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Can agriculture provide a lucrative source of growth in the future? John Walsh reports on a sector facing a comeback.

From the inception of the State up until the early 1990s, agriculture was the dominant sector of the economy. That in no small part came from Eamon de Valera's dream of a self-sufficient agrarian society but agriculture has slipped off the radar over the past 20 years. As the economy diversified, the influence of the farming lobby fell by the wayside. That could be about to change.

De Valera's idea of self sufficiency might be about to have a much more existential implication across Europe. For the first time since the Second World War, the issue of food security in Europe is becoming a concern. This raises the question: is the farming sector fit for purpose or in need of a huge overhaul?

Market purists argue that the common agricultural policy (CAP) is a financially illiterate document which is a huge waste of taxpayers' money and has caused the sector to become inefficient not just in Ireland but throughout Europe.

 Moreover, areas such as beef and cereal production, which are not profitable in Europe, should be allowed die as global competition ensures a supply of cheaper products from emerging markets.

Not so, says the farming lobby. Following a few turbulent years, the sector has a lucrative future. In fact, it could be a rich source of employment and export income in years to come. What's more, the maintenance of the CAP is essential as the alternative would be volatile food prices and a threat to supply, they argue.

There has been a cultural backlash against the farming sector in this country. It was seen as conservative and holding too much sway in Government circles. When the economy started to boom in the 1990s and the country moved towards a more secular and liberal model, agriculture looked set to become a footnote in history.

Stories of farmers selling up to property developers for millions passed into lore. Moreover, it looked as if the second generation of farmers had abandoned it in favour of more lucrative openings in the construction and financial-services sector.

But now as the economy begins the long road to recovery, agriculture is once again part of the mix. In fact, many agricultural colleges are over subscribed as the offspring of farmers return to the fold as other areas of the economy close down.

There are two types of farming in Ireland: dairy and non-dairy. Dairy is the production of milk which has had a volatile number of years. For example, in 2009 milk prices were coming in at 20c per litre yet costs were running at 24c per litre and that is before capital repayments.

The year before, prices registered at a healthy 37c/ltr with costs roughly the same which meant that profit margins were robust and the sector enjoyed a good year. But the past few years has seen far more prolonged periods of prices on the floor than buoyant revenues.

The medium to long-term prospects for the dairy sector are good. Surging demand on the back of a growing middle class in Asia is seen as one of the main reasons why consumption is set for a sustained increase.

Dairy farmers have a quota of milk they cannot exceed without being penalised. That has obviously imposed a cap on the  production capacity of the sector. That quota will be lifted in 2015 which could unleash a huge upside potential in the industry.

The Department of Agriculture has commissioned a report into the future of dairy farming in Ireland which will be released over the next few weeks (at the time of going to print).

It is believed that it will recommend that milk production should be increased by between 25-50% from current levels by 2020.

"That will be a challenge but if it can be achieved, then it will create jobs and export income," says Pat Smith, chief executive of the Irish Farmers Association. Ireland currently exports 85% of its milk production.

There are also a number of factors working in Ireland's favour. Because of the temperate climate, the cost of grass is 4c/kilo compared with 20c/kilo in places like France which is a huge competitive advantage.

Moreover, because the milk quota system put a ceiling on earnings, farmers have been forced to cut costs where possible over the last number of years which boosts the overall profitability of the sector.

Smith says there has already been a massive amount of investment over the past few years in order to meet EU imposed environment directives. But changes need to be made to the way the sector is run.

"There is no more capacity to process milk at peak time but we are mainly spring based producers. That peak should be pushed out and we should get more milk produced over August, September, October and November," he explains.

If milk production is to increase by up to 50% over the next decade, then there will have to be another wave of investment. Coming up with much needed capital is not easy in this environment. Banks are reluctant to lend even if the business proposition is sound. "Farmers have always been good at investing, even during the bad years. They are very good for the economy because they don't have flash lifestyles. They don't buy yachts or luxury apartments abroad. Every cent they earn, they re-invest back into the economy," says a consultant who works in the agri sector.

 "Typically a 100-cow herd requires an investment of €200,000. Farmers have good collateral. Even with property prices where they are, they could have land banks worth €500,000 when they are looking for loans of €100,000."

Possibly the biggest challenge facing the dairy sector is moving up the value chain. As it stands, 60% of milk is used for butter production.

 "We need to reduce that and increase the proportion of milk going into cheese products and ingredients which are less subject to commodity-price volatility," says Pat O'Keeffe, news editor at the Irish Farmers' Journal. "15% of the milk for the world infant-feed formula comes from Ireland and that is expected to grow," says Smith. "We have milk that is of the highest quality and it is environmentally sustainable."

But there are a few bottlenecks in the industry. "There are 30 co-ops in the country and they need to be rationalised.  We need to put that at the centre of the restructuring of the dairy industry so it becomes efficient," Smith argues.

Moreover, he has some advice for the new chief executive of the Irish Dairy Board. "He needs to keep on top of industry trends and feed it back into the system."

Non dairy delights

If the dairy sector can look forward to a healthy future, the non-dairy sector faces a much more challenging environment. Irish beef farmers have been squeezed heavily over the past few years on the back of increased competition from lower cost producers in Argentina, Brazil and other emerging markets.

The argument put forward by the farming community in Ireland is that it is not a level playing pitch. Brazil does not have to comply with the tough regulations imposed by the EU on the use of growth hormones and other artificial stimulants, says the Irish farm lobby.

Recently however, developments on the world market point to a possible upturn in the sector for Ireland. Argentina has pulled back on the amount of beef it is pumping on to the world market over concerns that a domestic shortage could trigger an inflationary spiral.

Smith is adamant that the way forward lies in selling Irish beef as a high-quality product based on an environmentally sustainable model.

"We export 90% of our beef predominantly into the EU. It is absolutely top class. But what we have to do is put more investment into branding Irish food. That way, we can increase the value by about 15-to-20%."

There is a domestic factor that is making the industry uncompetitive, say farmers, and that is the cartel system operated by the meat processors. Larry Goodman, Dawn Meats and Kepak control roughly 70% of the meat-processing industry in this country.

Farmers argue that this stranglehold on the market has created an uncompetitive environment and kept prices artificially deflated.

But a source close to the sector disagrees. "There is a perception among farmers that this is the case and that there is a cartel in operation but, in reality, it is the complete opposite. These guys [Goodman, Dawn Meats and Kepak could not agree on the time of day. Ultimately, it is the retailers who hold all the power."

What binds the dairy and non-dairy sectors is the need to move up the value chain and branded goods. There is so far not enough consensus between the vested interests on how this should be achieved. 

Food security

EU demand now exceeds supply

The EU has gone from being a surplus producer of agricultural produce to a situation where demand exceeds supply. The issue of food security has come on the agenda for the first time in a generation.

The recent volcano eruption in Iceland clearly highlighted how easily the global food-chain supply can be disrupted.

But the problem of increasing the food supply in Europe involves the politically thorny issue of the Common Agriculture Policy (CAP). Opponents of CAP claim that it is a huge waste of taxpayers' money and goes against the spirit of the free market, on the basis that it provides subsidies to farmers.

In Ireland, it takes the form of a single farm payment. The average single farm payment is around the €10-12,000 region. But that hides massive variations. Some farmers are getting as much as €400,000.

Payments are based on the level of output over the years 2000 and 2001, although that is now up for review with new base years used for a recalculation of payments. The new payments are set to commence in 2013.

The IFA's Pat Smith defends single farm payments on the basis that they are good for consumers. "CAP has to be retained. If we didn't have CAP, production would collapse, family farms would collapse and we would have no short-term solution.

"The consumer wins from CAP because there would be huge volatility in prices without it. There would not be the quality and choice without it either. Thirty years ago, households spent 30% of their income on food, today it is just 13%, so CAP has worked."

Food processing sector 

Government needs to plan a strategy

When the Government-commissioned Telesis Report was released in 1982, it recommended that economic expansion should be predicated on developing three industries, the three Fs: forestry, fishing and food. Of the three, food was seen as having the greatest potential.

But if the agriculture sector in Ireland is to have a viable long-term future, then there has to be a thriving food-processing sector that will create the value added component.

But Ibec's Shane Dempsey says that the country's cost base is severely hampering efforts to develop the sector. "Energy costs are 27% above the EU average, although recently the National Competitiveness Council has said that these have come down to 7% above the EU average. But that is still not good enough. We are a small open economy."

Dempsey argues that what the food processing sector in Ireland needs more than anything else is planning at Government level. As it stands, responsibility for developing the sector is falling between the Department of Agriculture and the Department of Enterprise, Trade and Innovation, he says.

He wants a Taoiseach's clearing house set up that will have both departments, relevant State agencies and industry bodies focused on how best to develop the food industry and how to promote the Brand Ireland logo abroad.

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