Dairy: Catch 22 revenue scenario Northern Ireland's dairy companies are being bruised by a strong pound and squeezed by the mainland multiples says Richard Wright Despite low milk prices times are tough for dairy processors in Northern Ireland. Those who publish their accounts have revealed losses, with the industry's biggest problem the value of sterling in relation to the euro. Making matters worse is the pressure on margins, because of the dominance of the Northern Ireland retail scene by the major UK multiples. For those exporting dairy commodity products, such as skim milk powder, times are particularly grim. This trade depends on export refunds from the European Commission, which are calculated in euro. With the euro slowly sinking against sterling since it came into existence in January 1999, the result has been that by the time export refunds are paid, their sterling value has fallen. According to Jim Noble of Dromona Quality Foods, which is owned by the farmer controlled United Dairy Farmers, this has had the effect of adding a penny a litre to the price they pay for milk. Add to this the problem all British companies have securing business overseas, because of the value of sterling, and the export business is now more about disposing of product, than profitable trading. Across the Northern Ireland dairy industry the results of tough export conditions are clear. Businesses have lost sales to the Republic of Ireland, which is in the euro zone. Dromona recently announced that it is ending yogurt production, and will instead source its requirements from a processor south of the border. For a company owned by farmers this is a major decision, but it says importing is now the only way it can hope to make money from selling yogurt. The past year has also seen Pritchett Foods, one of the most successful small private companies in the dairy business, cutting staff numbers at its Newtownards processing plant. It blamed the strength of sterling and claimed that as well as the export market being tough, market share was being lost in the UK to imports, drawn in by the strength of sterling. Surging imports have become another weapon for retailers keen to drive down supplier prices, and increase own label at the expense of local brands. Talk privately to anyone in the dairy processing industry, and they confirm how tough it is to do business with the retail giants. However the public stance has to be that they welcome the business, and see their relationship with the UK multiples as a partnership. But margins have been driven down and down, and the market share in Northern Ireland for local brands has been squeezed. Both on the local market, and in Great Britain, Northern Ireland dairy companies are fighting to retain own label business. Privately they admit being in a Catch 22 situation, winning more business from the multiples, but making a lot less money than they were from less business a few years ago. There can be little doubt that across all products, and particularly in the dairy sector, local brands have lost the value they once had. Companies are squeezed by falling market shares for their brand, which reduces the advertising spend, which in turn further reduces the market share. However a chink of light is that a number of retailers, such as Spar, Mace, and SuperValu, are now using local brands to differentiate their stores from the British retailers. This appears to be delivering dividends for both retailers and processors, and there is relief in the dairy industry that value is again being secured from long established brands. Amidst all the problems of the industry there have been some bright spots. Dale Farm, now the biggest supplier of liquid milk, won a major food industry innovation award for plastic cartons that are easier to stack and store. Despite the problems in the export market and with export refunds, Dromona's trading subsidiary Halib Foods won valuable business in China in the face of stiff competition from other European traders. And Golden Vale subsidiary Leckpatrick is gaining from the strong growth of the cream liqueur market, with its St Brendan brand, which is manufactured in Londonderry, cited as one of the good performers when the County Cork business published its 1999 results. For all dairy processors, and indeed for farmers, discussions about future prospects soon produce the comment that better days will only return when the currency imbalance is corrected. With few signs that this will happen quickly, there is little conviction that the good times, which the industry certainly enjoyed in the past, will soon roll again. The past 18 months have taken a toll on even those with the strongest balance sheets. That so many businesses have survived is surprising, but it seems certain that the European trend towards big companies getting bigger will eventually squeeze out many Northern Ireland players trying to compete in the dairy commodity market. {{Z SUPPLEMENTS }}