John FitzGerald: Food processing has been good for Irish farmers

Since the 18th century, Ireland has been a major exporter of food products. For nearly all of that period, Britain has been the main destination. Britain remains the major buyer today, but recent years have seen a diversification of our food markets, particularly since we joined the European Union.

There has also been a shift towards exporting processed foods. Up to the 1970s, our food exports consisted mainly of live cattle and minimally-processed dairy products. In the 1960s, the value added by the food processing sector only amounted to 15 per cent of final sales; today that share has risen to a third, and much more of our food exports have substantial domestic value added.

Ireland’s food processing industry results in significant employment. In addition, Irish firms are increasingly producing more valuable and sophisticated outputs, from casein to nutritional products, which facilitated the expansion of sales in markets that were unpromising in the past. In turn, this has supported substantial expansion in agricultural production, and facilitated better prices for farmers.

A key aspect of this development has been a major change in the way the industry is organised.

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In the 19th century, there was very limited processing of agricultural produce, undertaken largely by local merchants. The farming community had serious concerns at the control of the domestic market for their product that was exercised by such dominant buyers, and at the resulting poor return for their output.

To tackle this problem, the Irish Co-operative Organisation Society was formed in the 1890s by Sir Horace Plunkett and others, following a similar initiative in Denmark. The result was a set of farmer-owned co-operatives, giving the agricultural community much more control over what happened to their produce.

In particular, in line with their owners’ interests, these co-operatives aimed to maximise the price paid for agricultural inputs rather than seeking to maximise the profits from processing.

This model worked well initially, allowing for expansion in production and providing some protection for farmers. It was particularly important in the dairying sector, and it continued to be the dominant model in the post-second World War years. However, until accession to the EU, the co-operatives could not overcome the limited access Irish producers had to foreign markets, effectively being confined to selling in Britain.

In Denmark, where a similar co-operative structure had evolved, major changes occurred in the organisation of the industry the 1960s. The co-operatives gradually metamorphosed into major players in the international market for food products.

EU membership in 1972 opened up the EU market to the agricultural sector in both Denmark and Ireland. While the Danish processors were in a good position to exploit these opportunities, the Irish co-operatives remained limited in their scope and ability to add value or increase market share. A result was that Ireland came to rely heavily on EU intervention support to provide a price floor for farmers.

The contrast with more successful business elsewhere drove major changes in the 1980 and 1990s. Kerry Group went down the public limited company route. Other co-operatives, with the advice of IDA Ireland, also changed their operational model. There was major consolidation of small local co-ops into a few large firms with significant heft.

A key aspect of this organisational change was a move from a model of maximising returns to farmers, with minimal profits, to one where these firms earned a normal profit rate. The additional profits were reinvested in expanding processing and developing new markets. Whereas in the 1960 and 1970s, food processors’ average rate of profit on sales was 3 per cent, over the last 20 years it has been 20 per cent.

While larger firms have enabled growth and innovation, there will continue to be concerns that no single firm should dominate the market for farm output.

The reorganisation of the industry has benefited farmers rather than hurt them. The added value, and the development of new markets, on which the enhanced profitability is based, has allowed dairy processors in particular to pay a good and more stable price to farmers. However, there are continuing farmer concerns around the lack of competition in meat processing (a sector with much lower value-added), and at the prices received for their animals as a result.

A thriving food processing sector is very important for the farming community. Like farming itself, this sector will have to evolve to deal with climate change, and with the effect of changes in the volume and mix of our farm outputs. If the forestry sector were allowed to develop, the market for wood products could blossom.