Irish dairy industry challenges

As I indicated previously, it is important to recognise that the key driver of current constraints on Irish dairy output is domestic policy/environmental compliance-based, rather than deriving from EU policy. This, I pointed out, deviates from a time when the European dairy industry was subjected to the production constraints imposed by the 1984 milk-quota system, which was eventually abolished in 2015. The Irish dairy sector is certainly not constrained by any decline in demand for grass-based Irish dairy products. Ornua’s recent 2025 financial report bears testimony to the popularity of Irish premium-priced dairy produce, marketed under the Kerrygold brand.

Government imprimatur for Irish dairy

Importantly, the support for the new Nitrates Directive seems to reflect a broad cross-Government acceptance of the vital importance of sustaining/maintaining Irish dairy output. This contrasts with certain opposition entities’ views of what should happen to Irish dairy, much of which are pushed and vocalised without any consideration of their destructive impact across the economy and the wider agricultural sector.

Accepting political and economic realities

Given the various political, regulatory, and environmental restraints on production, how does the Irish dairy sector best adapt and plan? If we accept an output ceiling of nine billion litres (well beneath the sector’s physical limitations in terms of land availability, environmental protection, and human resources) over the next five to 10 years, what is the optimum dairy-processing structure and the optimum product mix across the dairy product spectrum?
Static throughput and product mix combined with continuously increasing processing costs under the current processing profile, point to declining margins to processors, lower price returns to producers, or both. In addition, imposed decarbonisation investment costs and ever rising energy costs are further key business development constraints.
Equally importantly, Irish dairy processors, unlike branded drinks manufacturers, such Guinness/Diageo, don’t have selling power that can transmit higher costs into consumer price hikes. This is a very real factor that is often ignored by policymakers who, nevertheless, insist that supermarket buying power must be maintained.

Strategic decisions

Given all these imposed realities, industrial development policy suggests that the first step in a dairy development strategy must be focused on a mergers/rationalisation process. When put together with an output cap of nine billion litres of milk, the realistic outcome of this inertia-based policy, with built-in ever-increasing costs, is declining margins and price reductions to producers. The proposed model, utilising existing production and product modelling, only works economically in an environment of processing capacity driven by increases in milk production.
The alternative strategic response to output inertia and ever-increasing costs suggests either a change in product mix or new product development/innovation or both. As an example, a strategic study of the Irish dairy industry, known as the Prospectus Report, published in 2003 highlighted an overdependence on butter production and proposed a switch to increased cheese production. Such a movement would also benefit from the increased production of whey products through the cheese stream. The partial adoption of this strategy has worked successfully for some processors.

International comparison

From an examination of those milk pools, even without impending and obvious output and business cost challenges, Irish dairy processing is relatively low scale compared to our global competitors. The largest milk processor in Ireland, Tirlan, is processing 3.4 billion litres annually. The figure, impressive in Irish terms, pales against the profiles of global dairy giants listed below.

While scale is not everything, in a relatively low-margin, commodity-focussed industry, lower-scale processors, without very high margin, niche product lines, will always be at a distinct competitive disadvantage. Grass-based production, accounting for only 10 per cent of global milk output, does offer some marketing advantages, but these do not significantly extend to bulk powder production.

Economics versus politics

If rationalisation/mergers, in an Irish dairy processing context, seems obvious as the key first step in managing the high cost/output, production cap challenge, several considerations and questions arise:

• Is Government prepared to financially support a rationalisation programme given that any immediate gains from scaling would be gobbled up in the huge cost of the decarbonisation of the scaled-up processing sector?
• Where do mergers fit into the functionality of the current farmer-owned dairy business model?
• The product mix and innovation/R&D challenge require a greater focus on commercialisation versus the ponderousness in terms of actual new product development of the current research system through innovation centres, which reflected the outdated EU Commission constraints on state aid supports for innovation which were criticised in the Draghi report.
• A greater emphasis is needed on support for accelerating commercialisation is imperative to deliver both reduced on-farm emissions and new product innovation.
• Post-quota growth in Irish dairy output delivered jobs, billions of euros in export growth and billions in increased Irish economy expenditure. Billions are not required to sustain this, but the overall Irish economic value is surely worth serious support.