the bad news - Aryzta reducing earnings growth forecasts for the year.
North America remains the key issue. A note from Swiss investment bank Vontobel said that the weak sales development was corroborating its view that Aryzta is losing some contracts to key competitors.
It believes that savings from Project Renew are not sufficient to offset the ongoing costs inflation. Vontobel also questioned the level of visibility available not only to investors but to management. "Reduce", was its conclusion.
Investec took a longer-term view, saying quarter-on-quarter volatility is to be expected in the early stages of a recovery plan.
Jon Cox, an analyst, perhaps got to the root of the issue. Despite management's best efforts, the latest profit warning "further hurt credibility".
"Management appears relatively relaxed about reaching its targets and improving profitability, but the market just won't give them the benefit of doubt," said Cox. Shares were down 10pc in the week.
And that is perhaps Toland's greatest challenge.
The turnaround plan is in train and some positive signs are to be welcomed. But he will need time to get it right - and the market's patience has been heavily tested already.
Sunday Indo Business