Dairy industry set for positive year ahead

Agri-food is heralded a major route to growth for the Northern Ireland economy, so what are the prospects for the dairy industry in 2014? John Dunlop, Chairman of United Dairy Farmers, talked candidly to Emma Cowan about the realities of business in the sector.

As Chairman of United Dairy Farmers, a co-operative and Northern Ireland’s biggest organisation in the sector, John Dunlop is a busy man. United Dairy Farmers represents 1,600 dairy farmers in Northern Ireland and Great Britain and owns Dale Farm, which has 4 plants locally as well as one in the English Lake District and in Rowan Glen in Scotland. The Co-op also has two feed milks in United Feeds one in Belfast and one in Dungannon. The group employs around 1,000 people (last year it created over 100 new local jobs) and has a UK milk pool close to 1 billion litres of milk annually.

First and foremost, however, John Dunlop is a dairy farmer, with a herd of 250 cows to be milked twice a day, every day. He is a man who understands his sector from the grass roots (quite literally) to the global marketplace.

 

Global commodity

And dairy is a global industry, spanning everything from commodities markets to value added, brand marketed consumer products, such as Dale Farm’s Dromona cheese and Spelga yoghurt. The assumption would be that it is here, in the consumer products sector, that there is real money to be made, with substantial profit margins and the chance to add to the bottom line. That’s a fair assumption but, in the milk market, things aren’t always so simple.

“Ordinarily you’d expect the consumer products to be where the money’s at, and that is what I would promote for the most part because the other markets are so volatile, but right now commodities and food ingredients are a good bet, with more money to be made than in retail consumer products,” commented Mr Dunlop.

The reason for this is simple – the weather! Whilst 2011 was a good year, leading to a glut in production and a slump in profit margins, 2012 saw drought in some parts of the world and excessive wetness in others, leading to a global shortage of supply. The knock on effect of this was a rise in prices in 2013, from late spring onwards.  As in all commodities markets, demand and supply rule the world and, right now, the situation is in the dairy farmer’s favour.

There is one other factor, called China. When it comes to dried milk, China is a big buyer and, while it has special import tariff arrangements in place with New Zealand, one of the top five global milk producers, its demand has stretched beyond to Europe and Northern Ireland is a supplier.

Mr Dunlop explained: “In terms of the future, much depends on what China does. China is consuming increasing amounts of dairy products well ahead of what it can produce internally. Last year Chinese milk output dropped by 20% partially due to an outbreak of foot and mouth and it’s been importing even more milk powder as a result. Some commentators believe that China is stockpiling powder, which has a long shelf life, and that the demand from quarter one this year could slow. If it does, it will have a significant impact on commodity prices and ultimately the returns that the farmer will feel in his pocket. With the market finely balanced the next few months will be crucial and the impact, one way or the other, almost immediate –  commodities markets are very reactive and the fallout of any change filters into the market very quickly.”

 

Post-quota markets

Adding to market volatility, the end of European milk quotas in 2015 will open up the market in a way that many producers haven’t experienced. “Post 2015 when quotas end, European dairy farmers will be able to produce as much milk as they want to and, having been restricted for many years by quota, the market is expecting a surge in production and that’s going to impact. At the moment, there’s a perception that much of this growth will come from Southern Ireland, but, in reality, other European countries could also weigh into the market with heavy additional volumes.

“Ireland [ROI] is certainly likely to go for significant growth, and as we compete directly in most markets, this will impact on Northern Ireland’s exports. However, there will be a significant investment needed in farming and processing infrastructure to support the increased production in the South so the growth will be spread over a longer period and thus delay the knock on impact on our producers in the interim.

“It would be a mistake to overlook countries like Germany, France, Italy and the Netherlands. Ireland and New Zealand would traditionally be considered top quality producers because of their grass-fed systems, but Germany, which uses a maize feeding regime, could well come into the 2015 market with big volumes.”

While 2014 looks positive, weather permitting, post quotas the future is more uncertain than ever.

 

Value added commodity

Certainly, with classic economic influences impacting on demand, supply and prices and with the vagaries of the weather exerting an almost existential influence, the dairy industry isn’t for the faint-hearted. But it is for the entrepreneurial!

One of the recent trends in the industry globally has been the move towards more added value in milk powders, especially infant formula, in what has traditionally been mainly commodity products.  “Most countries are now trying to develop more specialised products, so the milk powder market is beginning to segment into basic commodities and more value added nutritional products,” commented Mr Dunlop.

When it comes to product diversification, United Dairy Farmers’ processing subsidiary, Dale Farm, is at the forefront: “Right now we’re seeing strong growth in enriched milk powders,” said Mr Dunlop. “We’re taking the skimmed milk that is left when we remove the dairy fat to make butter and we’re adding various nutrients to give a complete food product which is good value for money and relatively easy to transport. It’s a product that is particularly popular in tropical regions, where fresh milk products are prohibitively expensive. This is a win-win development – our customers get a good nutritional, affordable product and we are effectively utilising the additional cream generated to increase our butter and fresh desserts production, so this it is resource efficient for us.”

United Dairy Farmers is also investing in whey protein powders, which have particular applications in infant milk formula production, high energy sports products and easily digestible products for the young, the ill or elderly. “We believe this is going to be a growth market for the future and we are already exporting heavily, particularly to Asia.”

 

On the shelves

When it comes to margin, branded consumer products are still king (see profit pyramid) and in this regard, United Dairy Farmers’ food processing company, Dale Farm, has been leading the way in Northern Ireland.

“The reality is that most milk is consumed in its country of origin,” said Mr Dunlop. “For example, India is the biggest producer of milk in the world but it doesn’t export a lot, as most of what is produced is consumed inside the country.”

Dale farm is the local market leader and is in every dairy category from fresh milk, cheese and butter, to yogurts, desserts and ice cream. But it is in cheese where the company is putting in major investment. While Northern Ireland is an important core market for Dale Farm, the company is building a national and international cheese business on the back of its growing local market share. The company has focused its effort on growing its market share in the GB and Irish markets and, indeed, further afield. Cheese is now a major export product for Dale Farm, with a growing international customer base as far away as Russia.

With fast moving consumer goods, marketing is crucial and, in this regard Dale Farm steals a march. “Provenance is a key word in marketing terms and here in Northern Ireland, we’ve got it. Our traceability system is second to none and we are also Red Tractor producers, so we’re telling consumers, especially in GB, with this symbol on our packaging, that we’re up to the mark on quality assurance, provenance and production methods. It’s also undeniable that most people perceive grass fed cows as producing the very best quality milk, cream, butter and cheese.”

Dale Farm is a major processor and producer. The company processes 85% of its total UK milk pool in Northern Ireland and, of that, just over half goes into consumer products in the retail and food service sectors. We are all familiar with Dale Farm Milk, Dromona butter and cheese, Spelga yoghurts and desserts and Dale Farm Ice Cream. So what’s going to be new in-store this year?

As you might imagine, John Dunlop isn’t going to give away too many secrets. He said: “In the latter part of 2013 we launched a new fresh custard product and also a fresh cream trifle range, so there’s still marketing focus to be given to those. But we do have new ideas for 2014 – look out for new cheese products coming on stream and, having added Mullins into our ice-cream portfolio, we’ll be dedicating some effort into expanding and developing premium Northern Ireland Ice Cream.”

All told, exciting and tasty times ahead!

Agriculture Dairy