He's angered pig farmers and trade unions, but Dairygold boss Jerry Henchy has more ambitious restructuring plans ahead, writes Barry O'Halloran.

Dairygold boss, Mr Jerry Henchy, is one of the few figures in Irish agribusiness to earn the tag "controversial". This week, he angered farmers and trade unionists with the announcement that the north Cork-based co-op is to close its two pigmeat processing facilities with the loss of 270 jobs.

Neither Mr Henchy nor the co-op actually said that the units, in Mitchelstown, Co Cork and Roscrea Co Tipperary, were losing money. Nor did they say how much it was costing the co-op to run the plants.

Instead they said that primary pig processing, that is slaughtering and boning the animals, was no longer viable. A spokesman told The Irish Times yesterday that it was labour intensive, with a cost base 10 per cent above the norm for this kind of operation in Ireland.

It is clear that the decision had more to do with strategy than cost in its own right. Mr Henchy wants to grow the business by targeting the falling number of multiples that dominate the British grocery market with own-brand foods.

However, this brings the north Cork-based co-op into competition from Europe, and specifically Denmark, where one producer is poised to open a plant that will slaughter 80,000 pigs a-week, twice this State's weekly kill.

His argument is that Dairygold cannot compete with that. Instead it should buy the meat from Dawn and Glanbia (which is expanding a plant to take on more capacity).

By taking out the cost of Dairygold's own plants, and using meat from two suppliers which are able to cut their costs because they will be operating more efficiently, the company argues that it will allow the co-op's consumer food division to compete.

"The biggest market in the UK is own-label," a spokesman explained. "They need quality, but they want it at a competitive price. We are finding that our competition from the likes of Denmark can consistently lower prices. And if we cannot compete on price, we just do not get in.

"We intend to grow the business by getting the cost strata right. Everything hinges on our success in getting own-label penetration in the UK."

Not everybody agrees with this logic. Fianna Fáil TD Mr Ned O'Keeffe, who operates a large pig farm in north Cork, argues that if cost competitiveness is the real concern, Dairygold should first of all take it up with its trade unions, led by SIPTU, before deciding to close plants. "This could be the death of the industry," he says.

Since Mr Henchy took over the Cork-based co-op last year, the company has eliminated 825 jobs. It laid off 525 workers. Another 250 transferred with the sale of its two beef-processing plants to Dawn Meats and Tyrone Meats. The rest went when it contracted out its transport division. Many of its former truck drivers are now working for it in a self-employed capacity.

It has also taken other steps, including contracting out the manufacturing of some products, and the closure of smaller branches of its stores. It is converting the remaining stores into a DIY brand, which it intends developing as a franchise. Dairygold has plans to spend €30 million on this.

The reason behind the shake-up was a collapse in profits at the group from €20 million to €4 million. Company executives argue that if it had carried on as it was, it would have been losing €20 million annually by 2007.

But change has not been achieved easily. SIPTU, the main trade union in Dairygold, has opposed a lot of the changes, on the basis that it meant their members were losing their jobs. In February, staff at its meat and dairy processing plant went on a one-day strike, and the union accused management of consistently flouting an agreement.

The shake-up has also left the co-op with a €44.6 million exceptional charge on its 2003 profit and loss account.

The cost of the pigmeat plant closures will come to an estimated €8 million. Ultimately, the shareholders, that is the 8,000 farmers who are members of the co-op, will have to foot the bill.

Mr Henchy has consistently warned that there is more pain to follow, a statement he reiterated on radio this week.

That will ultimately involve cutting the number of milk processing plants from four to one or two. Last year's Prospectus report into the dairy industry said that, ultimately, the State will only need three milk processing facilities rather than the 17 it now has.

Dairygold's chief executive wants the co-op to have one of those plants. To achieve this, he has said that it has to get the cost base right.

His ultimate ambition is to develop Dairygold into a food processing company with a strong international presence.

Many people believe that he is inspired by his former employer, the Kerry Group, for which he worked in both the US and South America, but he has denied that there is any comparison.

So far, he has managed to bring the bulk of his 8,000 shareholders with him. Some of them protested at yesterday's announcement, but this only affects 70 individual farmers. There were also protests at the store closures, and a failed attempt to get a vote of no confidence in the board (one was passed before he took over).

He has also convinced members to vote in favour of changes to the co-op's own structure, including a reduction in the size of its standing committee from more than 200 to a quarter of that number.

Far more importantly from the members' point of view, Dairygold has slipped from being consistently one of the top payers for milk to a more mid-division position (the price varies throughout the year). This is despite the fact that most of his shareholders are the dairy farmers who supply the co-op with its 180 million gallon milk pool.

Industry sources say that there are a number of reasons behind Mr Henchy's ability to maintain farmer support. The first is that the most radical changes have hit the workers, not the farmers. Sources point out that, as a general rule, farmers, at the very least, like to see management keeping a tight rein on the workforce.

The second is that he has managed to convince members that it is necessary for them to put up with some temporary milk price pain in order to get the co-op's cost base in order.

"He is committed to paying top price for milk, but that is in the context of getting everything else right," a spokesman says.

However, the spokesman also acknowledges that the market will ultimately determine "top price".

In the short and medium term, milk prices are likely to come down rather than increase.

In fact, according to EU figures, dairy farms with fewer than 50 milk-producing cows, including most Irish operations, will not be viable in five years' time, partly because the EU's changes.

So whatever top price is, it is likely to be less than what it was when Dairygold was closer to the top of the paying tree.

Also the smaller co-ops, such as those in west Cork, are paying more for their supplies, while the bigger players, like Dairygold and Glanbia, are mid-division. Sources say there is no reason for Dairygold to buck this trend.

With most other operational issues out of the way, Mr Henchy's stated intention of rationalising the milk side of Dairygold is likely to be his next big challenge.

It's the one area where he will need all the support he can get from the majority of his shareholders, whose futures are also tied to that very issue. The question is, can he keep them on board?