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The ICOS National Conference, today Thursday 21st October at Citywest in Dublin, posed the challenging question to dairy processing co-operatives and their members as to how the dairy industry will manage and fund the suggested 50% increase in milk supply as proposed in the recent Food Harvest 2020 Report.

Food Harvest 2020 stated that the agri-food and fisheries sector is Ireland’s most important indigenous industry. It is widely recognised as having a key role to play in Ireland’s export-led economic recovery. With €7 billion in exports the sector currently accounts for over half of manufacturing exports by Irish owned firms and serves in excess of 160 export destinations. The vision of the report is to increase this export value to €12 billion by 2020.

The dairy industry is one of Ireland’s most important indigenous industries and comprises a vital part of the agri-food sector. In 2008 milk accounted for the second largest share of Ireland’s gross agriculture output at 28%. It is an export driven sector with 85% of dairy products exported, representing 27% of all food and drink exports in 2008. The value of these exports was €2.3 billion in 2008 with the UK accounting for 32% and the rest of the EU accounting for 48% of these exports.

The 50% increase in milk supply, proposed in Food Harvest 2020 equates to an additional 2.75 billion litres of milk requiring processing.  It is envisaged that this would enhance the primary output value of the dairy sector by about €700 million with further downstream benefits in the form of increased dairy product values, export earnings and employment.

A line-up of senior level speakers addressed the challenges facing the industry in preparing for such a dramatic increase in scale and attempting to do so profitably.  Sharing their insights in the morning session were Kevin Lane, CEO of the Irish Dairy Board, Dr. Onno Van Bekkum of Nyenrode University in the Netherlands, and retail expert James Burke.

In the afternoon, a panel of experts including Jim Woulfe, CEO of Dairygold, Michael Dowling of AIB, Dr. Onno Van Bekkum and Sean Myers of ICOS, addressed the future relationship between co-ops and their supplier members.  The discussion was chaired by Matt Dempsey, Editor of the Irish Farmers Journal.  The Minister for Agriculture, Fisheries & Food, Brendan Smith T.D. addressed delegates in the evening.

It is a ‘given’ that milk quotas will have disappeared after 2015 and there will need to be some common mechanism which co-ops will use to regulate milk supply and to generate revenue for the expansion of processing capacity.   Over the past year, ICOS has been communicating with its members to seek to develop a common approach to dealing with expanding milk suppliers and new entrants, to ensure that the interests of member are protected, while avoiding the imposition of unnecessary barriers to new entrants.

While the industry wants and needs to attract new entrants, to sustain and increase production, we must address the fact that commodity milk processing has been loss making over recent years, and that the industry does not have sufficient capital to fund a dramatic expansion in capacity.

European and International competitor co-ops all require a significant capital contribution from member suppliers to fund the facilities and the innovation required to profitably process and market their milk.  It is important that farmers who are planning an increase in milk supply be aware that they will need to budget for such a contribution.

In parallel, ICOS has proposed that the time is now right to re-establish the link between milk supply and co-op shareholding. Largely due to the imposition of milk quotas, co-ops developed other areas of agribusiness, and with it, shareholding by non milk suppliers.

As a result, the link between milk supply and shareholding was weakened. This could result in milk supplier members losing control of their processing asset. It is important, now, to re-establish the supply shareholding link, to strengthen the position of active milk suppliers, and to ensure that members provide funding to the business relative to their use of the facilities.

ICOS has proposed establishing a Share Standard, or a minimum shareholding by all members, relative to their supply, and that for those members who wish to dramatically expand their supply, or for new entrants, where plant capacity has to be increased, those members should make a significant contribution to the cost of the necessary expansion. ICOS has suggested that where new facilities have to be developed, the cost of those facilities could be of the order of 30c per litre of annual capacity.

Given the high cost of the provision of processing facilities, and the fact that Ireland’s highly seasonal milk supply results in facilities which only operate at 60% of annual installed capacity, the industry – both co-ops and farmers – need to seek the optimum balance between grass driven production efficiency, and optimising the use of expensive plant.

In seeking to allocate rights to members to access processing facilities, it is important to incentivise members to flatten their supply curve. This could be done through differential pricing, with a small levy on peak milk being used to provide a premium for quality shoulder milk production. An alternative would be to allocate free processing rights for the shoulder period, but seeking a capital contribution per litre of peak milk above the current supply.

ICOS represents 150 co-operative businesses and organisations in Ireland with 150,000 individual members, 12,000 employees in Ireland (and a further 24,000 abroad) and combined turnover of €10 billion.  Irish agricultural exports contribute over €8.1 billion to the Irish economy each year and the sector accounts for 8.5% of national employment.

For further information please contact:

Tim Kinsella 086 813 7512 / tim@mkc.ie

For press releases, media kits and more visit the ICOS website at www.icos.ie