Potential Investment Costs in Milk Processing and...

Potential Investment Costs in Milk Processing and Transport to 2020

A Report Commissioned by ICMSANovember 2010

Author: Dr Michael Keane

ICMSA Head OfficeJohn Feely HouseDublin RoadLimerick

Tel: +353 (0)61 314532 / 314677Fax: +353 (0)61 314737Email:[email protected]: www.icmsa.ie

ICMSA Booklet J1575.indd 1 28/01/2011 12:26:21

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ForewordThe run up to the abolition of quotas and the period following their abolition presents opportunities to expand production of milk in Ireland. However, to profitably avail of these opportunities, our sector will require massive investment and planning. This, in turn, will require detailed and proper analysis of the costs involved and the likely return. To-date, the analysis and consideration given to the many issues has been rather vague and without the level of detail and technical information that ICMSA would prefer.

To address precisely that lack, ICMSA commissioned this report which is designed to investigate one aspect of the investment required, namely, the processing costs. We hope that this report, “Potential Investment Costs in Milk Processing and Transport to 2020”, will prove to be a valuable tool in the assembly of the essential information that is required for decision-making by the sector, by the Government, and by individual processors and individual farmers. I see this report as the first in a series of such reports that are undoubtedly required. I know that other bodies are examining other aspects of the expansion envisaged; specifically the crucial aspect of expanding market capacity and the costs associated with same.

I wish to thank Dr. Michael Keane, who (once again) has delivered an excellent and sharply focussed report that has quantified the costs involved for a 20 per cent expansion. In addition, he has set out a very useful and readily understood methodology for the quantification of the cost involved. ICMSA intends to continue commissioning this type of work and developing its own ‘in-house’ research capacities, as well as working in conjunction with partners within and without the sector.

Jackie CahillPresident, ICMSA


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Executive Summary

Objective: To provide an overview of the potential investment costs in milk processing and transport, arising from potential significant expansion of the Irish dairy industry in the medium term.

Assumptions for Milk Output Expansion to 2020: Some estimates of milk output expansion to 2020 range from 30% to 50%. While these estimates are certainly possible to achieve if climatic and economic conditions are favourable; the working assumption in this report is that milk output will be 20% higher in 2020 than at present, taking 2008 rather than the exceptionally bad 2009 as the base year. An increase of 20% takes into account the fairly regular occurrence that there are likely to be occasional years of poor weather/low prices restricting output increases between now and 2020 as well as some exceptionally favourable years for milk output.

The Seasonality Issue and Capital Investment: The current seasonal supply pattern for manufacturing milk, based mostly on spring calving grass based production, shows an approximate 7:1 peak to trough month ratio.

If milk for processing is to expand substantially by 2020, there are two fundamental options from a seasonality perspective:

(a) retain the current seasonal supply pattern (maybe with a little flattening of the peak), with necessary capital investment in processing and transport to accommodate the higher peak,

(b) change the seasonal supply pattern to retain the peak more or less as at present, while allowing for expansion through a major switching of milk supply to a more even all-year-round supply pattern.

Key Issues applying:

(a) What is the reduction in milk processing costs for storable commodity products and in milk transport costs if overall milk supply increases by 20% and the peak remains unchanged?

(b) What are the additional milk production costs at farm level (or increased milk price required) if the national manufacturing milk supply pattern changes to a much flatter seasonal curve, i.e. an increase of 20% in milk supply with no increase in the peak?

(c) How do the cost reductions in processing and transport compare with the increases in milk production costs (or increase in milk price required)?

Reduction in Milk Processing Costs: Based on an admittedly simplified analysis, if the peak remains unchanged and milk output increases by 20%, the estimated saving at processing level is estimated to be 0.5 cent/litre, with fixed costs reducing from 3 to 2.5 cent/litre and overall processing and transport costs reducing from 6 to 5.5 cent/litre.

Increased Milk production costs (or increased milk price required) with a flatter curve: On an overall national milk supply basis, it is estimated that the overall manufacturing milk price would need to increase by about 1.5 cent/litre, to reward suppliers who would need to switch to an even all-year-round supply pattern so as to achieve a goal of a 20% supply increase with a peak month supply reduced from 14.4% to 12% of annual deliveries, i.e. the same peak in volume terms as at present. This estimate takes account of the following:

• The proportion of the national herd that would need to switch to winter milk production so as to achieve a 20% increase in milk supply with no increase in the peak

• The estimated additional milk price that would be necessary for winter milk production

• The spreading of this increased milk payment over the total national milk supply.

Cost-Benefit Comparison: Based on the estimates above, an increase in milk supply by 20% while leaving the peak unchanged would result in a reduction in processing and transport costs of 0.5 cent/litre. However the requirement of milk suppliers to cover costs, etc is estimated to be about 1.5 cent/litre overall, or about treble the benefit at processing level. Therefore it is concluded that, for bulk storable commodity products, the clear advantage in an Irish context lies with spring calving grass based production as at present.

While the above estimate indicates that the continuing emphasis on spring calving based milk output is the most economic for dairy commodity production in an Irish context, there is considerable scope for a gradual lessening in seasonality through further development of a more even supply pattern from spring calving herds, as practiced for example by Teagasc, Moorepark and elsewhere.

Analysis of Investment Scenario to 2020: A 20% volume increase to 2020 (approximately 900 million litres or 200 million gals) with a pro rata increase in the peak will require new capacity to handle all additions to the current peak, i.e. there is no spare capacity at the current peak.

The Product Portfolio question: It is assumed that the extra capacity would involve the provision of additional whole milk powder capacity to accommodate the increased peak.


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Milk Processing Investment: Taking investment in a whole milk powder plant, to achieve the full benefit of economies of scale, a 15 tonne per hour drier with all associated costs (intake, evaporation, drying, storage, etc) would be the obvious chosen plant. The capital cost of such a plant on a green field site, including all the latest sophisticated technology, would be of the order of €70 million (private communications). Given that it is a 15 tonne per hour plant and assuming no spare capacity at present, then one such plant would be required to accommodate a 10% supply increase, or two plants for a 20% increase. Thus, the total capital cost at processing level is €140 million. This could be substantially reduced if established on a brown field site depending on available services.

Milk Transport Investment: Based on the gradually increasing capacity of milk tankers it is estimated that a 20% increase in milk supply at the peak will require an additional 50 tankers at a cost of €200,000 per tanker (with all modern additions). Thus additional milk transport costs represent a further €10 million capital cost (50 @ 200k each).

Overall Cost: Overall the estimated increase in capital cost, combining milk processing and transport, for a 20% volume increase with the same seasonal supply pattern as at present is €150 million. To the extent that there may be a little spare capacity at peak at present, this investment may be sufficient to accommodate an increase in the peak in excess of 20%.

Cost on an annual basis: Annual depreciation and interest can be calculated in different ways; however the approach taken is as follows:

• Depreciation: Assume processing plant and milk tankers have a life of 15 years, buildings have a 30 year life and trucks have a 5 year life with nil value at the end.

• Interest Rate: Assume long term interest rate is 6%, with calculations based on the declining balance method.

This results in an annual cost for the total investment of €15.8 million.

It may be noted that for accounting and efficient tax planning reasons, an accelerated depreciation approach may be taken, however the approach taken above is considered more appropriate in representing the “true” cost of the investment.

Potential Investment Costs in

ICMSA Dairy Policy ICMSA policy is focused on two key issues:

· A sustainable milk price for dairy farmers, and· Reducing the volatility of milk price

ICMSA is strongly of the view that the EU milk sector - given the costs demanded of EU dairy farmers through compliance with environment and other regulations - imposes a higher cost of producing milk by comparison with other dairy-producing regions of the world, for example, New Zealand.

An EU policy involving import protection, price supports and full recognition of EU standards is required to ensure that the EU milk price will be above the world milk price.

ICMSA Dairy Committee Members *

Pat McCormack Tipperary

Michael P O’Sullivan Cork

Michael Barron Wexford

Pat O’Rourke Longford

Shane O’Loughlin Wicklow

Nigel Byers Cavan

Dominic Cronin Cork

William Dennehy Kerry

Gerald Quain Limerick

Noel Corcoran Offaly

Thomas Ahearne Waterford

Pat O’Donoghue Clare

Jackie Cahill Tipperary

John Comer Mayo

* to December 20th, 2010


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Milk Processing and Transport to 2020This report is structured as follows:

1. Objective2. Assumptions for Milk Output Expansion to 20203. The Seasonality Issue and Capital Investment4. Analysis of Investment Scenario to 20205. Conclusions

1. Objective

To provide an overview of the potential investment costs in milk processing and transport arising from potential significant expansion of the Irish dairy industry in the medium term.

2. Assumptions for Milk Output Expansion to 2020

With the prospect of quota abolition in 2015 and small annual quota increases before then, some recent reports have projected substantial milk supply increases to 2020. The recently published Food Harvest 2020 (Dept. of Agriculture) for example stated the following:

“Prospects for the dairy sector in the medium to long term are positive. Given projections for significantly increased demand, the abolition of EU milk quotas in 2015 presents a real opportunity for the Irish dairy sector, with a significant potential for increased milk production. The sector also possesses a significant cost advantage in the form of an environmentally sustainable rain fed grass-based production system, which allows milk to be produced efficiently for much of the year.

On the basis of available data the Committee believes that a target of a 50 per cent increase in milk production by 2020 (using the average of the years 2007 to 2009 as a baseline) would be realistic and achievable, and that this will set the foundation for further expansion in subsequent years.This 2.75 billion litre increase would enhance the primary output value of the sector by about €700 million with further downstream benefits in the form of increased dairy product values, export earnings and employment.

The report recommendations are designed to support the realisation of this potential growth and to provide a sustainable return for competitive producers and processors.”

Likewise recent estimates from ICOS have mentioned the prospect of a milk supply increase by 2020 of 30%.

While these estimates are certainly possible to achieve if climatic and economic conditions are favourable, the working assumption in this report is that milk output will be 20% higher in 2020 than at present, taking 2008 rather than the exceptionally bad 2009 as the base year.

An increase of 20% takes into account the fairly regular occurrence that there will be occasional years of poor weather/low prices restricting output increases between now and 2020 as well as some exceptionally favourable years for milk output. Having completed the initial exercise in this report it would be fairly straightforward to repeat the exercise for output increases in the 30-50% range if required, although a more diversified product portfolio/ plant capacity investment would need to be considered.

3. The Seasonality Issue and Capital Investment

The current seasonal supply pattern for manufacturing milk, based mostly on spring calving grass based production, shows an approximate 7:1 peak to trough month ratio (Table 1). This is quite unique in Europe, though of course quite similar to our major competitor New Zealand.

Domestic Milk Intake

Liquid Milk Consumption

Manufacturing Milk

Monthly % of Annual

ProductionJan-08 127.3 44.7 82.6 1.86Feb-08 204.6 42.1 162.5 3.66Mar-08 379.8 43.1 336.7 7.59Apr-08 574.9 45.5 529.4 11.93May-08 683.2 43.5 639.7 14.41Jun-08 639.3 42.9 596.4 13.44Jul-08 607.8 43.3 564.5 12.72Aug-08 543.8 43.9 499.9 11.26Sep-08 440.8 42.6 398.2 8.97Oct-08 373.5 43.5 330 7.43Nov-08 232.4 42.3 190.1 4.28Dec-08 151.3 42.7 108.6 2.45

Total 4958.7 520.1 4438.6 100.00

Million Litres

Table 1: Seasonal Supply Pattern in Ireland

If milk for processing is to expand substantially by 2020, there are two fundamental options from a seasonality perspective:

(a) retain the current seasonal supply pattern (maybe with a little flattening of the peak), with necessary capital investment in processing and transport to accommodate the higher peak,

(b) change the seasonal supply pattern to retain the peak more or less as at present, while allowing for expansion through a major switching of milk supply to a more even all-year-round supply pattern.

This is a fundamental issue which must be addressed at the outset, as the objective of this exercise involving the potential requirement for new capital investment depends on it.


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Simplified Analysis of the Seasonality OptionsGiven an assumed 20% increase in milk production by 2020, the two seasonality options are shown graphically in Figs 1 and 2, with corresponding data in Table 2.

Fig 1: Alternative Supply Patterns % per month

02468

10121416

jan feb mar apr may jun jul aug sep oct nov dec

currentalternative

Fig 2: Alternative supply patterns, Million Litres

0

100

200

300

400

500

600

700

800

900

jan feb mar apr may jun jul aug sep oct nov dec

current patterncurrent pattern plus 20%alternative pattern plus 20%

Domestic Milk

IntakeLiquid Milk

ConsumptionManufactur

ing Milk

Monthly % of Annual

ProductionManufacturing

Milk + 20%

Manufacturing Milk + 20%

(Retain 2008 peak)

Monthly % of annual

ProductionJan-08 127.3 44.7 82.6 1.86 99.12 200 3.76Feb-08 204.6 42.1 162.5 3.66 195 275 5.16Mar-08 379.8 43.1 336.7 7.59 404.04 450 8.45Apr-08 574.9 45.5 529.4 11.93 635.28 640 12.02May-08 683.2 43.5 639.7 14.41 767.64 640 12.02Jun-08 639.3 42.9 596.4 13.44 715.68 600 11.27Jul-08 607.8 43.3 564.5 12.72 677.4 560 10.52Aug-08 543.8 43.9 499.9 11.26 599.88 530 9.95Sep-08 440.8 42.6 398.2 8.97 477.84 500 9.39Oct-08 373.5 43.5 330 7.43 396 420 7.89Nov-08 232.4 42.3 190.1 4.28 228.12 275 5.16Dec-08 151.3 42.7 108.6 2.45 130.32 235 4.41

Total 4958.7 520.1 4438.6 100 5326.32 5325 100

Million Litres Million Litres

Table 2: Seasonal Supply Pattern with 20% extra Manufacturing Milk


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Key Issues Applying:

(a) What is the reduction in milk processing and transport costs if overall milk supply increases by 20% and the peak remains unchanged (see data in Table 2)?

(b) What are the additional milk production costs at farm level (or increased milk price required) if the national manufacturing milk supply pattern changes to the much flatter seasonal curve in Fig 2, Table 2?

(c) How do the cost reductions in processing and transport compare with the increases in milk production costs (or increase in milk price required)?

For simplicity all costs in the simple comparison below are expressed in cent/litre.

(a) Milk processing/transport costs with a flatter curve

Assume that milk processing and transport costs are currently 6 cent/litre for mainstream commodity products (cheddar and similar hard/semi-hard cheeses, butter, milk powders (SMP and WMP) and whey products. The 6 cent/litre value is an assumption but is considered to be reasonably accurate.

Variable Costs

Of the 6 cent per litre, a proportion of the costs are comprised of variable costs which vary with use. These costs are not affected by seasonality as such. A good example is packaging which is quite an expensive cost item. Packaging purchases are dependant totally on the throughput of the plant and will for all practical purposes be unchanged for a given throughput in the year regardless of the seasonal supply pattern of milk.

Such costs, collectively the variable costs, (including a substantial proportion of labour, energy, etc) are largely unaffected by seasonality and can therefore be ignored in this exercise. Assume that the variable costs are 3 cent/litre.

Fixed Costs

The other costs are the fixed costs which mainly comprise capital equipment and buildings, a proportion of labour and some other related costs. Taking capital equipment and buildings, the annual depreciation and interest on both existing and new investment must be paid for, even if in the ultimate case for some reason the plant has no throughput whatsoever in the year. Fixed costs are essentially the key costs for a seasonality cost-benefit exercise.Assume that the fixed costs are 3 cent/litre.

Now the question is – what would the fixed cost be in cent/litre terms if the seasonal supply pattern changed to the much flatter curve in Fig 2? To answer this question one must consider the concept of

capacity utilisation. Currently capacity utilisation for the Irish manufacturing milk sector is about 57%. (This can be simply calculated by multiplying the peak supply month in % terms by 12 (14.4 multiplied by 12 = 172) which represents the capacity available throughout the year, and relating actual supply (100%) to this.

Thus 100/172 is 57% in percentage terms. Now if supply overall increased by 20% and the peak remained unchanged, capacity utilisation would be 120/172, (or 100/144) or 70% approximately. (144=12% - new peak – multiplied by 12). This would then be getting closer to some of the continental European supply patterns which generally range from 75% to close to 100% capacity utilisation.

How would this affect processing and transport costs where fixed costs are currently an assumed 3 cent/litre?Calculation:

Current Milk Supply Pattern: Fixed costs assumed at 3 cent per litre.

Alternative Supply Pattern (20% volume increase with same peak): Fixed costs become 2.5 cent per litre (3 multiplied by 144/172 (or 100/120) =2.5)

Thus the estimated saving at processing level is 0.5 cent/litre, with fixed costs reducing from 3 to 2.5 cent/litre and overall processing and transport costs reducing from 6 to 5.5 cent/litre if the peak remains unchanged and milk output increases by 20%. By the same token if milk output increased by 40% and the peak did not increase, overall processing costs would fall from 6 to about 5 cent/litre.

Note: This is a very simplified analysis; however it provides a reasonable working assumption for the purpose of this report.

(b) Increased Milk production costs (or increased milk price required) with a flatter curve

While some attempts over the years have been made in Teagasc to make a detailed cost comparison of seasonal versus all-year-round manufacturing milk production, no very satisfactory research results are available at present (personal communication). Hence, for this exercise the focus is placed on the increased milk price required to produce milk on a more even all-year-round basis. (Teagasc profit monitor data is referred to later for verification purposes.)

Milk production on a fairly even all-year-round basis at present is produced primarily by the liquid milk suppliers. Unlike the seasonal spring calving suppliers, the liquid milk suppliers produce milk on a consistent 2:1 peak to trough month ratio or even a little less over the past few years (Table 3).


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Of the supply from producers, part is sold as liquid contract receiving a higher price and part as liquid surplus which receives close to the general manufacturing milk price. In proportionate terms, the total milk supply from the approximately 2,000 liquid milk suppliers in 2008/9 amounted to 804 million litres. Supplies for processing for liquid consumption amounted to 57% of total supplies with supplies by liquid producers for manufactured products equalling 43% of total liquid supplies (NMA Annual Report 2009 – see Appendix Table 1 for details).

Year Manufacturing Liquid Combined2002 8.9 2.0 6.12003 8.2 1.9 5.62004 8.0 1.8 5.52005 8.2 1.8 5.52006 8.7 1.8 5.72007 8.2 1.8 5.62008 7.1 1.8 5.42009 8.1 1.7 4.9

Table 3: Manufacturing and Liquid Supplies - Peak to Trough Month Ratios (Courtesy NMA)

With regard to milk price, the NMA makes a very detailed comparison each year of the average liquid contract price compared with the average manufacturing milk price. Over the last eight years the difference in price has been fairly consistent at about 5 cent/litre on an overall annual weighted average basis (the precise eight years average is 5.2 cent/litre, see Table 4)

Year Manufacturing Liquid Differential2002 27.06 32.7 5.642003 26.79 32.26 5.472004 26.84 32.26 5.422005 26.29 31.0 4.712006 25.36 30.51 5.152007 32.54 35.28 2.742008 32.24 37.58 5.342009 22.04 29.17 7.13

Table 4: Manufacturing and Liquid Milk Prices - Cent/Litre (Courtesy NMA)

Profile of a typical Liquid supplier and Milk Price Comparison

From the NMA 2009 annual report liquid milk suppliers on average supplied 57% of their milk as liquid contract with an almost perfectly even supply provided throughout the year to meet this consumer need, together with liquid surplus of 43% and an overall peak to trough month ratio of about 2:1.

For simplicity it is assumed that the profile of a liquid supplier is 50% liquid contract and 50% manufacturing milk, with a 2:1 peak to trough month ratio based on 10% of annual supply in the peak month and 5% in the trough

month. Based on this profile (50% liquid contract and 50% for manufacturing), the liquid suppliers therefore would be receiving 2.6 cent/litre more for their overall milk supply in recent years (5.2 cent/litre for the 50% liquid contract divided by 2), assuming surplus liquid receives the basic manufacturing price).

Teagasc profit monitor data can be used for verification of the above estimate. While not a representative national sample in terms of farm costs (profit monitor represents mostly very cost and profit motivated farmers), the difference in milk price received by “spring” and “winter” herds is a good reflection of the overall situation. Based on a sample of about 900 spring herds and 100 winter herds, the milk price difference in 2009 was 3.55 cent per litre in favour of winter herds (Appendix 2).

This can be compared with the method used earlier in which the NMA estimated that the liquid contract price in 2009 was 7.13 cent/litre higher than the manufacturing milk price (Table 4). Given that the NMA also estimated that 55% of supply from liquid herds was for liquid contract in 2009, this results in an overall estimated milk price advantage for liquid herds of 3.92 cent/litre (55% of 7.13=3.92). As this estimate if quite close to the 3.55 cent/litre estimate above, it is concluded that the estimation process adopted in this exercise is robust.

Given that the overall objective in converting to all-year –round production is to accommodate a 20% increase in supply with the peak in volume terms remaining unchanged (or the peak in % terms falling from 14.4% to 12% as per Table 2), it can readily be calculated that 55% of average size spring calving herds would need to convert to an all-year-round liquid supply pattern to achieve this goal (i.e. herds with a 2:1 peak to trough month ratio, 10% peak month and 5% trough month).1

All-Year-Round Production and Milk Price

Based on the above, on an overall national milk supply basis, the overall milk price would therefore need to increase by 55% of 2.6 cent/litre, or 1.43 cent/litre, say about 1.5 cent/litre, to achieve a goal of a 20% supply increase with a peak month supply reduced from 14.4% to 12% of annual deliveries.

(c) Cost-Benefit Comparison

Based on the estimates above, an increase in milk supply of 20% while leaving the peak unchanged would result in a reduction in processing and transport costs of 0.5 cent/

1 If 45% of herds remain seasonal, producing 14.4% at peak (May), and 55% are average size herds producing a peak of 10% (May), then the overall peak will be 12% which is consistent with the requirement, Table 2.


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litre. However the requirement of milk suppliers to cover costs, etc., based on their current requirement for liquid milk production, would be about 1.5 cent/litre overall, or about treble the benefit at processing level. Therefore it is concluded that, for bulk commodity products, the clear advantage in an Irish context lies with spring calving grass based production as at present.

While the above estimate indicates that the continuing emphasis on spring calving based milk output is the most economic for dairy commodity production in an Irish context; there is considerable scope for a gradual lessening in seasonality through further development of a more even supply pattern from spring calving herds, as practiced for example by Teagasc, Moorepark and elsewhere.

Note: If innovative short shelf life products can be developed which can carry the extra cost of all-year-round production at farm level and leave a profit margin for all involved, then by all means this activity should be encouraged. As well as liquid milk, cream liqueurs and winter milk schemes are a classic example. However it is assumed that, while these products will hopefully develop over time, the overall milk volume requirement in winter will be fairly modest to 2020.

4. Analysis of Investment Scenario to 2020

Assumption: A 20% volume increase to 2020 (approximately 900 million litres) with a pro rata increase in the peak will require new capacity to handle all additions to the current peak, i.e. there is no spare capacity at the current peak.

The Product Portfolio question:

The additional capital cost of milk processing with a 20% increase in the peak depends in the first instance on the product portfolio chosen. For simplicity the issue is reduced to cheese versus milk powder capacity expansion. At present cheese production capacity following recent investments is estimated to be over 25,000 tonnes per month. (Actual production per month over the past three years as shown in Appendix 3 indicates that cheese

production at the maximum per month was a little below 25,000 tonnes).

If milk volume per month is increased by 20% assuming a broadly similar supply pattern to the present, then it would be possible to comfortably increase cheese production by 20% plus without any extra investment capacity in cheese by increasing cheese output in the “shoulder“ months. (25,000 tonnes cheese =240 million litres approx, March to October production is greater than 400 million litres per month, see Table 2).

Thus it is assumed that the extra capacity would involve the provision of additional whole milk powder capacity to accommodate the increased peak.

Milk Processing Investment

Taking investment in a whole milk powder plant, to achieve the full benefit of economies of scale, a 15 tonne per hour drier with all associated costs (intake, evaporation, drying, storage, etc) would be the obvious chosen plant. The capital cost of such a plant on a green field site, including all the latest sophisticated technology, would be of the order of €70 million (private communications). This includes milk reception, milk and cream silos, separators, evaporator, drier, powder silos, bag filling lines, CIP plant, overall energy recovery system, automation system, all utility plants, energy and project management, installation, commissioning and training.

Given that it is a 15 tonne per hour plant and assuming no spare capacity at present, then one such plant would be required to accommodate a 10% supply increase, or two plants for a 20% increase. Thus the total capital cost at processing level is €140 million. This could be substantially reduced if established on a brown field site depending on available services.

Milk Transport Investment:

Based on the gradually increasing capacity of milk tankers it is estimated that a 20% increase in milk supply at the peak will require an additional 50 tankers at a cost ot €200,000 per tanker (with all modern additions). Thus additional milk transport costs represent a further €10 million capital cost (50 @ 200k each).

Overall Cost

Overall the estimated increase in capital cost, combining milk processing and transport, for a 20% volume increase with the same seasonal supply pattern as at present is €150 million. To the extent that there may be a little spare capacity at peak at present, this investment may be sufficient to accommodate an increase in the peak in excess of 20%.


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Cost on an annual basis

Annual depreciation and interest can be calculated in different ways; however the approach taken here is as follows:

• Depreciation: Assume processing plant and milk tankers have a life of 15 years, buildings have a 30 year life and trucks have a 5 year life with nil value at the end.

• Interest Rate: Assume long term interest rate is 6%, with calculations based on the declining balance method.

This results in an annual cost for the total investment of €15.8 million.

It may be noted that for accounting and efficient tax planning reasons, an accelerated depreciation approach may be taken, however the approach taken above is considered more appropriate in representing the “true” cost of the investment.

Funding the investment

Many possibilities may be explored to fund the investment including Irish Government (Enterprise Ireland, etc) EU, equity (co-op members, co-op retained earnings/cash flow and bank debt. This would need to be discussed with relevant agencies at the appropriate time.

Equity versus Debt

This is a complex question which cannot be seriously addressed in this exercise as it will depend on the existing debt/equity situation of the co-op or co-ops involved. (It could be even more complex if the investment was a joint venture and the co-ops themselves had widely differing debt/equity balances). However a comment on general principles is included.The object of raising debt capital is basically to provide finance on terms cheaper than that required by the equity shareholders. Essentially the co-op that borrows is selling a certain proportion of its income as a prior charge to the debt holders in return for a capital sum. For the arrangement to be justifiable to the co-op members the situation must be that the return that they get through equity investment in their co-op outweighs the return that they would get from investment on their own farm, taking account of the alternative option that the co-op may have of funding through debt.

Overall the specific question of debt versus equity and appropriate level of gearing is well beyond the scope of this preliminary overview.

Equity Co-Op Shareholding and Milk Suppliers Rights

Traditionally processing co-op expansion in Ireland was funded primarily through co-op retained earnings/cash flow and debt rather than mainly through raising further equity from members, although various schemes, including revolving fund type approaches, have been employed.

However, it is very different in New Zealand where the members, through their level of shares in the co-op, form the basis on which the milk supplier member establishes an individual right to the processing of a given volume at the peak. As a range of issues now seem to be arising in Ireland regarding who should be required to fund new co-op capacity investment, it might be considered desirable to review the New Zealand approach in detail at some stage.


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Appendix 1


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Appendix 2


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Appendix 3

Production - Dairy Products (‘000 Tonnes)Month Cheese Butter Skimmed Milk

Powder2007M01 1.3 3.8 2.42007M02 2.4 5 1.92007M03 10.2 10.1 52007M04 17.6 14.8 10.12007M05 19.3 19.1 13.22007M06 20.7 21.1 14.32007M07 16.8 16.8 12.52007M08 16.2 15.3 8.82007M09 17.1 12.1 5.72007M10 12.4 10.3 42007M11 4.8 8.4 1.82007M12 1.6 4.6 2.82008M01 1.1 3.4 2.72008M02 3.2 5 2.22008M03 13.7 9.4 2.32008M04 19.8 14.2 5.72008M05 20.6 16.8 9.82008M06 24.2 15.4 8.82008M07 20.1 14.9 7.92008M08 20.1 13.4 5.42008M09 22 11.3 3.22008M10 16 10.6 3.62008M11 8.9 5 ..2008M12 4.7 4.7 ..2009M01 1.7 3.8 2.32009M02 3.2 6.4 1.42009M03 14.8 11.2 3.22009M04 17.3 13.7 9.62009M05 21.5 15.3 10.72009M06 23.5 15.6 10.22009M07 18.8 14.5 10.52009M08 17.8 10.7 7.92009M09 18.9 10.3 62009M10 14.9 8.1 5.62009M11 7.3 6.1 ..2009M12 2.7 4.9 ..

Table 5: Production of Dairy Products


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About the Author

Dr Michael Keane B Agr Sc, M Sc Econ, Ph D

Michael Keane has recently retired (Oct 2009) as Senior Lecturer in the Department of Food Business & Development, University College Cork where he has worked since 1981. He is now active as a dairy and food industry consultant while continuing to provide some teaching and research services to the University. In 2009 he completed a major study for the European Dairy Association (the representative body of European Dairy Processors) and has been invited as a speaker by the High Level Group of the European Commission at a conference in Brussels on the future of the European Dairy Industry in March 2010. For the past eleven years he has been a member of the expert group that advises the Dutch Dairy Board in relation to the European Milk Price comparison.

He has been involved in a wide range of international research, consultancy, teaching and training projects. He has completed many analyses of agri-food industries in these countries and has given numerous seminars on aspects of agri-food economics. He has also engaged in work in Africa, Asia and North America (USA and Canada), including work for the World Bank.

He has contributed to many Governmental and EU Committees including in recent years Irish Governmental Committees dealing with aspects of the World Trade Organisation, the EU CAP reform and the EU CAP “Healthcheck”. He is currently a member of the Irish Department of Agriculture, Fisheries Committee on CAP post 2013. At EU level he has also worked in recent years as an “expert” dealing with EU CAP Reform, in particular with the EU Committee of the Regions.

He has published widely in peer reviewed publications and presented papers at a number of international conferences.


15

Executive Area Name Surname

Carlow Carlow Exec John Ryan

Cavan Ballyjamesduff Nigel ByersKilleshandra Patrick CahillBallyjamesduff Anthony CallergyBailieboro Michael Carolan

Clare East Clare Martin McMahonNorth Clare Pat O’Donoghue

Cork North & East

Mitchelstown Marcus CliffordDuhallow Dominic CroninMidleton Joe FitzgeraldMidleton Kevin Galvin,Mallow Tom KielyMacroom Dermot MoynihanMitchelstown Terence O DonnellMacroom Tim O’CallaghanCharleville/Newmarket Julian O’KeeffeDuhallow Owen O’RiordanMallow Daniel O’Sullivan

Cork West Bandon Tom AllenBantry Joe BurkeClonakilty Eileen Theresa CalnanDrinagh William CollinsTimoleague Sean GriffinTimoleague Donal HarteClonakilty Michael P O’SullivanBandon Tom WilsonDrinagh Con Young

Donegal Donegal Exec Cecil FairmanDonegal Exec James O’Donnell

Dublin Dublin Exec Brendan O’Donoghue

Galway Galway North Michael Healy Galway North Pat CarthyGalway South Paul RoystonGalway South John Cormican

Kerry Listowel Vincent BrennanDingle James BrosnanCastlemaine Denis CarrollRathmore Conor CreedonListowel David DigginListowel Anne Marie Keane CotterDingle Sean KennedyDicksgrove Terry O ConnorCastlemaine John O’LearyAbbeydorney Maurice Walsh

Kildare Kildare Exec John O’Connor

Kilkenny Mid Kilkenny Kevin ConnollyNorth West Kilkenny Tommy CookeMid Kilkenny Denis DrennanNorth East Kilkenny James HennessySouth Kilkenny P J MaloneNorth West Kilkenny John Robinson

Laois South Laois Tim FitzgeraldNorth Laois Harry Vanston

Leitrim Leitrim Exec Joseph Devine

Executive Area Name Surname

Limerick Kilmallock Frank AllenBruff Area John BatemanRathkeale John BlackwellCastleconnell John EganNewcastle West Martin HeenanKilmallock Gerald Quain

Longford Longford Exec Pat O’Rourke

Louth Louth Exec Dermot Carolan

Mayo Castlebar John ComerClaremorris James Boyle,Ballina John O’Donnell

Meath Slane Emer DunneAthboy Patrick LynchSlane James Cogan

Monaghan Monaghan Town Matt CaulfieldCarrickmacross Edgar EakinBallybay Joe Rudden

Offaly Birr Paul RyanTullamore Michael Guinan,

Roscommon Roscommon Exec Michael O’Connor

Sligo Sligo Exec Gerard Queenan

Tipperary North Tipperary Ned BuckleyNorth Tipperary Sean ButlerMid Tipperary Jackie CahillMid Tipperary John CahillMid Tipperary Eamonn CarrollWest Tipperary Pat McCormackNorth Tipperary Padraig QuigleySouth Tipperary Liam RyanWest Tipperary Willie RyanSouth Tipperary Seamus Troy

Waterford North Waterford Denis CullinaneMid Waterford Thomas AhearneEast Waterford John SkehanWest Waterford William O’Donoghue

Westmeath Kilbeggan John HarringtonMullingar P J McGuinness

Wexford South Wexford Michael BarronGorey Area Dermot MaguireNew Ross Michael Murphy JnrGorey Area Sam Rose,Enniscorthy James TurnerNew Ross P J Wall

Wicklow Wicklow Exec Chris Fox,Wicklow Exec Shane O’Loughlin,

National Council Members List 2010


COMMITTED TOTHE FUTURE OF IRISH FARMING

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