The Irish Dairy Industry

1

• The Irish Dairy Industry
• Decision time is now
• September 2009
• Prepared for
• The Irish Farmers Association

2
Contents
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2
3
4
5
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• Executive Summary

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Little progress has been made in restructuring of
the Irish dairy milk processing sector since the
Prospectus Report of 2003
The objective of this presentation is to outline
the case for why the Irish Dairy Sector needs to
be restructured now.

• The current situation is not sustainable
• Average farm income dropped by 13.7 in 2008
• Projected to drop a further 25 this year
• Dairy farmers income projected to decrease by up
  to 40 in 2009
• Farmers now producing milk below cost
  estimated that it costs 27c/l to produce milk.
• Currently farmers are receiving approx 20c/l,
  driven by global market conditions
• Declining dairy incomes are making Irish dairy
  farmers unviable

5
Industry lacks the requisite business/processing
efficiency to compete with international
competitors

• Overview of the current Irish Industry
• The multiplicity of fragmented processors, many
  of them small, means that the industry lacks the
  requisite efficiency to compete with
  international competitors a distinct need
  exists to integrate the collection/processing,
  marketing and RD functions to maximise
  efficiency and scale has a role to play
  (particularly for commodities)
• Ireland cannot rely on the same product mixes to
  build a sustainable/efficient industry
• 80 of exported milk products go to the UK (32)
  or EU other (48) successes have been achieved
  in increasing exports to non-EU countries during
  the period 2003 to 2007, but a increased focus on
  emerging markets is also crucial
• There is insufficient product innovation in the
  Irish Dairy Industry and diversification in terms
  of use of milk output. This is the case despite
  robust data to illustrate changing consumer
  trends and preferences both in Ireland and on an
  international basis.
• Wage costs in the dairy processing sector are
  12.6 above the average for food processing, and
  29 higher than for meat processing. The sector
  needs to bring its wage costs in line with both
  national average and international competitors.

• The international outlook
• In the short-term, demand for dairy products will
  be effected primarily by the recession
• The medium to long term outlook for the
  international dairy industry is positive for
  countries with appropriate/efficient structures
  in place
• Countries within the EU are strongly positioned
  to serve the growing world demand for dairy
  products - efficient milk processing nations can
  expect to be suitably rewarded

6
The pace of efficiency gains in Ireland is up to
ten years behind our international competitors
7
The current processing model cannot provide the
basis for the future development of the Irish
Dairy Industry

• Our existing structures are now inefficient and
  out-dated on a number of levels in comparison
  with our international peers
• Model is disjointed and lacks the necessary
  system integration of functions (processing,
  development and marketing)
• Irish Dairy Board is one step removed from
  processing core functions therefore the
  capacity/capability of this resource is not being
  maximised
• Overall connection between key stakeholders and
  the market (domestic and international) is weak
  by international standards
• Focus of current product development processes
  remains too concentrated on commodities
• Current model has achieved limited efficiencies
  and economies of scale for commodities
• Irish products continue to compete against one
  another due to the under-development and lack of
  co-ordination of marketing functions
• Ireland continues to follow product innovations
  to a limited extent as opposed to leading them
• Scope for further development of the Kerrygold
  brands

8
Proposed new model
Farmers
Central Processing Coordinator
Research Development Product Development /
Innovation
Irish Dairy Board (Marketing Sales)
Irish International Markets
Processors
Product 1
Product 2
Product 3
Product 4
Product 5
Product 6
9
Proposed new model key functions of three main
components
Central Processing Coordinator
Irish Dairy Board
Research Development Product Development /
Innovation
Improved Efficiencies

• Milk assembly
• Efficient processing coordination / management
• Quality control
• Contracts with processors
• New / existing mass product production

• Market intelligence what are our competitors
  doing?
• Market research trends in consumer behaviour,
  butter vs other products etc
• Market opportunity identification potential new
  products
• Market testing of potential new products
• Market profiling of existing and new products
• Branding
• Sales distribution
• Maximising added value

• Research Development new products and
  processes
• New product development liaising with consumers
  and processors

10
Total projected increased income in a 4 - 6 year
period could be approximately 2c/l due to
increased efficiency greater added value
Projected financial gains for years 3 - 5
Total projected gains would be on a par with the
2cl extra projected by the Friesland- Campina
merger after 2010
11
Decision time is now Conditions will continue
to deteriorate under the status quo

• Dairy Farmers
• Irish farmers will risk financial difficulties,
  or even being put out of business, by the
  industrys inability to pay viable milk prices
• They will be put at a competitive disadvantage to
  equivalent export driven dairy farmers in other
  countries
• Dairy Processors
• Will produce products at unit costs that will not
  be competitive internationally
• Will continue to compete amongst themselves in
  international markets
• Dairy Industry
• Efficiency gains made by individual processors
  have been too slow to match international
  competitors and risk being lost
• A continued focus on commodity products will
  result in poor returns, under-investment and
  industry stagnation
• A fragmented dairy processing sector starved of
  resources would become the limiting factor to
  on-farm production increases
• The industry will not attract the right talent
  for the future
• The potential of the industry will not be
  exploited due to under-investment in marketing
  and product development
• Research Development will continue to be
  undertaken on an ad hoc basis
• Irish Economy
• An inefficient Irish dairy industry will place
  additional pressures on the Irish economy
  rather than serving as one of the main national
  engines for economic growth

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• 1. Introduction

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Introduction and Objectives
The Prospectus Report of 2003 recommended that
radical action was required by the Irish dairy
milk processing sector to ensure its long term
survival. However, little progress has been made
during the interim period to advance the
sector. This presentation provides an overview
of the key sectoral developments during the
period 2004 2009, examines the current milk
production processes and presents a suggested
national model to achieve the necessary
restructuring to ensure future viability and
profitability.
The overall objective of this presentation is to
outline the case for why the Irish Dairy Sector
needs to be restructured now.
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• 2. Overview of the Irish Dairy Sector

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Overview of the Irish Dairy Sector

• Farm Level
• Dairy farm numbers are consolidating faster than
  any other system of farming in Ireland
• Average dairy output has increased from 115,000
  litres to 250,000 litres in last 15 years
• There are less than 19,000 dairy farmers in
  Ireland at present, which is approximately 50 of
  the total 15 years ago
• Age profile of dairy farmers is high in Ireland
  in comparison to EU averages
• Average farm income dropped by 13.7 in 2008
• Projected to drop a further 25 this year
• Specialist dairy farmer income projected to
  decrease by up to 40 in 2009
• Farmers now producing milk below cost estimated
  that it costs 27c/l to produce milk.
• Currently farmers are receiving approx 20c/l,
  driven by global market conditions
• On-farm Investment
• The highest ever level of farm investment took
  place last year. Approximately 1b was spent on
  new buildings and machinery (relevant to the
  dairy industry) under the farm waste management
  scheme leaving the structure capable of major
  expansion

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Overview of the Irish Dairy Sector

• Processing
• A major existing problem in Ireland the
  multiplicity of fragmented processors, many of
  them small, lack the efficiencies to survive
• A distinct need exists to combine the collection,
  processing and marketing of dairy products
• Requirement also to facilitate additional RD in
  order to develop new branded products
• Ireland is too reliant on producing commodity
  products
• The dairy sector wage costs are 12.6 higher than
  the average for food processing, and 29 higher
  than for meat processing
• Importance of the Dairy Sector to the Economy
• Dairy exports worth approximately 2.2bn per year
• Ireland exports approximately 4.5 million tonnes
  of product annually
• One of the most important sectors of Irish
  agriculture accounting for 27 of agricultural
  output
• Employs approx 7,000 people and makes a
  significant contribution to sustaining rural
  communities

17
Our seasonality of milk supply is significantly
different to EU average
This serves as one of our main strengths, but
restricts our ability to diversify our range of
processed dairy products
Source ICOS (based on 2006 data)
18
Ireland sits in the lower half of the scale in
terms of milk price
Selling Price per 100 kg of Raw Milk
2007 data highlights the strong position of
Denmark. The indicator in general is
characterised by a degree of annual fluctuation
within countries.
Source Eurostat
19
Ireland sits in the lower half of the scale in
terms of milk price
Selling Price per 100 kg of Raw Milk
Data up to July 2009 highlights the increasing
price pressures being placed on dairy farmers
Source LTO Nederland
20
Standardised Milk Price July 2009(Milk price
per 100 kg standard milk)
21
Ireland cannot rely on the same products and mix
to build a sustainable industry
Breakdown of Products Produced in 2008
Whole Milk
Skimmed Milk
The range and proportion of products produced
annually has changed in line with changing
tastes/preferences, technological advances etc
however Ireland needs to be more proactive
Source Irish Dairy Board 2008
22
80 of our exported dairy products go to the UK
and mainland Europe
Breakdown of Products Produced in 2008
Source Irish Dairy Board 2008
23
Butter accounts for 60 of exports, but it is a
declining market
Our competitors have diversified to a greater
extent
Source Central Statistics Office
24
The pace of efficiency gains in Ireland is up to
ten years behind our international competitors
Source National Milk Agency 2008
25
CONCLUSION - Our industry needs to structure
itself accordingly to compete internationally
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• 3. Overview of the International Market 2009

27
Ireland has a greater reliance on international
markets than most countries
Exports
Milk and dairy products continue to be
predominantly consumed in the region of
production with the exception of countries such
as NZ, Australia and Ireland
Source Dairy UK 2009
28
Ireland is the 8th largest milk producer in the
EU - compares favourably in terms of herd size
Source Dairy UK 2009 (Based on 2007 data)
29

• International Market Outlook

30
The OECD Agricultural Outlook for the period 2009
2018 is positive

• During the above period, dairy products are
  expected to remain among the agricultural
  commodities for which consumption exhibits the
  highest growth rates
• Dairy demand over the medium term is expected to
  expand particularly in developing countries
• The agri-food sector is expected to be more
  resilient than other sectors to the present
  financial and economic downturn

Current Members of the OECD AUSTRALIA, AUSTRIA,
BELGIUM, CANADA, CZECH REPUBLIC, DENMARK,
FINLAND, FRANCE, GERMANY, GREECE, HUNGARY,
ICELAND, IRELAND, ITALY, JAPAN, KOREA,
LUXEMBOURG, MEXICO, NETHERLANDS, NEW ZEALAND,
NORWAY, POLAND, PORTUGAL, SLOVAK REPUBLIC, SPAIN,
SWEDEN, SWITZERLAND, TURKEY, UNITED KINGDOM,
UNITED STATES
Source OECD Food Agriculture Organisation 2009
31
Global demand for dairy products predicted to
grow by 16 by 2017

• Short term commercial situation will be
  challenging
• The global supply / demand balance looks
  favourable

OECD consumption forecasts 2008 2017 (000
tonnes
32
Significant increases projected in cheese
consumption (within and outside OECD)
Dairy Product Consumption Projections
Butter, SMP and WMP consumption projected to
remain relatively consistent within the OECD 2007
- 2017
Source OECD
33

• EU Restructuring To-date

34
Valio - Finlands Largest Dairy Company

• Now the largest milk processor in Finland
• Originally founded in 1905 consolidation of
  coops commenced in 1995
• Presently owned by 22 dairy cooperatives with
  approx 10,000 associated milk producers
• Annual turnover of 1.8 billion
• 15 production plants across Finland (2 in
  Estonia, 1 in Belgium)

Net Turnover by Product Group

• Restructuring process commenced in 1995
• Reorganising structures (in Valio and amongst
  member dairies) has reduced duplication from an
  operational perspective
• A number of mergers have taken place and resulted
  in a smaller number of larger cooperatives
  increasing their influence

35
Dairy processing across Europe has been
undergoing restructuring for a number of years
Germany Number of Milk Processors 1960 - 2009
The Netherlands Number of Milk Processing
Plants 2000 - 2007
Total milk processed in the Netherlands has
increased by almost half a billion kg during the
period 2000 - 2008 through effective
restructuring measures
Rationalisation of milk processing has also been
a feature within Germany over the course of the
last 50 years
36
The Friesland-Campina 2008 merger projected to
reduce milk processing costs by 175m or 2.1 c/l

• 17,000 farmer members
• Friesland-Campina now consists of four business
  groups
• Cheese Butter
• Consumer Products Western Europe
• Consumer Products International
• Ingredients
• The merger has created a leading global dairy
  business
• A more dynamic and effective company as a
  result
• Diversification across product groups and
  geographical markets
• Development of strong brands
• International scale in research, production,
  marketing and sales
• Capacity to respond efficiently to the constantly
  accelerating changes in the dairy market
• Significant projected savings in milk processing
  costs

37
The global outlook for the industry is positive,
but significant change is required in Ireland to
exploit opportunities

• In the short-term, demand for dairy products will
  be effected primarily by the recession
• The medium to long term outlook for the
  international dairy industry is positive for
  countries with appropriate structures in place
• Countries within the EU are strongly positioned
  to serve the growing world demand for dairy
  products - efficient milk processing nations can
  expect to be suitably rewarded
• An increased focus on innovation and RD to
  increase product ranges will significantly
  benefit the positioning of producer countries
• Countries renowned for the operation of efficient
  dairy industries continuously restructure as a
  means to ensure they can best support milk
  producers and processors
• Blueprints for efficient dairy industries have
  been developed and tested in countries such as
  Finland, the Netherlands, New Zealand and Denmark
  Ireland can learn from the experiences of these
  countries

38

• 4. The Current Irish Dairy Industry Model
  Proposed Changes

39
The current Irish model has largely evolved in an
ad hoc manner
of products sold on Irish / international
markets

Produce
Farmers
Milk
Processor A

utilised by the IDB for export purposes
Milk
Processor B

Produce

of products sold on Irish / international
markets
40
The current Irish model has serious disconnects
at vital points

• The existing structures have served the Irish
  Dairy sector well in the past
• Provision of a basic, yet effective, pathway from
  producer to processor
• Profiling and positioning of Irish produce on
  international markets
• Development of the Kerrygold brand on an
  international basis
• Provision of routes-to-market for certain
  commodity products (e.g. Cheddar cheese in the
  UK, etc)
• But, these structures are now inefficient and
  out-dated on a number of levels in comparison to
  our international peers
• Model is disjointed and lacks the necessary
  system integration of functions (processing,
  development and marketing)
• Irish Dairy Board is one step removed from
  processing core functions therefore the
  capacity/capability of this resource is not being
  maximised
• Overall connection between key stakeholders and
  the market (domestic and international) is weak
  by international standards
• Focus of current product development processes
  remains too concentrated on commodities
• Current model has achieved limited efficiencies
  and economies of scale for commodities
• Irish products continue to compete against one
  another due to the under-development and lack of
  co-ordination of marketing functions
• Ireland continues to follow product innovations
  to a limited extent as opposed to leading them
• Scope for further development of the Kerrygold
  brands

41
CONCLUSION - This status quo will not / nor
cannot provide the basis for the future
development of the Irish Dairy Industry

• A new model is required to secure farmer and
  industry viability
• The primary aim of this new model is to maximise
  efficiencies and develop the strengths of the
  Irish industry
• while putting structures in place that will
  enable the effective and efficient use of Irish
  produce
• thereby supporting the financial viability of
  Irish farmers and
• insulating the industry from the unpredictable
  nature of international markets
• Proposed new model includes the Milk Ireland
  concept, as developed by the Irish Co-operative
  Organisation Society (ICOS)

42
A proposed new model There is much to gain from
a collaborative and integrated approach to the
processing, development and marketing of all
Irish dairy products

• A centralised milk pool is necessary to
  coordinate milk assembly, processing and
  marketing throughout Ireland
• This organisation needs to determine where milk
  flows for processing and for what intended
  purpose a strategic distribution and processing
  approach with a remit encompassing all of Ireland
• It should also house all IDB functions (including
  market analysis and branding) to ensure a
  responsive approach to evolving demand and
  capacity
• A third tier with responsibility for product
  development and RD should also be included
  within the remit

This proposed new model has the potential to
offer a brighter and more viable future for all
involved in dairy processing
43
Proposed new model - responsible for coordinating
processing with a strong marketing product
development remit
Farmers
Central Processing Coordinator
Research Development Product Development /
Innovation
Irish Dairy Board (Marketing Sales)
Irish International Markets
Processors
Product 1
Product 2
Product 3
Product 4
Product 5
Product 6
44
Proposed New Model (Overview of key functions)
Central Processing Coordinator
Irish Dairy Board
Research Development Product Development /
Innovation
Improved Efficiencies

• Milk assembly
• Efficient processing coordination / management
• Quality control
• Contracts with processors
• New / existing mass product production

• Market intelligence what are our competitors
  doing?
• Market research trends in consumer behaviour,
  butter vs other products etc
• Market opportunity identification potential new
  products
• Market testing of potential new products
• Market profiling of existing and new products
• Branding
• Sales distribution
• Maximising added value

• Research Development new products and
  processes
• New product development liaising with consumers
  and processors

45
Proposed New Model Processing Function

• How this will work in practice
• All milk assembly will be centrally coordinated
  and centrally pooled as one resource
• New model will determine the appropriate purpose
  (product) and destination (processing plant) for
  all milk (based on a competitive commercial
  basis)
• A number of variables will be used to assist with
  the allocation process
• Product return
• Plant efficiency
• Geographic location of plant
• Plant capacity / expertise

46
Proposed New Model Marketing Sales Function

• How this will work in practice
• Marketing and sales function will identify
  emerging opportunities in international markets
• Will also work very closely with the processors
  and RD functions on product development
• Processing will be driven in the future by market
  requirements and market trends Ireland will be
  more responsive than international competitors
  regarding what the customer wants
• Five key focuses of this new model will be to
• Provide market-focussed product processing
• Achieve efficiency and scale in commodity
  processing
• Move up the value chain on certain dairy products
• Target new markets outside the EU
• Diversify our product range (within the
  constrictions of Irish seasonality)

47

• 5. What will the proposed new model mean to the
  Irish Industry?

48
Benefits of restructuring the dairy industry are
significant

• Irish Farmers
• Irish farmers will be better supported and
  receive a price for milk that is more consistent
  and less exposed to volatility of international
  markets
• Processing
• Increased efficiency in the collection and
  processing of milk and lower unit costs
• Better financial ability to increase processing
  capacity quickly to meet on-farm expansion
• Increased capability to respond to market
  volatility
• Healthy competition amongst the milk processor
  plants for business within the new model
• Necessary efficiency, coordination and
  development capacity to maximise our strengths to
  compete internationally
• Marketing and Sales
• More customer responsive and market led approach
  to international opportunities
• An integrated role for the Irish Dairy Board it
  will become a central core of the new model
• Increased revenue and greater margins from
  selling products with a higher value added
• Significantly increased focus on market research,
  development and production innovation
• Product development and marketing functions
  co-ordinated from the centre

49
Benefits of ongoing consolidation at farm level
will be lost without an overhaul of existing
processing structures

• Dairy Farmers
• Irish farmers will risk financial difficulties,
  or even being put out of business, by the
  industrys inability to pay viable milk prices
• They may lose the benefits of consolidation and
  efficiency gains at farm level
• They will be put at a competitive disadvantage to
  equivalent export driven dairy farmers in other
  countries
• Dairy Processors
• Will produce products at unit costs that will not
  be competitive internationally
• Will continue to compete amongst themselves in
  international markets
• Dairy Industry
• Efficiency gains made by individual processors
  have been too slow to match international
  competitors and risk being lost
• A continued focus on commodity products will
  result in poor returns, under-investment and
  industry stagnation
• A fragmented dairy processing sector starved of
  resources would become the limiting factor to
  on-farm production increases
• The industry will not attract the right talent
  for the future
• The potential of the industry will not be
  exploited due to under-investment in marketing
  and product development
• Research Development will continue to be
  undertaken on an ad hoc basis
• Irish Economy
• An inefficient Irish dairy industry will place
  additional pressures on the Irish economy
  rather than serving as one of the main national
  engines for economic growth

50
Financial benefits of restructuring milk
processing have the potential to be significant
in the longer term

• The above calculation is based on projected staff
  cost savings that could be achieved with the
  bottom nine processors achieving the average
  productivity of the top four processors -
  excluding any adjustment to pay and conditions
• The calculation involves bringing processor
  efficiencies up to that of our international
  competitors
• This initial saving would be complemented over
  the medium-to-longer term with a range of
  additional savings, all realisable through
  increased restructuring (outlined in next slide)

51
However, there are other financial benefits which
would flow

• Improving productivity and cost efficiency at
  processor level
• Assembly savings efficient transfer of raw
  material from the producer to the processor
• Overhead savings at processing level energy,
  water, effluent treatment, environmental
  management, insurance, finance, IT,
  administration
• Increased focus on maximising process efficiency
  and reducing manufacturing costs
• Increasing the volume of higher value-added
  products through a stronger commitment to
  Research Development
• Increased margin on certain products due to
  improved quality and more efficient processing
  approaches
• Closer relationship with buyers/customers
  enhanced understanding of needs and swift
  response time to new requirements and
  opportunities
• Increased margin on certain products due to
  enhanced product differentiation and branding
• Improved use of available capacity to increase
  levels of secondary processing
• Marketing and sales intrinsically linked to all
  processing functions
• Strong Irish brand(s) commanding improved and
  consistent price levels
• Maximise the application of our Quality Food
  Island reputation

52
Total projected annual increased income is
estimated at approximately 2c/l due to greater
added value increased efficiency
Total projected gains would be on a par with the
2cl projected by the Friesland-Campina merger
after 2010
53

• The Irish Dairy Industry
• Decision time is now!