A major report on the future of the dairy processing sector has concluded companies must amalgamate or be forced out of the business by international competition.
The Prospectus Report, entitled Strategic Development Plan for the Irish Dairy Processing Sector, warns that the dairy industry is starting to fall behind its competitors and must take quick action by implementing a €300 million rationalisation and reconfiguration strategy.
To achieve success, according to the report, the industry should rationalise the number of processing plants for butter, powder and casein production from 11 to four plants.
"A consolidated player needs to emerge in the medium term with a scale where it would be processing around 70 per cent of the processed milk, excluding liquid milk," it says. This may take two or three steps to be achieved. "It needs to begin with a consolidation between some of the five largest processors and also consolidation or joint venture among some of the smaller processors," it adds.
"The consolidation process within the industry needs to happen quickly, as it is highly probable there will be further consolidation among international competitors and rationalising of suppliers by buyers," it says.
"Without the development of a strong major entity to act as a catalyst to drive the changes required, there is a real danger the industry will drift, only make incremental changes and gradually decline in terms of total output and value while international competition continues to expand aggressively," it adds.
The report calls for increasing the proportion of output from commodity-type products into higher value-added products.
"Target other geographic areas beyond the home market with a selected range of products specifically targeted at the needs and opportunities in those markets," it advises companies.
There are market and product opportunities for the Irish dairy industry, such as protein fractionates, food ingredients and health foods, but these depend on research and development and getting the cost base to an internationally competitive level.
It urges the industry to ensure Ireland continues to be positioned as a quality food island by underpinning the highest standards of quality and safety of Irish dairy produce. The industry, with a turnover of €2.5 billion and more than 9,000 workers in the processing sector, relies on the State's 27,000 dairy farmers.
"The position and outlook for the Irish dairy farmers is considerably weaker than for the processing sector. They, like the processors, are in an environment of rising costs and are facing a milk price which could potentially drop to 90 cent to €1 a gallon or even below this level."
At prices of 20 to 22 cent per litre of milk, there was a potential loss of direct income from milk production of between €375 million and €480 million.
The report said it was unlikely and unreasonable to expect farmers to take all the pain in terms of lower milk prices to compensate for lower product prices.
Cost-efficient milk producers should move up to an output level that would enable them to generate a viable income, as in competitor countries, it suggests.
In Denmark, it notes, the average annual dairy farm output is around 107,000 gallons, 84,000 gallons in the Netherlands, 77,000 gallons in Northern Ireland - and only 40,000 gallons in the Irish Republic.