So two major issues have hove into view at the same time. One, the climate-change emissions reduction targets we were expecting, the other, Brexit, came rather out of the blue. These are now unfolding upon an industry that is already bedeviled by market collapses, price falls and across-sector, farm-income crises.
For dairy was the beginning of the end Ireland investing too heavily to supply the China market with dairy commodities. It was predictable that they were investing into the downturn. The supply-side reaction should have been foreseen but apparently a China-hyped global processing industry could not believe that the good days were not here to stay. It was the old Celtic Tiger property-boom mentality at work. That said, Russia and oil prices played a significant part and, as political factors, they were near impossible to predict. Will Russia ever be back or will President Putin turn Mother Russia into the agricultural powerhouse that it should be? And of course we now have the politically-induced crisis that has the potential to out-do them all as far as rural Ireland is concerned, Brexit.
What is difficult to understand is how, in a market that is over-supplied per se, but especially with long-life powders, is Ireland’s new Minister of Agriculture still pushing dairy expansion when the country’s new processing facilities are geared up to mainly produce powder? Some Irish processors are delivering a European bottoming milk price but still we read about implementing Food Wise 2025 expansion plans. Where is the wisdom in that? Or is that particular farmer-only carriage being driven by a fifth, named Bankruptcy, horseman of the Apocalypse? At times one does wonder.
What is driving the ‘keep expanding’ chant as it begins to sound strangely reminiscent of that belonging to the followers of Icelandic football? At the farm level one can understand a short-term, crank-the-volume up approach. More production means more income even if the price is falling. It is a logical [short-term] response for an individual farmer to take. I saw the consequences of such two decades ago in Thailand where 400,000 individual smallholder rubber producers simultaneously took the same logical decision, push up each day’s yields to maintain their daily income. Cumulatively they boomed the market and then spectacularly crashed it. An industry that was lauded as a global, rural development success story went from achievement to dereliction in months. A solution was found [by yours truly] and it has been onwards and upwards since.
A troubling aspect of the Irish farming problem is that the agenda has been set in recent years by the processing sector and not the farming industry. The desire to expand milk production has been driven by the raw material demands of the processors. That said, there were plenty of advocates of expansion in the farming, media and advisory worlds. Of course, the co-operative processors can point to their rules that said that they have to process what the farmer-member says that he/she will produce. The farmers are, however, all making their own decisions whilst the role of the co-operative processor should have been to temper their members’ activities in light of their broader understanding of the markets. One could say the same for those writing national agri-food strategy [although they chose to promote expansion over steady, cautious, ‘organic’ growth]. Did too many just get caught up in the hype and invested accordingly. Sadly, the consequence for dairying is that most of Ireland’s expansion capacity has been dedicated to milk powders and that is where the global dairy market has turned sour most.
So we now have this new capacity built. For the processors the logic is to use it and to use it to the maximum extent possible. The difficulty lies in not being able to pay the farmer a price to reward them for expansion. What is the alternative, to put one’s hand up and say we got it wrong? Apparently not. What we hear instead is a further rallying call to expand. And why not, we have invested vast amounts of the national resource into stainless steel so we must use it?
The farmer has, however, felt the consequences of a price that is well below their full-cost of production [the full-cost, not the marginal one that excludes any reward to the farmer]. If we were only looking at a China-market induced dip in the cycle, farmers may by now be seeing an up-turn coming. Are they? What about Russia, what about the oil price, what about Brexit and what about that other, hither too poorly explained issue, the consequence of climate-change regulation? Has there ever been such a complicated scenario to invest [further] into?
Any farmer could be forgiven for choosing to opt out, to switch to survival mode and to look to preserve their assets, even to the degree of ceasing production whilst they still have some control over the ownership of their primary asset, the farm. Sometimes it is better to walk away and to live to fight another day. These will be personal decisions and for some taking draconian measures on the farm may be preferable to taking on more debt in an environment where it is difficult to predict the market upturn and, critically, whether that market upturn will be sufficient to repay debt. It is situation where one has to question the validity of borrow-more messages. To put it bluntly, have we reached that point where the sacrifices have to be made at the processing level if we are to save the farming foundations of the agri-food industry? Idle processing capacity may be preferable to a bankrupt farming sector. Is it time for processors to take some responsibility?
From one angle one could say that Ireland is lucky in that it has a core processing capacity that can handle its peaks. A common theme of its agri-food strategy was to ensure that its processing capacity was sufficient to meet farm production. It was a theme that illustrates the supply-driven mentality within the industry. It is not what does the consumer want, can we produce it [from a technical and financial perspective] and is the investment to do so viable at all points of the supply chain. It was the market is there [global population growth] more exports will mean more income, profits and employment. The latter assumptions are probably correct, at least for some within the supply chain. For the farmer the connection is, apparently, tenuous.
Ireland’s supply-driven, commodity bias has evolved out of history. Butter and hard cheese and milk powder are ways to convert perishable milk to storable product. In some parts of Europe, some consumer-facing farmers have nevertheless made a virtue out of the first two. It is more difficult with the latter. Is one right in suggesting that making margins out of powders is the territory of the secondary processor? It is not an activity that lends itself to adding value to milk at the farm gate. It is why it is so difficult to see how the Irish-scale dairy farm is going to make money from producing milk for powder. Yes, they are told to expand but is the likely long-term price for powder-destined milk going to be sufficient to cover all of the costs of production, including a return on capital and the payment of all investment costs. Is there a flaw in Ireland’s strategic dairy model?
The question is; is the centralized processing of milk into long-life commodities the right one for the future? Into the longer-term do we need alternatives?
And is this an issue for the dairy sector alone? The meat industry has long since gone down the large-scale, factory-processing route. Dairy processing differs in that it is partly co-operatively owned [although when reading comments about the price paid by the co-operatives, one wonders how strong the sharing ethos is [or maybe the product mix does dictate the prices paid to farmers]]. The meat factories are privately-owned and that leads to on-going conflict.
The factories do, nonetheless, have to contend with supplying a highly consolidated retail sector and a highly fragmented supply-base. Over the years the factories have moved Ireland from being an exporter of frozen beef to one that supplies fresh meat to retailers but has their modus operandi remained one of high-throughput and low margins? With such a narrow ownership does this model still deliver significant profits to the few? If so, is it a model that incentivizes the factories to deliver higher-prices to their suppliers? And does a high-volume, operations-efficiency-focused model encourage the processing of small volumes for niche-markets?
Should one conclude that neither mainstream meat or milk processing model is sufficiently agile or flexible? Is this a fundamental problem for Irish farmers who by their very scale need to be supplying premium-paying, more niche markets? Has Ireland’s processing industry and, more recently, its agri-food strategy evolved away from what is needed by the farmer? Has there been a major failure within the overall agri-food industry to target what is needed by the farmer? And is this something that explains why the farming industry seems to lurch from one income crisis to another?
Should we now be seeking to re-write agri-food strategy and to set an agenda to restructure the milk and meat processing sectors? Probably not. Just what is to be gained by taking such a confrontational approach? For many years to come Ireland will need its existing processing players; not least because there is no quick-fix, re-directional solution. Alternative, smaller-scale routes to market are needed but supporting the development of the infrastructure that they require should not mean that the government has to first re-write its own agri-food strategy.
There is what the author calls a ‘Nokia moment’. It is when you realize that what you have built is not what you want. The term goes back to watching Nokia’s fortunes in the mobile phone market and, in particular, a cost-reduction, production-restructuring move from Germany to Romania. In 2008 a major new flagship production unit was built in Romania [much to the chagrin of a German plant’s workforce]. In Romania it was all about Nokia. By 2011 the Romanian factory was closed. It was the wrong investment at the wrong time and greater forces were at work. It does not matter how big or high profile you are, there can be a point in time when it is time to move on and to accept that you are not suited to what has been your market. There may come a point in time when some of Ireland’s primary processing sector reaches their Nokia moment.
This has mainly been about markets and their implications. I have often said that small-scale, Irish family farm need to be producing the raw materials for high-value products and that they need to be at the base of supply-chains that return value to the farmer [that they can premiumize the farm-gate price]. The quid pro quo of this is that farmers need to become attuned to producing specific raw materials for these exacting supply-chains. Higher farm-gate prices will not come about without change. It is a simple, albeit tough truth and significant change is needed.
We have to create a segment of the industry that can handle change if a premium, exportable-in-volume, Irish product range is to be developed. It will be about supplying the consumer and market positioning but, even then, such a change alone will be insufficient in light of the Sword of Damocles that is hanging over the industry; climate change and meeting newly imposed emissions targets.
As far as addressing the emissions situation from Irish farming, there appears to be a laid back, it will not happen approach. As with Brexit, one needs to assume that it will. A favourite response seems to be to state that Irish farming is a World-leader when it comes to its carbon footprint and that warrants it being free to continue with its current production practices. I would certainly like to see more evidence of this World-leading position as it will need to be pretty powerful evidence if it is going to stay the EU when it comes to seeing emission reductions delivered upon.
As stated previously, I believe that there is a growing body of evidence that suggests that grass-based livestock farming can sequester significant levels of carbon. It has even been suggested that done in the appropriate way, cattle farming can be a way to return agriculturally-liberated carbon back into the soils. It is this subject that needs to be rapidly investigated and verified. It also needs to be verified in the context of the Irish approaches to cattle farming. How can it be achieved for milk and meat production and will it create a strong enough case to reverse emissions-only policy decisions? It could have major implications for the Irish cattle sector in that proven net emissions- reducing farming systems may have to be prioritized over others. Policy and incentives may have to be re-focused to encourage the change of systems. And they may not be the same changes as suggested by emissions-counting alone. The jury should still be out on this but one fears that knee-jerk reactions and too simplistic ‘solutions’ may have already jumped the gun.
The French by contrast appear to be getting it right with their 0.4% increase per year in soil organic matter objective. Do they know something that the rest of us do not? It is a positive approach and one that has much to recommend it over counting emissions and then working out how to cut the high emitters, regardless of how successfully they sequester carbon.
As also stated in an earlier blog, we need to be identifying the best farming systems in terms of net carbon emissions and raising farm incomes. A part of that policy will have to be ensuring that the message is transmitted through to consumers. To do so will require a far different supply-chain than we have at the moment. It will need to be flexible and adroit and able to place in the market those products that fulfil multiple criteria relating to eating quality, environment, ethics of all descriptions and climate-change, planet-saving credentials. For the marketing, processing and farming sectors this is a whole new ball-game. It will be for the placement of government [tax-payer] resources.
And one would suggest again that we should see what France is up to. Apart from its interesting determination on soil organic matter, one should not forget that it is a World-leader when it comes to the production and sale of premium food products. Whilst it may be embarking on a new journey when it comes to carbon sequestration into soils it certainly is not when it comes to premium foods. Ireland can learn much on the latter and partner on the former. It may well be an approach that can deliver in terms of developing farming systems that can mitigate climate change consequences and deliver improved farm incomes.
The above said, Ireland will still need to become a more agile and flexible farming to food industry. And that is something that will not happen if the farming industry continues to be hampered by an oligopolistic processing industry that is able to focus on its own interests first. We need a farming industry that is truly sustainable, both economically and environmentally and that industry needs to be partnered with a supply-chain that can deliver market-driven results all the way back to the farmer. A leadership that is not willing to embrace change is, however, not going to deliver for the farming or rural communities, not to mention the climate. And without change, the future is, to be honest, looking a little dark. The question is, who is going to lead it out of the shadows?