The chief executive of Ornua has said that there is “scope for downward pressure on milk price” this year, as current milk prices are still above market returns and it’s unlikely that will remain the case.
In a sit-down interview with Agriland as Ornua published its annual financial results for 2022 today (Wednesday, April 26), John Jordan said that 2022 resulted in record high prices for dairy products and milk prices.
“Farmers got an exceptionally high milk price last year, albeit they had exceptional input costs,” he said.
“But they did have margin expansion, which is positive for them. Certainly, if you’re going to look at the markets in Q4 2022, there were signals there that markets were starting to weaken; that has continued into Q1 .
“It’s really driven around sentiment by buyers rather than necessarily the economics. So supply is relatively tight, but it’s lapping a year where it’s showing good year-on-year growth because milk in Q1 2022 was very low.”
Jordan stated that he also believes that inflation heavily impacted on consumer sentiment in terms of purchasing dairy products in 2022.
“If you were a buyer of dairy products last year for a company, every day you went out to buy something the price went up, you know, through inflation last year for them.
“So they’re sitting today saying, well, you know, normally where I’d buy for two or three months, I’ll buy for two or three days because if I go out tomorrow, the prices are cheaper.
“So that’s natural human instinct that they’re doing that. So there’s a bit of buyers standing back from the market at the moment which is making it week,” he said.
In terms of where milk price might go in 2023, Jordan explained that it’s likely going to continue the downward trend that has been forecast.
“If you look at the co-ops today, while they have cut milk price, to be fair to them, those milk prices are above what spot [market] returns are being found, and fine… they should be above spot returns, but the market is weaker than even the milk price getting paid today,” the Ornua CEO continued.
“So there is scope for downward pressure and milk price through the next few months. But probably with a little bit of strengthening back to sort of today’s figures in the second half of the year.
“But on average, it’s a much lower milk price in 2023 compared to ’22. And unfortunately for the farmers, their input costs haven’t come down at the same rate, so there’s definitely a margin squeeze on farmers this year.”
Ornua operating profit
While Ornua experienced record sales in 2022, it’s operating profit was down by more than 17%, according to its latest financial results.
“In the last five years, our compound growth has been over 15%, so we’ve doubled in sales. So for a 60-year-old company to double in sales in that short space of time says something very positive,” Jordan continued.
“So it wasn’t just a one-year phenomenon. 2022, having said that, was an exceptional year in many ways. We saw volume growth, we also saw price increases out to our customers and consumers.
“And of that €3.4 billion [revenue in 2022], we spent €2.3 billion buying Irish dairy products. And it was really important for us as a co-op, that represents product that we purchased from the dairy co-ops in Ireland who are our shareholders, and that helped them in turn pay milk price back to farming families.”
Jordan explained that Ornua wants to get the balance right between paying record high product prices to its members, but also making sure that customers and consumers continue to buy Kerrygold and Ornua’s ingredient products for the longer term.
So while, revenues were strong and suppliers to co-ops were receiving strong milk prices in 2022, Ornua’s operating profit took a hit.
“It was a thought-through strategy in terms of margin squeeze. We didn’t want to scare off consumers and customers for longer term,” Jordan said of the exporter’s offering in terms or pricing.
“We didn’t want to push the consumer to the point that they’d switch out of Kerrygold and buy something else, so we’ve put price increases through to the maximum we felt would retain the customer and create value, but longer term, as a 60-year-old business, it’s about how do we ensure long term success for the next 60 years.
“So maintaining loyalty with those customers and consumers is hugely important.”