Two milk processors in the northwest are engaged in a bitter battle over the supply of milk in the region, with the disagreement heading for the High Court in November.

Donegal-based Green Pastures and its sister company, Natural Dairies, say that local rival Aurivo Co-op is manipulating the quota system in an effort to lure their suppliers and drive their group out of business.

Green Pastures manufactures cheese and dairy products for the domestic and export markets while Natural Diaries processes liquid milk. Both are part of a group owned by the Molloy family, whose customers include Dunnes Stores, to which is supplies own-label milk.

Aurivo, the co-op formed in 2011 from the merger of Connacht Gold and the Donegal Creameries dairy processing business, is involved in the same activities. Its supplies own-brand product to Tesco.

Natural Dairies helped drive the introduction of supermarkets’ cheaper, own-label milk, against trenchant opposition from co-ops, which it says preferred to supply their own brands to retailers at a premium.

The difficulty it faces is that it is the Republic’s only large-scale independent processor, which means that unlike its co-op rival, it does not have farmer shareholders who are also its suppliers. This puts it at an immediate disadvantage to its competitors, which control production through the quota system.

This is the EU-wide means for controlling milk production introduced in the 1980s. Under the Republic’s system, the co-ops control the quotas in each of their regions and determine what an individual farmer’s share of that will be. Farms can be penalised if they produce more than the allocated amount.

Farmers can trade or lease quota that they do not need under regulations laid down in 2008, with the co-ops acting as effective clearing houses for these transactions. They can also move purchaser, once they give three months’ notice.

Any spare capacity that is not used reverts to the co-op, which can make it available to other producers, through the “flexi-milk” system, which is also regulated.

In affidavit opened during an initial High Court hearing in July, Green Pastures managing director, John Molloy, says that Aurivo has built up a stock of extra quota through the retirement and death of farmers and the acquisition of smaller competitors down through the years.

Extra capacity
The company says its rival has been offering additional quota to its suppliers in a bid to recruit them and to induce them to break the terms of their existing contracts with the business.

Molloy maintains that his organisation pays suppliers more than Aurivo. To support this claim, he points to the average 28.38 cent/litre that the co-op paid farmers last year, which placed it at the bottom of the Irish Farmers' Journal/KPMG price review.

Thus, while suppliers get paid less per unit, offering them extra capacity means that they ultimately earn more. This is a key incentive, as getting additional quota is the only means by which suppliers can grow their businesses.

Similarly, Green Pastures says that Aurivo holds out the same carrot to farmers who are considering moving to the company. Along with this, says Green Pastures, Aurivo has allowed some suppliers in Donegal to increase their allocation in contravention of the rules governing the temporary leasing of spare capacity.

Green Pastures says that the result of this is that “Aurivo’s control of additional and permanent quota”, coupled with its conduct in inducing suppliers to breach the notice terms of their contracts, threatens the continued viability of the group’s business. It says that the departure of one farmer to the co-op meant it was unable to meet a customer’s request for an additional 22 tons of product.

Molloy says that were it not for the fact that his company gets supplies from neighbouring counties such as Derry, Fermanagh and Tyrone, which are outside Aurivo’s catchment and whose farmers are not subject to the same quota rules, the business would not be able to get raw milk supplies.

The company claims that one farmer told it that Aurivo offered him 100,000 gallons (378,500 litres) in additional quota and said it would pay for a new refrigerated tank for his farm.

According to Molloy, Aurivo wants to drive his family’s group out of business before 2015, when the quota regime will end and farmers will no longer be dependent on the co-ops.

An affidavit filed by Aurivo chief executive, Aaron Forde, disputes all of these claims. He says that the co-op does not have a policy of building up extra quota, but acquires it because many of its farmers' milk production falls short of their allocation in a given year, so that capacity reverts to its pool.

Forde says that the co-op has no discretion in how this spare capacity is re-allocated and complies fully with all regulations.

Enlarged supplier
However, he argues that farmers thinking about moving to Aurivo will take into account the availability of its excess quota, which gives them comfort if they overproduce, as it can be used to ensure that they are not saddled with a penalty.

Aurivo grew from Connacht Gold's takeover of Donegal Creameries milk processing business in 2011, a deal that the Competition Authority approved following an investigation that focused specifically on the supply of raw milk in the northwest.

The enlarged co-op has a quota of more than 370 million litres. It sells its own branded products to retailers in the region and supplies private label milk and butter to multiples.

It competes directly with Natural Dairies. Farms that supply up to 80 million litres of the quota that Aurivo acquired in Donegal are located within a 15-mile radius of the Green Pastures/Natural Dairies facility at Convoy.

At the same time, Natural Dairies says that it will not supply the independent processor with milk on commercial terms, even though it was one of three co-ops reported to have been below quota last year.

Aurivo says that there is no evidence to support any of the direct claims made against it by Green Pastures. It denies that it induced any of its suppliers to breach their contracts with the independent processor and says that its argument is not with Aurivo, but with the quota system as a whole.