Ireland reaping the rewards as agri-food industry keeps growing

AMID THE seemingly relentless narrative of economic gloom, one sector of the Irish economy is holding its own. Ireland’s agri-food industry is flourishing. Food and drink exports increased by 12 per cent last year, reaching close to €9 billion, a record.

Having stayed in the shadows during the economic boom, the industry is firmly back centre stage, as the Government and policymakers try to ease the Irish economy out of recession. It is not difficult to see why. Irish agriculture embodies what is hoped will be the twin catalysts for the Irish economic recovery – exports and innovation.

Despite its reputation as an insular, domestic-focused industry, one of the defining attributes of the sector is its high dependence on export activity. More than 90 per cent of Irish beef and 85 per cent of dairy products are exported. Similarly, the indigenous industry has been at the forefront of scientific and nutritional innovation, as it develops more added-value products in the field of infant formula and whey-based protein nutritionals, and positions itself at the premium end internationally in terms of dairy and meat consumer goods.

But despite all the optimism, the industry is not without its challenges.

It is worth remembering that the Irish agri-food sector still relies on subsidies at a primary level. Irish agriculture may be performing well, but it is doing so in a highly protected market. The Common Agricultural Policy (Cap), the cornerstone of EU agriculture policy, effectively shelters European agriculture from the vagaries of the free market.

Though the methods by which Cap supports farmers has moved from a system of price intervention towards direct financial support to farmers, Cap still represents about 40 per cent of the EU budget, though this figure is falling. Ireland receives close to €2 billion a year in subsidies, mostly through single direct payment. An estimated 70 per cent of farm income derives from direct payments, according to the Irish Farmers’ Association.

Many commentators, including Prof Alan Matthews of Trinity College Dublin, have questioned the commercial viability of a sector that is so heavily supported.

Supporters argue that the system is essential to guarantee a stable food supply, produced to the highest environmental and safety standards for European consumers, as well as stressing its centrality to the rural economy.

While Cap is due to be reformed in 2014, the main changes will most likely concern the renegotiation of the current system whereby different rates are paid to different members and enhanced environmental requirements, rather than any substantive changes. Whatever its critics’ misgivings, Cap is here to stay in some form for the near to medium term.

The other more immediate issue for the sector is its inherent volatility. Like most commodity-based industries, agriculture is a cyclical business. Last year’s growth in Irish food and drink exports was due to high commodity prices as much as any increase in the volume of product sold. The disparity in dairy prices over the last few years exemplifies this price volatility. Milk hit 40 cent a litre in 2007, only to fall to nearly 20 cent within 18 months. Already this year milk prices have weakened from last year’s highs, with one co-op, Arrabawn, reducing the amount it pays farmers for milk earlier this week.

Although research shows underlying global food demand is on an upward growth trajectory as the population increases exponentially, short-term volatility is a reality of the business.

DAIRY

But despite the economic complexities, food production holds huge opportunities for growth. For Ireland, dairy holds the most potential. In 2015 the European milk quota system, which has capped the amount of milk European farmers have been permitted to produce since 1984, is to be abolished.

Ireland is particularly well placed to capitalise on the change, as its grass-based method of production allows it produce milk cheaper than most competitors. While competitors such as New Zealand and the US are expected to increase production by 2020, Europe as a whole is only expected to deliver modest growth allowing Ireland to benefit, though some price deflation is expected as Europe opens up to the market.

Ireland has already established itself internationally as an innovator of dairy-based products. Major listed companies such as Kerry Group and Glanbia have become world leaders in the food and ingredients space, with Glanbia, in particular, capitalising on the growing demand for nutritional products.

Irish co-ops, such as Dairygold and Connacht Gold, have also been to the forefront in cultivating new markets and products, exporting in some cases 98 per cent of the milk they produce, often in collaboration with the Irish Dairy Board.

Lakeland Dairies, which enjoyed a 52 per cent rise in profits last year to €6.85 million on revenues of €472 million, processes about 85 per cent of its milk into powder, which it then exports across Europe and particularly into North Africa. It is also exports branded food service and ingredients products to about 70 countries worldwide.

But despite the success of the Irish dairy industry in cultivating new products and markets, hurdles remain. Ireland’s export opportunities into some markets are limited by trade agreements between other countries. For example, New Zealand, has a bilateral agreement in place with China since 2008, which effectively prohibits Irish milk producers from competing in the space.

Hence the emphasis during this week’s trade mission to China of developing niche, premium-quality dairy products for the huge Chinese consumer market, rather than focus on bulk-selling of milk.

The Irish Dairy Board launched a Kerrygold-branded UHT milk product, which it has been developing specifically for the Chinese palette over the past 18 months with Lakeland Dairies, while Glanbia launched a new whey protein brand for the infant formula market, bringing to 9,000 tonnes the volume of dairy ingredients it exports to China.

Access to markets aside, the other main challenge for the Irish dairy industry is its preparedness for the abolition of milk quotas. The Government predicts a 50 per cent jump in milk volumes following the end of quotas. Ensuring farmers and processors have the capacity for this increase will be challenging.

One contentious issue is the question of consolidation of the co-operative sector, something believed to have been a factor behind recent tension at the Irish Co-operative Society (Icos) which culminated in the exit of its chief executive after a year in the role.

Seen just a few years ago as the necessary price for survival among Irish co-ops, the momentum behind the call for further consolidation appears to have abated in the last yea. This may reflect a certain complacency as milk prices reached record highs, though senior figures in the industry have also questioned the long-term suitability and sustainability of the kind of national consolidation model epitomised by New Zealand, where the country’s main co-ops merged to form dairy company Fonterra.

Nonetheless, it is widely accepted that some form of co-operation is essential if the Irish dairy industry is to compete internationally. Exploratory discussions between Dairygold and Glanbia, which will need extra processing capacity post-2015, about a new processing facility have taken place, while a buy-out of the Glanbia co-op by its 54 per cent co-op shareholders may also resurface as a possibility.

Another concern is whether producers are sufficiently prepared for expansion. The relatively small size of Irish farms, coupled with cultural issues such as the historical reluctance of Irish farmers to lease out land for cultivation and use despite tax incentives, may be barriers to development. Teagasc is playing a key role at producer level, working closely with farmers to improve the quality of their produce by focusing on animal health, nutrition and breeding issues, moves that also lead to more cost-competitive production. Encouraging better farming also has knock-on effects on Ireland’s sustainability agenda, as Bord Bia markets Ireland’s “green” credentials.

BEEF

While the dairy industry is set to take centre stage in Irish farming over the next few years, there is more limited scope for expansion within the beef industry. Ireland is one of the top-five beef exporters in the world and number one in Europe, but the industry is heavily dependent on EU subsidies.

It is widely accepted that any change to the single farm payment would have a serious impact on the viability of beef farming. So too would the liberalisation of world markets, given the large-scale operations and low production costs involved in the production of beef in non-EU bloc countries.

Minister for Agriculture Simon Coveney has outlined Ireland’s strong opposition to any relaxation of the rules to allow more South American beef into Europe, citing among many reasons the disparity in production and traceability standards required of South American and Irish beef. The issue is likely to come to the fore in next year’s negotiations on Cap.

Nonetheless, the Irish beef industry has rebounded from the meat scandals of the past, and has successfully managed to market itself as a premium, high-priced product.

While in the 1990s about 50 per cent of Irish beef went to non-EU countries such as the Gulf states, 98 per cent now goes directly on to the shelves of European retailers. Irish processors have built up direct relationships with the top retailers rather than depending on wholesalers. Again, Ireland’s green image is key to branding Irish beef as a premium product.

The suggestion that China may relax its ban on the import of Irish beef which emerged from the recent trade visit, is also welcome.

Irish pork has also managed to recover from the dioxin scare in late 2008. Again China is seen as a major player, as it accounts for half the global production and consumption of pork. It is expected to increase its imports by about 20 per cent as domestic demand outstrips supply. A visit to Ireland last year by leaders from the Chinese pork industry was seen as a key stage in the development of further trade links in this area.

While tillage farming accounts for a relatively small proportion of agricultural land use in Ireland, most cereal growers had a particularly strong year last year, reflecting strong yields. However, potato producers have been struggling, faced with historically-low prices and decline in consumption.

Other areas of growth are in the prepared foods, artisan and SME sector. A number of small, privately owned Irish companies are making their mark. Companies such as Shannon-based ABC Nutrition have made strides in the sports nutrition market internationally, while the sale of John Teeling’s Cooley Distillery to US drinks company Beam for $95 million illustrates the demand for Irish-branded products.

There is also a growing move to develop Ireland’s fish farming industry, with the Asian market a specific focus.

Above all, this week’s trade mission to China illustrates the possibilities open to Ireland in niche and ancillary services related to the agri-food industry. The range of contracts secured – Red Mill’s contract to provide the first imported horse feed into China, an application by Irish fruit company Keeling’s for a licence to export Irish-grown fruit directly to China, and Samco’s development of a corn silage system for the Chinese market – shows the huge potential offered by the agri-food sector internationally in new areas. For a country the size of Ireland, securing a niche in the global market may just be the way forward.