Cantillon

Inside the world of business

Irish dairy producers enjoy full-fat profits

Yesterday two of the country’s largest co-operatives posted full-year results. Both Lakeland and Dairygold enjoyed strong rises in revenue, reflecting the bumper year for dairy markets in 2011.

Their profitability is particularly impressive. Lakeland in particular posted a 52 per cent rise in operating profit, reflecting greater efficiencies at its high-tech processing plant and a greater mix of more value-added, innovative products. The increase in underlying profits, though relatively low in terms of operating profit margins, is particularly praiseworthy if we consider one of the unique aspects of the co-operative business model.

While most successful businesses are predicated on the simple model of keeping input costs down, co-operatives find themselves in the anomalous situation of being constantly under pressure to pay a high price to farmers for milk, their main input cost.

That Dairygold and Lakeland succeeded in delivering good operating profits, while still paying a decent price to their farmers, is no mean feat.

Nonetheless, there is no room for complacency. The strong 2011 performance was as much a result of favourable global commodity markets as good business practice.

Already, 2012 has seen a drop-off in dairy prices, due in part to temporary oversupply from the US and New Zealand.

Volatility is part and parcel of the business, and dairy farmers are experienced in managing peaks and troughs.

Those in the industry point out that, regardless of supply issues, global demand for dairy-based products is rising exponentially, particularly as Asia’s middle class expands.

Irish dairy food producers have also made strides in developing innovative products that generate higher margins, as well as capitalising on the emerging whey industry, securing a crucial foothold in the burgeoning infant formula industry, for example.

The major challenge for the industry is how it manages the transition to the post-2015 dairy landscape, when Irish farmers will be able to produce an unlimited supply of milk for the first time since 1984.

Taking stock of Iseq index  

It’s easy to forgot that just over five years ago the Iseq index of Irish shares was trading at a record high north of 10,000.

Thanks in large part to the collapse of the banking sector into State control, the index spent most of last year trading below 3,000.

But all is not lost for the venerable old lady of Anglesea Street. Keen market watchers will be aware that the Iseq jumped 12.2 per cent in the first quarter – its best first-quarter performance since 2000.

Irish shares advanced 1.5 per cent in March – their sixth successive month of gains – and during the month the Iseq reached a 52-week closing high of 3,360.

The performance is in line with US markets: the Dow and SP 500 were up 8.1 per cent and 12 per cent respectively, according to a note from Davy. It is also better than the FTSE Eurofirst 300 and Stoxx 600, which fell by 0.6 per cent and 0.4 per cent last month.

The Irish Stock Exchange (ISE) has suffered some blows in the past 12 months or so. Market heavyweight CRH moved its primary listing to London, following a pattern set by Greencore and Elan, while others including drinks group CC and conglomerate DCC are monitoring the situation.

There has been a rebalancing of the Iseq away from the financials. CRH, Ryanair, Elan and Kerry Group are now the index heavyweights in that order, with Paddy Power and Aryzta also having a heavier weighting than Bank of Ireland, the last of the banks on the senior list.

The ISE has long a way to go to reach the giddy heights of February 2007, but if results from the Irish corporates continue to perform, the future role of the exchange will be assured.

Estonia has soft landing after ‘hard-core’ response to slump

The Estonian government’s response to the dramatic 18 per cent contraction in its economy in 2008 was “very hard core”, the Baltic country’s president, Toomas Hendrik Ilves, said during a visit to Ireland, which ended yesterday.

Unemployment rose to 18 per cent as the government imposed pay cuts of 10 per cent and more in the public sector, while in the private sector the cuts were double that.

The country’s export-led economy has since bounced back and unemployment is now a less troubling 8 per cent.

Asked about the EU’s response to the economic crisis and the controversial emphasis on austerity, Ilves said Estonia played “by the rules” but he did not think the same held true for Greece.

Estonia’s average salary is 15 per cent lower than the minimum wage in Greece, yet “we are bailing them out”.

More than 70 per cent of Estonia’s parliamentarians voted in favour of Estonia’s participation in the European Financial Stability Facility, but a poll the following day showed that an equivalent proportion of the population was against “bailing out Greece”.

Such a situation is not sustainable, he said. For solidarity to work, those involved have to obey the rules.

Asked if Estonians saw themselves as also being involved in “bailing out” Ireland, the president seemed surprised, and said that the Estonians had a high regard for Ireland and it would take a lot to change that.

Quote of the Day

Ireland and the Irish Government and the Irish people have undergone a very, very hard and harsh fiscal consolidation programme and I would say from all angles they deserve to be praised for their efforts – ECB president Mario Draghi

Today

The Central Bank will publish its quarterly report, outlining its latest views on the prospects for the Irish economy

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