Just how often does one hear that Irish farmers produce the best produce in the World? Rather often is the answer. It is then usually followed by the complaint that it does not receive a price that reflects the quality. One can add that it is also often quality assured but that does not confer much premium. It is frustrating but it is, by and large, the reality.
The blunt truth is a premium price has to originate from the consumer. Can one really expect those in the supply-chain to provide the primary producer premium off their own bat? It is unlikely that the farmer will often meet such generosity.
Maybe processors can pay a premium but the circumstances would be limited to a ‘quality’ differential [a factor that improves in-factory efficiency whilst the value of the end product itself is not enhanced] created at the farm level that improves processing efficiency and the margin for the processor.
It may also be that a continuous-through-the-year, raw-material supply that equates with market need and allows efficient processing can justify a farm-gate premium for the raw material supplier. It is a reason why milk processors pay a premium at those times of year when supplies are short [i.e. winter premiums] and/or milk is more expensive to produce. The reverse can also happen; offer raw materials at the wrong time of year or at levels that are out of kilter with processing needs and prices fall or contracts get terminated.
Setting aside processing efficiency [important as it is to think in terms of whole supply-chain efficiency and not just inside-the-fam-gate efficiency], if the farmer wants to see a sustained premium for his or her produce, it needs to be derived from consumers who are willing to pay the premium. And the first requirement to ascend to that position is to be able to place a premium-quality product in front of the consumer through a supply-chain that will transmit that premium back to the primary producer. Does that happen in Ireland? And if not, why not?
First let us look at the beef sector. It is well known that it is dominated by a very few private, family-owned factories. Is it fair to say that their modus operandi is high throughput / low margin? Are they also a role model for an agri-foods policy that believes large-scale factories are necessary for Ireland to compete on global commodity markets? It is, however, a model that ignores the size of Ireland’s farming industry and the small-scale, family-farm, nature of the primary producers themselves.
The author has often said that supply-chains that link premium farm produce to premium-paying consumer almost, by definition, do not include industrial-scale factories. It is partly about consumer perception and it is partly about the high-throughput factory model is not conducive [or at least their usual perception of operational efficiency] to small processing ‘runs’ of premium products. It is this that means that Ireland’s beef supply chains are not suited to getting niche-market products from the farm to smaller sized but premium paying markets. For that to happen, smaller-entity, flexible supply chains [inclusive of operational facilities] are required.
On the surface and certainly according to local folk law, farmers have more control over the dairy supply chains through their cooperatives. Is this the reality?
The beef supply chain has few entities. It often goes farmer to factory to retailer or burger-chain to consumer. By contrast, for dairy the typical supply-chain is farmer to primary processor [the co-operative] to secondary processor [often privately owned] to retailer to consumer. Of course other routes exist but these are probably the dominant farm-to-consumer supply-chains?
There will of course be many exceptions to the multi-link dairy supply chains as some co-operatives will produce consumer products that go direct to retailer to consumer. To identify who is actually producing what one needs to get used to looking at retail labels when shopping [sometimes it also helps to know who the EU code on the oval label belongs to].
At present some of the smaller cooperatives are towards the top of milk price league tables. Is this because a greater proportion of their milk goes into Irish-market consumer-products? Or is it because they are more effective at selling ingredients to the next stage of the supply chain? One would also be interested to know the effectiveness of the smaller cooperatives when it comes to exporting consumer products [possibly via Ornua [another ‘level’ in the supply chain]]or ingredients.
Beyond these examples, just how clear is the line between primary and secondary processing?
- What consumer products are the cooperative themselves producing?
- To what degree are cooperatives producing butter and cheese for Ornua?
- How often are they producing ingredients for private supply-chain partners?
- Which entity creates and sells the higher-margin, branded consumer-product?
As said, in some cases one needs to check on the retail shelf to see who actually owns the consumer-orientated brand name; is it the primary or secondary processor?
One should consider the Irish infant formula success story. It is often said that Ireland produces 15% of the World’s formula but is it just assumed that this benefits the Irish milk producer?
Just what milk-derived ingredients are in the infant formula? One assumes it includes milk fat but it may only be used in premium products within a branded range. The rest may contain palm or other vegetable oil. It may contain lactose and whey powder. Does the use of milk constituents translate into a premium that is clearly passed back to the farmers’ milk price?
And then one gets to the crux of the matter; who formulates and produces the formula and who owns the brand name? Just how often is it the farmer-owned cooperative? Or is the farmer-owned cooperative only a supplier of raw materials for a privately-owned, significant other?
Whilst one hears “but we are lucky, we have our co-operatives” should one be asking whether they have largely become primary processors of milk into ingredients for others to add value to?
There has been much recent investment by the co-operatives to ensure that they have the capacity to handle their farmers post-quota expansion milk [as per their own co-operative rules] but has this predominately gone into stainless steel for primary processing? Have farmers invested heavily [inside and outside the farm gate] for others to accrue the benefits? One does wonder.
It was mentioned earlier that a problem with the beef supply chain is that it is dominated by entities with a high-throughput / low margin model that is inflexible when it comes to providing a supply chain that can develop niche markets. One fears that in the pursuit of extra capacity for expansion milk that some of the cooperatives have now achieved the same result. They have invested heavily in scale and left themselves in a position where they now do not have the flexibility to provide members with routes to alternative, possibly higher-value, premium markets.
It was reported on 20/02/16 in the Farmers’ Journal that the Irish dairy product mix will move from 10% powder in 2014 to 33% in 2020. So who is going to produce these commodities; is it the cooperatives or the privately-owned secondary processors? If it is the former, has the big-is-best model now committed most of the farmers’ expansion milk to commodity supply chains destined for global markets or to secondary processors who then utilise the ingredients to make a margin that reflects their closer-to-the-final-consumer position?
Hence, should one be asking if some of the cooperatives have invested in the low-return end of the supply chains in a way that limits their ability to pay a good milk price to their members?
And, at the same time, has this commodity focus allowed others in the supply chain to pass the current low milk-price pain back to the milk producers [via the farmer-controlled primary processor] whilst also protecting their retail or secondary processing margin?
If so, one can only imagine that re-balancing the situation within the dairy supply-chain is now a long road back. At least that is now a destiny they can share with their beef farming counterparts.