Milk price against share price - that is the conundrum that has always faced farmers who both supply milk and are shareholders in our publicly quoted dairy companies. Their situation has led to an assumption that farmer-shareholders have benefited unduly from inflated milk prices to the detriment of other shareholders, who believe that one group is being subsidised at the expense of everybody else.
The farming lobby, predictably enough, contends that this assessment is unfair. Whether it is or not, there is a strong view elsewhere that farmers are simply unwilling to accept that the price they get for their raw materials has to be linked to returns from the marketplace.
Glanbia managing director Ned Sullivan - who, uniquely among Irish dairy chief executives, does not have a background in the dairy industry - has made it clear that when the milk price guarantee that is an integral part of the Glanbia merger agreement expires this year, he wants to put in place some sort of mechanism that would directly link milk prices to market returns. We wish him luck, as he will need it in implementing such a move.
Remarkably, last week's annual general meeting of Glanbia shareholders did not hear a single mention of the need to restructure the Irish dairy industry to cope with the challenge from more efficient European and North American competitors.
Maybe Glanbia farmer-shareholders have had enough of rationalisation and restructuring, given the way their merged company has been treated by the stock market. But it was still remarkable that an a.g.m. that found time to go into the minutiae of auditors' pay ignored what is probably the most pressing issue facing the dairy industry.
By now, the need to rationalise an industry which has too many facilities producing too much milk at too low a margin has been well documented. While major competitors such as Denmark, Holland and New Zealand have gone through a series of mergers, some cross-border, where their dairy industries are concentrated on one or two big players, the Irish industry still remains hopelessly fragmented.
And that is not simply the view of the "Dublin stockbroker types" that are regularly derided by dairy farmers. It is also the view of ICOS, the representative body of the co-operative movement. ICOS might not have used such blunt language in its recent discussion paper on strategic options for the dairy sector - but the message was the same. If the Irish dairy industry is to survive and prosper in the face of reduced EU support prices, complacency about the long-term future of milk quotas, lower margins as a result of pressure from multiples and EU enlargement, then the industry will have to change. "There is scope for increased efficiency and value-added strategies to be implemented in the dairy sector in Ireland," the ICOS paper stated.
ICOS presented its member co-ops with three structural options:
- incremental development of the present structure of the Irish dairy industry;
- dairy producers combining at regional level to process dairy products either through merger or joint venture;
- one single large-scale processing business for the State's main dairy products.
ICOS does not identify its preferred option of the three, but realistically the second or third are the only solutions to the industry's problems. Large-scale mergers or the creation of a single processing business may present domestic competition problems, but ICOS believes these concerns can be addressed.
Practically, the creation or otherwise of one large processing business will be decided by Glanbia, Dairygold and Golden Vale, the three main producers. Such a move would require fundamental changes in the mind-set of the farmers who either control or have a major influence on the management of these groups. Local - and sometimes extraordinarily petty - rivalries will need to be set aside if the dairy industry and the people who provide the raw materials are to survive, let alone prosper.
Does the will to change exist? This commentator would like to think so, but is not convinced that awareness of the realities has yet permeated through to ordinary co-op members, even if board members now understand the situation. Time is running out, and the dairy industry can no longer put the tough decisions on the long finger.
Everybody concerned about the industry would do well to read and absorb the ICOS report, in which the dangers facing the industry are spelt out in black and white.
