Monthly Archives: September 2014

TO REGULATE OR NOT TO REGULATE

The calls for a Regulator for the Irish beef sector intrigue me. I am just not sure what a Regulator can really do in a country [and an EU] where the free market rules and there is thus little that can be controlled when it comes to created-within-the-rules trading imbalances.

The simple fact is that there is a major distortion within the trading relationships within the food supply chain. They have come about with the rise of the major supermarket retail chains to a point where a handful of buyers dominate the market. They have grown up within a legal structure and it appears that there is little way within competition law to curtail their dominance. For the Irish beef farmer there is also the added complication that the intermediate stages of the supply chain are similarly dominated by a few meat processors.

I have noted the calls for a Regulator to bring greater transparency to the supply chain. Then I ask myself how easy is it to get commercial companies to disclose internal management data? I suppose a Regulator can establish a way to determine standard costs for the various aspects of the supply chain and thus model who gains what from the processing and retailing of meat. It would be interesting to see if it shows that there is excess profit taken per carcass when it comes to those activities that happen between farmer and retailer. It may not.

There has been recent news about Tesco and its current difficulties. It concerns me that the Irish beef sector is over-exposed to Tesco as a sales outlet. It concerns me that there is too much talk about supplying Tesco. If, however, one considers that the likes of Waitrose have a British-beef-only policy one soon realises that Ireland is having to sell into the lower end of the market because it is Irish. Hence, I cannot understand why so much promotional emphasis is placed on the generic word ‘Irish’. The power of Tesco within the market means that they have a major influence on the Irish beef sector but I am not exactly sure what an Irish Regulator can do to persuade them to become more benign . Worse, with the current pressure on profits at Tesco, there is little to suggest that trading with them is going to get better any time soon.

Another complaint I often read is that the proportion of the final retail price received by the beef farmer is falling. In light of the fall in profits of the aforementioned retailer is this any great surprise? I also suspect that it is a benchmark used by the accountants within the supermarkets and I also suspect that beef receives a higher proportion of the final retail price than many of the thousands of other products on the retail shelf. Within the context of this benchmark and, bearing in mind that we are talking accountants and not farm management economists, one can expect the squeeze on beef suppliers to continue. If supermarket price wars intensify in the UK one cannot see the situation improving. A Regulator may be able to show that the Irish beef farmer is bearing an unfair burden but short of an appeal to consumers in the UK [who are already buying British] about fair trade practices I am not sure what a Regulator can do.

One may also like to think about this trading situation in the context of the apparent resilience of beef farmers to continue through thick and thin – it makes the supply of beef relatively price inelastic. Those within the supply chain also know that the CAP effectively subsidises the production of beef by supporting farm household incomes. To be cynical about it, the CAP payments are now providing a subsidy to the retailers in that they are able to source beef that may often be produced below the cost of production. Again, I am not sure what a Regulator can do about this other than to provide substance to the previous cost of production comment.

A Regulator can of course propose and introduce a Code of Practice. This, nonetheless, is likely to be voluntary. And have they been seen to be a great success elsewhere? To go beyond the voluntary is difficult and it will be hindered by the presence of the legal frameworks within which the commercial entities operate. To implement legal constraints on the trading practices of entities operating within the European Union food supply-chains could take decades.

One assumes that a Regulator could play an arbitration role between the processors and the farmers with regard to the operation of the payment schemes and the meeting of specifications. But then I cannot say I have heard many complaints about the way carcasses are actually evaluated within the context of the quality-specification/price grid itself. The complaints appear to be more about not being paid a quality bonus for animals produced on quality-assured farms; albeit it appears that having a quality-assured farm is not sufficient on its own to receive a bonus payment. This appears to be misunderstanding that has come about through the creation of a farm assurance scheme and then miss-calling it a quality assured scheme.

Numerous requests have been made to the Minister of Agriculture for a Regulator. As of today, he remains lukewarm about the idea. Apparently his alternative suggestion is to form producer groups of many thousands of farmers to enable them to trade together and redress the balance. One rational behind the idea appears to be that there are EU funds available to form such groups. I would, however, suggest that having an available grant is not a reason for forming groups. Good business decisions are not made on the basis of chasing grants; although one is becoming aware that grant chasing is something of a national pastime in Ireland.

A concern I have is that the creation of producer selling groups is focused on continuing an antagonistic situation between farmers and processors. If one concludes that the current beef crisis is in part due to a market information failure with respect to fully understanding and transmitting changing specification requirements back to the farmer, will producer sales groups actually address this situation? It may if they also take on the role of market research but, ultimately, the groups will still be at least one step removed from the retailer [if it is they who determine specifications] and two steps away from the actual final consumer of beef. Will an extended antagonist trading relationship actually improve the flow of market information?

I would like to see a movement towards producer groups but not on the basis of seeking to consolidate sales and redressing the trading relationships alone. I would prefer to see the producer groups created around a determined product rather than just a regional grouping of farmers that produce Irish beef. This is not least because of the continued over-emphasis being placed upon the use of an Irish brand; partly because it is of little value in the UK market and partly because, in a wider context, ‘Irish’ does not actually impart any particular quality characteristic on the product. ‘Irish’ branding is about selling rather than marketing.

One was also hearing this week about the success of the Irish Aberdeen Angus producer group. It was reported that it had benefited its 8000 producer members to the tune of Euro 2.8 million. That is, however, only Euro 350 per member. I would also like to know if this is an increase in sales revenue or an increase in bottom line farm income. As a farm management economist I would like to see what the benefits and costs are so I can reach a fair conclusion in terms of the bottom line benefits but alas seeing such information is far from common place within an Irish agricultural press that often falls short of robust farm management economic analysis.

There is, however, rather more to developing a producer group than one might think. One cannot doubt the success in recent years of the Aberdeen Angus and Hereford groups, both in the UK and Ireland. I do, however, ask whether they have been driven by those wishing to first sell AA or Hereford genetics as opposed to selling AA or Hereford beef. If it was the latter, why have the schemes been built upon using a registered sire and, hence, qualifying cattle for the schemes that are only 50% purebred? Such an approach has, however, clearly been successful in enabling the quantity of qualifying branded beef to be made available to the markets.

A question I would like the answer to nevertheless is to what extent has the volume of available AA and Hereford scheme carcasses influenced the retailers carcass size specifications? Has the rise of the ‘traditional’ breeds within the retail environment been partly responsible for the recent carcass size specification reductions? If so, have the AA and Herford schemes had an unforeseen consequence for the many who produce beef from the continental breeds?

Further, to what extent can the AA and Hereford schemes support beef export developments into, in particular, the USA. Are not both breeds already well represented in the beef lots and on the grasslands of the USA and also sold under similar breed-related schemes, albeit I have heard said that any cattle that are black may be considered to be Aberdeen Angus.

I know that an immediate response to the above comment will be that beef sold into the USA will be branded as Irish and grass-fed. The latter is, however, a pretty vague term that is far from defined in Ireland whereas it may well already be more clearly defined within the US market where grass-fed beef is on the rise. It takes more than blarney [and right now that is what I consider the use of grass-fed to be] to create a long-term market with sophisticated, informed consumers and vague claims are unlikely to cut it. If anything they will be detrimental as they become seen as what they are, sales talk that is not underpinned by any clear definition.

To come full circle to the idea of a Regulator, maybe one role a Regulator could have is to ensure that there is integrity within the Irish beef sector in terms of how beef is labelled and presented within the market to the consumer and the claims made about it. The future is about  products that the consumer can trust and that means that any claims about premium-quality characteristics have to be fully justified. It is not about branding and selling generic Irish beef as premium, it is about creating genuinely premium products [and for beef that is done first on farm] that have a complete and transparent marketing story behind them.

If one is to go down the producer groups route, the author’s preference would be for them to be created around the supply of clearly defined products. Ideally they should also be products that are unique and ones that the producer group can control the volumes of through a certification scheme. The parameters used for defining the products may be production related [say clearly defined grass/forage fed and suckler reared], breed related, meat quality related [say low in fat and/or low in cholesterol], environmentally related [organic or, for a wider market, conservation farmed] or heritage and/or location and/or landscape related. These parameters should define the product and should form the multi-characteristic, ‘multi-functional’ foundation of the product. The characteristics then inform the marketing story presented to the final consumer.

And finally to link back to asking the Minister to do something to help the Irish beef industry. Within a free market environment one of the few things that the Minster can do is influence how the government allocates its resources to industry support mechanisms, be they under direct Department of Agriculture control or indirectly as agricultural-industry-support quangos. There is a not insignificant agricultural support spend by the government in Ireland and I for one would prefer to see a proportion of these funds spent on supporting farmer producer groups to define new farming- systems-linked products, to evaluate their potential and to create routes to markets to deliver them to an informed, premium-quality-focused consumer. Only then may we see a situation where beef farmers can produce and sell the premium beef products that can properly reward them for their investment, time, husbandry and management skills.

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IRELAND’S LONG-TERM ROLE AS A FOOD PRODUCER

I spend more than a little time thinking about the future of food production and agriculture. It has just a part of what I do. It is about reading and listening and rationalizing all manner of information. It is not about economic modelling as that in itself is too constrained by limiting the parameters that have to be set to create a working model. It is mainly about logical thinking.

Hence some thoughts on one of my favourite subjects, where are the food and farming sectors going; not least when faced with the projected continuation in population growth. And what role will Ireland play in supplying this expanded human population of say nine billion by 2050.

Personally I do not buy into the idea that the market will just absorb whatever food that is produced. I also do not buy into the simplistic assumption that population growth will be accompanied by an exploding middle class with greater disposable incomes to spend on more ‘sophisticated’ food products. Limited resources and their rising prices will have an impact.

It is inevitable that within the 2050 time frame, ‘industrial’ agriculture will play a major role in food production. The presence of vast mono-cultures that produce oils and cereals are as likely as not inevitable for the foreseeable future. Likewise industrial production of lower-quality [at least from eating and animal welfare perspectives] animal proteins are a near necessity for feeding the great urban populations. And as to fruit and vegetables, we will continue to move them around the world until such a time as their transportation becomes too costly.

So where does Ireland fit into this largely industrialized food environment. Clearly from reading its recent national agri-food strategy, it has pretentions to being a global player. Equally as clear from a rational evaluation is that it does not have the resource base and farming scale to do so.

My viewpoint is that Ireland’s primary attention should remain on the UK and the EU. Within these market it needs to have a twin-track approach that increasingly focuses on genuine premium products whilst recognizing that it still has to find a home for its farm production that is best suited to what one can call premiumised commodities. The latter is a recent success story but it is only a stage in the long road from commodity producer to product creator.

Beyond the EU the focus should be on producing premium products for North America, the Middle East and the premium niche markets in countries like China, India, Brazil and Russia. With the latter the word niche cannot be under estimated. The idea that has been so heavily promoted within recent agri-food strategy that Ireland can be a major player within the global food markets is a flawed one and one that has led to the serious strategic misdirection of recent years. It is a flaw that Ireland’s farmers will pay heavily for in the immediate future.

The UK is the author’s home market and it is one that he follows closely. Although Ireland’s beef farmers have struggled in recent months due to, in part, the UK market’s desire for British beef first, changes within the food markets in the UK should be far from negative for the Irish in the long term. It is about taking a positive approach to creating the right products for the market.

Recently I found myself watching a UK television programme on the how we will produce food in 2050 for the projected nine billion human residents of the planet. Two things caught my attention. First was the idea that food could be reduced to its basic components and provided in the ultimate food-is-fuel form. As was highlighted, this of course ignores all of the other pluses that food consumption brings to the lives of many of us humans. Second, the TV show highlighted various initiatives to grow food within the city environment. The latter I found more appealing but one realizes that it has limitations, chiefly with regard to traditional protein foods.

The production of vegetables and some fruit and herbs certainly appears to be a lifestyle choice these days. True it is limited by land access within the modern urban environment but one reads of long waiting lists for allotments and  the creation of new allotments on the urban fringes. However novel solutions for community gardens in all sorts of locations and ‘high-rise’ growing seem to be moving ahead. When there is a demand it is surprising the ingenuity which people apply to finding solutions. Local growing seems to a problem that people are solving.

I can see this trend as being important to Ireland, located as it is as Europe’s off-shore, clean-environment food-producer. My rational is that food-source awareness and the desire to grow-your-own will continue to increase. It is not necessarily about growing cheap food; it is about knowing your foods’ origins and reconnecting with that most basic of activities; producing it. If you cannot do it yourself, it is about keeping it local [but within the context of availability and affordability]. In this respect Ireland, adjacent to serious northern EU markets, is well placed.

As an aside, what is the demographic of these people? I suspect that they are often towards the upper end. I also suspect that they are creating a trend that others of a similar ilk around the World are likely to follow. Hence, create a product for one market and you may well create one for others. With Ireland’s small-scale, family-farming structure these are the customers that these farmers need for their products if they are to find a sustainable future for themselves.

In urban locations solutions for grow-your-own are possible but they are likely to be suited only to the production of, roughly in order resource need, salads, herbs, vegetables and fruits. The limitations on land access means that the production of proteins within the urban environment is difficult; at least within the context of most protein-providing foods as we now know them.

The target for Ireland should, therefore, be to produce a range of minimally-processed dairy and meat products that are highly complementary to what can be self and locally grown. They will not be grown as locally as many would desire but they could be grown in a fashion that is highly sympathetic to the desires of the issues-aware food consumers. The author believes that the farming systems required to create these products would also be very much in tune with the farming communities of Ireland and the resources that they have available to them.

The fragmented land and small farms are often cited as a disadvantage to Ireland. They are if you try to compete head-on with the global players that have vast farming resources. But are they such a disadvantage if you are producing and selling products that have a provenance that highlights their family-farming origins? Especially when the food products’ characteristics also encompass a multitude of other characteristics that appeal to the issues-aware consumer?

One cannot deny that much of the growing and rearing of food in an ‘alternative’ way can be labour intensive [it is not an issue where growing is a part of a new lifestyle] and this will be a hindrance to those who wish to develop local food products in a rural UK where housing prices are out of reach of those who may wish to work in agriculture and food. It is less so in Ireland. The consolidation and ‘industrialization of UK agriculture in comparison to Ireland can be, if one prefers to think beyond the obvious, another advantage for Ireland’s farming and rural sectors.

There are many market and resource-linked factors that can provide a positive outlook for Irish agriculture and rural Ireland. Exploiting them will however require a much greater degree of imagination when it comes to creating agri-food strategy than is being employed at present.

So where does this place the more immediate future for the Irish agri-food sector? It is about embarking upon the transition from being focused on ‘premiumised’ commodities to creating less-processed, simpler, natural food products. It was where agri-food policy was focusing ten years ago before it was hi-jacked by the volume-expansionist policies of Food Harvest 2020. This will be a slow process as the resources required to support the transition have been misdirected in recent years. In the meantime, it is about developing a twin-track agri-food strategy that recognizes that premiumisation of commodities is here to stay for a long while yet but that their production is not going to provide a sustainable future for the many smaller-scale Irish farmers who would actually rather like to remain within food production for the duration.

Creating the second track is imperative. It is that which will develop from the farm itself the food products that will be demanded by the issues-aware consumers of decades to come. Ireland is very well located to provide for this market. It also has a positive international image. It does not, however, yet have the products to supply the market and these products will not come through branding alone. They have to be created on farm and in rural communities. But first their future presence within the markets requires a seismic change in strategic thinking.