EU farming reforms likely to hit food firms

Under the new regime, milk prices will drop by 25 per cent over four years, while prices for skimmed milk powder will fall by 15 per cent over three years.

Levels of EU intervention in the butter market have been capped.

Farmers will be directly compensated for 81 per cent of the reduction in their income, with processors such as Kerry and Glanbia, left to buy and sell milk at market prices.

Analysts believe the package will hit the processors' margins however, leaving them with little option but to reduce their dependency on dairy production.

NCB analyst, Mr Paul Meade, said the changes would make it harder for companies such as Kerry Group and Glanbia to increase earnings over the medium term.

Mr Meade believes that the reforms will heighten competition in companies producing large quantities of commodity diary products.

He said both Kerry and Glanbia face the need to invest in new processing technologies and products so that their dependency on butter and skimmed milk production can be reduced.

In Glanbia's case, he said this should encourage a replication of the company's existing US business model which sees dairy by-products driving profits. He believes Kerry is less exposed to the potentially negative affect of the changes.

A spokesman for Kerry said that while the dairy reforms would be significant in the domestic environment, they would be relatively "immaterial" in the context of the company's overall operations.

Kerry has in recent years successfully diversified into the global ingredients market while its dairy business accounts for less than 10 per cent of about €3.8 billion in annual sales.

The spokesman said the reforms would drive competitiveness in the domestic dairy sector, both for producers and processors.

Merrion Stockbrokers analyst, Ms Niamh Brodie said that in theory the Irish dairy processors should be able to pass on lower milk prices to their buyers, but suggested that this could become difficult if the prices paid to farmers at the first stage of the process crept up in the future.

A Glanbia spokesman said the company continued to digest the reforms but acknowledged that the balance between the price of raw materials and the market price would be critical in the new climate.

Glanbia is somewhat more exposed than Kerry to the reforms because it takes 13 per cent of its turnover from bulk milk processing.

It too, however, has concentrated on widening its business base over recent years with the development of a successful nutritional business.

The spokesman said this would continue.

Goodbody Stockbrokers analyst, Mr Liam Igoe, agreed that the drop in prices would increase the incentive for milk processors such as Glanbia and Kerry to diversify their businesses.