Thursday 17 October 2019

Glanbia's Michigan milk plant will churn out up to 3.6m litres daily

Glanbia Plc Managing Director Siobhan Talbot Photo: Bloomberg
Glanbia Plc Managing Director Siobhan Talbot Photo: Bloomberg

Dan White

Glanbia's $400m US expansion will consolidate its position as the largest producer of American-style cheddar cheese and add over one billion litres to its US milk pool.

On Friday the company, Ireland's largest dairy processor, announced that it was in "advanced discussions" with three local dairy co-ops to build a greenfield cheese and whey plant in the state of Michigan.

The plant will have the capacity to process up to 3.6 million litres of milk daily and come on stream in the second half of 2019. Ownership of the plant will be split 50:50 between Glanbia and its US partners, Dairy Farmers of America, Michigan Milk Producers Association and Foremost Farms USA. The co-ops will supply the milk while Glanbia "will have full responsibility for all commercial, technical and operational aspects of the business", according to the Glanbia announcement.

A company spokesperson declined to say how much the proposed plant will cost and what proportion of the investment will consist of equity and how much of debt. However, Davy analyst Jack Gorman estimates that a total investment of up to $400m will be required, split roughly equally between debt and equity.

The new plant will have the capacity to produce 130,000-140,000 tonnes of cheese annually. This will add up to 30pc to Glanbia's existing US cheese capacity, which is located at its wholly-owned operation in Idaho and its Southwest Cheese joint venture in New Mexico.

With an annual capacity of up to 600,000 tonnes when the new plant hits full production, the new deal will consolidate the company's position as the number one producer of American-style cheddar.

Glanbia is also one of the leading American processors of whey, the material that remains after the cream has been removed from milk to make cheese. Whey is one of the main ingredients in the sports nutrition brands produced by Glanbia's Global Performance Nutrition subsidiary.

As American milk output is far less seasonal than in Ireland, the new plant will process in the region of one billion litres annually, bringing the total volume of milk the company processes in the US to almost five billion litres - two-and-a-half times the volume of milk it processes in Ireland.

Long-time Glanbia watchers point out that the deal seems to be closely modelled on the existing Southwestern Cheese joint venture.

If that is the case then, unlike in Ireland where the processor carries at least some of the risk of milk price movements, the raw milk price paid to US farmers is based on a formula directly linked to global dairy commodity prices.

This means that when, as happened in 2015, world milk prices collapse, it is the farmers rather than Glanbia who take the hit. The main advantage for Glanbia of a joint venture, rather than an outright ownership, is that it is highly capital-efficient.

A $400m investment split equally between debt and equity would require an up-front investment of only $100 from Glanbia with the debt being parked, probably without recourse to Glanbia, in the joint venture.

Despite getting the thumbs-up from analysts, investors weren't excited by the deal with the initial 1pc increase in the share price following the announcement having largely disappeared by the close of trading.

The Glanbia share price has been treading water in recent months, down by 9pc over the past twelve months and by 10pc over the past six months.

Glanbia shares, which are currently trading at €15.57, have underperformed both the ISEQ Overall Index of Irish shares and the FTSE All-Share Index over the past six and twelve month periods.

Sunday Indo Business

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