Heavy losses in its red meat operations and price supports in the form of higher milk and pig prices for its suppliers were the main factors in a sharp fall in pre-tax profits last year at Ireland's largest coop, Dairygold.
But the co-op is expecting a solid improvement in the current year, although chief executive Mr Denis Lucey has warned that the market for Dairygold's butter and skim milk powder products is very depressed, with market prices £80£100 a tonne below EU intervention prices.
"For the foreseeable future, intervention appears to be the best option available for butter and skim milk powder," he stated.
Pre-tax profits last year fell from £16.7 million (€21.2 million) to £13.7 million (€17.4 million), although the real fall is cushioned by a £1.6 million gain included in Dairygold's 1997 profit and loss account for the sale of its cattle-breeding business in Britain. At the operating level, profits fell from £18.2 million to £16.2 million, with margins falling from 2.95 per cent to 2.6 per cent. Sales in 1998 were unchanged at £617 million.
Dairygold's meat business was the problem area last year. Mr Lucey said that the fall in profits was mainly due to the co-op's beef processing business moving from profit to heavy losses, although sales in the meat division were down only marginally from £162.2 million to £157.9 million.
The collapse of the Russian market, BSE, the consequent slump in cattle prices and a move by European consumers towards home-produced products all had a severe impact on beef profits, but Mr Lucey was optimistic there would be an improvement in the beef business this year.
After a solid first half, Dairygold's pig-meat business suffered in the second half as the coop compensated for the collapse in prices by subsidising the price it paid to its suppliers to the extent of 7p-8p a kilo. "That fed straight through to the bottom line," said Mr Lucey. He added that there were signs of a recovery in the pig-meat business. "The price paid to producers has gone up twice; they're still making losses, but I think they may go into profit by mid-year."
Turnover in the dairy business was marginally higher at £321 million and, according to Mr Lucey, Dairygold's consumer products performed well on home and export markets. Dairygold paid an average milk price last year of 108.57p a gallon, very much at the upper end of the price range. Mr Lucey was unable to say how much Dairygold's milk price was above the average, but every additional 1p on the price of milk is equivalent to £2 million at the bottom line.
He warned that Dairygold's current ex-VAT milk price of 103p a gallon will have to come down substantially but added that the co-op is acutely aware of the farmers' plight and would bear this in mind when deciding on the scale and timing of the price cut. "A price cut is, however, inescapable," he stated.
Dairygold's agri-trading business was boosted by the higher demand for animal feed as a result of the fodder shortage and higher sales of fertilisers. Grain intake, however, fell by 22,000 tonnes to 94,000 tonnes. Overall, sales in the agri-trading division rose from £135.3 million to £137.7 million.
Dairygold's strong balance sheet - net debt of £20 million and gearing of just 9 per cent - leaves the co-op in a strong position to cope with the difficulties in the dairy market, but Mr Lucey said the co-op would tread cautiously when it comes to looking at acquisitions.
On rationalisation of the dairy industry, Mr Lucey said: "I wouldn't argue the necessity, but the reality is that nothing is happening and I don't see any movement in the near future.
