According to a joint statement released this morning, Dairygold is to sell its 28 million-litre CMP liquid milk pool on to Glanbia (to come into effect later this year), leaving supply arrangements with its estimated 130 member-farmers unchanged.
Glanbia, in return, is to manufacture a reported 20,000 tonnes of Dairygold's best-selling self-titled butter brand (and also butter oil) at its production facility in Ballyragget, while it will also purchase and process an unspecified volume of Dairygold's whey.
When Dairygold's upgrade of its Mitchelstown plant is complete later in 2006, the co-operative will begin to manufacture a number of Glanbia's dairy products - receiving a volume of processed milk back from Glanbia.
The development will include the acquisition of all the "relevant sales and distribution assets" of CMP, but exclude Dairygold's production and chill facility. The agreement is still subject to the finalisation of contract negotiations between the two parties and is also awaiting regulatory approval from the Irish Competition Authority.
Dairygold has recently carried out an extensive restructuring programme, following a warning last year from Jerry Henchy, Dairygold's chief executive, that the Irish co-operative could stand to lose up to €26 million over the next few years.
Already the restructuring programme has resulted in a cull of 1,000 jobs (with an additional 500 expected over the coming months). According to unconfirmed reports in the Irish press, a further 90 jobs may be lost as a consequence of both today's announcement and also the closure of Dairygold's butter processing site in Mallow, north Cork, later this year.
Henchy commented that "the decision to exit the liquid milk business was not taken lightly, but in light of the highly fragmented nature of the sector, growing volumes of imported milk and the downward price pressure exerted by the multiples on the margins that can be achieved, it is the right business decision for Dairygold and its liquid milk suppliers."
"The Glanbia Dairygold co-operation agreement is a very positive move in the Irish dairy sector. Calls for consolidation of the industry have been made for many years, but progress to achieve meaningful rationalisation has been slow," he added.
Meanwhile, John Moloney, Glanbia's group managing director, claimed that the CMP agreement will "further strengthen Glanbia's Consumer Foods' customer offering," adding that "Glanbia has a long track record of co-operation with other processors, including Dairygold, and we view this as a sensible way forward for the industry."
In recent years analysts have claimed that the Irish dairy sector has been over-reliant on EU subsidies and has largely failed to make the necessary adjustments to remain on a competitive level with its European counterparts.
Following the announcement, Glanbia's shares climbed 6c to €2.98 per share.