Ed Cahill of University College, Cork, did not pull his punches last week when he told the assembled members of the co-op movement at the Irish Co-operative Organisation Society (ICOS) conference a few home truths. Professor Cahill's message was an unpalatable one - most of the co-ops operate at too low operating and cash flow margins and even the giant co-ops compare unfavourably in many respects with their British and European peer group.

But it was his parting comment to the conference that has probably provoked most controversy within the co-operative movement.

"I tend to see most co-operatives in a similar light to long established family businesses. I wonder about objectivity, and the closeness of people on the board of directors. There are usually no outsiders who could contribute from a governance perspective. I would consider it useful to have a business person or two and/or a professional (i.e. an accountant or solicitor) on the board, who might ask management a different set of questions and bring a wider set of experiences to decision-making and monitoring of performance."

One could not agree more with Professor Cahill. For too long, the co-ops - with the exception of the big four of Kerry, Avonmore Waterford, Golden Vale and Dairygold - have operated in a manner removed from commercial reality, apparently oblivious to the realities of the marketplace and the impact that Jacques Santer's Agenda 2000 proposals will have on their industry.

In general, the smaller co-ops have been self-centred and inward-looking, reluctant to take risks and devoted almost exclusively to maintaining the price paid to their members for their milk at the highest possible levels. Most are far too small and apparently unwilling to give even basic consideration to mergers and rationalisation that might impinge on the mini-empires run by the farmer-controlled co-op boards.

Whenever there has been a criticism of the co-operative movement in the past, it has inevitably been dismissed as carping from "townies" or "Dublin 4 stockbroker-types" who do not understand the place of the co-op in rural society and the loyalty that co-op members have towards their own society, no matter how small, undercapitalised or inefficient it is.

In recent years, the only rationalisation that has taken place on a grand scale was the Mitchelstown-Ballyclough merger to create Dairygold and the merger between Avonmore and Waterford. And it is arguable that the Avonmore-Waterford merger might not even have taken place at all, were it not for the fact that Waterford was in a position of weakness when Avonmore made its approach.

In the west, NCF, Kiltoghert and Midwest have flirted with the idea of a merger until the usual local rivalries intervened. In the south, the four West Cork co-ops, who were able to combine to buy the hugely successful Carbery cheese and whey alcohol business from Grand Met a few years ago, still find it impossible to put aside their domestic differences and create an enlarged group.

The figures on operating and cash flow margins given to the ICOS conference by Professor Walsh emphasise the financial challenges that face the co-ops. Most have operating margins of less than two per cent and cash flow margins of less than four per cent. Even the biggest "pure" co-op, Dairygold, has an operating profit of 2.8 per cent and cash flow margins of 4 per cent. Compare those figures with the 7 to 12 per cent cash flow margins enjoyed by major European and Antipodean dairy processors like Unigate, Northern Foods, Danone, MD Foods and New Zealand Dairy.

Professor Cahill states, quite correctly, that the relatively weak profit and cash flow margins of the medium and smaller co-ops means that their borrowing capacity - and, by inference, their ability to expand - is very limited. Pressure on margins will get even worse and the size of processing operations and the ability to achieve economies of scale will be of paramount importance in the new world dairy order.

So who is going to get things moving towards rationalisation? Hardly ICOS, given that its board is made up of representatives of the same co-ops that have steadfastly resisted any moves to rationalise.

Not Denis Brosnan, who has made it plain that he is not interested in increasing the size of his dairy business, which by now is simply an adjunct of Kerry's core ingredients and consumer foods business. Not Jim Murphy, who has made it clear that the revamped Golden Vale sees its future more in the prepared meals business with no increase in the size of its milk pool.

That leaves Pat O'Neill and his successor, Ned Sullivan, at Avonmore Waterford and Denis Lucey at Dairygold. These are the two agribusiness groups that have been able to build up scale in their dairy operations and that should logically spearhead the move to rationalise the industry.

Both Pat O'Neill and Denis Lucey took courageous positions when they led the Avonmore Waterford and Dairygold mergers. They, or their successors, are the obvious candidates to spearhead a slimmed-down and rationalised dairy industry.

If that does not happen, then the prospects for the smaller Irish dairy co-operative are bleak. A detailed examination of Professor Cahill's paper at the ICOS conference should be mandatory reading in the co-op boardrooms.