Irish Agricultural Development (Paper)

Irish Agricultural Development

(Paper primarily drafted by Teagasc)

Introduction

The economic, market and policy environments for the Irish agri-food sector have continued to change rapidly since the publication of the Agri Vision 2015 strategy in 2004.  Current evidence indicates an increased potential for change and volatility in the period up to 2020. Therefore, the requirement exists for an on-going appraisal of the national vision for this nationally important sector and the strategies needed to deliver it.  

Evidence indicates that the markets for existing and new food products and for other land-based goods and services will increase. However, major competitive, policy and regulatory challenges continue to emerge rapidly. 

The 2008 Teagasc Foresight report, which built on Agri Vision 2015, set out a shared vision for the sector as being:

• Growth-orientated
• Providing sustainable solutions to the security of food supplies
• Providing an expanded range of agri-environmental goods and services
• Contributing alternative solutions to energy needs
• Contributing to sustainable rural development. 

This is the vision for the Knowledge-Based Bio-Economy which encompasses agriculture, forestry, fisheries, food, drink and tobacco industries. There is recent national policy support for this vision. The importance of the sector is recognized in the Government’s framework document for economic renewal – Building Ireland’s Smart Economy.  The approach to economic development set out in the document “complements the core strength of our economy in the use of natural resources in the agriculture, forestry, fisheries, and tourism and energy sectors.” 

The preferred outcome is a responsive, fit-for-purpose national agri-food sector with the capacity to maintain and develop its contribution to both the wealth of the country and to the quality of life of our citizens. This will be built on the continuation of a strong agricultural production base that is competitive and sustainable; contributes to a secure and sustainable European food supply; is compatible with the urgent requirement to reduce greenhouse gas emissions; contributes to future energy needs; addresses environmental concerns; is able to respond to market demands; and helps sustain strong rural communities.

A Strengths, Weaknesses, Opportunities and Treats (SWOT) analysis approach is used to provide a platform that will assist in exploring the options and strategies required to deliver the shared vision for the sector. 

SWOT Analysis

The initial SWOT analysis for the Agriculture and Food Processing sectors (Agri-Food) is presented below. It is not exhaustive, but does provide a working framework to consider some of the key elements and their implications.

AGRICULTURE

Strengths	Weaknesses
Recognition of the key role of agriculture in the national and rural economy Strong support from EU/exchequer for knowledge support and a proven record in knowledge support for the sector Strongly branded green image of the sector with high welfare standards and disease- free status Comparative advantage in grass- based animal production systems	Small farm size and fragmentation with consequences for commercial viability and ability to cope with market volatility Age structure and professional image of the sector Scheme and regulation driven and weak links to consumer/market signals resulting in the absence of market-based profitability in key enterprises High entry and expansion costs
Opportunities	Threats
Food security is a key global concern New productivity gains from innovation - application of new and full exploitation of existing technologies New bio-product opportunities in the post- petroleum era Opportunity for expansion - removal of dairy quotas post-2015 Environmental goods & services delivered through the management of the natural resources with payments linked to this role	Increased market price volatility CAP post 2013 and WTO agreement may result in less favourable policy and market regime Impact of environmental and climate change mitigation measures Impact of climate change on productivity Food safety/ animal and crop health issues Increased competition from low cost producers Dominance of multinational retailers with shift in distribution of rewards throughout the food chain Spread of new animal diseases

FOOD PROCESSING

Strengths	Weaknesses
·         Strong indigenous companies, many with a significant overseas presence ·         Investment by international food companies in Ireland, i.e. infant milk formula manufacturers ·         Growing investment in dynamic sub-sectors (drinks, ingredients, prepared foods, infant formula) ·         Strong support from EU/exchequer e.g. export refunds, investment grants ·         High quality public R&D support system ·         Export orientation of firms ·         Low corporation tax rates ·         Experience in dealing with large (UK) multiples	·         Over dependence on commodity products ·         Moving the products up the value chain ·         Processing sector fragmented and the absence of scale compared with world class competitors, especially in prepared foods ·         Seasonality and quality of raw material supply ·         Over dependence on UK and volatile third -country markets for some products ·         Weak R&D / product development capacity in many companies ·         Human resource capability gaps and weaknesses ·         Organisational weakness of SMEs and micro-enterprises with an over- emphasis on production of low technology products ·         Control of much of the retail sector by a limited number of major operators
Opportunities	Threats
·         Growing international market for food, drinks, ingredients etc ·         New high value market opportunities from changing consumer demands - e.g. functional foods ·         Exploitation of green island brand ·          Productivity improvement and product development through innovation ·         Mergers creating opportunities for economies of scale ·         Freer world markets opening export possibilities.	·         Growing competition on international markets ·         Pressure on margins and rationalisation of suppliers  arising from retail concentration ·         Growth in private labels is threat on home market  ·         Changes in currency exchange rates ·         Cost and difficulty of establishment for new firms. ·         Dependence on export subsidies ·         Growing regulation (and consumer demands) on food safety, environment and animal welfare

Issues Arising from SWOT Analysis

Food Security -. The world’s population will have grown by 50% – from just over 6 billion today to over 9 billion – by 2050. World food production will have to more than double to meet the increased demand. In addition, economic growth will lead to rising per capita incomes, leading to a shift in diets, from ones based on carbohydrates to ones with higher protein content.  In addition, there are growing demands for new food types, particularly those linked to health.

Ireland has a high rate of self-sufficiency with most of its agricultural produce exported e.g. over 80% of beef and dairy products are exported. Our branded image, as a green island with grass- based production systems, is a major competitive advantage. This is particularly so in the case of dairy production.  In 2005, net foreign earnings of the bio-sector, comprising agriculture, forestry, fisheries, food, drink and tobacco industries, amounted to 32 percent of the total net earnings from primary and manufacturing industries and represented one-tenth of the Irish economy. Rising global demand for food and growing concerns regarding food security means the long-term opportunities for agricultural commodity markets are positive. 

The world’s capacity to deliver food security requires a combination of increased use of the natural resources and scientific advances in the technologies used to sustainably exploit them. Ireland’s recent investment in R&D, particularly in the biosciences, removal of quotas post 2015 and branded green image offer development opportunities for the commodity food production sector.  This is backed up by an internationally unique applied research and knowledge transfer capacity. The importance of this structure in delivering the expected return on the investment in the sector was emphasized in the recently published second SCAR Foresight report on the European agri-food sector.

Nearer to home, we cannot take our own national food security for granted. The impacts of change are already evident. Global food prices are prone to increasing volatility and, in response, some countries are engaging in defensive trade tactics that disrupt normal market behaviour. Increasing price volatility impacts directly on the profitability of Irish farming and disruptions to normal trade patterns could indirectly impact Irish agriculture, for example, in terms of a constant supply of animal feed inputs. The impact of these factors on our national food supply into the longer term should not be underestimated.

A ‘business as usual’ model is not what is required if Irish farming and food is to prepare for a viable long-term future. A new strategic vision for our entire food supply system is needed, one that will help avert the serious threats and take advantage of new opportunities. We need to bring together all of the interests in government, State agencies, supply network and consumers in order to develop this new vision and the strategies needed for implementation. The resulting policy framework will need to be developed in close collaboration with the other EU Member States.

Emerging Markets - Consumers in developed economies are demanding greater variety, increased convenience, higher quality and green labelled food products. This is being driven by a more educated consumer who increasingly appreciates the link between diet and health/disease. A key element of national food strategy is the development of a dynamic ‘foods for health’ (functional foods) sector underpinned by sound scientific knowledge.  There is an opportunity for Irish food and beverage companies to establish a lead position in this emerging market.

Many of Ireland’s food companies are export oriented and have expanded internationally; there has been significant FDI investment from international food companies and both the domestic and FDI companies have considerable marketing experience.  FDI companies are increasing their investment in functional foods and are strongly supported by public research organizations. Apart from supporting indigenous companies, a key element of national strategy is to build centres of scientific excellence that can provide an infrastructural base for new high technology foreign investment.  There is already a common approach between Teagasc and Enterprise Ireland in attracting specific inward investment initiatives. The build-up of scientific capability through large national and international R&D programmes and collaborations, the linkage of Teagasc with Irish universities and the successful integration of medical scientists into a food agenda, have provided the knowledge base and intellectual property (IP) platform for this development.

 

Bio-based products form part of new emerging markets. The recent Irish White Paper on sustainable energy suggested that we should sign up for 5.75% substitution of transport bio-fuels by 2010, replacement of 30% of the peat used in electricity generation by biomass by 2015, and 20% of electricity from renewables with 800 MW from combined heat and power plants (CHP) “with an emphasis on biomass fueled CHP” by 2020. This is in line with European Commission proposals that by 2020 we should have a 10% substitution of liquid bio-fuels and that 20% of all energy use should be from renewables.

Bio-products will contribute alternative options for petroleum-based products in the coming decades.  Plant products have the potential to replace many of the petrochemical-derived inputs used in manufactured goods. While this offers new opportunities in the energy, chemical, pharmaceutical, plastic and packaging sectors, it must be acknowledged that there is a trade off with the objectives of global food security.

Many of the weaknesses and threats to the food processing sector are also reflected in the agriculture sector, including:  scale, fragmentation, human resources capability, high entry costs, seasonality of supply, dependence on commodity markets, volatility of markets and retail rationalization. 

The challenge is to develop and implement the strategies that will deliver a smaller more focused group of food and bio-processors, linked geographically with the producers to process, transport and market high quality and high value products competitively.   The key to success is the development of the necessary knowledge management structure.

Maintenance and enhancement of biodiversity in the landscape will become a more intrinsic component of farming. The objective of biodiversity policy is that biological diversity must be protected and managed for future generations to enjoy. Ireland’s island status and geographical position at the edge of the European continent have given us unique habitats, ecosystems, and wildlife species of international importance. There are also significant areas of high nature value grasslands.  Identification and maintenance of areas of high environmental and ecological interest can become a source of income for farmers on the basis of providing environmental products and services.

Climate Change- An Increasingly Urgent Challenge

Under the terms of the Kyoto Protocol, global emissions must be reduced by an average of 5% during the period 2008-12, relative to 1990 emissions. Nevertheless, the EU elected to reduce emissions by 8%, with Ireland’s emissions limited to 13% above 1990 levels. However, national emissions had increased by 25.5% in 2006, from a baseline of 55.53 m t of carbon dioxide (CO₂) equivalents to 69.77 m t. Despite having largest sectoral emissions (27.7% of national emissions), total emissions from agriculture have decreased by 3% relative to 1990 levels. In contrast, the transport sector has increased emissions by 160% between 1990 and 2005.

In order to meet national emission targets, Ireland will utilise the "flexible mechanisms" of the Protocol which allow Annex I economies to meet their emission limitation by purchasing carbon credits. These can be bought either from financial exchanges, from projects which reduce emissions in non-Annex I economies under the Clean Development Mechanism (CDM), from other Annex 1 countries under Joint Implementation, or from Annex I countries with excess allowances.

On 23 January 2008, the EU Commission announced a package of proposals on climate change and energy measures, including proposals for burden-sharing of the agreed EU greenhouse gas and renewable energy targets for 2020. For Ireland, the proposals involve a 20% cut in emissions from the non- emissions traded sector (ETS) by 2020 compared to 2005. In the event of a global emissions agreement, this target would rise to 30% of national emissions. As agriculture comprises 40% of non-ETS emissions, this agreement could require a cut in emissions of between 4 and 6 Mt CO₂-eq by 2020.  This raises a number of important issues for the agri-food sector, including:

• The conflict between global requirements for enhanced food security and increased food production, on the one hand, and reduced emissions from the agriculture sector, on the other. 
• As well as increased food production, policy makers are increasingly looking to the agricultural land base to produce more renewable energy to meet current and future targets.
• Agricultural production is both global and mobile, and decreases in agricultural production in Ireland or the EU would more than likely be compensated for by increased production elsewhere.
• The goal of reducing emissions ands meeting energy targets could compromise our ability to profit from opportunities arising from the removal of milk quotas.
• Challenges arise in both accurately quantifying the effects of mitigation strategies and inputting these strategies into national inventories if the sector is to engage in trading carbon credits.
• Changes in global warming potentials which will come into force post-2012 will increase by over 20% for methane, while reducing marginally for nitrous oxide. This could prove unfavourable for the future emissions profile of Irish agriculture.

Competitiveness, Sustainability and Innovation

The aim of the Lisbon Agenda (March 2000) is to make the EU "the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion, and respect for the environment”. 

In 2001, the European Council added the environment to its economic and social reform pillars to create the ‘Gothenburg Agenda’, ensuring that environmental protection is now systematically integrated into all policies of the European Union. Ireland’s environmental strategy reflects this Gothenburg Agenda and identifies the main challenges facing Ireland as:

• Limiting and adapting to climate change
• Tackling air pollution
• Protecting water resources
• Protecting soils and biodiversity
• Sustainable use of natural resources.

Agriculture, forestry and maritime activities affect our water, air, soil and biodiversity, and the Common Agricultural Policy (CAP) identifies the protection of these natural resources as a priority.

These EU policy drivers establish important elements of the policy context for the development of the Irish agri-food sector.  They now have a focus on competitiveness, sustainable economic growth and environment protection delivered by knowledge management.    The outcome of the reform of EU budgets and CAP post 2013 will have a significant bearing on the shaping of the agriculture sector.  It is impossible to accurately predict the actual outcomes, but it appears inevitable that there will be a decline in both the overall agricultural budget and the average levels of direct supports to agriculture.  Future iterations of these policy mechanisms are likely to be increasingly evaluated in terms of their environmental effectiveness and economic efficiency. Such policies will continue to be influenced by societal preferences, although more affluent societies typically have greater demand for environmental quality and related amenity values.

Significant scientific progress has been made in understanding how our agriculture and land use activities impact on profitability, competitiveness and the natural environment. However, for the agriculture and land use sector, the natural variability of soils, unpredictable weather, different land use systems and enterprises, regional contexts and the varying management levels continue to create significant challenges for the development of a sustainable competitive agriculture. The key point is that a “one size fits all” approach, commonly applied in other industrial sectors, is not entirely suitable for agriculture and land use systems.  They require location specific adaptations of the broad production models to deliver both competitiveness and sustainability.  For example, the knowledge requirements and skills of intensive dairy farmers are different in the south/west and north/west regions.

To complicate the process of envisioning the 2020 agri-food sector further, there is an array of challenges at national and international levels that are constantly changing. Some of these, food security and climate change, have been referred to above. Others include a shift to more market focused activities, herd and crop health and product safety.   

The Irish Agri-Food Sector – Development of a Viable Industry

There is a need in the 2020 strategy to address the reality that none of our main agricultural production systems are currently returning a positive net margin to the primary producer. Irish farming is dependent on income support and REPS payments to generate a profit margin. REPS is being phased out and direct payments are likely to be drastically different for Ireland after 2013. Any future strategy must address issues relating to the scale of farm enterprises in Ireland, barriers to entry to the sector, and issues arising from the conflict between climate change strategies and expansion opportunities in dairying. Scale will be a key component of profitability at farm level, as will increasing enterprise specialization, while land prices are likely to continue acting as a barrier to expansion. Consideration needs to be devoted to the further development of different land ownership and management models (such as contract farming).

Data from the Census of Agriculture shows that there were approximately 136,000 farms in Ireland in 2002. These have been classified into three groups based on their economic viability and their longer-term sustainability (Table 1).

• An intensive farm is defined as one having (a) the capacity to remunerate family labour at the average agricultural wage, and (b) the capacity to provide an additional 5% return on non-land assets.
• Transitional farms are those that are not economically viable but where the farmer or the spouse works off the farm. Although these farms are not economically viable as businesses, the farm household may be sustainable in the longer term due to the presence of an off-farm income.
• Vulnerable farms are neither economically viable nor sustainable.

Table 1: Current State of Farming Population

Farm Group	2002
Intensive Farms (%)	38,700 (28)
Transitional (%)	37,200 (27)
Vulnerable (%)	60,400 (45)
All Farms	136,000

Source: Irish National Farm Survey (2002) and CSO Census of Agriculture

Only 28% of the farming population could be considered economically viable farm businesses.  A further 27%, although not economically viable, could be considered transitional in the medium-term because of the presence of off-farm income. Finally, almost half of all farms, 45%, are considered to be vulnerable.

A review of these data over time shows a gradual and persistent decline in total farm numbers in conjunction with an increase in the proportion that are transitional due to the presence of an off-farm income in the household.  The recent decline in the opportunities for off-farm employment will impact on these trends. However, the general progression towards fewer intensive and transitional farmers will continue.  There will be an increase in the number of vulnerable farmers who will continue to exit from farming altogether.  

It  is clear  that the number of intensive farmers who derive their income from full- time farming will decline.  It has been suggested that there will be in the region of 20 to 25,000 of these, with the majority involved in the dairy sector.  They will provide the majority of food and other bio-products for the processing sector.   Intensive farmers will be required to comply with the 2020 equivalent of good farming practice and cross-compliance, but will rely on the open market for most of their income and only receive some payment for provision of modest levels of agri-environmental benefits. 

The number of transitional farmers will continue to decline with profitability driven by the provision of agri-environmental products and services.  However, it is likely that part of their income will derive from both off- farm employment and the sale of food or bio-products arising from the management systems to promote biodiversity.  The context for the future importance of agri-environmental products and services to farm incomes is set against the current background of Irish farmers being allocated almost €1bn in REPS up to 2013. It is probable that other policy mechanisms emerging in the post 2013 CAP reform will be increasingly aligned with the delivery of agri-environmental products and services. Society will continue to pay for these agri-environmental products and services, but will demand greater accountability for their environmental effectiveness and economic efficiency.

Food Processing:  The sector must aim to achieve global competitiveness through efficient and sustainable processing, consolidation, energy efficient technologies, maximum recycling of by-products and assured quality and safety.  An increase in the output volume of dairy products focusing on milk powders, cheese and ingredients for infant formula must be a critical goal.  The sector must seek to add value to meat as a raw material, especially from the dairy herd, and ensure the safety and green image of the food chain. 

High value added food sector: This sector of food processing is fast moving and international.  It is innovative, continually improving the technologies used for production, processing, distribution and preparation. Supply chains are also constantly changing and considerable attention is given to intangibles such as patents, brands, provenance and traceability.

Export/Market Orientation

Further reform to the CAP and WTO agreement will result in a more open market- driven agri-food sector. While this may cause short- term shock to the industry, it is to be expected that in the medium –to- long term, it will result in a more robust and dynamic industry able to respond more rapidly to consumer needs.

This optimistic outlook is supported by the Strategic Priorities 2009 – 2011 report of An Bord Bia, which demonstrated that the value of exports from the sector increased from €8,299m in 2006 to €8,681m in 2007 and forecast growth to €10,000m by 2011. While this report was framed in the economic context that existed prior to the current global economic downturn, it is reasonable to predict that with prudent management the industry could achieve this level of activity by 2013.   

Innovation/Technology Transfer/Upskilling

The years between now and 2020 offer an opportunity to move the agri-food sector towards a sustainably competitive agri-food bioeconomy. This achievement will be dependent upon the development of integrated systems of knowledge acquisition, innovation and dissemination that will evolve to incorporate new understanding.  The rapid transfer of knowledge is particularly important in times of significant change, such as modified market conditions and policy reform.

An important challenge will be the need to minimize the delay between knowledge generation and knowledge acquisition by the intended end-users. New initiatives will be required to enhance effective co-operation and dissemination.

Internationally, there is long-standing recognition of a need for improved communication between research communities and policymakers.  This requires a forum in which research  staff, agri-food stakeholders and policymakers can interact.  This should increase compatibility between knowledge innovation and policy needs. Early and frequent interaction will help to build productive professional relationships, and help better anticipate impending policy reform in sufficient time for research solutions to be developed. By working on shared problems and challenges, such strategic partnerships will build understanding, communication, and professional networks. The ultimate aim of such policy-oriented technology platforms it to provide the capacity for effective action.

The views expressed in this background paper do not purport to reflect the views of the Minister, the Department of Agriculture, Fisheries and Food or the Agencies whose activities are discussed.