Monthly Archives: April 2016

THE IRISH FARMERS’ CONNECTIONS TO THE CONSUMER?

Just how often does one hear that Irish farmers produce the best produce in the World? Rather often is the answer. It is then usually followed by the complaint that it does not receive a price that reflects the quality. One can add that it is also often quality assured but that does not confer much premium. It is frustrating but it is, by and large, the reality.

The blunt truth is a premium price has to originate from the consumer. Can one really expect those in the supply-chain to provide the primary producer premium off their own bat? It is unlikely that the farmer will often meet such generosity.

Maybe processors can pay a premium but the circumstances would be limited to a ‘quality’ differential [a factor that improves in-factory efficiency whilst the value of the end product itself is not enhanced] created at the farm level that improves processing efficiency and the margin for the processor.

It may also be that a continuous-through-the-year, raw-material supply that equates with market need and allows efficient processing can justify a farm-gate premium for the raw material supplier. It is a reason why milk processors pay a premium at those times of year when supplies are short [i.e. winter premiums] and/or milk is more expensive to produce. The reverse can also happen;  offer raw materials at the wrong time of year or at levels that are out of kilter with processing needs and prices fall or contracts get terminated.

Setting aside processing efficiency [important as it is to think in terms of whole supply-chain efficiency and not just inside-the-fam-gate efficiency], if the farmer wants to see a sustained premium for his or her produce, it needs to be derived from consumers who are willing to pay the premium.  And the first requirement to ascend to that position is to be able to place a premium-quality product in front of the consumer through a supply-chain that will transmit that premium back to the primary producer. Does that happen in Ireland? And if not, why not?

First let us look at the beef sector. It is well known that it is dominated by a very few private, family-owned factories. Is it fair to say that their modus operandi is high throughput / low margin? Are they also a role model for an agri-foods policy that believes large-scale factories are necessary for Ireland to compete on global commodity markets? It is, however, a model that ignores the size of Ireland’s farming industry and the small-scale, family-farm, nature of the primary producers themselves.

The author has often said that supply-chains that link premium farm produce to premium-paying consumer almost, by definition, do not include industrial-scale factories. It is partly about consumer perception and it is partly about the high-throughput factory model is not conducive [or at least their usual perception of operational efficiency] to small processing ‘runs’ of premium products. It is this that means that Ireland’s beef supply chains are not suited to getting niche-market products from the farm to smaller sized but premium paying markets. For that to happen, smaller-entity, flexible supply chains [inclusive of operational facilities] are required.

On the surface and certainly according to local folk law, farmers have more control over the dairy supply chains through their cooperatives. Is this the reality?

The beef supply chain has few entities. It often goes farmer to factory to retailer or burger-chain to consumer. By contrast, for dairy the typical supply-chain is farmer to primary processor [the co-operative] to secondary processor [often privately owned] to retailer to consumer. Of course other routes exist but these are probably the dominant farm-to-consumer supply-chains?

There will of course be many exceptions to the multi-link dairy supply chains as some co-operatives will produce consumer products that go direct to retailer to consumer. To identify who is actually producing what one needs to get used to looking at retail labels when shopping [sometimes it also helps to know who the EU code on the oval label belongs to].

At present some of the smaller cooperatives are towards the top of milk price league tables. Is this because a greater proportion of their milk goes into Irish-market  consumer-products? Or is it because they are more effective at selling ingredients to the next stage of the supply chain? One would also be interested to know the effectiveness of the smaller cooperatives when it comes to exporting consumer products [possibly via Ornua [another ‘level’ in the supply chain]]or ingredients.

Beyond these examples, just how clear is the line between primary and secondary processing?

  •   What consumer products are the cooperative themselves producing?
  •   To what degree are cooperatives producing butter and cheese for Ornua?
  •   How often are they producing ingredients for private supply-chain partners?
  •   Which entity creates and sells the higher-margin, branded consumer-product?

As said, in some cases one needs to check on the retail shelf to see who actually owns the consumer-orientated brand name; is it the primary or secondary processor?

One should consider the Irish infant formula success story. It is often said that Ireland produces 15% of the World’s formula but is it just assumed that this benefits the Irish milk producer?

Just what milk-derived ingredients are in the infant formula? One assumes it includes milk fat but it may only be used in premium products within a branded range. The rest may contain palm or other vegetable oil. It may contain lactose and whey powder. Does the use of milk constituents translate into a premium that is clearly passed back to the farmers’ milk price?

And then one gets to the crux of the matter; who formulates and produces the formula and who owns the brand name? Just how often is it the farmer-owned cooperative? Or is the farmer-owned cooperative only a supplier of raw materials for a privately-owned, significant other?

Whilst one hears “but we are lucky, we have our co-operatives” should one be asking whether they have largely become primary processors of milk into ingredients for others to add value to?

There has been much recent investment by the co-operatives to ensure that they have the capacity to handle their farmers post-quota expansion milk [as per their own co-operative rules] but has this predominately gone into stainless steel for primary processing? Have farmers invested heavily [inside and outside the farm gate] for others to accrue the benefits? One does wonder.

It was mentioned earlier that a problem with the beef supply chain is that it is dominated by entities with a high-throughput / low margin model that is inflexible when it comes to providing a supply chain that can develop niche markets. One fears that in the pursuit of extra capacity for expansion milk that some of the cooperatives have now achieved the same result. They have invested heavily in scale and left themselves in a position where they now do not have the flexibility to provide members with routes to alternative, possibly higher-value, premium markets.

It was reported on 20/02/16 in the Farmers’ Journal that the Irish dairy product mix will move from 10% powder in 2014 to 33% in 2020. So who is going to produce these commodities; is it the cooperatives or the privately-owned secondary processors? If it is the former, has the big-is-best model now committed most of the farmers’ expansion milk to commodity supply chains destined for global markets or to secondary processors who then utilise the ingredients to make a margin that reflects their closer-to-the-final-consumer position?

Hence, should one be asking if some of the cooperatives have invested in the low-return end of the supply chains in a way that limits their ability to pay a good milk price to their members?

And, at the same time, has this commodity focus allowed others in the supply chain to pass the current low milk-price pain back to the milk producers [via the farmer-controlled primary processor] whilst also protecting their retail or secondary processing margin?

If so, one can only imagine that re-balancing the situation within the dairy supply-chain is now a long road back. At least that is now a destiny they can share with their beef farming counterparts.

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IS THE FUTURE ABOUT PREMIUM CONSUMER-PRODUCTS?

CONSUMER-PRODUCT SWOT ANALYSIS

The following was largely written a couple of years ago but it has been dusted off because it makes a change to write something positive amidst the commodity-induced gloom that is now engulfing too much of the farming industry.

The following is a SWOT analysis of switching to a product-focused strategy.

HIGHER-VALUE-PRODUCT FOCUS STRENGTHS

  •  The positive, widespread international image of Ireland and a green Ireland
  •  Ireland is well suited to the production of natural, high-quality food products
  •  An agricultural resource base and climate that is suited to grass-fed farming
  •  Value-added products will not require such a production-expansion approach
  •  Higher-value with lower output should be environmentally more sustainable
  •  Lower climatic-linked risks with fewer livestock targeted at producing value
  •  Compact Irish agricultural industry suited to higher supply-chain traceability
  •  Producing high-value-added products should mean wider rural job creation
  •  Additional local employment can enhance family-farm household incomes
  •  Potential for less capital investment and the usage of more ‘artisanal’ labour
  •  May give more of the supply-chain margin to the farmer and local processor
  •  Small domestic markets suited to gradual product and market development
  •  Reduce farmer exposure to decisions made by a few supply-chain partners
  •  Farmers avoid processors over-committing them to one route-to-market

HIGHER-VALUE-PRODUCT FOCUS WEAKNESSES

  •  Historically the industry is dominated by agricultural commodity production
  •  ‘Commodity’ is embedded into the thinking of Ireland’s farming leadership
  •  Current processing investments still very focused on producing commodities
  •  National policy emphasis too much towards volume and economics of scale
  •  Conservative resistance to change at the both processing and the farm level
  •  Very little current involvement of farmers with value-added food products
  •  Some on-farm changes needed to produce specifically for premium foods
  •  Learning and training needs will be high to develop new processing skills
  •  Creating new food products and developing their markets will take time
  •  Lower population density limits sales through the likes of farmers’ markets
  •  Dominance of the supermarkets makes new-product market-access difficult
  •  Small domestic market limits scale of development before having to export
  •  Some target export markets are becoming more local-product orientated
  •  Need other characteristics to overcome being non-local in export markets
  •  Will need to reconfigure route-to-markets to support smaller processors
  •  Little history of producing designated-origin, higher-value food products
  •  Need to develop systems to consolidate premium products for exporting
  •  Developing the higher-value, consumer-foods sector will not be a quick fix

HIGHER-VALUE-PRODUCT FOCUS OPPORTUNITIES

  •  Greater consumer concern about eating over-processed, industrial foods
  •  Consumers and retailers demanding yet more traceability and provenance
  •  A rising consumer belief in the health benefits of eating grass-fed products
  •  Farming systems and stockmanship that appeal to issues-aware consumers
  •  Could benefit from an eat-less-meat-but-pay more-for-it consumer approach
  •  Possibilities to bring together multiple, positive characteristics in one product
  •  Increasing consumer awareness in mature markets of multi-functional foods
  •  Consumers’ demand for a diversity of products that reflects their ‘awareness’
  •  Opportunities to add value and to make each unit of farm production ‘count’
  •  The chance to link premium farm produce with premium-paying consumers
  •  Some people want to see more than just food in exchange for EU payments
  •  Fragmented land should make it easier for dynamic, farm-industry entrants
  •  Lower rural housing prices suited to artisan and/or food-sector labour force
  •  Increasing interest in agriculture and agri-food as a feasible career choice
  •  A value-added farming focus may provide more farming opportunities
  •  Integrated farming/processing may be more interesting to the young

HIGHER-VALUE-PRODUCT FOCUS THREATS

  •  Too little support for the sector from short-term-focused policy-makers
  •  Too many research and marketing resources going to support commodities
  •  Too little knowledge of international high-value consumer-product markets
  •  Too much focus on reducing on-farm costs and too little on enhancing value
  •  A farming industry that is too reluctant to change to become near-to-market
  •  An agricultural press that is too orientated towards supply-driven production
  •  Farmers’ supply-chain partners who would prefer to maintain the status quo
  •  Dominant down-stream players determining the agri-food sector’s direction
  •  Processing throughput/cost-reduction is more important than farm income
  •  Less dynamism caused by downstream consolidation to compete globally
  •  Ethical/ecological credentials not enhanced by commodity-sales focus

IS IRISH FARMING MARKET-LED OR SUPPLY-DRIVEN?

Another return to my early 2014 review of the Irish national agri-food strategy. It may be interesting to read in the context of the current, over-supply created problems in the dairy sector.

The following quotes are extracted from the three ruminant-livestock farming sector FH2020 recommendations:

  • “In order to remain competitive, the Industry should ensure that processing capacity in the beef sector matches producer output. This should be a guiding objective both for any State intervention in the sector and for industry participants”, (from the beef sector recommendation, FH2020, pg40)
  • “The processing sector must ensure that processing capacity meets the expected increased milk supply post quotas”, (from the dairy sector recommendations, FH2020, pg42)
  • “In order to remain competitive, the Industry should ensure that processing capacity in the sheep meat sector matches producer output. This should be a guiding objective both for any State intervention in the sector and for industry participants”, (from the sheep sector recommendation, FH2020, pg44)

On reading the above, one could be forgiven for concluding that the FH2020 is, for all its use of market-responsive terminology, a supply-driven strategy. A fundamental recommendation is that downstream supply-chain partners must ensure that they invest to process whatever the upstream primary producer produces.

The above does contradict many statements and other recommendations within FH2020; for example, [acquiring an] “in-depth knowledge and understanding of consumer preferences and trends will help agri-food and fisheries businesses better predict and prepare for their future opportunities (FH2020, pg29].

It is possible that the initial three statements were as a result of a compromise position reached when agreeing the FH2020 strategy. It is not difficult to envisage a situation where the farmer representatives involved were adamant [rightfully so] that if the strategy was to demand that farmers were to expand, that a similar demand should be made of those downstream. It is interesting to note how it has played out in reality in the dairy sector.

A characteristic of the milk-processing sector is that a significant proportion is made up of farmer-owned cooperatives. The consequences of this are that “in keeping with its co-operative ethos’, Dairygold added, it has committed to accepting all the milk its members will produce” (Dairygold cited in the Southern Star). The quote was made within the context of Dairygold investing to expand to accept the milk that its suppliers have indicated that they will be supplying post milk quotas and up to [coincidentally] the year 2020.

A similar situation has occurred with respect to the creation of the Glanbia Ingredients Ireland (GII) joint venture between the Glanbia plc and the Glanbia Co-operative Society. The JV was established to create the processing capacity to process the expected 60% [coincidentally also by 2020] increase in milk production from the Society’s members. It is interesting to note that the Glanbia plc [the original downstream partner] chose to focus its own resources on its highly successful international growth strategy rather than investing in milk-processing capacity.

It is not entirely surprising to see such a supply-driven situation. A characteristic of Irish agriculture is that it is largely geographically remote from its markets. It has also evolved a highly seasonal milk supply based upon the production of milk from grass. In recent years the latter appears to have evolved from a problem into a virtue and, to an extent it is [assuming that the industry can deliver high-value, grass-fed products to customers]. The history is, however, one where milk is produced in spring and summer for processing into low-moisture content, storable and easily shipable commodities (butter, cheese and milk powders). The milk-processing industry has developed to add significant value to these base commodities [via the ingredients and nutritional markets] but, at the farm level, it still seems to remain largely about the production of basic milk solids from[mainly grazed] grass.

A concern with FH2020 is that by emphasising so clearly a 50% increase in milk production by 2020 target, it has actually led to a further embedding of the very problems that were highlighted in previous strategy papers as major concerns; i.e. the industry’s reliance on selling commodities derived from highly seasonal milk. It appears now to have become acceptable, even preferable, to expand specifically to supply seasonal milk. The Irish dairy industry’s fascination with all things New Zealand is certainly taking the industry yet further down this route.

A further quote from FH2020, reiterates this situation thus, “the industry at all levels must engage on alternative options for financing the expansion in capacity to process anticipated volume growth, including investigating efficient solutions to the processing of milk during the period of peak seasonal milk supply”, (FH2020, pg42). Hence, does one conclude that the Irish dairy industry has actually moved further in the direction of being supply driven?

To what extent FH2020 is responsible for this is, or course, a question that is open to debate.