BUILDING UPON ROCK-SOLID FOUNDATIONS

This post first appeared on line at http://www.thatsfarming.com on the 8th May 2017

Apparently, every few years it is necessary to investigate how internationally competitive Irish dairy farming is. Apparently, every few years it is necessary to cherry-pick the results for the positives and to avoid any distasteful conclusions. Thus, are created the foundations upon which the national agri-food strategies are built.

Any farming visitor to the Emerald Isle will swiftly be regaled with tales of how competitive the Irish grass-based dairy-farming model is. It is legendary. It is again highlighted in the 2017 edition of the Teagasc report into the ‘Competitiveness of Irish Agriculture’. It states, “the competitive position of Irish dairy farms was very positive when cash costs were considered … [they] had the lowest cash cost to output ratio amongst the key international milk producing regions”.

Deliberately removed from the above quotation is the fly in the ointment; “in isolation from imputed charges”. Simply, to ensure consistency across data sources the costs of own ‘unpaid’, usually family, labour and owned assets are excluded from the cash-cost comparisons. It is standard comparative analysis practice and it is methodologically correct.

For an industry, reliant on family labour and with high land costs, ‘cash costs’ are a smaller part of total costs and, hence, partial costs are less indicative of the overall economic standing of the business. As the report states, such an approach is only “valid in the short-to medium term”. In other words, receiving a price below the full cost of production can only be sustained over short periods as farmers must live, assets renewed and debts serviced.

Add in imputed costs for labour and owned assets and the narrative alters; “when economic [all] costs are considered, the competitiveness ranking for the Irish dairy sector, for the average size farm in particular, slipped relative to the other countries examined… a warning signal for the future competitive performance of the average sized Irish dairy farm in a global environment”. This is a similar conclusion to that drawn in the 2011 report. Or, in other words, get bigger or get out?

Cost is of course only one half of the profit equation, but in a price-taking situation it is the crucial part. Elsewhere, farmers have chosen to get closer to the consumer, to process, to add-value and to focus on price first, even if their milk production costs are higher. It is not an easy option in Ireland’s small domestic market. Equally, is focusing on global commodity [premiumized or otherwise] markets despite having a relatively small-scale, higher fixed-cost farming structure, such a grand idea? Thankfully, at least for now, Irish dairy farmers enjoy CAP support and the off-farm-income-earning members of the farm household to alleviate the contradiction between their market position and their total farm costs.

The Teagasc report highlights that for Irish dairy farms to be internationally competitive they need economies of scale to reduce their fixed costs per kg of milk solids. To do so means more cows and/or many less farms. It means investment and debt loading. It means consolidating land. It means hiring labour. And what about its dependency on fossil-fuel-based N-fertilizer with all its arising implications. Or how about climate change, GHG and other environmental issues. One can envisage a rosy scenario where all Irish dairy farms are double in size but is that achievable? Is it even desirable? And lest one forgets, others’ herds are also getting bigger.

Chasing low-cost competitiveness off an Irish family-farming base is, frankly, a pipe dream. Small farms with high fixed costs do survive but they supply milk into supply-chains linked to higher-value markets. Even New Zealand, with its dairy-farming scale, is asking itself how it can add value and move away from its commodity-market dependency. Ireland must ask the same question.

Admittedly, these competitive reports can be daunting to read but they are drawing correct conclusions. It is the role of the farming organisations and, to a degree, journalists to analyse them and to ensure that farmers receive a correct and factual overview of the findings. It requires critical analysis. It does not need a back-slapping, aren’t we doing well, sanitized version of reality. It is about giving farmers rock-solid information upon which to build their businesses.

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