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(Business & Finance Via Thomson Dialog NewsEdge) Glanbia Ploughs Global Fields
As EU agricultural subsidies disappear, the domestic market gets more challenging.
Glanbia's John Moloney explains its strategies to John Walsh.
Glanbia is one of those companies that offers a good insight into the changing face of Irish society. Born out of the merger of Waterford and Avonmore Co-ops, it is steeped in the dairy industry that once dominated the Irish economic landscape. In the days before the current boom, farmers were seen - rightly or wrongly - as being one of the few economically advantaged groups in society. How times have changed.
Developments in the domestic economy put the agri-sector in perspective. And the changing dynamics of the global trade environment have forced significant changes on Irish farming.
The level of subsidies handed down to Irish farmers as part of the EU's Common Agricultural Policy (CAP) was the subject of much heated debate during the 1980s and the early part of the 19905. But as soon as the first General Agreement on Tariffs and Trade (GATT) agreement was hammered out in 1994, it set in motion a chain of events that would eventually open up European markets to much cheaper produce from developing countries.
And in tandem with open trade policies, European farmers had to learn how to survive without the generous support funding that had helped prop up many areas within the agri-sector.
Inevitably, there was a huge backlash from farmers' organisations. The wholesale demise of Irish farming was seen as inescapable reality. And if the ground was shifting under Irish farmers, then that meant that companies like Glanbia also faced increasing uncertainty.
After all, a secure supply of dairy produce is needed to be a successful dairy processor and food manufacturer. Over the past decade, spiralling property prices have lured many farmers away from agri-pursuits.
The complexion of the farming sector once this speculative boom dies down is causing widespread concern.
Glanbia group managing director John Moloney acknowledges these difficulties: "The ingredients business is challenging currently because we have reforms of the dairy sector across Europe, where the support prices are being reduced by the order of 25% over a three-year period. That is through '04, '05 and '06 and a partial one in '07. So I think the big issue in the first half of this year has been that we have seen two parts of that come together.
Effectively last year's impact was defrayed because you had high international prices for dairy products. They have come off a bit - not dramatically. But it did mean that you had to catch up from last year's reform and this year's coming together in one year, and that has led to an impact on ingredients in Ireland in terms of dairy market returns. At the same time, you have costs moving in the other direction."
Moloney argues that the reform period is coming to an end and that from now on there will be a period of adjustment at both farm level and processing level. But it is this period of adjustment that has prompted some speculation that there will be a supply shock if too many farmers quit the dairy sector.
"If you take any of the studies that have been done, Ireland has 25,000 dairy farmers currently and if you look at AgriVision 2015 report done by the Department of Agriculture based on Teagasc economic forecasts, you could get down to 12,000 dairy farmers who would have scaled up - producing the quota or close to it and would be compensating for the price effect through increased scale and efficiency and that or some level of that is going to happen.
It is important that you bear in mind as well that there are significant differences in efficiency between the top 20% and the bottom 20% - of the order of 45 cents per gallon. That far exceeds the level of milk price reduction that is being implemented in the industry to date."
Moloney points to the quota exchange set up by the Department of Agriculture as a step in the right direction and a move that Glanbia had lobbied for to ensure a smooth transition and prevent a supply shock. "Historically farmers who wish to expand have had the resources in terms of land and capital but are constrained by their ability to get quota at reasonable value.
We hope that the exchange mechanism when the first one is introduced in December will begin to contribute to that."
Moloney expects a smooth transition. He says it will be very difficult for families that have been lifelong dairy farmers to jettison their livelihoods. "But I think you also have to see it in the context that Ireland is also different.
There are far greater opportunities. Land values have generally kept pace with the property market which is an important backdrop in terms of the farm balance sheet," he adds.
Glanbia has been running workshops for every 18-20 suppliers from across its supply base in order to provide assistance and support while the trading environment remains challenging.
Glanbia comprises a plc and a co-op. The co-op has a 54% holding in the plc. And in a move to cushion the removal of support prices, the dividend from the plc accruing to co-op shareholders is used to compensate for loss of earnings. Even though it is only on an anecdotal level, Business & Finance has sounded out a number of dairy farmers about the future of the sector in Ireland. They were much more pessimistic than the Teagasc report. They argue that new nitrate and waste water management directives coming from Brussels will put too much burden on farmers to make it tenable in the longer term.
Moreover, they claim that there will be big problems with succession issues as the next generation of farmers are taking up much more lucrative positions outside the industry.
Government dig-out
The Government has chipped in with a plan to help smooth over the transition to the post-CAP environment by announcing a EUR300m-aid package for the industry. Although Moloney points out that only EUR100m will come from the Government's coffers - which will be run jointly by the Department of Agriculture and Enterprise Ireland - with the remaining EUR200m coming from the industry.
"But it does give us a chance to invest and diversify. So Glanbia as well as other operators in the sector are looking to options around new product development and around rationalisation.
We'll also be happy once we complete that part of the exercise to talk to other parties. If there are joint projects that it makes more sense to do, we'll keep an open mind about that. We will come to a view about that in October.
"I think on balance we may end up with a mix of internal projects and maybe some joint projects and they'll be across the area of cheeses and specific protein derivatives from milk for export."
That potentially includes building a new milk-drying and filtration plant, adds Moloney.
Milking overseas opportunities
The latest set of Glanbia's interim results was a bit of an anomaly in the Irish corporate earnings season. As most other companies posted double-digit growth, Glanbia stood still with pretax profits roughly unchanged at EUR30.2m compared with the same period in 2005, operating e profits were down 5% at EUR36.4m and revenues down marginally at EUR922.8m compared with EUR926.1m for the year earlier period.
The company attributed much of the poor performance to the sluggish Irish ingredients business.
Similar to Kerry Group and other companies in that sector, future growth hinges on carving out markets abroad.
"We've had an international presence for some time. We have a significant business in the US. We have expanded that with a joint venture in New Mexico. That will make us the largest producer of cheddar-type cheese in the US when we get to full capacity in New Mexico by the middle of next year.
"So when you look at the Glanbia profit and loss sheet going forward, you will see the returns from the wholly owned subsidiaries, but the share from the associates line will also become much more important.
In a similar vein, we have set up a joint venture in Nigeria with Cussons. That business is currently annualising $100m.
So if you look at growth, you have $100m there, and New Mexico has $350m. And with the acquisition [Glanbia forked out $105m for US nutritional business Seltzer on September 7th] we will grow the nutritionals group to over $150m.
So you are looking at close to $600m in new business over the next two-to-three years."
Glanbia has also opened a sales and marketing office in China. Moloney says the company is linking China with the ingredients business: "and indeed to the acquisition we announced [Seltzer] in terms of infant formula etc in Asia".
And even though Glanbia is limited to a sales and marketing presence in China as it stands, the company is likely to build rather than buy if that policy changes in the future, he adds.
After a hectic few years on the mergers and acquisitions trail around the globe, Moloney says that it is time to consolidate on its recent acquisitions. That will include adapting the plants in New Mexico to meet extra demands if needed, he adds.
"We have room to make some modest acquisitions in 2007, and it is important to keep that pipeline going because there is a lead time in starting these things up."
Watergate?
Moloney says there is no outcome yet to the investigation in allegations that farmers in the Kilmeaden area ("Watered-down milk?" Business & Finance, July 27th) inflated milk supplies by adding water. "That [investigation] is ongoing. Obviously that is a fraud on the company rather than an issue for our consumer so far as it costs the company more to extract water. Obviously a very serious view is taken on that."
Some of Glanbia's milk suppliers that Business & Finance has spoken to claim there is not enough dialogue between the company and dairy farmers in terms of international markets.
One farmer says there is not enough emphasis on the different types of nutrients that can be used to produce high-quality milk which, in turn, can be used to manufacture high-quality products.
That is a pattern that is happening throughout Europe, he claims. Geraldine Kearney, a spokeswoman for Glanbia, to extract water. Obviously a very serious view is taken on that."
Some of Glanbia's milk suppliers that Business & Finance has spoken to claim there is not enough dialogue between the company and dairy farmers in terms of international markets.
One farmer says there is not enough emphasis on the different types of nutrients that can be used to produce high-quality milk which, in turn, can be used to manufacture high-quality products.
That is a pattern that is happening throughout Europe, he claims.
Geraldine Kearney, a spokeswoman for Glanbia, says Glanbia has always been very progressive in opening up channels of communication with its milk suppliers. She cites the company's various workshops as well as its regional committee structure, which are aimed at keeping on top of industry developments.
"There will always be more work to be done, but we are engaging with our suppliers at a number of different levels," she says.
One other area of concern for some shareholders is that the members of the board of the plc comprise the board of the co-op. Moloney argues the value of the co-op and the level of the dividend each year is determined by the growth of the plc. "Therefore everybody is aligned in growing the value of the plc.
That has become clear to shareholders over the past year. So there are no plans to change that [the structure of the plc and co-op] currently."
What about the relationship between the plc and the co-op changing some time in the future?
"I suppose you can never say never - you can't rule it out at any point in time - but not today."
Glanbia has always been very progressive in opening up channels of communication with its milk suppliers. She cites the company's various workshops as well as its regional committee structure, which are aimed at keeping on top of industry developments. "There will always be more work to be done, but we are engaging with our suppliers at a number of different levels," she says.
One other area of concern for some shareholders is that the members of the board of the plc comprise the board of the co-op. Moloney argues the value of the co-op and the level of the dividend each year is determined by the growth of the plc. "Therefore everybody is aligned in growing the value of the plc.
That has become clear to shareholders over the past year.
So there are no plans to change that [the structure of the plc and co-op] currently."
What about the relationship between the plc and the co-op changing some time in the future?
"I suppose you can never say never - you can't rule it out at any point in time - but not today."
Copyright 2006 Belenos Publications Ltd Source: Financial Times Information Limited - Europe Intelligence Wire.
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