Appendices Page 1 History and background of the Irish ... · PDF file1 History and background...

Strategic Development Plan for the Irish Dairy Processing Sector

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Appendices Page

1 History and background of the Irish dairy industry 114

2 Overview profiles of benchmark countries 116

3 Project methodology and approach 120

4 Overview of the product mix of the Irish industry and that of its 123

main competitors

5 Profile of the Irish industry’s product sales, exports & imports 128

6 The Irish industry compared summary 133

7 Approach adopted in determining the future configuration of the 135

dairy processing industry

8 Savings from economies of scale at manufacturing level from plant 137 rationalisation

9 Estimating benefits using EVA analysis 139

10 Competition issues 144


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Appendix 1: History and background of the Irish dairy industry Ireland64 has a long track record of producing and exporting quality products. Ireland’s dairy industry has its origins in farm produced butter, which was one of Ireland’s main exports until the late 19th century. In the late 19th century, Ireland moved from largely farm based to factory based production, with the establishment of creameries and co-operatives, and up to 1920 experienced improved prosperity and increased turnover.

There was significant downturn in the industry in the 1920s, which led to the creation of the Dairy Disposal Company (DDC), which purchased most of the privately owned creameries, and some of the co-operative creameries. In 1928, the State put in place a licensing system to control the establishment of new creameries.

By the 1930s, therefore, the dairy industry was firmly in co-operative or public control, and a regulatory system for controlling production and entry into the industry was in place. Butter making was the predominant processing activity and Britain the principal export market.

The decline in butter prices in the 1930s and an economic war with Britain resulted in heavy duties on Irish exports. This led the government to introduce price support. However, milk supply levels remained low due to poor prices right through to the 1940s, and this inhibited the growth and diversification of the industry. During this period, the number of co-operative creameries fell from 274 in 1929 to 193 in 1951.

In the early 1950s market conditions improved and exports to Britain resumed, and together with improvements in farming, milk yields and supplies increased. Milk output increased from 480 million gallons in 1960 to 740 million gallons in 1973.

In response to EU membership, more favourable markets and increasing milk supplies, a dynamic phase of growth and reorganisation in the industry began in the 1970s. There was greater product diversification and investment. Milk powder became more important, new milk dryers were installed, and the manufacture of chocolate crumb became an outlet for milk supplies with the establishment of plants in Ireland by companies such as Rowntree Mackintosh and Fry Cadbury.

The lack of a co-ordinated approach to the marketing of exports was a problem up to the establishment of a co-operative marketing agency for Irish milk powder products through an arrangement with Unigate in 1959, and with Bord Bainne, the Irish Dairy Board (IDB) in 1961. Previous attempts had failed due to lack of support from creameries. In the 1960s, IDB launched Kerrygold, a branded Irish butter, on the British market, and later extended it to Middle Eastern, American and European markets.

The signing of the Anglo Irish Free Trade agreement with Britain in 1965 helped the industry considerably by doubling the existing butter quota. In the lead up to entry to the EU in 1973, ICOS and the government stressed the need for rationalisation and amalgamations in the dairy industry to achieve economies of scale and diversification.

This period saw the takeover of DDC creameries by co-operatives, the closure of smaller creameries, the centralisation of processing facilities, and bulk collection ex-farm by milk tanker. Out of the reorganisation in the north and west of the country, Lough Egish, North Connacht Farmers and Donegal emerged. In the south, seven major groups emerged, including Avonmore, Ballyclogh, Golden Vale, Mitchelstown, Waterford, North Kerry and a group of creameries based in County Tipperary. As well as the seven large dairy groupings, there also emerged a second group of six dairy co-operatives, ten at the next level, and a further 20 smaller co-operatives.

In the 1960s and early 1970s, there was some diversification away from butter to cheese manufacture. Cheese production increased from 5,000 tonnes in 1960 to 45,000 tonnes in 1973. During this period, the practice of returning skimmed milk to farmers declined, as processing facilities for the manufacture of skim milk powder developed. The manufacture of casein also developed into the early 1970s in Waterford, Mitchelstown, Avonmore and Kerry. Infant food also became an outlet for milk powder, with the establishment of facilities in Ireland by companies such as Unigate, Nutricia, Wyeth and Abbot.

Up to Ireland’s entry to the EEC in 1973, IDB had operated as a statutory marketing agency with almost exclusive control over dairy product exports. This situation was not compatible with EEC policy, and the board was changed into a co-operative in which the dairy product manufacturers were shareholders.

64 Ireland throughout the report refers to the Republic of Ireland unless otherwise stated


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In the 1970s, competition between the main dairy co-operatives increased. It was also a period of major capital investment.

The introduction of quotas in 1984 marked the end of an era in the dairy industry, as up to this point the industry had developed by focusing on continuously increasing milk supply, and it could rely on intervention as an outlet for surplus products.

Milk quotas placed a limit on the expansion of milk production, and consequently limited the scope for expansion by dairy processors in Ireland, and led to overseas expansion through the acquisition of existing facilities, mainly in the UK and US. The introduction of quotas has also led to a greater focus on yields, waste elimination, added value products and manufacture of dairy ingredients for specific end uses.

In the 1990s, consolidation in the industry continued, and by 2002 the four biggest processors accounted for 71% of the total milk pool.


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Appendix 2: Overview profiles of benchmark countries 2.1 Denmark The Danish dairy herd has been gradually falling over the last ten years, from 708,000 in 1992, to 628,000 in 2001. Similarly, the number of dairy farms has fallen from 20,000 in 1991 to 8,911 in 2001, a reduction of 55%, and has fallen a further 800 during the last year. However, the average quota held by dairy farms has increased from 234 tonnes in 1991 to 500 tonnes in 2001, and reached 550 tonnes in 2002, while output per cow has risen from 6,212kg/cow in 1990 to 7,328kg/cow in 2001. Improved feeding programmes and a move to more extensive cattle housing and less pastoral grazing have contributed to this increase. Denmark now has the second largest herd size in the EU, with an average of 70.1 cows per farm, behind only the UK.

Milk production is gradually moving west in Denmark. Since 1991, the volume of milk produced on the three islands of Zealand, Lolland and Falster has declined by 21%, to account for just 5.6% of milk deliveries in 2001. Quota is freely tradable, and Zealand farmers are continuing to sell their quota, primarily to farmers in Jutland. Milk production on Zealand is no longer sufficient to meet the daily consumption demands of the island, requiring milk to be transported to the island daily. Today, the majority of milk is produced in South, West and North Jutland. Production in East Jutland and Funen is also declining.

The Danish dairy industry has altered considerably over the last ten years. Key product categories in the processing sector are liquid milk products (by volume), cheese (and within that, blue and feta cheeses, and traditional Danish cheese such as Danbo and Havarti), butter and canned/powdered milk. The country’s focus on exports is reflected in the bias towards more shelf stable products.

In line with growing consumer concern for health, the liquid milk sector has seen a visible switch in production (and consumption) from whole milk to semi- and skimmed milk. Interestingly, semi-skimmed milk production peaked in 1996, since when levels have dropped off in favour of skimmed milk. Total liquid milk production levels have remained largely unchanged over the last decade.

While remaining export-oriented, processors have also become more versatile in developing new and/or novel products for domestic consumers, such as drinking yoghurts, flavoured milks and fromage frais. Total turnover for Denmark’s dairy industry was reported to be DKK21.8 billion (€2.9 billion) in 2000, a fall of almost 9% on the previous year.

Key dairy industry figures

% of total turnover Year Total turnover

(DKK million) Total turnover

(€ million) 3 largest 5 largest 10 largest

1999 23,965 3,223 82.2 88.2 92.9

2000 21,841 2,925 88.4 90.6 95.0

2001 21,592 2,897 89.9 92.0 95.9

Source: Danmarks Statistik

The dairy industry is extremely concentrated, with 89.9% of total turnover generated by the three largest processors, although within that, one processor – Arla Foods – clearly dominates. Below Arla, the industry is characterised by a large number of very small private players.


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2.2 Netherlands The Netherlands has a total of 1,550,000 dairy cows on nearly 28,000 farms. Both have been falling over the last ten years, with the number of dairy farms declining from almost 47,000 in 1990 to just under 28,000 in 2001. The figures demonstrate a greater consolidation at the dairy production level, as a greater percentage of farms have over 70 dairy cows. Conversely, the number of dairy farms stocking between 1 and 29 dairy cows has fallen from almost 39% of the total to just over 20% in 2001.

Today, Dutch dairy herds are, on average, the third largest in Europe, with 55.4 cows per farm, behind only the UK and Denmark. The average quota held by dairy farms has grown by almost 70%, from 234 tonnes in 1991 to 394 tonnes in 2001. Output per cow has also increased, from 6,223 kg/annum in 1991 to 7,304 kg/cow in 2001, while both fat and protein content has shown marginal improvement over the last decade.

Total annual milk production in the Netherlands has remained relatively stable over the last five years. Production in 2001 was approximately 11,155 tonnes, only a slight decrease on the year before. Over production during the second half of 1999 resulted in lower production in 2000 to avoid super levy charges.

The key product categories in Dutch dairy production are liquid milk, yoghurts and factory cheese. Liquid milk for drinking has remained relatively stable. Cheese production has experienced an increase of 6.9% over the last ten years; the most significant growth occurred between 1991 and 1997 (an increase of 15%), but was followed by a decline of some 8% in 1998. Some recovery occurred during 1999 and 2000, but reduced export demand/competitiveness in 2001 has encouraged a further fall. Moreover, more milk has entered the manufacture of high added value dairy drinks.

Production of butter declined in both 1999 and 2000, primarily following declining demand from recipients in Russia and Asia as a result of economic crises, and also as a result of an increased level of cheese production. However, signs of recovery were evident in 2001. Production of WMP and condensed milk, while still strong, has declined over the last decade, while SMP has increased significantly, albeit from a small base.

The markets for canned and evaporated milks have continued to decline in traditional producing countries such as the Netherlands. Production is growing in other parts of the world, especially where manufacturing is based mainly on the reconstitution/recombination of dairy ingredients. Unlike the rest of Europe, cheese production has fallen over the last few years.

The industry’s co-operatives have instead moved from bulk production to custom production, specifically tailored to their export markets. Cheese production is primarily of its traditional semi-hard varieties Gouda, Edam and Maasdam, with the latter experiencing the best growth over the last decade. Production has increased marginally for block Gouda, predominantly for the hotel and catering industry. The use of cheese as an ingredient, for pizza and fast food for example, will be the primary growth market.

Domestic consumption trends have moved towards fresh dairy products, hence the decline in consumption of condensed milk. Liquid milk consumption, however, is in gradual decline, though this is parallel to growth in the cheese and quark product sectors.

The Dutch consumer is increasingly searching for new and healthier dairy products, fuelling large investment in new product development. Both manufacturers and retailers are aiming to satisfy this demand alongside the development of the growing indulgence market.

Of the two large dairy processors, Campina is more dependent on the domestic market than Friesland Coberco. Campina has 28% of the branded white dairy sector (milk, yoghurt, desserts), and an estimated 65% of all liquid milk products, once private label volume is taken into account.

It is worth noting, however, that the Netherlands has historically held a significant role as a trader and key entrepôt provider. This role has not reduced in importance, and therefore can distort import and export figures, given the volume of re-exports that occur. The dairy industry in the Netherlands has experienced significant rationalisation, with the number of enterprises halving in the last ten years to just fifteen in 2001. Co-operatives account for about 70% of all processing sites, and continue to have the strong ties between producers and processors within the industry.


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Number of enterprises and factories (co-operatives and non-co-operatives)

1990 1995 1999 2000 2001

Enterprises 31 19 15 15 15

Total factories

Co-operatives

Non-co-operatives

95

79

16

80

62

18

71

56

15

66

46

20

63

44

19

Source: Productschap Zuivel

Though the Dutch dairy industry is dominated by two giant enterprises (Friesland Coberco (FCDF) and Campina), there has also been a rise of small, mostly privately owned, dairy companies, some of which have grown out of farm dairies, and which operate in specific niches within the dairy market.

Latest figures available from the Dutch Dairy Board (May 2002) indicate that there are only 13 companies in operation, following FCDF’s purchase of the smaller dairy Friese Ecologische Zuivel and FCDF’s merger with Coöperatieve Zuivelindustrie Dinkelland B.A, from January 2002. Since May 2002, a further dairy, Swenty Milk, has gone bankrupt, while Friesland Coberco has also purchased Nutricia Dairy and Drinks Group from Royal Numico, leaving just 11 enterprises in operation.

Further developments have seen Wessanen divest its European dairy interest, and the French dairy player, Fromageries Bel, has acquired the cheese company Leerdammer. Campina, by comparison, has more recently pursued cross border activity, merging with German dairy group Milchwerke Köln/Wuppertal (MKW) in 2001, to form one of Europe’s largest dairy co-operatives with 3,500 members in Germany, in addition to its 8,500 in the Netherlands.

2.3 New Zealand The New Zealand dairy industry has continued to expand during the past decade due to a combination of factors, including no production quotas. Most notably, the end of the New Zealand Dairy Group Moratorium (December 2000) on new dairy farm conversions has facilitated an increase in cow numbers, which reached 3.3 million in 2001, but also New Zealand’s 13,900 dairy farms have improved per animal performance by 6.9%, as a result of a concerted research and extension programme to enhance on-farm profitability.

Fewer land constraints than Europe, combined with the amalgamation of smaller farms, has seen the average herd size in New Zealand more than double over the last decade to reach 251 per farm, more than five times larger than Ireland’s 45.7 cows.

The New Zealand dairy industry has set an ambitious on-farm productivity target of 4% per annum. This level has been determined as one of the strategies by which the industry can maintain its international production cost advantage, and successfully market dairy products into Northern Hemisphere markets.

The majority of New Zealand’s dairy industry is based in the Waikato, Taranaki, Manawatu and Northland in the North Island, and Otago and Southland in the South Island. In recent years, the industry has grown at a faster rate in the South Island, with a large number of sheep farms converting to dairy production due to the declining profitability of sheep meat and wool production relative to dairy, as well as cheaper land.

This has seen the South Island’s milk production grow from 9% of the total production in 1980 to 23% in 2001. In fact, dairy farm numbers in the historically strong dairying areas of the Waikato and Taranaki have declined in recent years, as many farmers have moved to larger farms and better opportunities in the South, and urban sprawl has increased the pressure on farms in the North. However, consistent rainfall and increased availability of animal feed on the North Island is enabling farmers there to also expand milk production.

New Zealand’s dependence on a pasture-fed milk production system results in a very seasonal supply curve. It is, in fact, the most seasonal of all major dairy nations, and creates a number of logistical issues for the sector. The issue of seasonality introduces periods of overcapacity in the processing sector that imposes greater costs on the industry. In the past, these have been offset by low on-farm production costs, but other developing dairy industries are now challenging New Zealand’s low cost systems, leading


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the industry to investigate new techniques to assist in flattening the curve. In the past few years, a number of systems have been employed to encourage farmers to produce milk out of peak season. These have included differential milk pricing during winter months, and research into extended lacta tion lengths. However, as farmers have increased production they have, by default, accentuated the peak milk flow problem.

Unlike most other dairy nations (with the exception of Ireland), the New Zealand industry is totally export-focused, with in excess of 97% of all production being sold outside the country. As such, the vast majority of products are shelf-stable, enabling them to be exported to markets in Asia and the Northern Hemisphere.

The New Zealand dairy industry has increased production of all broad product groups over the last decade, particularly the manufacture of WMP, cheese and butter concentrates. Butter production, however, has grown by a relatively small amount, only 19%, reflecting the difficulties of selling more of this product in overseas markets, and the decision to focus production on cheese and powder production.

Total turnover for the New Zealand dairy industry was reported to be €2,828 billion in 1999, while exports alone increased by 50% over the next two years to reach €3,460 million by 2001. The New Zealand dairy sector now represents one of the most concentrated globally. Since the formation of Fonterra Dairy Co-operative in 2001, the country now has only three major dairy processors, with Fonterra collecting and processing over 96% of all raw milk produced.

The remaining two dairy processors are also co-operatively owned, with Tatua Co-operative Dairy Company concentrating on the production of higher value dairy consumer and ingredient foods. The other player, Westland Milk Products (previously Westland Co-operative Dairy Company), is based on the West Coast of the South Island, and in general produces similar products to Fonterra for both the local and export markets.

The New Zealand dairy industry, through Fonterra, has invested heavily in Latin America and Asia, and is committed to growing these markets, while at the same time forming a joint venture with Arla to market the Anchor butter brand in the UK.


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Appendix 3: Project methodology and approach A multi-staged approach was adopted in order to meet the specific needs of this study. The following diagram outlines the key activities during each stage.

Key activities summary

Irish Dairy industry today:•Markets•Products and production•Processing•Distribution•Production efficiency•SWOT

Irish Dairy industry today:•Markets•Products and production•Processing•Distribution•Production efficiency•SWOT

Current internationaldairy industry:•Products•Capability•Distribution•Production efficiency•Consolidation

Current internationaldairy industry:•Products•Capability•Distribution•Production efficiency•Consolidation

International dairymarkets:•Geography•Consumption•Requirements•Competitors

International dairymarkets:•Geography•Consumption•Requirements•Competitors

Stage 1:'Where are we?'

Future international dairysector:•Trends•Supply/demand•Structure•Future opportunity

Future international dairysector:•Trends•Supply/demand•Structure•Future opportunity

In-market forces forchange:•Consumerism•Raw product supply•Processing base•Distribution

Global forces for change:•New technology•Globalisation•Trade policies•International agreements•GMOs

Implications for the Irishdairy industry:•Organisation•Production•Distribution•Products

Implications for the Irishdairy industry:•Organisation•Production•Distribution•Products

Learning from experienceof others:•Same industry•Similar competitiveenvironment•Similar challenges

Stage 2:'Where do we need to be?'

Gap analysis:•Review•Strategic imperatives•Markets and marketing•Products and production•Adjustment to change

Stage 3:'How?'

Strategic evaluation of,and recommendationsfor, the Irish dairyindustry:•International/Globalmarket opportunities fordairy products identified•Product options to exploitthese opportunitiesassessed

Strategic evaluation of,and recommendationsfor, the Irish dairyindustry:•International/Globalmarket opportunities fordairy products identified•Product options to exploitthese opportunitiesassessed

Actionablerecommendations:To improve the industry'slong term competitiveness :•Key markets•Key products•Necessary future structure

Actionablerecommendations:To improve the industry'slong term competitiveness :•Key markets•Key products•Necessary future structure

Stage 1: In-depth research and review of market changes The initial part of the study involved a review of the changes that have occurred within the dairy market. This involved extensive industry interviews and primary research together with a review of published and in-house research work to summarise the market changes in the dairy supply chain that have occurred in the international dairy sector during the past five years. As part of this process a detailed benchmark questionnaire was completed by the following organisations:

• Arrabawn Co-Operative Society Ltd. • Carbery Milk Products Ltd. • Connacht Gold Co-Op Society • Dairygold Co-Operative Society Ltd. • Donegal Creameries Plc • Glanbia Plc • Irish Dairy Board • Kerry Group Plc • Lakeland Dairies Co-Operative Society Ltd. • Newmarket Co-Operative Creameries Ltd. • North Cork Co-Op Creameries Ltd. • Tipperary Co-Operative Society Ltd. • Town of Monaghan Co-Op • Wexford Creamery Ltd. In particular, this stage concentrated on the following blocks:


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Irish dairy industry today… A comprehensive analysis of the current Irish dairy sector

Current international dairy industry… A snapshot of the dairy industry today and information on the current international dairy industry.

International dairy markets… In-depth research into the industry state and changes taking place within key dairy markets.

Stage 2: Competitive analysis and future market makeup This stage built both on the information obtained in Stage 1 and on additional research carried out in parallel. An assessment of the international dairy sector in the future was a key element of this stage. The analysis of the likely effect on the market for dairy products in the next 5-10 years considered issues including the market trends for dairy products, the likely impact of new technologies, international trade policy changes and changes in structure and ownership of major players. Based on this analysis, the implications for the Irish dairy industry were projected. Most importantly, the above analysis enabled the study team to determine:

• The market opportunities for dairy products in different geographic locations, and their particular requirements, and

• The products required to exploit these opportunities

Stage 3: Document the evaluated recommendations and industry actions Stage 3 effectively summarised and brought together results obtained in Stages 1 and 2. It marks the path for the Irish dairy leading to improving the industry’s long-term competitiveness. It also involved the development of a recommended approach and strategic change action plan for the industry to bring about the necessary changes and to exploit the identified market opportunities.

Project structure Throughout the project the study team worked closely with the Study Secretariat consisting of representatives from the Department of Agriculture and Food, Enterprise Ireland, IBEC and ICOS. Meetings with the Project Steering Group were conducted at the start of the project and at the end of each stage. The Steering Group was comprised of the following:

• James Murphy - Arrabawn Co-Operative Society Ltd. • Gus O’Brien - Bandon Co-Operative Society Ltd. • Peter Dineen - Barryroe Co-Operative • Dan McSweeney - Carbery Milk Products Ltd. • Tom Commins - Centenary Co-Op • Michael Farrell - Connacht Gold Co-Op Society • Denis Lucey - Dairygold Co-Operative Society Ltd • Philip Carroll – Department of Agriculture • Tom Moran – Department of Agriculture • Tom O’Donnell – Department of Agriculture • John Keon - Donegal Creameries Plc • Joe O’ Sullivan - Drinagh Co-Operative Ltd. • Mike Feeney - Enterprise Ireland • Eddie Hughes – Enterprise Ireland • Seamus MacLoughlin – Enterprise Ireland


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• Billy Murphy - Glanbia Plc • Pat Ivory - IBEC • John Tyrrell - ICOS • Noel Cawley - Irish Dairy Board • Jerry Houlihan - Kerry Group Plc • Ed Prendergast - Lakeland Dairies Co-Operative Society Ltd. • Pat Dineen- Lisavaird Co-Op Creamery Ltd. • Michael Cronin - Newmarket Co-Operative Creameries Ltd. • Sean McAuliffe- North Cork Co-Op Creameries Ltd. • Noel Horgan - Tipperary Co-Operative Society Ltd. • Vincent Gilhawley- Town of Monaghan Co-Op • Seamus O’Beirne - Wexford Creamery Ltd. The contributions and co-operation of the Secretariat, Steering Group members and individual industry participants was an essential element in the successful completion of the project and was greatly appreciated by the study team.


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Appendix 4: Overview of the product mix of the Irish industry and that of its main competitors

4.1 Raw milk utilisation by Ireland and its major competitors

The level of raw milk deliveries that is used as liquid milk in Ireland is comparable to its European competitors

In 2001, just under 90% of raw milk deliveries in the Irish market were used for processing, with the remaining 10% utilised as liquid drinking milk. These figures are consistent with other leading European processors, with Denmark processing 88% and the Netherlands 92% of their raw milk deliveries. The data for these countries in previous years produces similar levels of milk used for processing as 2001 data.

Comparison of raw milk utilisation (2001)

Raw milk deliveries (‘000 tonnes)

% drinking liquid milk production

% milk used for processing

Ireland 5,338 10.4 89.6

Denmark 4,418 11.8 88.2

The Netherlands 10,683 8.1 91.9

New Zealand 12,322 4.0 96.0

Source: ZMP, Eurostat, IDB (2001)

The utilisation of whole milk for butter has declined while cheese has increased The changes over the last decade in the utilisation of whole milk and skim milk, illustrate the move towards a more diversified Irish product mix. In the last decade, the utilisation of whole milk for butter production has fallen from 70% to 60%, with its use for cheese production rising from 16% to 24%. During the same period, the utilisation of skim milk for casein production has risen from 27% to 51%, with utilisation for production of skim milk powder falling from 59% to 28%.

There has been a significant shift in product output in Ireland, with a decline in butter and SMP and increased output of cheese and casein Over the last decade, the Irish industry has responded to changing market conditions, taking advantage of opportunities to diversify and add greater product innovation, and reducing the dependence on butter and skim milk powder. However, many would argue that the safety net (or the commercial pragmatism) of heavily utilising the EU product intervention market price support mechanisms, and the significant export subsidies for certain commodity products, has skewed the Irish product mix to over rely on these product types. It has also stunted a more proactive approach to product diversification and the development of new markets.

The production of cheese and casein has increased significantly over the last ten years The current more diversified product mix is also reflected in the changes in Ireland’s production figures for key products from 1991 to 2001, as illustrated in the table below.


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Ireland – annual production by broad product type (‘000 tonnes)

1991 1997 1998 1999 2000 2001 % 1991/2001

Liquid milk 509 549 559 546 545 556 9.2 Butter 140 139 131 135 137 128 -8.6 Cheese 72 86 92 97 96 120 66.7 Whole milk powder 23 34 31 36 35 34 47.8 Skim milk powder 183 109 100 94 88 75 -59.0 Casein(ates) 27 42 42 46 46 48 77.8 Chocolate crumb 77 84 75 77 75 75 -2.6 Butteroil 6 9 8 7 7 7 16.7 Cream 8 10 10 10 10 10 25.0

Source: Eurostat, IDB, Dept. of Agriculture, ZMP (2002)

Ireland – annual production by broad product type (‘000 tonnes)

139 137128

96

120

183

7575

2334

27

48

140135131

97

9286

72

88

100109

9477

75777584

3431

36 35

464642 42

1991 1997 1998 1999 2000 2001

ButterCheeseSkim milk powderChocolate crumbWhole milk powderCasein(ates)

Source: Eurostat, IDB, Dept. of Agriculture, ZMP (2002) The most significant change in Ireland’s product portfolio has been the increase of 67% in the production of cheese. However, while the trend over the last decade has been towards increased production of cheese, the figure for 2001 may be artificially high due to increased demand for cheese in the UK during the foot and mouth outbreak in that year. Casein production has gradually risen to its current level of 48,000 tonnes, while SMP output has fallen by 59% to 75,000 tonnes. While butter and SMP production has fallen in relative terms over the last decade, they have remained key products for the Irish industry. It is worth noting, that while there are discrepancies and differences between the various sources of production data, the overall production trends (based on the data in the table above) are consistent across the majority of data sources.


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4.2 Denmark – annual production by broad product type (‘000 tonnes)

1991 1997 1998 1999 2000 2001 % 1991/2001

Liquid milk 509.7 513.4 518.6 518.7 518.1 519.9 2.0 Buttermilk 33.1 27.8 24.5 24.5 22.8 22.3 -32.6 Cream 38.7 39.2 39.8 37.8 36.0 38.4 -0.8 Crème fraîche 8.9 10.0 9.8 11.1 10.8 10.8 21.3 Yoghurt 44.6 41.6 44.2 44.6 47.6 49.8 11.7 Chocolate milk 31.3 35.4 40.2 42.2 42.2 41.8 33.5 Other liquid milk products 42.7 58.7 60.6 67.8 67.1 73.0 71.0 Butter 70.5 50.2 48.5 47.9 45.8 46.0 -34.8 Cheese 286.9 289.6 289.3 292.8 305.8 317.9 10.8 Whole milk powder 108.5 103.8 106.3 97.1 97.1 87.8 -19.1 Skim milk powder 16.9 22.8 22.0 34.4 38.0 40.2 137.9 Buttermilk powder 1.7 4.5 4.2 4.6 4.1 3.6 111.8 Cream milk powder 0.1 0.2 0.2 0.2 0.1 0.1 0.0 Others inc. sterile cream 52.3 56.3 57.1 57.9 62.5 64.5 23.3

Source: Mejeriforeningen (Danish Dairy Board)

Denmark – annual production by broad product type (‘000 tonnes)

317.9

87.8

40.2

286.9 289.6 289.3 292.8305.8

108.5 103.8 106.3 97.1 97.1

70.550.2 48.5 47.9 45.8 46

16.922.8 22

34.4 38

1991 1997 1998 1999 2000 2001

Cheese Whole milk powder Butter Skim milk powder

Source Promar / Prospectus research, 2002 The major shift product production that has occurred in Denmark over the last decade has been the decline in butter and WMP production. The production of cheese and SMP increased. While there are no official figures for production of casein in Denmark it is estimated that roughly 13,000 tonnes was produced in 2001.


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4.3 Netherlands – annual production by broad product type (‘000 tonnes)

1991 1997 1998 1999 2000 2001 % 1991/2001

Liquid milk 924 881 855 860 864.1 866 -6.3 Yoghurt, sour milk products, dairy desserts 655.0 727.7 707.0 721.5 713.1 713.6 8.9

Cream 40.6 24.5 24.6 28.4 26.2 24.5 -39.7 Butter 163.3 134.5 149.0 139.9 126.2 130.4 -20.1 Cheese 599.9 692.7 638.0 645.6 671.1 641.3 6.9 Quark 13.7 11.5 11.5 13.1 12.5 10.5 -23.4 Whole milk powder 175.1 112.3 115.2 110.1 96.7 107.9 -38.4 Skim milk powder 49.3 39.0 60.8 74.8 69.3 68.0 37.9 Condensed milk 405.3 328.9 290.1 288.5 273.5 304.5 -24.9 Whey powder 269.0 280.5 260.6 240.0 242.4 219.2 -18.5 Lactose 116.065 160.2 157.8 155.2 164.5 155.4 34.0

Source: ZMP, Productschap Zuivel

Netherlands – annual production by broad product type (‘000 tonnes)

641.3

304.5

219.2

107.9130.4

68

671.1645.6638

599.9

692.7

273.5288.5290.1328.9

405.3

242.4240260.6280.5269

96.7110.1115.2112.3

175.1

126.2139.9149134.5163.3

69.374.860.83949.3

1991 1997 1998 1999 2000 2001

Cheese Condensed milk Whey powder Whole milk powder Butter Skim milk powder

Source Promar / Prospectus research, 2002

There has been a significant shift in production in the Netherlands over the last decade, with lactose up 34%, SMP has increased by 38% (although from a low base), yoghurts, milk products and dairy desserts are up 9% to 713,600 tonnes, in 2001 and cheese is up 7%. Butter production has fallen by 20%, condensed milk by 25% and whey powder by 19%. As with Denmark no official figures for casein production are available but it is estimated that the Netherlands produced in the order of 35,000 tonnes in 2001.

65 1990


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4.4 New Zealand – annual production by broad product type (‘000 tonnes)

1991 1997 1998 1999 2000 2001 % 1991/2001

Liquid milk n/a 850 866 820 850 885 - Butter 218 292 271 260 255 258 18.3 Butter concentrates (AMF) 44 59 73 79 89 95 115.9 Cheese 140 254 266 250 297 289 106.4 Whole milk powder66 275 374 396 381 450 515 87.3 Skim milk powder 136 172 177 172 187 251 84.6 Buttermilk powder 23.4 32.7 37.8 30.4 31.5 33.7 44.0 Whey powder 12.3 21 22 22 25 25 103.3 Casein(ates) 74.2 92.2 103.7 86.7 97.2 110.0 48.2 Lactose 25.0 40.5 40.4 42.9 41.8 - -

Source: ZMP, Statistics New Zealand

New Zealand – annual production by broad product type (‘000 tonnes)

515

258289

110

450

381396374

275

255260

271292

218

297

250266

140

254 251

187172177172

136

97.286.7103.792.274.2

1991 1997 1998 1999 2000 2001

Whole milk powder Butter Cheese Skim milk powder Casein(ates)

Source Promar / Prospectus research, 2002 Over the last decade, the output of all product type In New Zealand has increased, with the greatest growth occurring in cheese (106%), WMP (87%), SMP (85%) and casein (48%), while butter output increased by only 18%.

66 Includes infant formula


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Appendix 5: Profile of the Irish industry’s product sales, exports and imports 5.1 The Irish dairy industry is very dependent on exports, with over two thirds of its total output

having to be exported Ireland’s entry to the EEC in 1973 played a major role in the development and growth of the Irish industry in opening new markets for Irish products, and also providing a guaranteed outlet and support price structure for much of Ireland’s product output. Historically, Ireland has exported a significant proportion of its dairy production, and data gathered from processors for this study supports this, indicating that over 60% of the processors’ dairy sales value comes from exports. Industry data for 2001 from IDB and Eurostat indicates that 63% of the volume of Irish dairy production was exported (when liquid milk for drinking is included). However, over 83% of its butter, SMP, WMP and bulk cheese output is exported. This heavy reliance on finding markets for products is a significant challenge for the industry, but has driven product diversification and innovation.

Some significant differences and inconsistencies exist between the various sources of data on Irish dairy exports. However, the trends captured in the tables below for both the volume and value of Irish exports, remain consistent across the various sources of data. The focus is on these trends and the picture they paint of the change in Ireland’s exports over the last decade.

Irish sales accounted for 33% of total product sales by processors in 2001 (excluding ‘other’ product sales) Based on an analysis of data supplied by the processors, the table below shows the split between home market sales and export sales (either via the IDB or directly by the processors themselves).

5.2 Home market and export sales in 2001

Product type Value of sales within Ireland (€000s)

% of total sales Value of export sales via IDB or direct

(€000s)

% of total sales

Butter 67,883 14% 407,387 86% Cheese 107,799 25% 330,156 75% SMP 42,050 23% 138,371 77% Casein 47,456 14% 292,772 86% WMP 5,722 3% 178,682 97% Whey powder & protein, Lactose

39,916 38% 65,792 62%

Yoghurt & Cream 87,828 91% 8,707 9% Functional foods 1,618 4% 38,826 96% Liquid milk 306,609 100% 0 0% Other67 254,699 86% 41,816 14% Total (excl. other) 706,882 33% 1,460,692 67%

Source: Promar / Prospectus research

Almost all the processors’ fresh dairy products are sold on the Irish market, together with significant proportions of cheese and SMP. The vast majority of sales for the other products are export based. 84% of all butter, cheese, SMP, WMP and casein sales in 2001 were from exports.

67 The other product category consists of mainly surplus/third party milk sales, which are sold on to other processors


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Total dairy exports, by volume (‘000 tonnes)

1991 1997 1998 1999 2000 2001 %

1991/2001 Butter 128 123 119 109 107 100 -21.9 Cheese 71 82 87 87 88 116 63.4 WMP 26 39 41 46 47 40 53.8 SMP 71 96 51 83 124 44 -38.0 Chocolate crumb 59 17 18 21 23 27 -54.2 Casein(ates) 25 32 32 37 40 35 40.0 Butteroil 7 8 7 7 6 5 -28.6 Cream 2 6 3 4 3 3 50.0 Whey powder 42 46 47 40 48 55 31.0 All other dairy products68 41 155 180 165 168 n/a n/a Total 472 604 585 599 654 n/a n/a

Source: IDB, Eurostat, ZMP 5.3 Export market destination Over two thirds of Irish dairy exports went to the EU in 2001 with the UK being the largest single market

2001 export sales – country breakdown

30.5%

37.2%

1.8%

15.0%

2.8%

6.5%

1.6%2.6%

0.1%1.7%

0.3%

UK Other EU OtherEurope

NorthAmerica

LatinAmerica

Africa South EastAsia

CentralAsia

China &Russia

MiddleEast

Other InclJapan &Korea

Source Promar / Prospectus research, 2002 Cheese export markets Ireland remains hugely dependent on the UK as a market for its cheese, with 83% of total cheese exports (90,500 tonnes) going to that market in 2001 This level has remained consistently high throughout the last decade. The fact that the Americas, Ireland’s second largest export market for cheese, accounted for only 4% (4,800 tonnes) of total exports in 2001 is an indication of the importance of the UK market for cheese. A breakdown of cheese exports by type illustrates that the majority of Ireland’s cheese exports are of cheddar, accounting for just under 70% of all cheese exports in 2001. The on-going dependence on the UK cheddar market remains, 68 Includes liquid milk, butter milk, yoghurt, butter spreads and infant formula


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despite the efforts of some producers to reduce this dependence through diversification into other cheeses such as mozzarella.

Exports of cheese have grown dramatically over the last decade In volume terms, the key change in exports over the last decade has been the 63% increase in the exports of cheese. However, this figure has been inflated by a significant increase in 2001 in exports of cheese to the UK, caused by the substitution of cheese for meat during the foot and mouth outbreak. Butter exports Butter exports have fallen by just under 22% over the last decade to 100,000 tonnes in 2001, with 90% of butter being exported within the EU Exports of butter to Germany doubled between 1991 and 1997, and despite minimal growth over the last five years, it remains the key export market for butter – purchasing 33,000 tonnes in 2001 or one third of total butter exports. The UK and France are the other main export markets for Irish butter, accounting for 22% and 19% of exports respectively in 2001.

WMP exports The volume of WMP exports doubled between 1991 and 1997 In 2001, Ireland exported the same volume of WMP that it exported in 1997 – 39,700 tonnes. The export markets for WMP have changed significantly over the last decade, with a steady rise in the volume of WMP exported to EU countries, so that in 2001 exports were evenly split between intra and extra-EU markets.

SMP exports The volume of SMP exported by Ireland has varied significantly from year to year since 1991 The drop in exports from 124,000 tonnes in 2000 to just 44,000 tonnes in 2001, illustrates this volatility. While the split between exports of SMP intra and extra-EU has remained relatively even, there have been significant changes in the export markets. For example, exports of SMP to Italy rose from 5,900 tonnes in 1999 to 16,300 tonnes in 2000, but then fell to just 700 tonnes in 2001. While this volatility is not surprising given the commodity nature of the product, it illustrates the difficulty that the Irish industry faces in selling this product, where price rather than reliability, quality or any other factors is the key criterion for buyers.

Casein exports Casein exports have risen by 40% in the last 10 years to reach 35,000 tonnes in 2001 In 1991, 92% of Ireland’s casein exports went to the US, which remains the key export market. However, Ireland’s dependence on the US has reduced, with this market accounting for 60% of exports in 2001, and intra-EU exports representing 38% of the total. There is concern regarding the ongoing viability of this US casein market. This is due to possible US Government action that may result in the disposal of large volumes of SMP within the domestic US market, with this product potentially being able to be used as a substitute for imported casein. Large quantities have been allocated by the US Government and small quantities have begun to be sold under this casein conversion programme. While it remains to be seen how successful the programme is, it could severely impact on a market that accounts for 21,300 tonnes (60%) of all casein exports and 44% of casein production from Ireland. The export figures for Ireland’s main products illustrates the overall importance of Irish exports within the EU In 2001, over 90% of butter exports and 93% of cheese exports by volume were to EU countries. Over the last four to five years, EU countries have also accounted for roughly half of Ireland’s export volumes of SMP and WMP. Therefore, a key issue for the industry in the future is the focus to be placed on EU markets, and the implications of the continued importance of these markets. Chapter 2 of this study investigates the predicted trends in consumption and changes in distribution channels within these markets, and ultimately, the opportunities that exist for Ireland.

Ireland’s export markets are important to overall industry profitability. With 63% of all liquid milk production being exported, it is critical that the product mix of Ireland’s dairy processors is in tune with consumers’ or the food processing industry’s requirements. The reliance of Ireland on export markets is far greater than that of Denmark and the Netherlands, but well below that of New Zealand. Other dairy


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industries – in particular Denmark and the Netherlands – have greater levels of internal liquid milk consumption. This is due in part to higher populations, and the fact that both of these markets have greater ranges and consumption levels of liquid milk products, including drinking yoghurts, flavoured milks and buttermilk products. Ireland’s greater reliance on export markets for sales of its output has impacted the product make-up, which historically has needed to be transported over distances in a shelf-stable form to meet the demands of distant consumers.

Given this need to export products, the sector has concentrated primarily on base product production (butter, powders, casein and bulk cheddar cheese). But in the recent past, the international dairy market has demanded a greater range of higher value dairy products for direct consumption – products that geographically-isolated producing countries like Ireland and New Zealand find difficult to supply. New Zealand’s strategy has been to invest in added value production facilities in some key markets to utilise lower value base dairy products, and convert these into higher value products. Ireland faces a challenge to adapt its product mix to better suit the market requirements, or invest in technologies to utilise its products within the affluent Northern Hemisphere consumer markets. Ireland has been reducing its proportion of base products over the last decade; however, as will be discussed in chapters 2 and 3, the industry needs to shift even further out of these product types.

5.4 Export values Export value of dairy products (€ million)69

1991 1997 1998 1999 2000 2001 %

1991/2001

Butter 352.7 388.3 390.3 320.2 320.1 296.9 -15.8 Cheese 206.6 277.0 278.9 273.5 285.8 386.3 87.0 WMP 59.8 89.7 86.6 89.7 105.2 101.0 69.0 SMP 106.8 186.6 95.0 155.1 244.6 105.9 -0.8 Chocolate crumb 87.6 25.6 28.0 35.3 36.7 44.2 -49.6 Casein(ates) 86.0 135.5 125.4 141.0 185.1 190.5 121.5 Butteroil 19.3 15.7 18.4 16.4 13.5 11.2 -42.0 Cream 4.0 11.3 5.8 7.3 5.1 7.0 75.0 Whey powder 24.5 40.6 40.0 38.8 45.0 n/a n/a All other dairy products70

27.2 91.0 91.8 90.6 99.7 n/a n/a

Total 974.5 1,261.3 1,079.9 1,167.9 1,340.9 n/a n/a Source: IDB, Eurostat

The value of Irish cheese exports has risen by 87% over the last decade against an increase in volume of 63% The price achieved in the UK market is the key determinant of this average price, given Ireland’s reliance on this market as a purchaser of cheese. While the average price achieved in the UK rose from €2,930 per tonne in 1991 to €3,400 per tonne in 1997, the price has fallen over the last five years, and was just €3,280 per tonne in 2001. This price trend is reflective of the influence of the average UK cheddar prices achieved by Ireland, which peaked in 1997 at €3,540 per tonne, but fell back to €3,360 per tonne in 2001. While the volume of butter exports fell by 22% over the last decade, the value of these exports fell by only 16% This was due to an increase in the average price achieved in both the UK and French markets, with UK prices rising from €2,860 per tonne in 1991 to €3,100 per tonne in 2001, and French prices going from €2,970 per tonne to €3,210 per tonne during the same period. This is in contrast to the price achieved in Germany, which in 2001 was back at its 1991 level of €3,020 per tonne.

69 NB: 1991–1998 values in ECUs, figures are based on customs values and do not take into account refund value of third party trade 70 Includes liquid milk, butter milk, yoghurt, butter spreads and infant formula


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Over the last decade, Irish exports of WMP increased by 54% in volume terms, but this was outstripped by an increase in value of 69%. This was due to increases in the price of WMP sold to markets such as Africa and the Americas, with prices rising by 30% and 19% respectively from 1991 to 2001. At the same time, the prices achieved in key EU export markets fell, with a fall of 11% in Dutch prices having a significant negative impact.

The average price obtained for Irish exports of SMP has risen by 60% in the last decade. This has been due to a significant increase in the price paid by extra-EU countries, and resulted in a situation in 2001 where there was minimal variance between the price for SMP in all Ireland’s main export markets.

5.5 Import volumes and value Ireland’s imports of cheese and other dairy products has grown strongly over the last five years Irish dairy imports, by volume (‘000 tonnes)

1991 1997 1998 1999 2000 2001 % 1991/2001

Butter 0.9 1.5 3.3 2.8 2.8 5.1 277.8 Cheese 12.7 17.7 15.4 20.6 22.2 23.5 89 WMP 0.1 0.6 0.9 1.0 0.6 0.6 60.0 SMP 2.1 3.5 2.7 6.5 5.9 5.5 142.9 Chocolate crumb 0.2 1.2 1.1 0.1 0.2 0.3 50.0 Casein(ates) 2.2 2.0 2.2 2.9 3.4 1.3 -40.9 Butteroil 0.2 0.1 0.2 0.2 0.4 0.5 150.0 Cream 2.4 14.2 41.8 19.0 11.9 7.6 216.7

Whey powder 21.4 12.4 14.0 8.8 12.4 9.5 -52.8 All other dairy products71

58.7 215.4 291.4 387.6 308.1 230.2 292.2

Total 100.9 268.5 372.9 449.6 367.8 283.0 180.5 Source: Eurostat

The most significant Irish imports, in volume terms, of the main product types is the importation of cheese.

The volume of cheese imported has risen gradually over the last decade from 12,700 tonnes in 1991 to 23,500 tonnes in 2001. This is against total production figures of 120,000 tonnes in 2001. The average value of the cheese imported in 2000 (the last year where values were available) was €3,617 per tonne, considerably higher than the average value of Irish exports in the same year at €3,256 per tonne, and probably reflects the import of softer cheeses, which usually command a higher price than the harder cheeses.

The volume of cream imported over the last decade has been high relative to Ireland’s production. In 2000, 11,900 tonnes was imported, compared to Irish production of just 9,800 tonnes. This may be addressing the shortage of supply from the Republic of Ireland due to seasonality of production. However, there does seem to be a wide variance in the production and import figures for cream from the various data sources available.

A significant volume of imports are categorised as ‘other dairy products’, which includes liquid milk, butter milk, yoghurt and unsweetened condensed milk. In 2000, 308,100 tonnes of these products were imported; however, the average value of these imports was just €398 per tonne.

71 Includes imports of liquid milk, butter milk, yoghurt and unsweetened condensed milk


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Appendix 6: The Irish dairy industry compared summary Comparative measure Ireland

(industry) Denmark (industry)

Netherlands (industry)

New Zealand (industry)

Dairy processing turnover and as a % of GDP

€2,530m

2.5%

€2,930m

1.7%

€5,681m

1.4%

€2,356m

4.5% Milk delivered (million tonnes)

5.388 4.418 10.683 12.322

Average quota per farm (‘000 tonnes)

189 500 394 None

Average number of cows per farm

45.7 70.1 55.4 251

Average milk yield per cow kg per annum

4,600 7,300 7,415 3,341

Average milk price (€/100 kg standard milk72)

28.15 31.01 29.98 18.94

Seasonality peak to trough ratios

5.99 1.21 1.15 82.8873

Protein levels %

3.28 3.41 3.46 3.64

Fat levels %

3.80 4.33 4.44 4.84

Production costs € per kg of milk solids45

2.59 3.48 2.82 2.08

Number of companies processing 80% of the milk pool

6 1 2 1

% of milk drinking milk production

10.4% 11.8% 8.1% 7.2%

Number of butter plants in 2002

11 20 6 10

Number of cheese plants in 2002

10 60 26 9

Number of powder plants in 2002

11 7 11 11

72 2000 figures Source ZMP 73 1999 figures Source: Keane 2002


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Comparative measure Ireland (industry)

Denmark (industry)

Netherlands (industry)

New Zealand (industry)

Average plant output of butter (000 tonnes)

11.6 5.7 21.7 35.2

Average plant output of cheese (000 tonnes)

12.0 8.9 24.7 31.3

Average plant output of powder (000 tonnes)

9.9 28.0 35.9 68.1

Capacity utilisation

60.8% 92.3% 92.9% 52.2%74

Annual butter production (000 tonnes)

128 46 130 258

Annual cheese production (000 tonnes)

120 318 641 289

Annual SMP production (000 tonnes)

75 40 68 251

Annual WMP production (000 tonnes)

34 88 108 515

Annual casein production (000 tonnes)

48 1375 3575 110

EVA 1.7276 2.177 1.83 1.53 % of dairy production exported by volume (incl liquid milk for drinking)

63.4% 35.6% 54.9% 79.3%

Use of EU intervention support for butter

13,700 tonnes 35% (% of total)

0 12,900 tonnes 35% (% of total)

N/a

Use of EU intervention support for butter78

38.800 tonnes 26% (% of total)

0 0 N/a

Average profitability79

2.7% 3.2% 3.8% -0.06%

R&D expenditure (as a % of t/o)80

0.2% N/a 0.4% 0.6%

Reinvestment rate (as a % of t/o)81

2.6% 4.5% 3.1% 5%

74 2000 figures Source CSO data, Eurostat 75 Estimate only, official statistics unavailable 76 2000 data - Average for 13 dairy processors in 2001 was 1.45 77 2000 data 78 Figures for 2002 (June) 79 Profitability figures for DK, NL, and NZ refer to their largest processors and are given for indicative purposes 80 See above 81 See above


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Appendix 7: Approach adopted in determining the future configuration of the dairy processing industry A market led approach has been adopted to determine the optimal industry configuration in line with the overall approach to this study. The key market requirements and the strategic imperatives for responding to these market requirements are the main drivers of the future industry configuration and have been discussed in chapter 2 and sections 3.1 and 3.2. Outlined below are some the remaining factors that have been taken into consideration in determining an appropriate future configuration for the industry. These include specific details of the estimated primary and secondary product volumes to meet the market opportunities, research and evidence of the most efficient plant size and some practical considerations.

Estimated primary and secondary processing product volumes

As outlined at the end of chapter 2, the key opportunities that Ireland is best placed to concentrate its efforts on will result in a product portfolio consisting mainly of butter, SMP, WMP, semi-hard and semi-soft cheeses. However, it is expected that up to 5% of butter, 20% of WMP, 30% of SMP and 50% of cheese output will be used to meet opportunities for enhanced value dairy products as solutions for various customers in the industrial and foodservice markets. This has resulted in estimated primary and secondary processing product volumes as set out in the table below.

Estimated primary and secondary processing product volumes (2015)82

‘000 Tonnes Primary Processing

Secondary Processing

Total Output

Butter 123.2 6.5 129.7

SMP 58.7 25.1 83.8

WMP 26.5 6.6 33.1

Total cheese (111.2)

Semi-hard cheese 35.3 35.3 70.6

Semi-soft cheese 15.3 15.3 30.6

Other cheeses 10.0 - 10.0

Source: Promar Trade Estimates

The configuration of the industry going forward must be such that it can produce these estimated outputs of primary and secondary processed products.

Identifying the most efficient plant size suitable to the future needs of the Irish dairy processing sector

There has been a major drive in competitor countries to increase economies of scale by substantially increasing the scale of plant size for base product production. For example, the Netherlands is continuing to increase its scale of production to reduce fixed costs and achieve its objective of being a cost leader. The leading Danish co-operative Arla, have recently announced plans to double the size of its largest cheese plant in Taulov to 70,000 tonnes per annum. Meanwhile, the New Zealand industry has built some of the largest plants in the world.

As discussed in chapter 1, the data gathered from processors for this study, provides evidence to suggest that the larger scale producers of base products achieve higher margins. While the data is not consistent for all processors, it does suggest that there is a positive relationship between higher margins and larger scale, particularly in the production of base products. This finding supports the research conducted by academics both in Ireland and internationally.

In determining the most efficient Irish plant size for each of the main base products, both academic research and practical experience have been used as inputs. This involved balancing the decreasing

82 Estimated product volumes assume Ireland maintains its current market share in each of these markets


136

average processing plant costs that are achievable with increasing plant scale, against the corresponding increasing collection costs that can arise as plant scale increases.

Research by Teagasc83 on the optimum scale of powder plant for Ireland concluded that 7.5 tonne per hour plants provided the best option, providing economies of scale while retaining some flexibility. Based on Ireland’s existing capacity utilisation, these plants would have an output of roughly 30,000 tonnes84 per annum. While this research may need to be updated to reflect increased cost of production it’s overall findings remain relevant.

While there has been no recent Irish research on the optimal butter plant size the recent international trends have been towards larger scale plants. Consideration was also given to research by Keane85 that focused on the optimal configuration of cheese plants in Ireland. This research combined manufacturing and collection costs and found, as previous studies had, that there are considerable economies of scale up to about 20,000 tonnes per annum.

Practical considerations that need to be factored in

There are a number of practical considerations that have been taken into account in determining efficient plant size and the number of plants required in Ireland to effectively and cost efficiently meet prod uct demand. The factors considered include:

Location of the milk pool - the location of plants must take into account where milk is produced within the country and in particular, should avoid unnecessary transport of liquid milk. The seasonality of milk supply within different regions also impacts on the practicality of locating certain types of plants in different regions.

Joint services - clustering of plants enables processors to drive out cost savings through economies in joint services such as gas, electricity, water source, effluent treatment / disposal and environmental control compliance.

Existing sites - the current scale and suitability of existing plant sites for increased production impacts on whether sites can be upgraded, leveraging the existing investment in infrastructure such as manufacturing equipment, water and electricity, or if new green field sites are required.

Compatibility of different product processes - much of the research on plant efficiency focuses on the manufacturing plant, but does not take into account overall enterprise level issues such as multi-product sites. However, taking an industry wide perspective, it will be necessary to have multi-product sites to achieve overall economies, the most obvious example of this being sites combining production of both butter and powder.

Current returns and requirement for capital re-investment - Chapter 1 identified the lack of significant capital re-investment by Irish processors with the last round of major re-investment being in the 1980’s. While there has been on-going investment by processors this has mainly been to maintain rather than to significantly improve plant and equipment. The Irish processing sector is fast approaching a point where it must re-invest significant amounts of capital. This is being driven by demands from customers and regulators for investment to address environmental, food safety and quality concerns. Capital investment is also necessary to achieve efficiencies at plant level and meet the specific product requirements of customers. The challenge in determining the appropriate future plant configuration for the industry is to determine the most efficient areas and way in which to re-invest. In particular, given the current profit margins it is likely, that certain processors will find it difficult to obtain the funding required to reinvest without a significant change in the focus of their production away from base products into higher margin products.

Other considerations -numerous other practical considerations will impact on the future configuration of the industry including proximity to transport infrastructure and population centres. For secondary processors there may be greater importance and emphasis on these factors.

83 O’Callaghan and Kelly, A Cost Model Approach to Capital Re-Investment Choices for Competitive Milk Powder Manufacture in Ireland, 2000 84 30,000 tonne output is based on operating for 20 hours a day at 7.5 tonnes per hour for 200 days per year. 200 days represents current capacity utilisation. 85 Keane, Structural Change & Economies of Scale and International Competitiveness in Dairying, 1998


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Appendix 8: Savings from economies of scale at manufacturing level from plant rationalisation In calculating the reduction in fixed costs or contribution to capital costs, the square root rule of thumb is usually applied to determine these savings. This approach suggests that a doubling of scale results in a 41% increase in the contribution to fixed costs, effectively a saving of 30%. The relationship between scale and fixed costs is well documented internationally and to illustrate this relationship included below is a graph from research by Teagasc1 on the influence of production scale on fixed costs for milk drying (at 60% utilisation)

Plant scale and fixed costs for powder production

100

120

140

160

180

200

2.5 5 7.5 10 12.5 15

Scale (tonnes/h)

Fixe

d co

sts

International and Irish studies indicate a significant fall in direct labour input as scale increases. Research by Teagasc on powder plants86 found that a doubling of scale results in a 27% drop in direct labour input.

There are also numerous other benefits such as improved quality control, standards and specification of products, but these are difficult to quantify in financial terms.

Many commentators also believe that increasing scale can result in savings in collection and assembly costs. They argue that having fewer larger plants facilitates the efficient planning of milk collection and reduces the unnecessary expense associated with several plants collecting milk from farms in the same towns or local regions.

However for the purposes of this study it is assumed that these savings are outweighed by the increased cost of assembly associated with larger scale and reduced number of plants and in particular the significant cost of transporting liquid milk longer distances.

Cost increases:

The impact of scale on collection or assembly costs involves numerous factors and complexities. Detailed research by Teagasc87 on this cost element factored in route distances, road conditions, supplier herd size, frequency of collection and seasonality, and estimated the influence of catchment radius and shape, factory location, supplier volume and milk production density. Their conclusion was that expanding manufacturing capacity and/or centralised production would lead to an enlargement of the catchment area within which milk is collected and hence an escalation of assembly costs. Similar research of collection costs by Keane88 also indicates rising collection costs with increases in scale.

Using data provided by processors for this study, the views of industry experts and published estimates of powder manufacturing costs and the impact of scale on these costs89; it has been possible to estimate the savings and costs associated with the anticipated change in the scale of powder production.

87 O’Callaghan et al, A Cost Model Approach to Capital Re-Investment Choices for Competitive Milk Powder Manufacture in Ireland, 2000 88 Keane, Structural Change and Economies of Scale and International Competitiveness in Dairying 89 A cost model approach to capital re-investment choices for competitive milk powder manufacture in Ireland (O’Callaghan & Kelly (Teagasc), 2000)


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The net impact of the increased scale of powder production has been estimated to result in a 2.46 cent per gallon reduction in the manufacturing cost of SMP and WMP. Applying this saving to the whole milk equivalent of SMP and WMP production (260 million gallons), results in a saving of €6.5 million per annum. Using the data provided by processors to include the production of other whey products the savings from the increased scale of production are lower per gallon but given the larger volume of milk the total saving is slightly greater than for just SMP and WMP.

While there is less data available on the manufacturing costs of casein, it is assumed that similar savings and costs are associated with increasing the scale of casein production. Indeed given that reductions in fixed costs are greater when moving from lower levels of scale, the savings in casein manufacturing costs may be greater than with powder. However, the savings in casein manufacturing costs are estimated to be one cent per gallon, based on the estimated increase in casein plant scale. This saving applies to a milk equivalent of 379 million gallons resulting in a saving of €3.8 million per annum.

A conservative approach has been adopted in estimating the manufacturing level sav ings from economies of scale. Savings have been calculated for powder and casein production and have not factored in any potential savings from the production of butter or other products. The reality is that savings, while less significant, are also likely to be made from larger scale manufacturing of butter and other products.


139

Appendix 9: Estimating benefits using EVA analysis

The economic value added (EVA) ratio is used as an indication of the value -added to raw dairy products through processing and marketing activities. Enhanced values suggest that an industry is able to extract greater value from milk through particular types of products manufactured and/or the markets serviced.

As discussed in chapter 1, the Irish dairy industry has a lower EVA than its competitors used to benchmark the sector. This in part reflects the Irish reliance on lower value products due to the seasonal supply pattern, its utilisation of EU price and market supports, and to some extent its geographical location.

To demonstrate this fact, the EVA as calculated for this study, is shown for a number of European dairy industries. While in the benchmark section of the report New Zealand was used for comparative purposes, in this case it has been removed as its EVA is significantly enhanced through its lower milk price. In addition to this, New Zealand sells a vast volume of products into the Asian market, rather than Europe, and as a result its inclusion in this calculation is of limited value. For comparative purposes, the dairy industries of Denmark, the Netherlands and Germany have been compared with that of Ireland for the period 1997 – 200090.

EVA of major competitor dairy industries 1997 – 2000

Ireland91 Denmark Netherlands Germany 1997 1.58 2.03 1.78 2.18 1998 1.54 2.37 1.75 2.12 1999 1.61 2.39 1.94 2.02 2000 1.72 2.10 1.80 1.99

Source: ZMP, IDB, CSO, National Statistics, Prospectus/Promar Research

The challenge for all international dairy industries is to create greater value from the raw milk, through the combination of products and markets. Many opportunities can be considered as possible, especially those that add additional value to milk, but it is imperative that such tactics are undertaken in a manner that ensures that added costs in processing and marketing do not outweigh the benefits.

The prominence of butter, SMP and WMP to the Irish dairy industry is shown below. There are a number of well understood reasons for these products’ historical manufacture, but it would appear that they tend to negatively impact on the industry’s ability to create additional value from raw milk.

The following table provides an indication of the relative importance of butter, SMP & WMP dairy products to the Irish dairy industry. The dairy industries of each country are compared using the volume of milk used in the manufacture of butter, SMP and WMP as a percentage of the total volume of milk processed. A milk equivalence method has been used to estimate the relative volumes used in the manufacture of each product. Despite some ongoing debate over some of the actual indices used, this system remains an internationally accepted method for this type of comparison. While other methods, including the volumes of processed products, could be used, after consultation with a number of industry groups, it was decided that the milk equivalence method was the more appropriate for this type of comparison.

90 These industries have been chosen as they produce and distribute products in the European markets. New Zealand is not included, as the EVA is enhanced through the lower producer milk price. 91 Irish EVA figures for 1997 to 2000 based on industry data from CSO.


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% Butter, SMP and WMP products92 % for major competitor industries 1997 – 2000

Ireland Denmark Netherlands Germany 1997 45.32 29.35 21.17 30.48 1998 45.00 28.95 24.39 30.04 1999 44.71 30.40 24.15 30.07 2000 43.30 30.39 21.87 28.75

Source: ZMP

The rationale for the increased reliance on butter, SMP and WMP has been discussed earlier, but in the main these products have limited ability to return premiums to processors, as they are continually under price pressure because many international producers are able to manufacture base dairy products. It is often said that the world is awash with milk powder. This said the Irish dairy sector is more reliant on the sale of these base products to provide industry returns. In effect, it is a price taker for a significantly larger proportion of its processed milk than other European dairy industries.

Within the Irish dairy industry, many draw attention to the fact that their European counterparts are able to supply greater volumes of fresh dairy products into their domestic markets, and therefore have a decreased need for the manufacture of base products for sale in (arguably) the more competitive international marketplace. In addition, the others in this comparison have more uniform seasonal milk production curves – reducing the need for base products to soak up seasonal milk. While the domestic market in Ireland is smaller in population terms, per capita consumption of dairy products is mixed. Large volumes of liquid milk are consumed, but residents purchase significantly less butter and cheese than the European per capita average. Cultural traditions may explain some of this variation, but there would appear to be opportunities to increase dairy consumption in some areas, to improve this current situation to the benefit of the local dairy sector.

Relationship between EVA and base product % (Butter, SMP and WMP) In chapter 1 the relationship between the percentage of milk used in the manufacture of butter, SMP and WMP was profiled, using the benchmark industries of Denmark, the Netherlands and New Zealand. This same relationship exists when plotting EVA (as calculated) against the percentage milk used in the manufacture of butter, SMP and WMP when Germany replaces New Zealand.

92 In order to compare the impact that the proportion of base products within the total product portfolio has on the EVA ratios of the different benchmark countries, it is important to compare similar type products produced by the different countries. Butter, SMP and WMP are produced in all of the countries, and the products are broadly similar. However, it is not possible to compare cheese as there are major variances within the product category, and it is not possible to make plausible cross-country comparisons. For example, the Dutch industry produces large quantities of edam and gouda cheese, which are mainly commodity type products, not produced to any extent in the other countries. As a result, the only base products we compare to assess their impact on EVA are butter, SMP and WMP on a milk equivalence basis.


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Relationship between base product percentage and EVA

1.50

1.55

1.60

1.65

1.70

1.75

1.80

1.85

1.90

1.95

2.00

2.05

2.10

2.15

2.20

2.25

2.30

20.00 25.00 30.00 35.00 40.00 45.00

Base product %

EVA

Ireland

Netherlands

Germany

Denmark

This chart suggests (as in chapter 1) that there is a negative relationship between volume of milk used to produce base products percentage, and a dairy industry’s ability to add value to the milk processed. The chart strongly suggests that rewards, in terms of enhanced EVA, are available for industries that can reduce their reliance on the production and marketing of these types of products (butter, SMP and WMP).

The effect of raw milk price By definition, it is possible for dairy industries to enhance their EVA through the payment of a lower milk price. This is certainly the case in New Zealand. However, when comparing the European industries used in constructing the curve above, it is noted that Denmark, the Netherlands and Germany have all paid greater prices (in absolute terms) for the raw milk purchased from suppliers (ZMP data).

Average producer milk price 1997 – 2000

Ireland Denmark Netherlands Germany 1997 28.23 30.87 29.17 28.32 1998 27.92 30.80 30.59 29.72 1999 26.66 30.26 26.77 28.47 2000 27.20 30.86 29.98 30.00

Source: ZMP

Over the period under review, the other industries have in fact paid between 6% and 12% more for their raw milk than Ireland. Despite these higher milk prices, these same European industries have managed to create greater value from dairy processing using their respective structures, markets and product portfolios. This suggests that in this case, added value gained from marketing less base product, has in fact delivered added value throughout the total value chain, including producers.

Impact of product mix and EVA change Through using the EVA / base product curve as shown, it is possible to extrapolate the estimated impact of changing the percentage of milk used in the manufacture of butter, SMP and WMP. In 2000, the base product percentage for the Irish dairy industry was approximately 43%, (43% of all milk processed was manufactured into butter, SMP and WMP), and this resulted in an EVA of 1.72. This in effect meant that the industry, through its processing and marketing initiatives, was able to add 172% to the value of the raw milk price paid to producers.


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Impact of product mix change on EVA

1.50

1.55

1.60

1.65

1.70

1.75

1.80

1.85

1.90

1.95

2.00

2.05

2.10

2.15

2.20

2.25

2.30

20.00 25.00 30.00 35.00 40.00 45.00

Base product %

EVA

34%

1.90

The strategy as suggested in chapter 3, proposes to create a situation where the Irish dairy industry changes its product mix to one less dependent on base products. It proposes the move towards the creation of added value, differentiated dairy products utilising Ireland’s distinct attributes and technologies. This shift creates a situation where only 34% of its raw milk would be used in the manufacture of non-differentiated butter, SMP and WMP (i.e. products that are sold into markets with very limited ability to set price). Using the trend line above, this move is expected to create a situation where the Irish dairy industry could generate an EVA of 1.90, adding 190% to the value of the raw milk purchased, compared to the present level of 172% - an extra 18%. Based on current milk volumes (5,338,000 tonnes) and a milk price of €29.22/100Kg, this equates to an estimated €280 million in additional turnover from the milk processing industry. While the product shift is considered to be the major driver for the increased EVA factor, it must be remembered that other aspects including industry restructuring and rationalisation of the delivery of products to market, may also assist in delivering this increased industry efficiency. An example of this – Ireland The impact of changing product portfolio and EVA enhancement has been demonstrated in a number of dairy industries, including Ireland. In the past 4 years, Ireland has managed to decrease the percentage of milk used in the manufacture of butter, SMP and WMP, with this translating into an increased EVA.


143

EVA – base product percentage – Ireland

1.52

1.54

1.56

1.58

1.6

1.62

1.64

1.66

1.68

1.7

1.72

1.74

43.00 43.50 44.00 44.50 45.00 45.50

Base product %

EVA

2000

1999

1998

1997

While the shifts in base product percentage have been relatively modest compared to that which is being proposed, the trend is well demonstrated. In the past 4 years, the reduction in raw milk used in the manufacture of butter, SMP and WMP from 45.32% in 1997 to 43.30% in 2000, has resulted in an EVA enhancement of 0.14. The proposed strategy will result in a further growth in the EVA of 0.18 over and above the enhancement that has occurred since 1997, resulting in an estimated €280 million in dairy industry turnover.


144

Appendix 10: Competition issues Competition in the domestic market Within the domestic market it is envisaged that the strong competition that currently exists within the liquid milk market, with local processors competing with the larger players, will continue following the implementation of the changes outlined in this study. However it may be necessary for some processors to divest of certain domestic activities, as has been the case in other countries where major rationalisation has occurred.

The recommendation of this study to create a large single player will ensure the international competitiveness on global markets of 80% of Ireland’s total output from dairy manufacturing that is exported. However this should not reduce the competition within the domestic market, particularly for liquid milk where local processors will continue to play a key role in the market. The fact that Ireland is an open economy will ensure that there is competition within the domestic market for consumer dairy products, particularly from other EU countries.

Competition is required in the home market and this competition should enable processors to utilise the home market to develop and test new products that the market is demanding so that consumers choose Irish products rather than being forced into buying them due to a lack of alternatives. Ultimately it will also result in greater opportunities for the exportation of these products to other EU markets where Ireland sells the majority of its dairy products. The rapid consolidation of both Danish and New Zealand dairy industries has brought into question whether the two major companies in each market (Arla and Fonterra) are able to act in an anti-competitive manner due to their size. In fact, both of these operators were formed with government approval, although questions are still regularly asked regarding market behaviour.

Denmark

Until the recent past, it appeared that the Danish Competition Authorities were not too concerned about the creation of the MD (and now Arla) operation. In fact, at a number of stages the Authority approved the growth. However, recently the Competition body has been asked to rule on the company’s strategy, in particular during the merging with Clovermilk and the cross-border merger between MD Foods and Arla to form Arla Foods. The merger between the Swedish and Danish dairy giants also avoided EU Competition Authorities as it fell below the value threshold for such investigations, resulting in the merger being subject only to approval by the Danish and Swedish Authorities, which was granted. The Authorities approved the merger on condition that some smaller operations were sold off to ensure a degree of local competition.

Despite ongoing approvals by the market watchdogs, Arla continues to be investigated on a regular basis, including as recently as December 2002. To date, the reaction to Arla’s plans has been favourable, but these approvals have failed to slow the level of questioning by concerned groups within the Danish and Swedish dairy markets. New Zealand

Fonterra was formed through the combining of the country’s two largest dairy processors and the New Zealand Dairy Board. This combination resulted in the new company controlling over 95% of the raw milk supply and the domestic milk market. The New Zealand Government was asked to enact legislation that would enable Fonterra’s formation to bypass the Commerce Commission, a group that was almost certain to veto the creation of the new company. This bypass was granted, as it was considered it was in the national interest to form a single large dairy processing and marketing company to compete on the international dairy market.

As with the Arla example, Fonterra was forced to relinquish some of its domestic market operations to maintain competition in consumer dairy products in the local market. In addition, two other dairy processors (Tatua and Westland) continue to operate in both the domestic and international dairy markets beside Fonterra, providing some small degree of competition. Questions are still asked about Fonterra’s dominance of the New Zealand dairy industry, especially in its ability to set raw milk prices. However, due to its co-operative ownership structure, some consider that the Government’s ability to interfere is limited, and that the company is unlikely to face any severe legislative restrictions on its future strategies as long as these are approved by its 14,000 supplier shareholders.

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