Mr. John Jordan:

I thank the Chairman and members of the committee for the invitation to meet with the joint committee to discuss fixed-price milk contracts and their future and Ornua’s role in the dairy industry. I will take this opportunity to thank the committee for the flexibility it has shown to Ornua in scheduling this meeting. I personally wanted to be here but, due to diary conflicts, it was not possible for me to attend any earlier than today.

Ornua is a dairy co-operative, Ireland’s largest dairy exporter and owner of the Kerrygold brand. We are a second-tier co-op in that we are owned by almost all of the dairy co-ops across Ireland, including eight of the nine processing co-ops. Our members are, in turn, owned by 14,000 dairy farmers. There is no mandatory obligation on our members to trade or collaborate with us but they do so because we create significant value for them.

Ornua’s purpose is to create value for Irish family farms. We export to 110 countries worldwide and have annualised sales of in excess of €2.5 billion and a global team of 2,900 employees. We have been in existence for more than 60 years. We operate from ten business units worldwide, including 16 production facilities and nine innovation centres. We have sales and marketing teams working in-market right across the globe.

As a co-operative of co-operatives, we operate collaboratively with our key stakeholders, that is, our farmers, our member processing companies and our own employees. Our key role is to build long-term, sustainable and value-adding routes to market internationally for Irish dairy products. Complementing this, we have a number of businesses that leverage our core competencies to generate additional profits. This combination of value-adding routes to market and profitable businesses enables us to pay to our members strong purchase prices for their products, as evidenced by the Ornua purchase price index. We now pay out at an index of 178.5, which equates to a milk price equivalent of 55.2 cent per litre, excluding a processor margin. We also pay to our members the Ornua value payment, which is a combination of product premia over and above the base purchase price and a performance-based cash bonus. The Ornua value payment to members was €78 million in 2021.

Over and above being a key customer for all our members, our value to our shareholders lies in: our co-operative structure; the strength of our market return in terms of purchase prices; the strength of our brands, in particular Kerrygold, our long-term customer relationships and our overall business performance in terms of our Ornua value payment; our funding of members’ working capital; market volatility management; product innovation; and market intelligence and insights.

Kerrygold is Ireland’s only food brand with a retail value in excess of €1 billion and 2021 marked another record year for the brand, with volume growth up 12%. Kerrygold continues to be the fastest selling brand on supermarket shelves in Germany and is the number two butter brand in the United States. We now sell more than 11 million packets of Kerrygold butter and cheese around the globe every week.

Importantly for today’s discussion, as a co-operative whose purpose is to create value for 14,000 Irish farming families, we successfully captured and returned significant value to our member co-ops last year. As I have mentioned, the Ornua value payment for 2021 was €78 million. This is a record payout, up 13.5% year-on-year, and amounts to a compound annual growth rate of 26.5% over the past five years. It is an important contribution to our member co-ops which, in turn, support farmers’ incomes.

It is an important contribution to our member co-ops which, in turn, supports farmers’ incomes. In addition, we purchased €1.2 billion or 389,000 MT of premium Irish dairy products and we paid strong prices as reflected in the Ornua purchase price index, PPI. We are confident that this purchase price will exceed again this year in both value and volume. This performance delivers on our commitment to maximise returns to our member co-operatives and the 14,000 farmers who supply them.

Market volatility is very much a feature of today’s dairy commodity market, and this market risk has to be managed. In 2015, Ornua presented to this committee on the risks to dairy farm incomes of greater market volatility and the need for resilience and adaptability. For farmers, the best insulator against volatility is a combination of market return, fixed milk price schemes and margin protection schemes, and efficient and shrewd financial planning.

Ornua itself has invested significantly in volatility management resources, skills and mechanisms to ensure our own product prices trade in a narrower, less volatile range than the commodity markets and to ensure we can provide an option – I would stress it is only an option - for our co-op members to hedge or de-risk a portion of their business. We know that our fixed product price schemes have brought welcome stability to our co-op members over the past number of years.

Ornua is not involved in the operation of any fixed milk price schemes for farmers or in setting the structure or parameters of these schemes. Our involvement is to provide a bridge to manage volatility and hedge uncertainty for our customers, our business and our suppliers, that is, our member co-ops. Those co-ops in turn may or may not offer fixed milk price contracts to their farmers. We have, of course, become aware of a certain number of farmers and farm families under financial pressure and, indeed, mental strain due to the fixed milk price arrangements they have in place with their co-ops, given the unprecedented and unexpected rise in input costs in 2022. While we are not involved in managing these schemes, we strongly believe it is incumbent on everybody to step up and support these hardship cases. To this end, Ornua has offered a flexible programme to our members to enable them to target such cases among their own farmer supply-base in whatever way they see fit. Ornua’s fixed price contracts with its members are for an agreed volume of product - butter, cheese or powder - purchased at an agreed fixed price. We have offered to increase the contractual purchase price on 10% of this volume, subject to the member supplying the same volume in 2023 at this increased price. This is intended as an option for member co-ops and a potential contribution to addressing the difficulties that have arisen. It is not and was never intended to be a full solution to bridge the price between fixed and prevailing milk prices for all of the Irish dairy sector.

The Ornua offer is based on an assumption that 10% of the volume of Ornua purchases on a fixed price basis is from milk supplied by farmers in hardship. Therefore, Ornua’s offer is a price increase of an average of c. €1,000 per MT on 10% of product purchased from the member co-ops in 2022. This offer can be managed by the co-op in whatever manner it deems most appropriate for its situation. It would equate to 10 cent per litre on 10% of the volume, or 1 cent per litre on all of their volume. There is a link to 2023, in that the volume and price are in turn fixed for 2023 at the same increased return.

As Ornua is not involved in the design or management of any of the fixed milk price schemes, we have no data on hardship cases. This information is held by the individual co-ops and it is only they who can determine whether to take up this discretionary offer and how it should be used. Ornua is also not the member co-ops’ sole customer for fixed product price contracts. The Irish Farmers' Journal recently estimated that more than 1 billion litres of Irish milk was in fixed milk price schemes. If this is accurate, Ornua is a counterparty for less than one third of the milk in fixed milk price contracts. Ornua’s offer of support is being funded by Ornua. It is entirely separate from the payment supports recently brought in by individual dairy processors and aims to provide equity across all our members, while helping co-ops to target hardship cases. Some member co-ops have taken up the offer and others have chosen not to. The principle of equity is important in this context, as not all of our members offer a fixed milk price scheme to their farmer suppliers, while others reportedly have only a small proportion of their farmers in such schemes and an even smaller number of hardship cases. Not all members will, therefore, avail of this offer - to be fair to them, there appears to be a challenge in supporting just a proportion of farmers and not all others - and yet all farmers will ultimately be implicated. The cost of Ornua’s offer will impact Ornua’s annual result and the overall amount of Ornua’s 2022 value payment.

Despite this, and notwithstanding the fact that Ornua is only one of a number of customers used by the processing co-ops to off-set their fixed milk price schemes, we believe that our offer of support is the right thing to do, is balanced and is in keeping with our values. While confidence in fixed milk price schemes has been very significantly impacted by the negative experience of some farmers in 2022, we believe, given the volatility of world markets, that hedging and derisking tools will continue to have a place in all our businesses. Having said that, lessons will need to be learned from recent experience and consideration given to how income margins can be protected under any new schemes if there is an appetite for them. It will be important also to ensure that farmers are appropriately advised on the use of volatility management mechanisms in their businesses so they strike the right long-term balance between income and market stability when seeking to de-risk their businesses.