Category Archives: Food Strategy 2025

RISK MANAGEMENT IN A VOLATILE IRISH CLIMATE

A subject that was particularly disliked by many of our agricultural business management students was statistics. So why did we teach it? The rational was simply that farm management planning is about risk management and it is imperative that decision-makers understand probabilities. Preferably. it need to become intuitive as much as formalized. That said, if one is adroit at using spreadsheets for planning, looking at the possible downsides is not onerous.

One should also remember that planning is not solely about cash flows; there are many situations that would not be first considered in financial terms. Feed supply is an obvious one. Although resolving an on-farm fodder crisis will have financial implications, it is preferable not to get into it in the first place. In the days when a farm was entirely self-reliant, farm planning involved ensuring that there was a safety margin between expected supply and anticipated need. Nowadays one wonders if an expectation of government crisis support has led to farmers risking operating closer to the margin than they would have in the past.

I remember commenting in 2014 that the Fodder Crisis of 2013/14 should have been immediately followed by a review of the Food Harvest expansion plans. Just what would the implication be if it was repeated with an extra 300,000 dairy cows on the island? It would certainly mean [yet] another ‘Dear Taxpayer’ letter emanating from those who represent Irish farmers. At present, one wonders how some farmers are coping with the quality of their silage this winter.

Prior to Ireland, my previous dozen years had involved farming in a climate that had warm to hot summers and long cold, dry, windless winters. We did not have long grass-growing seasons but leguminous forage crops grew in abundance. The summers were good enough for hay-making and conservation could be back-stopped with haylage. Land costs were low and we could farm on a low-cost, extensive system that meant a fodder safety margin could be built in. I would say it was an easier location to farm cattle, sheep and, as it was, water buffalo.

How different Ireland is. Yes, it has a long grass-growing season but it has an unpredictable, maritime climate. As I often say, the country has low variable costs of production for milk and meat but those are more than dissipated by the small size of Irish farms. Consequentially, it is not a low-cost producer. And endlessly repeating the statement that it is does not turn the myth into reality. It is a myth based upon partial costing and it is one that continues to undermine the future of Irish farming. That this has led to a processing / exporting model that assumes that Ireland can produce low-cost raw materials is the farming tragedy of our times.

Apparently, the solution of more than a few who advise Irish farmers [and write agri-food strategy] is to recommend that farmers intensify their farming systems. The logic being that if one aims for a greater production per acre [land being a major constraint for most farms] costs per unit of farm produce can be driven down. The more intensive grassland use will lead to greater ‘profits’. Whether this will provide a sustainable return on the farmer’s labour, management and assets is an issue that partial costing does not properly address.

One would also ask if this model can be successful in Ireland’s volatile climate? Is there a gap between the theory and what farmers can achieve year-on-year within risk-set safety parameters? If those who advise are frustrated by farmers’ willingness to adopt their ideas [regardless of how many discussion groups they attend] it is probably because the farmers are weighing up the risks involved and concluding that intensification is not a sustainable solution for them.

One read a headline the other day that referred to producing 44 DM t/ha from grass in Brazil. It was under centre-pivot irrigation. Intensive farming invariable means operating in a controlled environment [indoor livestock or protected crops] or where climatic variation can be mitigated [as with irrigation]. Yes, it rains in Ireland and an awful lot at times. When and how much is less predictable. One wonders how many advocates of intensify grassland use, more stock and greater forage reliance have run the economic models [and risk assessments] necessary to fully assess the wisdom of going down that route on an island that is quite so exposed to the Atlantic Ocean? I suspect that many farmers have [at least intuitively] gone through the processes.

It is why I keep questioning the idea that Ireland is [or can be] a low-cost food producer. The farming structure is unsuitable and the climate too variable. I tend to consider Ireland as more akin to those European regions that have a difficult climate, constrained to small-scale farming and remote to market. It requires a different mindset and farming/food model.

Sadly, many in Ireland’s farming establishment are fixated with New Zealand’s large-scale farms as a model. Sadly, many in Ireland’s agri-food establishment believe that Ireland’s farmers can survive on low farm-gate, commodity prices. Realistically they cannot; regardless of the taxpayer support that flows their way. Irish farming is exposed [by their supply-chain partners] to the wrong markets and they are being advised to rectify the problem by adopting farming systems that simultaneously and increasingly expose them to the vagaries of Ireland’s climate.

The strategic advise given at all levels to Irish farmers should be built upon risk-based farm planning but, one must ask, just who has done such? Has anyone? And, not least, was it done for Food Harvest 2020 or Food Wise 2025? And if not, why not? I for one am left with the impression that there is just too little rigorous farm business planning around.

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SPINNING A YARN TO IRELAND’S FARMERS

Ever since arriving in Ireland back in 2013, the author has been amazed at how active the press and the agricultural establishment has been at telling farmers what they need to know and the information that they should be basing their farming and investment decisions upon.

For the first couple of years, this was about how important the agri-food sector was to an ailing economy. It was about farmers pulling on their green jerseys to help the country by providing the raw materials for a food processing industry that was a major export earner. It was and still is about the headline export earnings figure. It remains the number that is foremost when it comes to agri-food strategy and how successful the agri-food sector is. Ask a politician about the health of the farming industry and the likelihood is that they will reply with export earnings figure.

The headline figure is always gross; it is never net. Or should we be talking about the agri-food trade balance? True the gross figure reflects the wider economic activity within Ireland but what about all the farm-input imports that the farming sector needs; its energy, its one million tonnes or so of nitrogen fertilizers, its one million tonnes of protein feeds; its pesticides and its farm machinery? And then there are the imported raw materials that are not produced by Ireland’s farmers that the food processing sector uses; be it, for example, palm oil or cocoa powder. And finally, one can add in all the imported food that is consumed by the Irish population; imported in part because the food processing sector chooses to focus on producing for export rather than feeding the Irish people. It may be a case of making decisions based upon where the processor-exporters see their comparative advantage but whilst they export to feed China, are they feeding the Irish at home?

One should also add that the headline figure for export earnings has been influenced by recent high food prices. It will be interesting to see if the export earnings have been maintained [or even risen] over recent months at a time when farm-gate prices have fallen. If they do continue to move ahead whilst farm incomes and farm-gate prices have fallen one should be asking just what is going on. In a country that is meant to have a co-operative ethos in its dairy sector, one would expect that processing sector earnings should in some way be reflected in farm-gate prices.

One did notice the indecent haste with which the Food Harvest 2020 agri-food strategy was updated to Food Wise 2025 before the last election. One wonders if it was done so before the current farm income crisis became too evident. For the farming community, after a couple of years of farm-gate prices being below the cost of production, it is now all about farm incomes. Sadly, we remain with an agri-food strategy that is about export earnings from the ‘agri-food’ sector and not about enhancing farm incomes. It is apparently now locked in until 2025 and immune to change despite the all-sectors farm income crisis, Brexit and climate change. As when Margaret Thatcher was asked to perform a U-turn, the answer is “the lady is not for turning”.

One can argue that the national agri-food strategies are working well. Agri-food exports have been rising [at least in monetary terms (one will not go into the details of volume)] and it appears that the returns being generated by the processing sector have been okay. That is not surprising if one believes [cynically or otherwise] that a primary objective of both strategies was/is to support farming to more efficiently produce low-cost raw materials for the processing sector. Even more cynically, one could suggest that this objective does not give due consideration to farm incomes.

It appears that analysing the two strategies impact on farm incomes was not undertaken at the strategy development stage [or that the farmers’ leadership insisted that it should be so done]. The habit of many in the establishment of saying that Ireland is a low-cost producer of farm products [based upon partial costings] only makes matters worse. That Ireland is a low-cost producer is indeed one of the greatest yarns spun to farmers. Just why is the idea perpetuated that Ireland is an internationally leading low-cost milk producer when Teagasc’s own report in 2011 into international cost comparisons concluded that, on a full-cost basis, Ireland was only average. With larger farms it could be a low-cost producer, but the scale required can only be achieved by land consolidation, massive farm investment and a significant decline in farmer numbers; none of which are going to happen overnight or even by 2025.

So, we have a successful agri-food strategy in operation and that is supported by Irish farming’s low-cost farming systems. Is that Yarn #1?

Another of the author’s favourites yarns is the one that said that Irish farmers should expand post the end of milk quotas because the world needed and would absorb any amount of food produced; after all the global population was going to reach nine billion souls by 2025. Rarely did anyone say where these people were going to be living or whether they could afford to purchase food produced in Ireland. Indeed, one has already heard of ‘success’ stories whereby Irish milk powder is sold in sub-Saharan Africa. The author did ask the simple question; “will it provide an improved return to the Irish dairy farmer?”. Not unsurprisingly, a definitive answer was not forthcoming. Apparently, the idea of analysing the supply chain backwards from the retail price to the farmer is not done. Or maybe it is beyond the investigatory capacity of Ireland’s farming journalists [even to the extent of asking the question]. Across most sectors, there is the naïve assumption that just by exporting produce, the Irish farmer will benefit. Yes, somebody does benefit but judging by current levels of farm income, it is not the farmer.

So, higher exports will lead to improved farm incomes and farmers should invest to expand on the assumption that the latter will automatically happen. Is that Yarn #2?

A third yarn is that particular agri-food exports illustrate how successful the agri-food sector as a whole [including farming] is. Although not definitively said, it can be construed that the message to farmers is that they should consider that success when it comes to their own on-farm investment decisions.

In the dairy sector, it seems rare to ask who benefits from those exports and whether there is any ‘trickle down’ to the farmer [who incidentally often must make the major proportion of the investment required to increase volumes]. In the meat sector, however, most farmers would swiftly ask the question due to the limited private ownership of the factories. The difference is probably explained by the more complicated structure of the milk-processing sector [where some co-operative ownership remains]. The author’s recommendation is to look at the latter in terms of who owns the primary and secondary processing activities and to keep in mind that it is second that owns the brands and sells the finished products. And also, ask if in recent years the cooperatives have invested in primary processing or the [probably] more profitable higher-value-added secondary-processing along with its associated brand-owning, nearer-to-the-consumer activities?

Of note, is the success story that is Irish infant formula [yes, there is controversy around infant formula but there is a need for it, so why not Ireland]. Recent years have seen significant rises in Irish formula exports. On the assumption that category 098.93 of the CSO export data is dominated by formula exports, exports have risen from 105,000 tonnes in 2012 to 161,000 in 2015. In value terms, exports have risen from about €680 million in 2012 to €1.17 billion in 2015.

Interestingly, for the first 8 months of 2016, export volumes have been about the same [104,000 tonnes] but export value has risen from €758 to €854 million. The value rise is largely attributable to a c.50% rise in sales to the lucrative Chinese market [includes Hong Kong]. In 2012 the average sale price for exports in this category was nearly €6,500 per tonne whereas it was close to €7,300 in 2015 and over €8,200 for January to August 2016. This is largely driven by the growth in China/HK which accounted for 10% of sales volume in 2012 and 25% in 2016. By contrast, the mature EU market has a much lower unit sales value [under €4/kg in 2016 compared to China at nearly €15/kg].

If one accepts that export earnings are a good key performance indicator [KPI] for the Irish agri-food sector the latest export earnings figures from the CSO for the 098.93 category indicates what a rip-roaring success infant formula manufacturing and selling is for the agri-food industry.

From a farming perspective, has the performance of the infant formula sector benefited Irish dairy farmers? From reading the press and hearing comments from politicians and farmer leaders, one would assume so. Let us, however place this in a different context.

Few dairy farmers would doubt that 2015/16 has been a poor year for farm-gate milk prices. Would they have been even worse if not for the infant formula sector [a sector that has seen a 12.5% growth in sales in 2016]? Irish dairy farmers produced 6.75 billion litres in the September to August 2015/2016 period whilst the infant formula sector export sales were €1.25 billion. This equates to an export sales figure equivalent to 18.5 cpl. It is a thought-provoking statistic.  Should these export sales figures be delivering a better return to dairy farmers?

Are, nevertheless, these sales made by that part of the milk processing that is owned by the dairy farmer? The answer is only that which is indirectly owned as shareholdings in the PLCs by the cooperatives. Farmer ownership is too often limited to low-value-creating primary-processing whilst processing into consumer products and brand ownership lies in the secondary processing sector [which is often owned by the private sector]. One should ask just what proportion of infant formula sales from Ireland are made by Nestle, Danone and Abbott Nutrition? If the brands and manufacturing of infant formula is controlled by privately-owned multi-nationals, just what level of ‘trickledown’ to farmers should we expect?

It is often said that it is important to use Ireland’s green and grass-fed images to promote infant formula; that there should be an Irish brand in the market place that promotes these virtues. It is also often said that ‘product of Ireland’ should be more in evidence. Is either realistic? The common labelling used with infant formula, at least when reviewing the online retail listings, is ‘produced in the EU’. Hipp Organic does, at least, manage to specify ‘produce of Germany’. If one looks at the ingredient lists for infant formula, it then becomes self-explanatory.

If one peruses the information [easily accessible via online supermarket listings] for a widely available ‘First Milk’ formula one can work out that the fat, carbohydrate/sugar and protein contents of the powder are about 23%, 47% and 8% respectively. Where it gets interesting is when one also looks at the ingredients that fulfil these nutritional categories.

Now one may think that the fat content in baby milk powder comes from milk from [in this case Irish ‘grass-fed’] cows. Well one would be wrong. The typical ingredient list specifies “vegetable oils (Palm, Rapeseed, Coconut, Sunflower)”. One can be certain that none of these, rapeseed oil included, are of Irish origin. Hence, straight away, one can see how difficult it is to ‘play up’ the Irish farming origins of the infant formula. They are manufactured in Ireland and their manufacture may create economic activity and employment in the wider economy, but they are not derived from dairy fats as is the case with butter or cheddar cheese.

The carbohydrate source is lactose [from milk] and the protein source from demineralised whey [from milk]. Can one assume that these are or Irish origin? It is a question that warrants further investigation given that in 2015 Ireland IMPORTED about 55,000 tonnes of lactose and 40,000 tonnes of whey [it also imported 48,000 below -1.5% fat milk powder (with the value of all three items being about €200 million)]. These are being used by the food industry and in quantities that brings into question whether many food products can be linked to Irish farm production.

As a note, Ireland imported 92,000 tonnes of palm oil in 2015. It also imported 46,000 tonnes of soybean oil. Neither of these are widely used by the general population for cooking. Hence, as with proteins for animal feeds in farming, the food processing sector is reliant on imported vegetable oils. This again shows how difficult it is for the processing industry, with its complex food products, to build their sales promotions around ‘produce of Irish farms’.

So, should farmers be more sceptical when they are told that they are directly benefiting from the export activities of the agri-food industry? One would say so. One is not questioning whether Ireland has a successful food industry but one is questioning whether its success is trickling down to the farmer. Are we even right in expecting that it should? Or should we accept that, as with many manufacturing processes, raw materials and components are sourced from the most appropriate supplier. It is then about being processed in Ireland using Irish people, skills and technology? It is beneficial to the economy but, judging by recent farms incomes, not necessarily so to the farmer.

It is a clear reason why Ireland needs to separate its agri-food strategy into one for food processing and one for farming [and rural Ireland]. Government expenditure to each sector can then be better targeted, justified and rationalized. It may then be appropriate to judge the food industry’s performance on export earnings whilst farming can be first evaluated in terms of farm incomes.

One would also suggest that the farming community and its leadership needs to become far more aggressive in terms of critically analysing what they are told and specifically the broad-brush measurements of ‘success’ that are used.  Yarns are just too common place but, too often, they are going unchallenged.

ARE WE BEING LED BY A HORSEMAN OF THE APOCALYPSE?

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?

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 THE CAPITAL AVAILABLE TO COMPETE?

Another extract from my FH2020 review. One of many questions that should have been asked and analyzed when the strategy was put together.

Does anybody not appreciate that going global means that the Irish farmer is going to be going head-to-head with capital investment flows into agriculture from China, the Middle East and the wider financial world? If not, they should do as the desire to become a global player off a finite Irish production base is a questionable strategy.

In this extremely unequal contest the author would only predict one winner and it is not the Irish farmer. In the short-term there may be opportunities to plug the current gaps in the market but capital will flow into locations where agriculture is under-performing; thus snuffing out those opportunities to supply agricultural commodities from higher-cost, fragmented, small-scale, small-volume-producing farms located in western Europe or Ireland. It is also a situation, given the starting point, that any amount of land, farm or business consolidation will not rectify.

To cite the Farmers’ Guardian in January 2013 quoting Catherine Lascurettes, executive secretary of the National Dairy and Liquid Milk Committee of the Irish Farmers’ Association, “farmers would have to invest £1.5bn on their farms to deliver that 50 percent increase [in milk production], and that needs to be matched by a significant investment from other co-ops. Along with the huge investments necessary there are challenges over… farmer’s access to credit (which is worse in Ireland than the UK)”. In terms of credit provision, does Ireland after the banking crisis have banks willing to lend to agriculture, or even have the capability to fully appraise the expansion plans of agriculture? The author also doubts that Ireland has an up and coming Rabobank to service its farmers.

To place this into context one only has to scan the international agricultural and agri-food linked journals to see the magnitude of investments being made around the World into agriculture and food. As mentioned earlier, the Chinese appear to have ear-market five billion US dollars to address the issues with its infant-formula supply. In terms of magnitude, the Smithfield Foods takeover was similar. One has also heard of a three billion US dollar investment by the Chinese into the Ukraine and also their intentions towards large-scale investments in Australia and New Zealand. And that is not to mention smaller milk-powder related investments within the EU.

With regard to the Ukraine, an interesting article appeared in the Irish Farmers’ Journal dated 11th January 2013. It was a piece about a 300,000 (yes, three hundred thousand) hectare crop production operation that is just building its first [note “its first”] 10,000 cow dairy unit. Below is a quotation from the article.

The relevance to Irish farmers ofMriya’s Ukrainian operations Irish Farmers Journal (11/01/14). Even a simple analysis of Mriya’s operations poses some serious questions for Irish farmers, co-ops, farm organisations, food processors and agricultural policymakers so”. Hence the author, Brendan Dunleavy asks: “How many Irish farmers and agri-businesses can compete with large, completely integrated, well-financed, highly efficient, agro-industrial groups like Mriya? Are our much-vaunted low-cost, grass-based, livestock production systems enough?

In the context of this section of the review [of FH2020], the key words are ‘well-financed’. As to the various questions posed, one would tend towards a simple answer; ‘no’ to each one. And the last is literally the billion dollar question.

In the context of finance, the author would expect those involved in finance provision to be wary of funding what would in effect be a credit line to the farmer-suppliers of the downstream supply-chain entities. In this situation the financiers themselves would need to be very convinced that the business model of the processors showed that they could then compete in their chosen markets. There would also be the question of ultimately who carries the credit risk, the processor or the farmer? Such credit lines are made [formally] available but they tend to be in the developing world and are financed by the World Bank and its ilk. It is a very unlikely solution for Ireland.

The author himself has worked in the past with major agro-industrial investments [in particular those that now supply vast quantities of palm kernel cake to the New Zealand dairy industry] so the report in the IFJ comes as no great surprise. He has also worked in Eastern Europe so is well aware of the potential of the likes of the Ukraine.
The Ukraine is not a major milk producer (relative to its population) and it volume is a little more than double Ireland’s, but that does not mean that major agro-investments will be targeted at the domestic market. If major investments are, for example, Chinese or Gulf-financed, the produce may be destined for export from the start.

Ireland may be a major player in terms of its share of the global dairy trade but in the context of its resources it is an agricultural lightweight. If one considers dairy products [regardless of whether they are grass or cereal-fed] the Ukraine has about thirty times the arable land area of Ireland. Romania, another CEE with serious agri-food potential is currently reputed to have three times the arable area of Ireland lying derelict. In addition to a physical resource shortfall, Ireland (as mentioned earlier) has serious access-to-finance constraints. Its fragmented, small-scale farming base and slow-moving land market will also make it unattractive to major agri-business investors.

 

COMPETITIVE MILK POWDER INVESTMENTS

Just reading again some of what I wrote over two years ago [late 2013] when I wrote a review of Irish agri-food strategy. This I found particularly relevant when thinking about the root causes behind the current dairy crisis. They are a few paragraphs to note when one hears executives from the processing sector saying that nobody saw the depth of this crisis coming!

“With so much talk about the Chinese market for infant formula and milk powder, the author’s reaction was to investigate what its various suppliers are doing. In the past he has seen perfectly rational decision-makers all working with similar information all reaching the same decisions without fully reflecting upon the consequences of what may happen if they all make the same decision at the same time. The consequences can be dire.

Clearly New Zealand is the leading supplier into China and it has a free trade agreement in place. In 2011 NZ accounted for 75% of China’s milk powder imports. Since then the market has continued to expand and China has diversified its sources but what has the reaction been? Well in NZ Fonterra has just opened (December 2013) a new 2.2 million litres of milk a day, 85,000 tonne per annum milk-powder facility. It has also announced the development of another, new,marginally larger facility. All will, of course, be target at their export markets.

It appears that the Chinese themselves are directly investing in France and entering into joint ventures elsewhere in Europe. One press article states that one-third of Chinese milk powder imports in 2012 derived from production facilities that were by then directly controlled or had agreements with Chinese businesses that have a track record supplying their own domestic market. The USDA reports that Friesland Campina is investing in three new infant formula facilities and Arla Foods is planning to expand its milk powder sales to China. It also reports that in France nine milk-drying facilities are being built or expanded. Hence, the supply side is currently very dynamic.

Although nobody appears to be predicting that the demand for imported infant formula or infant-formula based upon imported raw materials is going to change anytime soon, there remains the question of just how long will this market boom last? Will Chinese government efforts to restore confidence in home-produced infant formula succeed?When will new Chinese, industrial milk production investments kick-in and impact upon the market? Will the Chinese companies investing overseas develop a supply-base that is sufficient to fulfill domestic demand and will the supply-base even include Ireland? How will foreign-owned brands fare into the long term? There are a lot of questions that a milk producer at the bottom of a supply-chain-to-China should be asking if the supplier that they supply [and maybe investing to supply more] milk to is specifically investing to supply the Chinese market.”

JUST WHAT IS THE COST OF IRISH GRASS-FED MILK?

It was interesting to read the budget for 2015 for the Greenfield demonstration farm in Kilkenny in the Irish Farmers’ Journal this week. It was interesting because this is the farm to demonstrate that the grass-fed model is the way to go when done at scale [about ¾ of an average NZ dairy farm] and carrying heavy debt-for-investment loading.

The following is a summary costs of production from the Greenfield Kilkenny budget for 2015:

–  Variable costs of production – €19.58 per litre

–  Fixed costs of production – €18.19 of which:
      – Labour – all staff-related costs – €5.81
      – Depreciation – machinery/buildings – €4.07
      – Land – rental and leases – €4.34
      – Other fixed costs – €3.95

– Total costs of production are €37.76 per litre

– Capital repayments are €3.80 per litre

There may be some rounding in the above. One also has to be careful not to ‘double-count’ depreciation and capital repayments as the former is not a cash item and is included to account for capital consumption; although the question is whether there is any capital replacement going on whilst the initial debt [which presumably funded the original purchase] is being repaid [it is always difficult working with someone else’s numbers].

It should be noted that this appears to assume that many costs will be [forced] lower in 2015 than 2014. The budget also lists the cost of heifers in the budget as a variable cost without specifying how many. Likewise for livestock sales and how much of that is cull cows; thus not allowing one to work out what the depreciation cost is for the herd.

The above does include all costs and that contrasts to other information that focuses on variable and cash fixed costs and leaves out the farmer’s ‘unpaid’ labour and owned land/infrastructure costs. On this basis the cost per litre figures would be about €0.10 per litre lower [c.€27.5]; probably not atypical for the non-included costs on an average farm.

To relate this to the author’s previous posting on ‘is land and grass the new Irish milk quota?’, it is worth noting that the IFJ states that the farm is targeted at producing 127,185 kg of milk solids in 2015. This compares well to:

 –  New Zealand – 139 tonnes of milk solids and an average herd size of 401 (2012)
 –  Australia – 120 tonnes of milk solids and an average herd size of 240 (2012)
 –  United States – 111 tonnes of milk solids and an average herd size of 170 (2010)
 –  Denmark – 106 tonnes of milk solids and an average herd size of 159 (2013)

To quote from my paper “to return to the figures, what they highlight is the importance of fixed costs … Whereas the emphasis in Ireland is on the low cost of grass as a nutrient source for dairy cows, the author would be focusing more on the fixed costs of production [especially labour] and the sales value of the milk [in that for smaller producers in high labour cost countries it is about being within a supply-chain that sells high-value products to consumers]”.

To quote further:

“In June 2011 a report was published by Teagasc entitled “Study of the International Competitiveness of the Irish Dairy Sector at Farm Level”… [In the following paragraphs direct quotations from the report are presented in italics].

The report first compares Irish dairy production to that in seven pre-eastward expansion EU countries [Belgium, Netherlands, Germany, France, Italy, Denmark and the UK]. It concluded that “the position in relation to Ireland is still positive on a cash costs basis per unit of milk solids, with costs approx. 5 per cent below the average of all countries”. This, however, is based upon cash costs and excludes family labour and any land ownership costs.

Based on the competitive index of total economic costs, which compares Ireland’s position to the average position of the competing countries, Irish dairy farms had costs per unit of milk produced which were only slightly above the average of all countries… Ireland had a relative advantage in terms of particular ‘cash cost’ items, but these particular advantages were outweighed on a total economic cost basis, due to the high imputed cost of owned resources”.

- “The relatively low stocking rates and milk yields per hectare on Irish dairy farms over the period also must be considered as a contributing factor in Irish dairy farming’s high economic costs.

- The competitive advantage of Irish producers deteriorates when all imputed charges for owned resources [family labour and land costs – author’s note] are taken into consideration.

- On a full economic cost basis, high land prices are seen to adversely affect the competitiveness of Ireland

While the Irish dairy sector has low cash costs of production, it is also characterised by relatively low productivity in terms of labour, milk yields and constituents. Land costs, as measured by land rental values are high in Ireland and are a key reason why the competitive position of the Irish dairy sector is less favourable on a total economic cost basis”.

The report then went onto look at how Ireland compares against global players including NZ, Australia and the USA.

It appears that for the period 2008-2010, the competitive position for Irish dairy farms outside the EU15 was very positive when cash costs were considered in isolation from imputed charges for owned resources…This result is consistent with previous research… However, as the opportunity costs of owned resources are not included in this calculation this indication of future competitiveness can only be considered to be valid in the short to medium term. In the longer term adjustment within the sectors will be a reality. Hence, total economic costs, which include imputed charges for owned resources must be considered to gauge the longer term ability of Irish dairy farmers to compete on a global scale”.

With land and family labour costs imputed the following is concluded. “On a full economic cost basis the smaller 48 cow Irish farm ranks poorly among the countries considered. On a full economic cost basis the competitive position of Irish farms deteriorates, but the larger Irish 110 cow farm still ranks well… The lowest per unit total economic costs were shown to be in Argentina Australia and New Zealand for the period 2008-2010…On a total economic cost basis, the average size Irish dairy farm… had costs well in excess of some of the major dairy exporting regions of the world.
.
When economic costs are considered, the competitive ranking of the Irish dairy sector and of the average size farm in particular, slips relative to the other countries examined… this finding could also be considered as a warning signal for the future competitive performance for the average sized Irish dairy farm in a global environment.”

Furthermore, if Irish dairy farming transforms to larger scale production units in a no quota situation and significant scale economies are achieved, the Irish milk sectors competitive position will be strengthened”.

A few thoughts to come out of this research include:

- Is it safe to conclude that the Irish dairy industry can compete globally so long as there is a very significant move towards consolidation? Just where will this leave the traditional, ‘average’ Irish dairy farm?

- Can Ireland with its highly fragmented land based actually achieve the dairy farm consolidation required?

- Recent 3.5% p.a. rates of expansion will only increase the average Irish dairy herd to 77 cows.

- Even with much faster expansion, will both global and EU competitors continue to expand at least as rapidly?

- In terms of its labour usage, all fixed costs and land costs, will Ireland with its focus on lower milk yields per cow from grass be able to compete on a total economic cost basis into the long-term?” [end of quotation]

The question is; does the budget from the Greenfield Kilkenny farm provide any reason for questioning the findings of the above Teagasc report on the competitiveness of Irish dairy farms; not least given that the Greenfield farm is operating at a scale that is going to be unachievable as an average dairy farming unit in Ireland [and it is still below that in New Zealand]? If not, how does this bode for the major processing investments made in Ireland to process ‘new’, post-2015 milk that appear to assume that Ireland is a highly-competitive, low-cost milk-producer?

The author’s paper on ‘is land and grass the new Irish milk quota?’ then goes onto look at the possible costs of milk production under various expansion / investment scenarios. [it is available as a download from the Agrifood Solutions Blog]. By and large, the total production costs given in the author’s paper are not out of line with the Greenfield farm budget; if anything that could be a little lower [they are also reliant on the accuracy of other published sources].

The following is, however, some of the conclusions. Does the Greenfield farm data contradict these? To quote:

“The author’s research suggests that there is a major issue concerning just how competitive the Irish grass-fed model is both within Europe and globally. Apparently, this conclusion is actually nothing new. More recently it appears that too much credence has been given to the low variable costs associated with grass-based systems [because grass is cheap] and too little has been given to the full costs of production. Further grass-cereal comparison may well have placed too much faith in cereal prices staying closer to their highs of recent years. Overall the major cost issues are:

 – the total cost of labour per litre that is a consequence of small Irish herd size
 – the extra capital expenditure required to expand and increase stocking rates
 – the fragmented land structure and consequentially small milking platforms
 – the rental or purchase cost of removing the land constraints on scaling-up
 – the difficulties associated with the massive degree of scaling-up required

The model is limited by grass availability but it is also limited by seasonality in terms of its capability to provide milk for a wide range of products that could increase the value of the milk ex-farm. If anything, recent developments within the dairy farming sector years are promoting more, not less, seasonality. It is about chasing spring grass. This has been further embedded by processing investments that are focused on processing more peak season milk.

Ultimately, the question is whether milk from the Irish grass-fed model will be able to compete globally against NZ’s scale and against others who are operating with average long-term grain prices that may trend upwards by, say, only 2% per annum? It should also be remembered that many commodity-focused producers operate off large-scale production units [whilst their smaller-scale farmers supply the more ‘artisan’ sector]. Ireland, by contrast, is trying to compete with them with a farm-scale that is more typical of other’s artisan product supply-chains” [end of quote].

And finally, does the Greenfield demonstration farm illustrate the cost implications of scaling-up the grass-fed model within Ireland’s unique land holding structures? Likewise, does it illustrate the implications for investing heavily in a country that has high-costs in terms of unit labour costs and, more generally, other fixed-cost factors of production?

A point the author also made in his earlier paper was that there is a difference between a ‘natural’ evolution and a ‘forced’ expansion. The latter was envisaged within Food Harvest 2020 based upon the idea that there would be an irresistible desire for dairy farmers to throw off the shackles of milk quotas [whereby the argument is that land and grass will actually now become the over-riding ‘quotas’ operating in Ireland and that they (due to the use of the grass-fed model) will be nearly as constraining as quotas were themselves; not least when considered in the context of the high capital and land rental costs associated with removing them]. Typically, expansion has happened over time and at a pace that the farmer chooses. It certainly happened within the context of affordable land acquisition and gradual investment that gave due consideration to debt loading [and the risks associated with such] and market volatility.

The major plus to the end of quotas is that it provides farmers with a greater degree of freedom to make their own decisions. One would be surprised if milk production does not rise post quota but for many farmers it will be a gradual process that allows for the rearing of additional cows and improving grassland by reseeding, drainage and improving access. It will be about making better use of the resources they have first rather than major expansion investment. In other words they will favour a more ‘natural’ evolution to expand post quota, regardless of the impacts this may have on a wider dairy industry that has invested in the expectation that expansion will be rather more dramatic.