| 8.9°C Belfast

Co-ops tackle milk shake-up


An ongoing shortfall in UK milk production versus quota has meant that Northern Ireland has not been constrained by quota for the past five years and acts as if quotas were already phased out

An ongoing shortfall in UK milk production versus quota has meant that Northern Ireland has not been constrained by quota for the past five years and acts as if quotas were already phased out

An ongoing shortfall in UK milk production versus quota has meant that Northern Ireland has not been constrained by quota for the past five years and acts as if quotas were already phased out

More investment, productivity and profitability will be needed when quotas end in 2015 but the NI industry is all set to milk the situation together, finds Paul Gosling

The ending of EU milk quotas in 2015 will fundamentally change the milk processing sector, but the impact is already, gradually, being felt. Rather than there being a ‘big bang’ introduction, the move away from quotas has been ongoing since 2009, with an annualised quota rise of 1% until 2013.

While quotas have assisted farmers to maintain production and generate income, they have been widely criticised as a system of protecting agriculture from market forces and which has held back inevitable structural reform. That substantial structural reform is now under way in much of the sector.

One of the UK’s largest agricultural businesses is the Belfast-based United Dairy Farmers, which has a £331m turnover and recorded a profit last year of £2.4m. This is a co-operative owned by the dairy farmers, who provide its milk.

It was formed in 1995 from the privatisation of the Northern Ireland Milk Marketing Board and its subsidiary, Dromona Quality Foods. Today the group’s divisions include Dale Farm, Rowan Glen, United Feeds, United Tankcare and United Quotas, the brokerage for milk quota.

The group is also responsible for the Dromona and Loseley brands, and handles more than half of all milk produced in Northern Ireland.

United’s profits and turnover have fluctuated in recent years, along with the rest of the dairy sector, but the trend is good. In particular, auction prices have improved, with the figures for June being the best ever for the month. United expects this trend to continue, reflecting tighter milk supplies and rising consumer milk prices on a global basis.

The Dale Farm division is especially well positioned because it is midway in a £39m investment programme — supported by Invest NI — which is already increasing milk |processing capacity. “United is confident that it has sufficient processing capability to handle any potential expansion in its members’ milk supplies after the abolition of milk quotas in 2015, through its own processing facilities in Dale Farm and those of its core milk-processing customers, who source milk for their processing requirements from United,” says Dr David Dobbin, its group chief executive.

Yet there is concern in the Republic that farmers there have not maximised investment returns or prices and are not adequately prepared for the ending of milk quotas. ICOS (the Irish Co-operative Organisation Society) recently commissioned KPMG to analyse the state of the dairy processing industry. ICOS represents 130 co-operative businesses and organisations in Ireland — including the dairy processing co-operatives — with some 150,000 individual members, 12,000 employees in Ireland and another 24,000 abroad, with a combined turnover of €10bn.

Neither ICOS nor KPMG is willing to release the report, but it is understood to conclude that higher levels of investment, productivity and profitability are required to get the industry into shape to meet a target of a 50% increase in output for the Irish dairy sector.

The report argues that Irish returns are not on a par with international peers, such as New Zealand, and it is more affected by seasonal variations than is the case in Northern Europe. However, processing costs are comparable with those of other producing nations.

ICOS says it is clear that Irish farmers will work together to achieve efficiencies. “The extent of collaboration that has taken place within the industry to co-operate with the study is encouraging,” says ICOS president Pat McLoughlin. “On this basis, we can reasonably look forward to further significant progress.”

Issues highlighted by the report include the wide variations in business models used by ICOS members, resulting in wide disparities in gross margins, seasonal impact, working-capital requirements, expansion potential and market opportunities. These factors will have to be considered as the dairy market becomes more global in character, says the report.

Achieving improved investment returns also requires evaluating the focus on providing peak supply capacity that goes into long-life commodity products. Yet investment in product innovation is low, compared to international peers.

But, says UDF’s Dr Dobbin, the conditions in the sector North and South differ significantly, and the challenges facing the sector in the Republic have already been faced in Northern Ireland. “The flexible quota market within the UK has meant that, from the early 1990s, Northern Ireland dairy farmers were able to expand their milk output through the purchase or lease of milk quota from farmers in GB,” he says.

“Furthermore, since 2003/04, UK milk supplies have consistently failed to fill the national milk quota, with a shortfall of around 10% in recent years. This ongoing shortfall in UK milk production versus quota has meant that Northern Ireland has not been constrained by quota for the past five years and that local farmers behave as if quotas were already phased out.

“Consequently, the NI industry has already seen a significant expansion in milk output not experienced elsewhere in Europe. Local milk supplies have grown by 39% since the 4% of UK supplies, compared with just 10% in mid 1990s. In the Republic of Ireland, however, production has remained relatively flat, with dairy farmers constrained by quota from expanding their output. In the current year, RoI face super levy for over-production against quota and this is already starting to impact on their ability to expand.”

He adds: “In productivity terms, NI dairy farmers have significantly improved their efficiency, producing more milk per cow than previously. The average milk output per dairy farm in Northern Ireland is now double that in the Republic. In reality, the RoI dairy industry is playing catch-up at farm level on NI, which has already seen major expansion.

“The removal of quota restrictions in 2015 will enable the industry in the Republic to make up for the lack of development opportunity since the 1980s, and a 50% expansion target has been set for 2020. UDF recently surveyed its members and we also anticipate growth, but at a more modest level. However, there are major constraints to expansion in milk production, not least in the availability of finance, farmers’ reluctance to borrow for investment in the economic climate and the environmental restrictions on stocking density imposed by the EU Nitrates Directive.

“The seasonal pattern of milk production in the Republic also means that it will be difficult to expand their output without massive investment in milk processing to handle the extra spring milk output. Driven by its grass-based production system, milk production in the Republic of Ireland is much more seasonal than in NI, with seven times more milk in the highest supply month of May than in the lowest supply months at the turn of the year.”

UDF is able to much better smooth supplies with demand, says Dr Dobbin, with a peak to trough ratio of supplies at a mere 1.4 to 1.

But most significant of all, says UDF, the dairy sector is becoming more globalised and more connected to wider market factors. In this international market, Northern Ireland is well prepared, because it is structured to rely on external rather than home demand, because of the high production related to low population.

Global demand is rising about 2% per annum, led by changes in food consumption and rising populations, particularly in Asia. In this context, international competition is from New Zealand, South America and elsewhere, so it is important not to respond with over-supply.

In this more competitive market, Northern Ireland has many advantages. In the global fight for trade in the knowledge economy, it is essential that the importance of our traditional sectors is not overlooked. Dairy farming is well positioned for the future.

Belfast Telegraph