Cantillon

Inside the world of business

UK sees no evil in banking denials

THE SUGGESTION – swiftly denied by the UK chancellor – that British banks may need another state bailout next year will have raised a wry smile at the Financial Regulator and the National Asset Management Agency.

The New Economics Foundation (www.neweconomics.org) has concluded that British banks are riddled with losses that they are not confronting and are only functioning because of cheap credit from the Bank of England.

The British banks were rescued through a combination of liquidity measures. On top of upfront capital injections, the Bank of England lent billions against illiquid assets. At the same time, the UK government underwrote losses on these assets.

The drawback with the approach is that it does not incentivise banks to face up to their losses. While this reduces the immediate strain on the British exchequer, the danger is that you end up with zombie banks.

Say what you might about the approach adopted here, it does represent a serious effort to get the banks to recognise their losses upfront and move on. The fact that we may have come close to bankrupting the State in the process by presenting a €50 billion bill is another issue.

This presumably was the point George Osborne was trying to make yesterday, pointing out that “the banking system in Britain is much more stable than, for example, the banking system in Ireland”.

But as the New Economics Foundation points out, UK banks face a familiar sounding “funding cliff” in January 2012 when they must repay the £185 billion they borrowed from the Bank of England against £287 billion of illiquid assets. Eventually the bond market vigilantes will get around to the issue.

Lakeland Dairies’ methods ahead of herd 

ANYONE WHO wants a concrete example of the kind of innovative, export-driven industry the Government is trying to promote should take a trip to Lakeland Dairies’ new processing plant in Cavan.

The €20 million plant, the largest of its kind in Europe, is an impressive piece of agricultural infrastructure and an example of the kind of sophisticated dairy processing methods that those in the industry hope will make Ireland a leading player in the lucrative global dairy market.

The consensus is that Ireland’s dairy industry needs to consolidate if it is to compete internationally, particularly when milk quotas end in 2015. Lakeland Dairies has taken the advice on board, rationalising its operation in recent years.

Approximately 85 per cent of the milk supplied to Lakeland by its 2,500 farmer-suppliers goes into the production of food ingredients, ie, powdered, dry milk which is supplied to infant formula producers such as Danone and Wyeth, or exported to Africa, a growing export market for the co-op.

The remaining 15 per cent goes into food products, such as coffee cream and ice cream, the more value-added part of the business.

The business model has evidently worked. Despite the difficult conditions, the co-op made a pretax profit of €1.4 million in 2009, despite a sharp drop in turnover. It is also keeping its farmer suppliers happy, increasing milk prices this year.

Unfortunately, Lakelands is the exception rather than the norm. Despite the widespread belief that Ireland can benefit enormously from the increase in capacity that will be available post-2015, consolidation between co-ops has been slow to take place. The defeat of Glanbia’s proposal to sell its Irish dairy division to its co-op this year hasn’t helped as it was seen leading consolidation.

If Ireland is serious about capitalising on its potential to be a major player in the global dairy industry, it needs to take its lead from processors such as Lakeland Dairies.

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