THE RISKS FACING THE IRISH AGRI-FOOD INDUSTRY

Another abstract from by submission for the Public Consultation on FS2025.

The question: What do you consider the most critical risks facing the Irish agri-food sector and rank in order?

The following will of course relate back to comments made elsewhere within the questionnaire and the Annexes. Although the risks are numbered, equating this to an exact ranking is something of an inexact science.

1. The risk associated with not prioritising the creation of sustainable family farms and farm incomes

Simply if Ireland’s family farming model is not viable and does not create equitable returns to farmers, the whole agri-food industry becomes a ‘house of cards’. This does not necessarily mean that every farm has to produce a living income for the family but it does mean that the farming family has to be able to derive a living income from the farm and other employment within the local area. This may mean working on adding value to farm produce or in other rural-based industries like tourism. It is why one says that the beef crisis is not a beef crisis but a rural crisis as the beef production model in much of Ireland requires the farming family to have other income sources. It is why a strategy for rural Ireland is suggested as the priority.

2. The risk associated with giving priority to one sector of the agri-food industry over another

It is difficult to deny that there is a massive imbalance between Ireland’s family farms and its agri-food sector dominated as it is by a very few major players. Yes, there are the farmer-owned dairy co-operatives in the mix but how much of their produce still goes to supply-chain partners who are multinational by ownership and operations? With its targets on export growth and raw material expansion, it is not difficult to conclude that the priority within the Food Harvest 2020 strategy lies with an agro-industrial food processing sector of maybe 10-12 entities. And one could ask just how many strategic advisors have food industry experience as opposed agricultural and rural development experience? Even the lauding of FH2020 on the back of increased export values whilst farmers are seeing flat-line or declining incomes seems a little disingenuous whilst also hiding the fact that a successful food supply-chain has to be successful for all of its supply-chain partners.

One should also remember that one person’s raw materials is another person’s premium product; more so when you have a highly disparate trading relationship. If the former is a multi-national with a loyalty to is shareholders, one would expect it to keep its supplier options open and not to get overly-committed to one supply source. For their suppliers that may of course mean being tied into a supply-chain that does not wish to give credit for their premium raw materials [more so when their supply-chain partner is more interested in developing their own brand rather than a brand that is partly linked to the origin of their raw materials]. It is a case of good commercial practice coming into direct conflict with the interests of their supply base in one of their supplier countries. This is a risk for the raw material suppliers in that particular country and it is a risk that should be mitigated against [rather than embedded] by that countries agricultural strategy.

3. The risk associated with giving priority to the short-term when farming and food is long-term

If the author was to choose a single phrase to exemplify the FH2020 strategy as it pertains to the milk sector it would be “thinking short and planning long”. Agriculture is a very long-term business and when farming is a family business it is multi-generational. A major consequence of FH2020’s expansionary objectives is likely to be felt in 2015 with what is now being foreseen as a major crisis in the milk production sector. It may well metamorphose itself into something similar for the farmer-owned milk processors as they seek to support their farmer suppliers whilst having business plans that are insufficiently robust to do so beyond the short term. A part of this crisis can be attributed to excessive hype over the short-term market signals from 2008 to 2010 and a failure to analyse their likely impact over the subsequent years [at least to a point where Ireland could join the expansionists party in 2015]. It is imperative that markets are properly analysed and evaluated and from both the demand side AND the supply side. It appears that too few undertook the latter with the consequence that whilst new milk supplies are now coming on stream it has only taken a couple of demand-side hiccups to crash the global dairy market. Setting strategy is about undertaking in-depth market and economic analysis otherwise the strategy carries the inherent risk of just sending out the wrong signals.

4. The risk associated with continuing with a strategy that promotes commodities over products

This returns to the twin or triple-track strategy proposed earlier. One accepts that for the foreseeable future Ireland will need its agro-industrial, agri-foods sector to shift its milk production that is focused on milk solids and its beef production that is focused on the EUROP grid. Whether this will ever be sufficient to enhance the returns to the smaller-scale Irish family farm is another matter. In the end the author believes that into the long-term Ireland must be competing for the top 10% of the World food markets and that it must have the necessary products to do so. If one considers those products to be of a multi-characteristic, designated-origin nature that appeal to issues-aware consumers across the ‘developed’ World then Ireland’s current offering to the market is very short of what is needed. These will take time to develop and the longer the agri-food strategy remains focused on commodities [premiumised or otherwise and/or produced in an industrial scale factory] the greater will be the risk to the long-term future of Ireland’s family farms. And one should not forget that whilst Ireland is trying to compete on the global markets [as unsuitable as they are for its farmers] others will be exploiting and developing the very markets that Ireland needs to be competing within.

5. The risk associated with focusing market development on markets unsuited to Ireland’s farms

To compete in a food market, be it local, national or global, all of the components within the supply-chain have to be sustainable. There can be brief periods when one or more of the partners can be loss making but essentially, over the long-term, all have to be financially viable. Is this the case in Ireland or are off-farm incomes and/or transfers from the tax payer [in various guises although some may be rightly construed as payments for environmental management services] actually subsidising the farm’s produce? Is this likely to change in the short-term? If not, should agri-foods strategy be focused first on finding market-financed solutions to improve the returns to the farm from farm produce sales? And if it does not, is the industry itself running the risk of building its future on the weak foundations of a largely unsustainable farming sector?

The following is a paragraph the author wrote recently about the Irish beef industry; “The absolute priority is to work within the constraints placed upon the beef industry by, for example, its small-farm structure and fragmented land ownership. This is simply the situation as it is and there is no sense in creating plans that ignore this fundamental starting point; not least in a beef industry that is characterized by many tens of thousands of small family farms. Solutions for the future of the beef sector have to take account of the wishes of those who have ownership of the agricultural sector’s primary asset, the land. Further, they have to consider that the family farming of beef is a fundamental part of rural Ireland and the farming-focused communities therein“. This is the starting point for an agri-food strategy for the beef sector and thereon it is about finding markets that suit the products that can be derived from the farming structure that actually exist in Ireland. The rest of the article, as it appears in Agrifood Solutions’ blog is included in Annex H.

6. The risk associated with further reducing the route to market options for Ireland’s family farms

Reducing the number of entities in the processing sector [to improve efficiency and gain economies of scale] is often cited as one solution for Ireland’s agri-food sector. The farmer-owned co-operatives Fonterra, Friesland-Campina and Arla are all given as examples to follow. These examples are, however, poor ones in that Ireland’s dairy sector is already dominated by two publically listed companies who are unlikely to vote to join a mega co-operative. The beef sector is also privately owned. Hence, is there going to be any real gain from consolidating the processing side further?. The author would argue that what farmers need is an array of dynamic smaller-scale processors and the greater sales opportunities created by more, not less, routes to market [albeit with as suggested, consolidated distribution and sales activities]. Without these farmers are exposed to the risks associated with major supply-chain entities getting it wrong or just [rationally and, according to their shareholders, properly] taking decisions that are not in the interests of their Irish farmer suppliers. Monopolies or oligopolies within the supply chain just mean greater risks for farmer suppliers.

7. The risk associated with over-playing the ‘green card’ in developing new market for Irish products

The author is an outsider to Irish agriculture. He has also spent many years in probably the most biodiversity rich region in Europe. It is light years away from many of the intensively farmed pastures of Ireland that are sown with ryegrasses and fed with imported nitrogen. Yes Ireland is said to be forty shades of green, it is called the Emerald Isle, and its national sporting colours are green but that does not, by default, mean that is food products are green. The author has even read the argument that Ireland should not have to comply to CAP greening measures because it is the EU’s greenest country already! This is not an attitude to take into the market development of a truly green image. More likely it will lead to a green version of horse-gate.

If Ireland is going to truly exploit its colour-green image it needs to take to the market products that have green characteristics that can stand up to the full scrutiny of highly-aware consumers. Broad-brush green branding may work in a B2B context where supply-chain partners are looking to enhance their own green credentials but is that going to translate to the price premium necessary to make Ireland’s family farms sustainable? More likely it will need issues-aware consumers to pay a price premium for Irish products. Thus Ireland needs to be producing these products and to ensure that they have integrity. In a nutshell, believing that selling green is all about branding and sales talk just runs the risk of undermining Ireland’s potential long-term position as a supplier of premium and green food products to the World’s top 10% food markets.

8. The risk associated with focusing on climate-dependent, high-input, grass-fed farming systems

It is easy to assume that using a mainly grass-fed system is also be a low-risk system. It is, nonetheless, a system whereby performance is highly weather dependent and pushing the productivity boundaries can also increase those risks. A lower-risk system will leave significant flexibility to absorb any climatic variances but it may also not be the most economical [the monetary difference being the ‘cost’ of the ‘insurance’ policy]. As the farm targets higher yields and production levels, the climatic risks increase. If the higher production levels also require significant investment, the financial and, possibly, debt-related risks will also rise accordingly.

One frequently hears about maximising grass production but one should also be aware of the risk of forage shortfalls and high stocking levels [as demonstrated by the recent fodder crisis]. Variable climatic conditions can also mean abundant grass but an inability to conserve forage or to conserve high-quality forage. Drought conditions can mean the opposite [one cannot imagine many Irish farms considering irrigation to mitigate against drought]. Late springs and tight February/March calving can also have an associated climatic risk. It is certainly anything but straight forward and it is the individual farmer [as opposed to the strategist] who has to work out the right balance between productivity target and risk. And it should be remembered that for some farms the answer may be very extensive systems that focus on producing premium-quality products.

9. The risk associated with operating dysfunctional supply-chains when partnerships are required

The author highlighted the importance of strong supply-chain partnerships in Annex E – ‘Irish beef and the need for a parting of the ways’. The Agrifood Solutions blog post focuses on how the UK retail beef market has evolved in recent years. It is also continuing to rapidly evolve and it is all about developing very strong supply-chain relationships for fresh retail beef. It has been evolving for a number of years but has accelerated since the horse-meat scandal. It is about creating very transparent farm-to-retail-shelf supply chains that confer the maximum of traceability on the retail product. The strong farmer-processor-retailer relationships are also the basis for ensuring that the market/retailers specifications are met. Of course, as everyone should now be aware, this has included the renationalisation [or localisation] of the UK retail beef market and that has been at the expense of the Irish beef producer who now largely fulfils the role of shelf-filling back-stop.

The important point here though is the evolution of the strong farmer-processor-retailer relationships as per Waitrose, Dovecote Park and its beef suppliers. These are examples of how beef farmers and processors have to act to supply the real premium markets. Alas in the case of Ireland, if anything those involved with the beef supply-chain are moving further apart and into more antagonistic relationships. This does not bode well for the exploitation of premium market opportunities [like the USA]. This situation also creates a risk to the future of many of Ireland’s traditional beef farmers. It is also not a long-term risk, it is an immediate one. And as is said in Annex E, it may take some radical new route-to-market developments to change the situation.

10. The risk associated with contagion across and within the different agri-food sectors in Ireland

A question one has to ask is; what lessons have been learned in Ireland from the likes of the BSE crisis and, more recently, form the horse-meat crisis? A particular one that needs to be learnt is that it is important to reduce the risks of contagion whereby a crisis spreads between and within agricultural sectors. Not only does the author disagree with the Irish preference for broad-brush branding of its products but he is also not a fan of the use of quality assurance schemes that are designed to be all inclusive and bring all farms under one assured umbrella [it does little for creating the unique selling points that real, premium products need]. The risk is that when all products are marketed under one generic, ‘Irish’ label a single incidence of, say, horse-meat contamination can impact upon the entire industry. With BSE it was a dairy sector problem that through contagion impacted upon the suckler beef sector for many years. The use of generic branding, labelling and assurance schemes leaves little protection against contagion and exposes more sectors of the farming industry than necessary to a food scare. The potential for the use of ring fencing to mitigate against risk is also limited. By chance, broad brush branding will also not create the premium products that Ireland needs.

11. The risk associated with creating strategy without in-depth options, market and economic analysis

If a national strategy is to inform those working within an industry about the direction that the government wishes them to follow, it is beholden on that government to ensure that everything possible has been done to guarantee that the strategy is well prepared and solidly constructed. If not, is there a risk that the industry will be misinformed and misguided. Is there not such a risk here with the limited methodology being used?

12. The risk associated with listening to market-hype rather than relying on in-depth market analysis

In a similar vein, it is critical that those responsible for establishing a national agri-food strategy do so on the basis of having undertaken a thorough analysis of the relevant markets. This means both the demand and supply sides. The current crash in the dairy markets can be attributed to too many people around the world investing in dairy on the back of a very hyped-up demand situation five years ago. This triggered both milk processing and milk production investment which due to investment lags is now coming on stream [plus the market is anticipating more EU milk from 2015]. Good supply side analysis should have seen this imbalance in supply and demand coming and it should have been flagged up as possible in the FH2020 strategy. It may then have done something to reduce the possible risk of Ireland investing into a serious market downturn.

13. The risk associated with creating strategy when not fully costing raw material production costs

One often reads about production costs in Ireland that do not include the costs of farmer and family farm labour and a return upon some major capital items. As pointed out in a letter to the Irish Farmers Journal, the costs of production for milk do not include “some farm business costs, such as the farmer’s own labour”. It appears that milk production costs often only include a very small labour cost and that reflects paid labour only [of which there is little in Ireland]. One expects that the cost of production accounting line is actually drawn to allow international comparison with labour, property and capital costs being excluded to avoid what may be their distorting effects on the comparative data. This is an ‘academic’ exercise but it is one that feeds the illusion that Ireland is a low-cost producer of milk as it ignores farm scale. And scale of production is very important in an Irish context because it is the ‘multiplier’ that produces farm income.

The Irish farmer needs a living wage and this should be imputed in before considering the final cost. A land rental may also make sense to account for capital tied up, even if it is only to reflect interest that could be earned elsewhere. Factor all of this into the costs on a 60 head dairy herd that is the full-time occupation of the farmer and you might find that another €30,000 is a part of the costs, which at 5000 litres/cow is another €10 per litre. There are times when full-cost accounting is a necessary evil and this is one of them as without it the talked about cost of production may be highly misleading when it comes to, for example, establishing a national agri-food strategy where Irish family-farm-produced milk is the primary raw material used by the country’s agri-foods sector. The production costs as per an international comparative methodology may look notable but this is of no use to man nor beast if total farm income is simply too low to be sustainable.

14. The risk associated with going off ‘half-cock’ in the important-in-the-long-term US food market

One is greatly concerned about the potential for Ireland to overplay its ‘Irish’ credentials in the US market and to assume that just being Irish will be sufficient. It may lead to products being marketed with a price-quality relationship that is inappropriate. The US has a mature market and the premium-foods segment that Ireland needs to target will be an issues-aware one [as much as elsewhere internationally]. A case in point is the grass-fed label. There is a growing movement surrounding grass-fed/pasture-fed in the US and it is about raising/ranching cattle on grass so consumers will want to know exactly what is meant by ‘grass-fed’ within the context of Irish produce. It is not clearly defined and the risk is that some will attempt in the short-term to sell Irish beef products into the US using generic branding that makes broad, unclarified claims about it being grass-fed. This initial lack of definition may then undermine the credibility of later sales.

15. The risk associated with the Transatlantic Trade and Investment Partnership agreement

Annex F includes an Agrifood Solutions blog post about TTIP. Whilst it recognises the concerns that some Irish MEPs have over the potential impact that TTIP may have on, in particular, the Irish suckler beef sector, the blog states that a greater threat to the Irish farmer may come from Irish agri-food strategy itself rather than TTIP per se. This is again about ensuring that Irish farmers are a part of a supply-chain that builds upon their strengths as opposed to exposing their weaknesses. The article is about Ireland focusing on producing high-value, premium products that compete in the top 10% of the foods market place with the kind of designated origin products that are more likely to originate from marginal zones within the EU where farms are generally smaller [and probably family run]. It is about Ireland’s farmers being asked to compete like versus like.

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