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Trevor Lockhart: 'Global forces have sparked a collapse in local milk prices'

The Big Interview

Chris McCullough talks to the chief executive of Fane Valley about what can be done to alleviate the current crisis which is threatening the dairy sector.

Q. Fane Valley is at the forefront of processing milk in Northern Ireland, an industry that is going through a real tough time at the moment. How do you keep your farmer suppliers abreast of what is going on in the markets?

A. The main method of communication is through the staff in our agriculture team who are engaged directly with our milk supplier base on a daily basis. In addition we will hold periodic information meetings. Externally of course there is a lot of commentary in the agri-media concerning movements in dairy markets and many farmers will source information directly from a range of online sources, for example the New Zealand Global Dairy Trade auction or the EU Milk Market Observatory.

Market prices remain very depressed and although the most recent New Zealand auction recorded some improvement, the absolute price levels being achieved still leave local milk producers incurring heavy losses.

Q. Currently, farmers are protesting in supermarkets across Northern Ireland and are alleging the retailers are selling liquid milk as a loss leader. For processors, liquid milk sales are only a small percentage of their business. Does the supermarket price have such an influence on what farmers are paid?

A. Only 10% of the milk produced in Northern Ireland is sold as liquid milk through retail stores. The remainder is predominantly sold in the form of milk powders and cheese as a food ingredient in export markets. Nonetheless, the price realised for every litre of milk contributes to the overall return from which producers are paid, so the approach adopted by retailers is an important part of the mix. However, what happens in the global dairy markets will have a much greater influence on the farm gate milk price.

Q. Moving on to other dairy products such as milk powder, butter and cheese. They are also hit by falling prices around the world. What are the main reasons for this?

A. The reasons are threefold. The imposition, by Russia, of a ban on EU food products in reaction to the enforcement of sanctions in response to the Ukraine conflict closed the door on the market for one third of the cheese and one quarter of the butter produced within the EU. Secondly, the economy in China is clearly weaker.

China is a country which accounted for 53% of global whole milk powder imports. They are also a significant customer for whey powders. In 2015 the volumes shipped to China have fallen by two-thirds. Thirdly, oil-rich countries have historically also been major buyers of dairy products. As oil revenues have fallen so too has their ability to purchase dairy products. The combined impact of these factors coupled with increased global supply has triggered the price collapse.

Q. Prices generated at the Fonterra auction in New Zealand seems to be a driver for prices around the world. Do you think it should have such dominance in the milk industry?

A. In short, no. Although exports from New Zealand are significant in the context of the international trade in dairy products there is a disproportionate focus on the Global Dairy Trade auction as a barometer for prices on a wider basis. Questions have also been raised on how volumes are allocated and how the auction itself functions.

Q. Going forward, how should farmers be paid for their milk and by which method should the prices be set?

A. The price payable to farmers will ultimately be reflective of the returns available from the marketplace. Like any market the returns will move up and down in line with supply and demand etc. The difficulty is that over time these market swings, particularly from commodity markets, have become more frequent and more severe. The challenge therefore is - how do we better manage this volatility? The use of longer-term customer contracts and futures markets will become more prominent in the dairy industry over time.

This will enable processors and farmers to develop new supply chain models which will allow all parties to better manage risk. It will also give farmers better visibility and security of forward milk prices.

Q. The majority of consumers tend to be on the side of the dairy farmer and are asking retailers to pay the producers more for their milk. Recently Asda and others have announced paying 10 pence per litre more to processors. How do you see that extra 10 pence being distributed to the farmers?

A. The support of consumers who day and daily buy our local dairy products is hugely important and much appreciated. Any extra revenue received from retailers can either be paid to a small group of farmers who would be linked directly with supplying the retailer concerned (this has not historically been the case in Northern Ireland) or the extra revenue can be spread over all the milk supplied by all the producers to the milk processor. In the case of the latter the overall movement in farm gate price will be limited given the relatively small proportion of overall milk volume which is sold through retail stores.

The additional income however from this source can undoubtedly represent one element of the overall solution needed. The initiative taken by several retailers is therefore to be welcomed.

Q. Do you think the Northern Ireland Minister of Agriculture Michelle O'Neill is doing enough to help the local dairy industry?

A. The Northern Ireland Agriculture Minister is actively engaged in the issue and is striving to do everything within her power to achieve the outcomes we need to address the very severe challenges facing the sector. Our collective problem is that the key short-term decisions we are demanding rest with Brussels and the European Commission has to date not fully grasped the gravity of the problem.

Q. If you were present at the forthcoming meeting of the Council of Agriculture Ministers in Brussels in September, what message would you put across to those present about how the dairy industry can be saved?

A. In view of the urgency of the matter, the European Commission must use the tools they have already got. We can question later whether they our fit for purpose in the longer term. The long-established intervention mechanism is intended to provide a safety net for product prices in times of extremely low market returns.

The last time the relative price levels at which intervention can be triggered were reviewed was in 2003. Farm costs have risen sharply since then.

The support threshold is therefore outdated and operates well below the level needed for even our most efficient dairy farmers to be profitable.

It also makes business sense for the EU to act. The product purchased through a revised intervention mechanism can be released back into the market in times of higher returns - hence delivering a profit for EU finances.

Perhaps most importantly of all a signal from the EU that they were willing to act would send a strong signal to the market which in itself would put a higher floor in the market.

Q. Even though dairy prices are falling across Europe and across the world, do you think it is possible that Europe, with 28 different Member States, can come up with one solution to fix the problem?

A. The difficulty for Northern Ireland is that as a result of its higher dependence on international exports it feels the impact of global price changes first. By the time the rest of Europe recognises there is a problem Northern Ireland is really hurting. As Europe has grown it has lost the ability to be responsive to regional needs and although a European Union solution is possible the decision-making process is simply too slow.

There is an important meeting of EU Agriculture Ministers on September 7. The local industry is calling on the European Agriculture Commissioner, Phil Hogan, to come forward with solutions and in particular deliver a more effective intervention support mechanism.

Q. Liquid milk is now cheaper than water in the shops. Surely that cannot be right?

A. When one considers the time and effort required to rear a cow and the cost involved in the production and processing of milk it is extremely hard to reconcile the relative retail prices between the two end products. All dairy farmers are asking for is a fair price for the quality product they produce. In the same way I believe farmers would wish those involved in the supply chain for bottled water or any other food product to be rewarded fairy for their efforts.

Q. Just recently Fane Valley teamed up with Lakeland Dairies in a bid to "enhance economies of scale and overall competitiveness for their farmer members". Was the timing of the merger planned with current markets in mind?

A. No. Our discussions with Lakeland Dairies commenced well before the current crisis unfolded. The main driver was a recognition by both boards that they have a responsibility to ensure that their business models can be competitive and profitable in the longer term.

The co-op philosophy is that farmers working together can achieve more than by working independently. The same is true for co-operatives.

The fact that our discussions concluded at a challenging time for dairy markets makes the merger with Lakeland more relevant, not less.

Q. Other sectors in the agriculture industry are also facing a tough few months with prices falling for beef, lamb and arable farmers. Outside of farmers, other businesses are strongly affected by falling produce prices. How is Fane Valley coping?

A. Overall the group continues to perform satisfactorily. One of the strengths of the Fane Valley business model is its diversity across a range of sectors. When one sector is experiencing difficulties generally others will be performing better.

More widely, the agri-food sector is heavily reliant on food exports and the strength of sterling relative to the euro has negatively impacted on margins across the industry. This will make 2015 a more challenging year for farmers and processors alike.

Q. The Fane Valley Co- operative was formed in 1903, and over 110 years later still remains 100% farmer-owned by 1,800 shareholders. What do you think are the basic ingredients that have given the business its longevity?

A.  The business has remained true to its core values over the decades whilst also remaining focused on the needs of the market. Co-operatives are often said to be very traditional in their approach and too slow to change. First and foremost Fane Valley is a business and we have to be commercial in everything that we do. We have to take decisions with are heads and not our hearts. In 112 years the world of farming and food has changed a lot and Fane Valley has always been willing to change with it to ensure that it can be sustainable in the longer term.

Q. The company has a turnover in excess of £525m, with over 2,100 employees on sites in Northern Ireland, Republic of Ireland, England and Belgium. How do you keep an overall view of how all the businesses are performing?

A. The key to running any company the size of Fane Valley with 26 different operating sites is a team of skilled people and effective systems and processes.

Each division within the group has a clearly defined three-year strategy with target milestones to achieve along the way. Senior group and divisional management meet monthly to review operational performance and progress toward strategic objectives.

Q. Let's not forget about the other sections of the business that make up Fane Valley. Can you give us an outline of the others and how they complement Fane Valley and its farmer owners?

A. The roots of the co-op are in milk processing and this still accounts for approximately 20% of group revenues. The largest division within the business today by turnover is red meat processing through Dungannon-based Linden Foods.

Our operating activities in red meat extend to two factories in Northern Ireland, three factories in the Republic of Ireland, one in England and one in Belgium. Within our food division Fane Valley own Whites, an oat milling business in Tandragee, Hilton Meat Products in Carrickfergus and Duncrue Food Processors in Belfast. All of these businesses buy raw material derived from what our farmers produce.

On the opposite side we also have businesses which are focused on supplying what the farmer requires by way of inputs. We manufacture approximately 275,000 tonnes of animal feedstuffs and run 13 retail stores.

Our involvement therefore extends right along the supply chain.

Q. You joined Fane Valley back in 2004 as a Project Development Manager. Can you outline your career path prior to becoming chief executive in April 2007?

A. Having studied agriculture at Queen's University, Belfast, I started working in Georgia, USA in the management of a dairy farm and milk processing business. After a few years I returned home to start a career with the Ulster Farmers' Union, initially in a policy role.

I subsequently managed public relations before progressing to the role of Commercial Director. The opportunity then arose to join Fane Valley - Northern Ireland's largest agricultural co-operative. Having started as Project Development Manager I then progressed to Deputy Chief Executive before becoming Chief Executive in April 2007.

Q. If you were handed a magic wand and were given three wishes, what would they be?

A. One - Farming: For a strong, competitive and vibrant agri-food sector in which all the participants achieve a fair return on their investment.

Two - Global: The world's wealth and resources could be more evenly distributed.

Three - Sporting: Ireland can win the Rugby World Cup!

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