Monthly Archives: December 2014

A TWIN-STRATEGY SOLUTION FOR IRISH AGRICULTURE

In my previous blog post I asked a rather pertinent question about whether the much-promoted Food Harvest 2020 strategy was actually delivering results given that success was being claimed on the back of a one dimensional performance measure, that of food exports achieved. It also appears to be acceptable to ignore the fact that the trade balance for food, beverages and agricultural inputs has gone nowhere and that much of the rise in food exports since 2007-09 can, largely, be attributable to market price rises rather than actions that were directly influenced by FH2020 strategy.
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With plans afoot to re-use the FH2020 strategy-establishing methodology for setting goals through to 2025, one has to express one’s concern for the validity of the approach used. We are also far from seeing the full implication of the FH2020 strategy and it is far too premature to be venturing forth with a new edition. If we wind the clock forwards 12 months, we may well be judging matters in the light of a fall in exports whilst also seeing farm income and cash flow crises across most Irish farming sectors. The latter can already be said to be present in the beef, tillage and pig sectors and looming large in the dairy sector but the judgement on FH2020 appears to ignore them.

One also has a concern that Ireland’s agri-food policy is prepared by a committee that is again going to be heavily weighted towards the agro-industrial complex that processes so much of the output of Ireland’s farms [one has the impression that agri-food policy is best left to those who have big business experience]. Although the original FH2020 document made many references to the importance of sustainable farm incomes and sustainable environmental practices, it is fair to say that the headline grabber was the expansion targets. They were easy to understand and easy to promote. Their simplicity certainly helped to generate a bandwagon of support for FH2020.

One cannot deny that there is a major role for the agri-food companies in processing and exporting Irish farm produce. The country has a history of seasonality with its milk production and being at a distance from its markets. This has led to a focus on commodity export rather than on consumer products. Its processing-export models have evolved to handle these issues. The sunset industry years for agriculture during the Celtic Tiger times only exacerbated the situation as farming became less relevant in a ‘modern’, very ‘first-world’ country. Hence, one cannot expect Irish agriculture and its processing sectors to change from [premiumised] commodities to premium food products anytime soon. Realistically, they will have to handle 80% of the produce from Irish farms into the distant future and for many farmers, supplying them will be the preferred and economic choice.

The question is, nevertheless, whether the large-scale processing for export model can deliver the returns needed to enable Ireland’s traditional family farms to survive, let alone thrive to the extent that the following generations will wish to make farming their way of life? The few good years post 2008 for agriculture and a rising awareness that food may not be the sunset industry after all has led to a renewed interest in agricultural education amongst the young. The author’s fear is that these new recruits may soon become the disillusioned generation as they realise that farming in Ireland in an environment where they are heavily subservient to the few major companies that make up the Irish agro-industrial food complex offers little of the lifestyle that they were expecting.

For the author, the crux of the matter is that by intention or not, the Food Harvest 2020 documents is an agri-food strategy for the agro-industrial food sector. Although many issues are highlighted it is the expansion targets that are the drivers behind FH2020. It rapidly became all about producing more and consolidating processing capacity to create economies of scale in the belief that this would allow Ireland to compete on the global markets. It expected the same from farming; even though it is known that Ireland’s fragmented land structure is pretty fixed.

Hence, at one end of the agri-foods business it was about expanding capacity to process more raw material whilst at the other end it was about trying to enable Irish farmers to consolidate to overcome their scale disadvantages with the World’s other exporters. The fact that the latter as a target was frankly delusional did not seem to enter into the equation; the operational scale of traditional Irish farmers is barely on the same planet as those to be found in the USA, New Zealand, South America or what can be implemented in locations like Eastern Europe.

The FH2020 strategy and the strategic approach of the major Irish agri-food exporting entities; which one could be forgiven for thinking are one and the same, has placed the traditional Irish farmer, four-square, in the path of the World’s major agri-food industries. It is not a healthy place to be. There is, of course, the comfort that the Irish milk and meat farming model can produce low unit costs of production, but that is another doubtful conclusion in that farm scale is too little to generate sufficient farm household in Ireland. The Irish family farm works with its small scale so long as there are other non-farming income streams [or product value-added] to supplement farming income. The family farm is a sound model within a vibrant rural economy and/or where the farm is able to operate close to the final consumer and obtain significant supply-chain returns. Neither is widespread in today’s rural Ireland.

A starting point for the development of any strategy is to work within the constraints that are imposed upon you. It is where the author believes the FH2020 approach was weak. A lack of analysis of the farm-level economics and the control of the primary farming resources [namely farmland, its ownership and its fragmented structure] resulted in the development of an agri-food policy that was not sufficiently focused on delivering a viable and sustainable return to the industry’s primary producers within the land structure constraints that currently minimise the economics of scale possible to the average Irish farm. The land market in Ireland is pretty immobile and consolidation slow. There are attempts to encourage and facilitate land movement but, essentially, one should ask whether that should be a primary objective within agri-foods policy given that the traditional Irish family farm is highlighted as a key aspect of rural life [not to mention its role in Ireland’s cultural heritage]. Any agri-food / rural development strategy [including the Rural Development Programme] needs to have as its first objective the preservation of the Irish family farm.

One of the earliest conclusions the author made when reviewing FH2020 was that Ireland needs to first develop a strategy for creating a sustainable future for the country’s family farms. As many farms will invariably need to have diversified income sources [a sound risk lowering strategy in its own right], it will also mean developing an integrated farming and rural policy. In itself, the issue of risk is an important one [and one that will feature in a future post] as is the oft mentioned one of price volatility; a problem that is actually exacerbated for the Irish farmer by the current agri-foods strategy. Is it by chance that an out-of-balance food supply-chain passes the price volatility within the global food markets onto the weakest link, the primary producer?

It is not that such issues are not mentioned in FH2020, it is just that they have become secondary to the expansion and farming cost-reduction elements of the strategy. Within an integrated farming-food-rural policy, smaller-scale, local foods processing has to be a core element. Again it is in FH2020 but with the support emphasis is on those small companies that can grow rapidly to become significant exporters; the emphasis being on increasing food exports and not on the role that smaller food businesses could play in the rural economy if correctly linked to genuinely premium food markets.

If one was to look forward twenty or more years, one would hope that Ireland is producing food for the top 10% of the World’s food markets. This contrasts to the present situation where realistically [and despite all the blarney about Ireland producing the best food in the World] Ireland’s produce hits say the 60-70% position in the food market. One justification for this statement being that top-of-the-market foods rarely come out of agro-industrial processing facilities. They are more likely to have their origins in small-scale, artisanal processing. They are also often protected by designated origin status and they may also have their roots in what may be called ‘disadvantaged’ regions [a plus for much of Ireland] as they are the places where farmers and local communities have worked out that they have to produce high-value products that generate income and employment from low production levels. Their remote region origins also mean they have to have the right value to shipping cost ratio. And often they also have to fit comfortably with the region’s image as the food products themselves are also tourism ‘ambassadors’.

A strategy is about having a vision and this is where FH2020 falls short. It falls short because its over-riding objective is not about how to create a sustainable family-farming-based rural economy. It is the lack of farm-focused economic analysis that means that it does not begin to address how to square the circle of global markets, industrial processing and smaller-scale, traditional Irish family-farming. Far from repeating the FH2020 exercise, the priority needs to be about developing a strategy for rural Ireland as opposed to one that undermines the future of rural Ireland.

The word ‘crisis’ seems to be linked to pretty well all farming sectors at present. One, nevertheless, wonders whether we are considering the issue correctly by looking at it in farming terms alone. Is it really a rural crisis because traditional Irish family farms can only survive as part of a wider thriving rural economy? It is about farming within the rural communities and not farming in isolation. In general, a viable and sustainable family-farming future needs both on and off-farm income sources. The question is, where are those income sources?

I have often stated that we need to be developing products in Ireland that are created in a fashion by which the value-added happens on farm and/or within the local community. This contrasts greatly with the wisdom of others who see value-added as an activity that takes place within a centralized, industrial-scale processing facility. Likewise when it comes to the much used term ‘innovation’; it is something that is done in-factory and most likely developed in the food science laboratory. The author questions if that is where true premium products are to be found; at least not in the context of premium products that can provide the necessary returns to farmers and rural communities.

As stated earlier, the author does not question the importance that the agro-industrial complex has within Ireland. It is, and will be, a necessity into the longer term. He does, however, question the excessive emphasis that is given to it, either directly or indirectly, through support given to reduce the cost of or increase the supply of its raw materials. One could also go as far as saying that there should be a separate agri-food strategy that is specific to the agri-food sector and all that goes to support it. It is largely dominated by a number of major companies and there should be total transparency about how Irish and, if relevant, EU tax payers funds are allocated in various ways to support it.

My review of FH2020 published in March 2014 effectively stated that Ireland needs a twin-track agri-food strategy. My view has not changed significantly in the intervening nine months and Ireland definitely needs two strategies. The first would relate [into the longer term] to say the 80% of Irish farm production that would continue to be processed through the agro-industrial complex. The second would relate to developing the other 20% as premium [in the top 10% of the World’s food markets] foods whereby the value-added created is directly related to on-farm production systems and/or processing on-farm or within the local rural community.

In the above scenario, the second strategy would effectively be a rural foods strategy. It would be about creating incomes for farming families and it would be about creating employment and income for rural communities [some of whom will most likely also be farming family members accessing off-farm income sources]. By its nature, the second strategy would be a de facto rural development strategy. It should also be integrated with environmental / landscape management programmes [especially where farming and food products can be linked to the activities required].

Such a holistic rural foods strategy would certainly focus minds on the needs of rural and farming communities and, the author, suspects that such will be much more closely aligned to European Union rural and foods policies [an issue that is now being scrutinized due to the embedding of FH2020 expansion plans within the current proposed-to-the-EC Irish Rural Development Programme]. Into the long term, as EU tax payers scrutinize the use of the funds handled by Brussels it is likely that funding attributed to rural and environmental issues will be more acceptable [possibly tempered by food security needs] than those which can be attached to food exports destined for non-EU nations and where the benefits are evidently attributable to large-scale, possibly multi-national, agri-food companies.

The author’s recommendation is, therefore, that Ireland should adopt two distinct strategies; an agri-foods strategy and an integrated rural, farming and foods strategy. One would hope that by so doing there would be both greater clarity and an enhanced direction for all those living within Ireland’s farming, food and rural sectors.

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FOOD HARVEST 2020 – IS IT A SUCCESS STORY?

It was with some sadness that one read that the Food Harvest 2020 strategy development approach is to be reused for a 2015 to 2025 strategy. I have written at length about FH 2020 and have long concluded that it lacked the analytical depth required. As a consequence expansion targets were set that may have been advantageous to some in the food industry looking for economies of scale to support their global sales ambitions but it did not give due regard to Ireland’s farmers. Nevertheless, it appears that FH2020 is seen as a success because data shows that exports of agri-food products have increased over the period from the FH2020 baseline years of 2007-09. I fear that a visit to the databases of the Central Statistics Office is required!

Using the CSO code zero for total food and live animals gives average exports of nearly exactly €7 billion for the 2007-09 base year [using the three year average]. By 2013 this had risen to €8.75 billion. Part year data for 2014 would suggest that this will have risen by about another 8% to around €9.5 billion for 2014. To this can be added code 11 for beverages; a relatively static €1.1 billion to give a total of about €10.6 billion for 2014. In percentage terms code zero has seen a growth of 25% [about 4.5% per annum] to 2013. Add in 2014 estimates and it is 35%.

When one looks at the above in the context of the FH2020 target of “achieving [by 2020] an export target of €12 billion for the [agri-food] sector. This represents a 42% increase compared to the 2007-2009 average” (FH2020, page 8), using this single measure of success clearly shows that the FH2020 strategy led to a success story.

Now let us dig a little further. Over the base year to 2013 period, code zero imports have risen by 32% from about €4.5 to €6 billion. On this basis the trade balance has only risen from €2.4 to €2.7 billion; a far less impressive figure. Further if one adds code 4 for animal and vegetable fats, the trade balance narrows further. Add in the cost of imported fertilisers which the Irish farming industry is reliant on and the trade balance become €1.95 billion rising to €2.05 billion. Add back in code 11 for beverages and the figures are €2.35 and €2.40 billion. That is a trade balance rise of about 2% over five years. One would have to say that 2% is not such an indicator of success.

One accepts that food prices have been rising and that will have influenced the value of food imports so one could say that the rise in exports has offset increased local food import costs. With a fairly static population will this have accounted for a €1.5 billion rise in imports? And any food prices rises will also have acted on the other side of the equation and inflated export values. There has also been a rise in feed [doubled] and fertiliser [+40%] imports.

An interesting point to mention here is there has not just been a rise in imported agricultural inputs. There also appears to be a rise in the imports of raw materials used for processing within the agri-foods facilities of Ireland? One is aware that the dairy processing side has been expanding to handle anticipated increases in post-quota milk supplies in 2015 but imports of dairy products have actually risen by nearly 50% from 2010 and look to increase by a further 25% in 2014. A recent article in Agriland (December 5th, 2014) highlighted just how imports of dairy products [lactose, skimmed milk powder and whey powder equivalent to 1.25 billion litres of milk] have risen. Thus is it fair to conclude that this reflects an increase in raw materials imports specifically for secondary processing? If so, just how much of the increase in export value is actually attributable to the processing for export of imported raw materials? Also one might speculate, given the current dramatic falls in the global milk price, will there be a temptation for some processors to import rather than source locally?

With so much focus on dairy, one should not over-look the fact that about 40% of the code zero exports are attributable to meat and live animal exports. Between 2007-09 and 2013 these rose by about €0.7 billion. However, over a similar period the Bord Bia R3 steer price rose by nearly 40%. Thus it is possible to conclude that nearly half of the rise in code zero food exports was down to the rise in beef prices; a factor that was not greatly influenced by FH2020 food strategy.

The rise in dairy exports themselves was around €0.5 billion. To put this into context, Datum data suggests that from 2007-09 EU butter prices rose by nearly 40% whilst prices for skimmed milk and whey powder rose by a little over 20%. Strangely, a price trend for EU cheese is not so easy to find so the author decided to look at UK wholesale prices as the UK is the major export destination for Irish cheese. In the UK, wholesale cheese prices rose by about 25% [whereas butter rose by 50%]. Again, should one could conclude that the main reason for the rise in export value was broader market price movements rather than FH2020 strategy?

Finally one should also look at the exports of infant formula. As the producer of 1/6th of the World’s infant formula this is rightfully considered a success story. Whether this is actually going to deliver enhanced returns to the dairy farmer is a different matter given that the production and sale of the infant formula is largely in the hands of multi-nationals [with the Irish, farmer-owned co-operatives being suppliers of raw materials]. If one looks at code 098.93 and assumes that it is mainly infant formula, exports in 2013 were nearly €0.75 billion [8.5% of code zero exports].

Infant formula as a sector is in itself noteworthy because it has been the focus of attention for many dairy industries around the world since the Chinese melamine contamination crisis in 2008. Since 2010 Ireland has started selling increasing quantities into China and this has driven up its average export sales value [China and Hong Kong are the highest value markets]. The latest data to September 2014 shows that further volume inroads are being made into the Chinese market, thus further raising both the average value of exports and the total export value itself. To put it into a wider context though, infant formula sales to China and HK have now passed the €200 million mark but that still only accounts for about 2¼% of Ireland’s code zero food and live animal exports.

As highlighted earlier, there is also a question mark over how much of the increase in dairy product exports can be attributed to the processing of imported dairy raw materials. Given that FH2020 is about the entire agri-food sector it is perfectly justifiable to include increases in exports resulting from further processing within Ireland, but one has to question whether it is a point that carries great weight when looking at the farming and rural sectors; both of whom are highly relevant to a national agri-foods strategy. Yes they generate economic activity and employment but I expect that the jury is still out on whether these additional exports directly benefit those in rural Ireland.

When one starts drawing these various strings together one begins to wonder just how tenuous are the claims about the success of the FH2020 strategy. It could well be that most of the increase in export values can be principally attributable to wider, general market price rises. A little more may be accounted for by adding value to imported dairy ingredients. The rest can largely be attributable to the export of fish [03] and other processed foods [09] that, again, are likely to have a significant inclusion of imported ingredients.

So if the reader has an interest in farming and seeing improved farm incomes due to FH2020 directed activity, just what is one to conclude? Has there been anything that has actually directly improved farm incomes? From a rural development perspective has there been any significant advances? Is the reality one where the ‘success’ of FH2020 is nearly entirely due to rising prices and in-factory processing of non-Irish-sourced raw materials rather than factors that result in improved farm incomes and a stronger rural economy?

To conclude, is the export success being attributed to FH2020 solely derived from increases in export prices over the 2007-09 to 2013 period? If so, how rapidly will this success change to failure in 2014 and 2015 with falling dairy product and meat prices? To a small degree some of these price falls may be offset by value-added occurring within Ireland, but will the value-added directly benefit the farmers of Ireland, let alone the rural communities they live within? Or will the value-added benefits go to those multi-national companies that control much of the secondary processing [or primary as in the meat sector] in Ireland. And one should not forget that they also own so many of the retail brands that are linked to Ireland?

What we are now seeing in Ireland is an agri-food processing industry that is separated from the farming and rural sectors. In the beef sector this is very clear. In the dairy sector the waters are muddied by the primary processing presence of the farmer-owned co-operatives. One should ask to what degree do the latter own brands and create retail products, or are they just primary processors who create raw materials for their secondary, real-value creating, supply-chain partners?

Ultimately, it is too early to judge the success of FH2020 as, until now, it has delivered on a single key performance indicator, namely exports; and those results are likely to be mainly due to market price rises than anything that has resulted from FH2020 strategy. On the beef side there have also been aspects of FH2020 that one could suggest have back-fired and contributed to the beef crisis in 2014. One should also mention that within the context of it being a strategy paper, market analysis as part of preparing FH2020 should have brought attention to the major changes in the UK beef market that have now seriously impacted upon Irish beef farmers.

We have, however, yet to see the true legacy of FH2020 and that may well unravel in 2015. Without doubt, the single most talked about recommendation of FH2020 was to expand milk production by 50% by 2020. It was a target set years before the ending of milk-quota but it did, along with many cheerleaders, champion the idea of expanding primary milk processing capacity in preparation for increased milk production from 2015. Farmers were likewise encouraged to prepare for the ‘once-in-a-lifetime’ opportunity to expand. What went largely unnoticed was that the secondary processors were leaving the primary processors to expand to handle the anticipated additional milk output. Apparently processing milk into commodities was not for them. Hence, the expansion encouraged by FH2020, from the dairy farm through to the primary-processing was to be funded under farmer ownership.

The result is that those aspects of the supply-chain that require significant investment have been left to the Irish farmer [with the banks being encouraged to help]. These also happen to be the parts of the supply-chain that are most vulnerable to market changes creating price volatility. One does not need to look further than what is now happening at the end of 2014 and into 2015 [to coincide with the ending of the EU milk quotas] to see who is actually paying the price for the global dairy sectors overly vigorous investment in response to 2008-10 market signals; the dairy farmer. If the downturn in milk prices resulting from over-supply and under demand lasts for any significant period, in Ireland the pain will be felt by both the dairy farmer and their co-operatives. There is now talk of a dairy crisis [to follow the beef crisis] and one does wonder just how those in the farming and primary processing will survive? For those who have over invested and/or borrowed to invest, times will be especially difficult.

As to FH2020 and the oncoming dairy crisis, is there a degree of responsibility for the situation that should be attributed to FH2020? Clearly FH2020 was pushing for milk expansion from 2015 but is it fair to state that it was a poorly set strategic objective? As I stated in my review of FH2020, for the dairy sector it was all about thinking short and planning long. Too much thinking was based upon 2008-10 market data and too much has been made of China’s dairy crisis and China’s economic boom. On top of that has been overlaid global population expansion expectations even though they were projections to 2050 [although one wonders if the extra two billion was not due to arrive tomorrow]. To be fair, these justifications were commonly used across the dairy sector and they did trigger a widespread supply reaction. The major difference was that others [including a less quota constrained UK] could react and expanded many years before Ireland could even begin in 2015. As a result of their enthusiastic investment, Ireland has invested into a major downturn and it is one that could be critical for many. Should this possible market-led investment scenario [starting from say 2010] have been identified when FH2020 was prepared? The answer is yes, but only if a very thorough demand and supply market analysis had been made at the time. And was this done?

So if we look forwards into 2015 just what are we going to see? A continued beef crisis as the Irish industry comes to terms with losing access to the mid-to-upper echelons of the UK market [due to the renationalisation of the UK beef market] is likely. And maybe open should ask whether something a similar could happen in the UK butter and cheese markets? And if it does will Irish eyes [as appears to be the case with beef] be too busy being distracted by ‘opportunities’ elsewhere to notice another major export market slip quietly away? Will there be a deepening dairy crisis as the global markets enforce a supply readjustment or just await the arrival of positive demand-side change? And, with respect to that primary performance indicator for FH2020, will we see a decline in Irish food exports as the value of agricultural produce and primary-processed commodities falls?. It is a bleak outlook and especially so for the Irish farming community. They can, however, now take comfort from the fact that FH2020 is considered to have been such a success that it is now to be re-trod to provide the basis for an Irish agri-food strategy through to 2025.

IRISH RURAL BUSINESS SOLUTIONS

After 18 months gradually acclimatizing myself to the Irish agricultural and food industries I decided it was time to prepare a website that was rather more dedicated to Irish agriculture, food and rural issues. It is also, after all, where my family and I have chosen to make our home.

Whilst I plan to maintain my Agrifood Solutions blog, I decided I needed a different identity because, in Ireland, the term ‘agri-food’ has become synonymous with the agro-industrial complex that processes farm-produced raw materials into ‘premiumized’ commodities for sale onto global markets. Whilst I accept that it has a major role to play in Ireland, I consider that it has become far too dominant. It not only dominates the farm-produce trading environment but it has also come to dominate the establishment of agricultural policy in Ireland.

A subject of forthcoming posting to my blog will be the need to specifically focus on developing a genuine, recognized-by-the-global-foods-consumer-as-such, premium foods sector in Ireland. And not one that is responsible for processing and selling a couple of percentage points of total farm produce but one that handles a fifth or more. One that provides a real alternative sales outlet for farmers. It will be about creating products and routes to market that can deliver far better returns to the traditional, small-scale Irish farmer. It will be about adding value to farm products either on-farm or within the local community. It will be about developing smaller-scale, rural-based food-businesses. It will be about the importance of businesses to the future well-being of rural Ireland. Hence, my choice of Irish Rural Business Solutions.

The new website address is www.irbs.guru. The dot-guru is rather tongue-in-cheek humour and I admit I could have used something like dot-biz but that would have been far too conventional. It also reminds me of the fact that I was taught and worked alongside a handful of people who were and still are considered gurus in the farming and food world. I would like to think something rubbed off! They certainly left me with a strong technical background in farming agricultural business management and economics and, somewhere along the line, they taught me to write. And after a lifetime in farming and food that goes back to before I could walk, maybe I have learnt sufficient along the way to justify the use of the dot-guru suffix!