“Progress is a nice word. But change is its motivator. And change has its enemies.” Bobby Kennedy, the younger brother of John F Kennedy could have been talking about what lies ahead of our fragmented dairy industry. He might have added that for any industry to progress, radical change is needed.

We now have 40,000 fewer dairy farmers than in 1984. Without scale, dairy farmers realised they were not efficient, could not compete and would not survive. So, why has the same economic theory not applied to our processing sector? Have poor milk prices camouflaged operational inefficiencies at the expense of farmer incomes?

Over the past 20 years, we have seen considerable consolidation in the European dairy market. Of the top 25 dairy companies headquartered in Europe in 1997, only nine remain.

In New Zealand, all of the key dairy processors have merged and the equivalent of the Irish Dairy Board has been integrated into one entity – Fonterra. It is now responsible for 95% of New Zealand’s dairy output.

With a milk pool similar in size to Ireland, Denmark had around 150 dairy co-operatives in 1980. Today, it has less than five, with Arla accounting for 90% of the milk pool.

Even the Chinese industry is consolidating and is being backed by its government. It has plans to form about 10 large milk-powder companies by the end of this year, with the number set to fall to five by 2018. Meanwhile, almost 20 processors handle the small Irish milk pool. And efforts to scale the industry have been pedestrian.

It is possible to count the number of mergers on one hand. Dairygold was formed with the merger of Mitchelstown and Ballyclough. The merger of Avonmore and Waterford formed Glanbia in 1997, while Kerry purchased Golden Vale in 2001 and Newmarket in 2010. Aurivo was formed bringing together Shannonside, NCF, Kiltoghert and the milk side of Donegal Creameries. Arrabawn was formed through the merger of Nenagh and Midwest, while Centenary-Thurles was formed with the merger of Centenary and Thurles.

Even with this low level of merger activity, more than 26 processing plants remain. This is before we add the 11 milk factories processing less than 500m litres of liquid milk.

Why consolidate?

Dairy companies across the world have consolidated for a variety of reasons, ranging from cut-throat competition to economic necessity. When company owners consider mergers, acquisitions or sales, they must reconcile their personal bottom lines with the fiscal realities of customers and investors. Successful consolidation can improve margins, grow market share and reduce overall operating costs. It also gives companies greater access to capital. Anyone looking from the outside into this industry must think that there is plenty of fat for all processors to survive. This is a tight capital intensive business with margins in the range of 1% to 4%.

While welcome in terms of growth, the Dairy Investment Fund in 2007 helped to preserve the status quo by allocating grant aid to 19 projects across 12 companies. It could also be argued that the presence of the IDB has preserved the status quo; it has allowed smaller co-ops to remain viable as they can access international markets via this route.

But at whose expense have they been allowed survive? The consumer is not losing as demonstrated by the fiercely competitive liquid milk market. Large multinationals have plenty of willing suppliers knocking on their doors. The infant formula manufacturer Danone, for example, is supplied with ingredients from Dairygold, Tipperary, Glanbia, Kerry and Lakeland.

With the world’s top 10 dairy players capturing just under a quarter of global dairy sales, no one realistically would want to compete against these players alone. Imagine for a minute we had one processor responsible for our 5.3bn litres. This is still only a quarter the size of Fonterra and half the size of Friesland Campina.

Last year, Ireland exported €3.8bn worth of dairy products with the Irish Dairy Board marketing around 50%. Meanwhile, last year, our competitors such as FrieslandCampina had sales of €11.4bn, Arla €10.6bn and Fonterra €15.5bn. Excluding Kerry and Glanbia, the majority of our co-operatives have sales less than €1bn. What do we need to do?

To survive and pay truly leading global milk prices, we need less than a handful of hyper efficient processors backed up by a strong marketing company in the form of the Irish Dairy Board. This is not about individual processors finding new markets or new added value products. This is about removing waste and driving efficiency.

Taking a look at the Finnish company, Valio. It has a turnover of €2bn, is owned by 17 co-operatives and has 15 processing plants in Finland. This is a model that could be used to bring all the smaller co-ops together under one structure, while preserving the identity of each co-op. This structure would eliminate wasteful overheads across manufacturing, marketing, distribution and management.

With €1bn spent in the last five years, we now have a highly invested processing sector with huge capacity. To leverage this infrastructure that both Government and farmers have paid for, it needs to be sweated.

As each co-op tries to outshine its neighbours, the real competition is outside of Ireland and they are focusing on expanding their core businesses and continuing to aggressively grow through international mergers or acquisitions.

We know that our competitive advantage is growing volumes of quality grass cheaply. But we also need a comparative advantage at processing level, where we can produce products such as dairy powders at a lower cost than our competitors. Ultimately, this is a commodity business where only the lowest cost producers will survive. We need to become hyper-efficient and this will provide the best returns to farmers while allowing us to compete. Unfortunately, it may be a crisis that will force consolidation and it may not be farmers who dictate the next evolution in Irish dairy processing but external forces such as low milk prices.

Strong, brave and visionary leaders must emerge to progress this industry in an unprotected market. These leaders run the businesses and sit on the boards of every co-op. They have done so before as we have seen in both Kerry and Glanbia’s case where world-class businesses have been created. The Government must also play a role and foster an environment where mergers happen so that we can build a truly world-class industry.

Thankfully, there is a choice – change to progress or risk getting left behind to become an acquisition target. Do we want to see our industry head the way of the UK industry, where it is majority owned by foreign players?

This article features in an 80-page End of Milk Quotas magazine which is available to all digital subscribers of farmersjournal.ie from 6am on 1 April and to all print customers on Thursday 2 April