Economic report: Agriculture in Ireland

One of the most important reforms to the agricultural sector in modern times takes place in April next year. The EU is ending milk quotas. The result is a radical restructuring of the dairy sector in Ireland.

Milk quotas were introduced in 1984 to limit public expenditure, control milk production and stabilise both milk prices and milk producers’ incomes. There has since been a substantial reduction in the number of dairy farmers in Ireland, falling from 68,000 in 1984 to 16,000 by 2010.

A comprehensive assessment of the likely impact of the ending of milk quotas has been published by

the European Commission (Economic Impact of the Abolition of the Milk Quota Regime). It predicts that abolition of milk quotas will lead to Irish dairy production increasing by 4.4%, causing a decline of 10% in raw milk prices. Butter and milk powder production rises in these projections by 5% to 6%, with prices falling 6% to 7%. Production of cheese and fresh milk products is predicted to rise by 1%, with prices declining by 4% to 6%. Irish agricultural income is projected to fall – unless counteracted by increased exports – by 4.5%.

According to Teagasc – Ireland’s agriculture and food development authority – milk production in Ireland may increase beyond the levels predicted by the European Commission report. Teagasc suggests that milk production may rise by about 18% by 2017, with about 60% of dairy farmers planning to increase production and a small number of farmers – less than a thousand – re-entering the dairy market. But Teagasc argues that while the best performing one third of dairy farms earned profits of nearly €2,500 per hectare last year, this is around four times’ the profits of the weakest third of dairy farms. This suggests that many farms need to increase efficiency and adopt more innovative farming practices.

David McGee, a consulting partner at PwC, argues that Ireland can be a world leader in the agri-food industry – providing it modernises. “We have all the ingredients in Ireland to become the ‘silicon valley’ for food and be a world leader for food innovation,” he says. However, he warns that this requires Ireland to take advantage of technological advances to increase yields, reduce the use of energy and water and extend produce shelf life. If it does this, Ireland can exploit global demographic change.

“Doing what we are doing now will not satisfy these future needs and wants,” he told the recent Future of Food Summit. “Ireland needs to further invest in the industry to position it as a leading food centre of excellence. This includes leveraging from existing technological know-how to significantly increase profit margins and putting the funds in place to support our food start-ups.”

Irish agriculture minister Simon Coveney is also in no doubt that the industry must adapt. The minister told the recent Managing Volatility in a Post-Quota World conference: “We are on the cusp of the most fundamental change to Irish Agriculture in a generation. Since 1984, the industry has operated within a quota environment. The shackles come off next April and following that we will have an exciting mix of opportunity and challenge for all stakeholders; farmers and rural Ireland, processors and manufacturers, agri-business and exporters. It is timely that we take stock of where we stand in terms of our preparedness for this new era.”

Aidan Cotter, the chief executive of Bord Bia is positive about the prospects for the sector. “The growth in the global demand for food, combined with shifting dietary habits towards more protein based foods and dairy products, is relentless,” he says. “It is driven by a population growing at 75 million people a year and double that number joining the middle classes.

“This means that over the next ten years a market three times the size of the EU, in buying power terms, is being created, principally in Asia but also Africa, now home to more than three quarters of the world’s population. With 40% of its exports already destined for international markets, principally to these regions, as our dairy industry expands it is well positioned to benefit from the sustained growth in demand for dairy products.”

In other words, to convert the European Commission’s projections of falling agricultural incomes into an opportunity for growth depends on the capacity of the industry to export. China has in recent years become one of Ireland’s most important target markets – it is the sixth largest market for Irish agricultural exports. Dairy exports to China doubled in the last two years, to €270m, with agri-food exports trebling over three years. Total agri-food exports to China were valued at €390m in 2013 and that is expected to have increased to €500m in 2014.

Simon Coveney has just led a trade mission to China, which included 37 leading agri-food and agri-services companies – several of which reported contract completions as a result of the mission. The minister’s objective was not only to support the sale of Irish dairy products, but also to promote beef exports and, over the longer term, poultry products.

The government is taking a very ‘hands on’ approach to the development and enlargement of the agri-food sector. A ten year plan for the agri-food industry is being produced in consultation with industry leaders and will be published next year. This follows what is regarded as the success of the Food Harvest 2020 report, which focused on the themes of Smart, Green, Growth.

The Department of Agriculture points to various Food Harvest 2020 interim targets having been met, most notably with the primary agricultural sector growing by a third in four years. In addition, employment in agriculture has risen significantly. In the decade leading up to Food Harvest, sector employment fell by 1,500: in the last four years it has risen by about 4,000.

It is surely significant that while Ireland’s ‘new economy’ based on financial services has collapsed that it is the old economy of agriculture that is thriving.

Box One

The agri-food sector is one of Ireland’s largest industries. According to the Department of Agriculture, Food and the Marine it is worth €24bn a year to the national economy, generating 6.3% of gross value added, providing almost 10% of Ireland’s exports and 7.7% of national employment.

But at present there is enormous volatility and uncertainty in the dairy sector. The Rabobank Dairy Quarterly report for Q3 2014 stresses that the dairy industry is being severely squeezed by an unfortunate coincidence of events. Milk production has expanded in exporting countries at the very time that China has pulled back from purchasing, focusing instead on using up previously bought stock. Meanwhile, Russia has retaliated against trade sanctions by banning food imports from various external suppliers.

Rabobank reported that while EU prices have yet to feel the full impact of these factors, some international prices have fallen by between 15% and 30%. There will now be a sustained period of low dairy prices, predicts Rabobank.

Box Two

The North

Northern Ireland’s minister for Agriculture and Rural Development, Michelle O’Neill, told Accounting & Business: “The position in the north of Ireland is different to that in both Britain and the south of Ireland. From 1995 the north has been able to expand production by taking advantage of the freeing of milk quota movements between Britain and the north of Ireland, in addition to the subsequent fall in Britain’s production. This has been to the benefit of the local dairy industry. However, during this time production in the south has been constrained by milk quotas and it is anticipated that production in the south will increase following the ending of milk quotas in 2015.

“What happens in the future in the north of Ireland will depend on market conditions. The Agri-Food Strategy Board’s report Going for Growth has set challenging targets for the dairy sector anticipating that there will be long-term growth opportunities as a result of rising global demand. In this context I believe that a market-led strategy is vital for the dairy sector, with future decisions being taken in the context of input costs and market returns.”

David Dobbin, chief executive of Belfast-based United Dairy Farmers, one of the UK’s largest dairy businesses, takes a similar view. “NI has no current quota constraints as the UK for a long time has come nowhere near its quota,” he says. “This in effect has given NI an advantage of being able to produce as much as it wanted when other regions, including RoI, have been constrained by their quota.

“So when quotas end in Spring 2015, NI loses an advantage it has had and RoI will be able to expand rapidly for the first time in years. Since deregulation of the UK Dairy industry in 1995, the NI milk pool has grown by 50%, whereas the RoI industry has only grown by 5%. This means that there is significantly more potential for RoI to expand, as NI already has a much more productive dairy herd.

“At present dairy markets are significantly over supplied after a surge in milk production following favourable global weather and good prices. The biggest growth has been in the UK and NI has led the UK. However the strengthening in sterling plus a major oversupply situation has led to a crash in milk prices worldwide. Against the current low market returns I would expect to see UK milk production slow down, whereas RoI will grow because of pent-up demand for quota and because their production costs are lower. In a normal market I would expect NI output to grow around 2.5% per annum, which up to recently has been the background growth in global demand.”

Ulster Farmers’ Union president Ian Marshall is positive. “The end of milk quotas in 2015 gives Northern Ireland’s dairy industry further scope to grow and expand,” he argues. “There is growing demand globally for western diet type foods, which includes milk products. With our grassland based production – usually resulting in relatively lower production costs – and a clean, green image, Northern Ireland is in a good place to help meet these growing global demands.

“However, an increase in overall milk production would need to coincide with increased processing capacity, so expansion and growth needs to be carefully considered and managed. Clearly there is huge potential for our dairy industry going forward, but we cannot overlook the current situation facing dairy farmers. Milk prices are suffering and world market volatility continues to wreak havoc on farm businesses. With this in mind, I believe many dairy farmers have a cautious optimism about the future of Northern Ireland’s dairy industry. The potential for growth is there, but it will depend on how farm businesses cope during these challenging times if this growth can be realised quickly. What we would like to see is some sort of mechanism introduced that can support farm businesses during times of extreme global market volatility.”

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