Rebalancing may solve dairy processors' problems

In the second of a three-part series, Seán Mac Connell, Agriculture Correspondent, warns that the sector must react to falling market supports by changing its product mix

Huge changes have been taking place in the Irish dairy processing industry and in the past two years thousands of jobs have been shed in the sector as industry chiefs attempt to get to grips with rising costs and lower profits.

Dairygold, the Munster-based, farmer-owned dairy co-operative, with a turnover of €800 million annually, now has only 900 employees. Four years ago, it employed nearly 4,000.

Last September, Lakeland Co-Operative announced nearly 150 job cuts as part of an €8 million restructuring package to help it cope with market trends. The second largest dairy co-operative milk processor in the State signalled its intention to exit all branch trading in its agri-store network throughout Cavan, Monaghan, Leitrim, Longford, Louth, Meath and Westmeath.

Lakeland also said it would cease milk-drying operations at Lough Egish, Co Monaghan. This will increase milk throughput at its other facilities and will optimise the utilisation of plant and resources. Milk processing operations will be consolidated to other sites at Bailieboro, Killeshandra and Newtownards.

The pig and poultry feed mill and grain intake site at Castlebellingham, Co Louth, will be closed and sold at the end of 2006.

"Volatile markets, driven by the Fischler reforms, intense competition from New Zealand and Australia, increased energy costs and reduced EU supports, have each had a heavy impact on dairy processing margins and milk prices for farmers," said a company statement at the time.

Nothing seems to have changed since then, except a further erosion of the market supports that the EU had been giving to the dairy industry, which were slashed in the mid-term review of the Common Agricultural Policy (CAP).

The processors say while farmers have been compensated for these cuts, there has been no aid for them and this is making international markets outside the EU very difficult and volatile.

As recently as 2004, the proportion of the EU dairy budget spent on market support was 85 per cent. By next year, that will have shrunk to only 27 per cent. In 2013, it will be 20 per cent market support and 80 per cent direct aid to farmers.

Last week, these difficulties were being pointed out to the 1,500 farmers and processors who attended the annual Teagasc national dairy conferences in Limerick and Cavan. The best overview of the situation and a view of how processors might get themselves out of difficulty was given by Noel Coakley, the recently appointed chief executive of the Irish Dairy Board.

He said that the EU currently produces 142 million tonnes, or one-quarter of the world production of cows' milk, and that Europe has a 28 per cent share of a growing world dairy market.

He explained that in Denmark, one company processed 90 per cent of the country's milk; in the Netherlands, two companies processed 82 per cent of the milk produced there, and in New Zealand, one of Ireland's greatest rivals in the international market, one company processed 90 per cent of the milk.

In Ireland, which produces 4 per cent of EU milk, half of the Netherlands' output and one per cent more than Denmark, there are 15 processors.

He pointed out that Ireland was manufacturing too much butter from its milk and not enough cheese. Butter consumption, he said, was falling, but the cheese market in Europe was continuing to grow.

"The product mix we have here is out of kilter with the rest of Europe and in a sense we are running a risk. We need to bring the mix back into kilter."

He said 63 per cent of Irish milk was turned into butter, while in Europe that figure was 31 per cent.

He said 35 per cent of milk in the rest of Europe was turned into cheese and 31 per cent was turned into butter, while in Ireland only 17 per cent went towards making cheese.

There would be costs of perhaps €70-€80 million in expanding into the European cheese market and one would not know what the response of competitors would be, he added.

"The thing to remember is that the market is growing about one-and-a-half per cent per year, and over a five-year period, it will be significantly larger than the one you were trying to break into in the first place," he said.

On the need to consolidate our processing facilities, he said we should look at what was happening in other EU countries and it was up to those involved to decide what kind of industry they wanted. He explained there was very little over-capacity at processing level in the Irish dairy industry because of the seasonality of Irish milk production at peak milk production time. However, on a year over basis, utilisation was at about 55 per cent.

"With a flatter milk curve, other European countries have a utilisation capacity of about 85 per cent. Off-peak, we have capacity, but at peak periods we must have the processing capacity available," he said.

Part of the problem with the EU marketet was that there was a structural milk surplus of about eight per cent, twice the average Irish production of milk, which manifested itself in butter.

"Unless you can export 250,000- 300,000 tonnes of butter with export refunds out of the community, the market is not in balance," said Coakley.

While intervention for butter is becoming less of an option under the recent CAP reform, of the 61,656 tonnes of European butter that went into the scheme this year, 22,550 tonnes - the largest amount - came from Ireland. The amount of butter that can be taken off the market into the intervention system falls to 40,000 next year, and in 2008, said Coakley, the maximum allowed from European producers will be 30,000 tonnes.

The industry last weekend also focused on the Government's €100 million dairy processing investment fund, which will provide capital assistance to co-operatives or companies wishing to upgrade processing facilities.

It is understood there is at least one major project submitted for a cheese manufacturing plant.

The committee vetting the submissions will give its final decision next spring.