Milking the markets

AGRI-FOOD SECTOR:AMID THE SEEMINGLY endless narrative of economic pessimism, one economic sector is bucking the trend. Ireland's agri-food sector is thriving. Once dismissed as a sunset industry, the Irish food and drink industry is defying the recession. The sector now contributes €24 billion to the economy, and is responsible for between 10 and 15 per cent of jobs, directly and indirectly.

Ironically, in contrast to its homely image of an inwardly-focused domestic industry, agriculture and food is one of the main drivers of exports, considered to be a key component of Ireland’s economic recovery. Irish food and drink exports increased by 12 per cent last year, reaching close to €9 billion, a record for the sector.

But beneath the headline figures, there are small murmurs of discontent. Some within the farming community in particular have expressed caution about the unbounded optimism that seems to be surrounding the sector. Despite their reputation as doomsayers, the concern of farmers is not unfounded.

One source of disquiet is the issue of price volatility. A breakdown of the figures shows that most of the growth in exports last year was driven by value rather than volume. In other words, the sector’s record performance was primarily due to the fact that the earnings from most output has been phenomenally high, with commodity prices reaching record levels.

The issue illustrates one of the major challenges for the industry, and one that has long been known to farmers – its inherent volatility. Agriculture is a cyclical industry. The dairy industry provides many examples – milk hit 40 cent per litre in 2007, but fell nearly 20 cent within 18 months, for example. Although the projected growth in the world’s population and the knock-on effect on food demand means commodity prices are more likely to follow an upward trajectory in the coming years, at the very least short-term price fluctuations will be continue to be a challenge for the industry.

The other major issue confronting the sector is the fact that agriculture operates in a protected market. The Common Agricultural Policy, a feature of EU policy since the Treaty of Rome, gives substantial protection to European products from cheaper (and less regulated) imports. While the system has changed significantly over the years, moving away, for example, from export subsidies and support prices to direct payments, European food products are nonetheless protected from free market vagaries. According to the latest figures from the Irish Farmers’ Association, the single farm payment and other direct payments accounted for more than 70 per cent of farmers’ incomes in 2011.

Commentators such as Prof Alan Matthews of Trinity College Dublin have questioned the commercial viability of the Irish agri-industry in the absence of the substantial protection provided to EU agriculture and, unsurprisingly, Ireland is campaigning strongly against further trade liberalisation as the next phase of CAP negotiations get underway.

Other commentators strongly defend the agri-industry’s contribution to the Irish economy. Food economist Ciaran Fitzgerald argues that, because of the low margin nature of the agricultural industry, the sector’s contribution is underestimated in the “gross value added” calculations which are used to measure contribution to GDP, when in fact the industry is a major contributor to the domestic economy.

Citing research from Forfás, he points out that the agri-food sector purchases around 80 per cent of its input from the Irish economy, compared to “modern” industries such as the IT, pharmaceutical and financial sector, which buy between 10 and 20 per cent. He also argues that the newer industries are supported in other ways, through the generous corporation tax regime or patent protection.

While pharmaceutical companies are granted patent protection of up to 20 years for some inventions, agricultural innovation does not have the same intellectual property rights, while food producers are usually required to provide retailers with a cheaper, own-label version of an innovative product to ensure they are listed.

But whatever the ideological questions around the support of the sector, almost all commentators are agreed that the agri-food industry holds huge potential for Ireland.

Specifically, the main area of opportunity lies with the dairy industry. Dairy accounts for 30 per cent of our exports, around the same percentage as meat sales abroad. But while the potential for further significant growth in the beef industry is limited due in part to trade restrictions, the dairy industry looks set to expand on a massive scale.

In 2015, the EU will lift its dairy quotas, with the result that, for the first time in almost 30 years, European farmers will be able to produce an unlimited supply of milk. The reason this is of particular benefit to Ireland is primarily economic – Ireland’s grass-based feeding system puts it at a competitive advantage to other countries.

The increase in world population, the expansion of the middle class and the demand for dairy-based protein food sources, particularly from India and China, means there will be a huge demand for milk-based products. Irish milk processors are already at the forefront of innovation in the sector. Most of the milk produced in Ireland is processed by the co-ops, which export between 80 and 90 per cent of dairy product, usually in powder form. Multinational food companies operating in Ireland such as Danone, Wyeth and Abbott use raw milk to make infant formula, with the result that more than 10 per cent of the world’s infant formula comes from Ireland. Private sector indigenous companies such as Glanbia and Kerry have been laying the ground in the innovation and development of new value-added product from the basic dairy commodity.

But while few deny the scale of the opportunities, the issue for those in Ireland’s food industry is how well the country is positioned to capitalise on the industry’s potential.

Food Harvest 2020, the ambitious Government strategy document which sets out growth targets for the development of the agri-food sector, is estimating a 50 per cent increase in milk production by 2020.

One concern is whether producers and processors are sufficiently prepared for expansion.

Currently, there are no plans at an EU level to introduce a “soft landing”, whereby quota restrictions will be gradually increased in the run-up to 2015, with the result that preparing for expansion is difficult.

There is also widespread agreement that consolidation in the co-op sector is needed – one of Ireland’s main dairy rivals, New Zealand, is dominated by Fonterra, a major co-operative with more than 10,000 farmer members – although the recent acquisition of Donegal Creameries’ dairy division by Connacht Gold, as well as various arrangements between processors and co-ops, indicate that there are moves in that direction. Major processors such as Glanbia are also reported to be planning new facilities to deal with the sharp increase in output.

Another issue for the sector is market penetration. The UK accounts for 41 per cent of total exports in the sector, with the EU representing 34 per cent. Although the Irish dairy industry has increased its presence in non-EU markets – Ireland exports about 60,000 to 70,000 tonnes of milk powder to West Africa each year for example – there is widespread acknowledgement that Ireland needs to increase its presence in emerging economies where most of the population growth and rising food demand is set to take place.

Speaking at the publication of the Bord Bia export figures earlier this month, Minister for Agriculture Simon Coveney acknowledged the challenges. While pointing out that 85 per cent of Irish food produce has to find a home outside Ireland, he said that the Chinese market presents some barriers to entry, mainly due to the fact that New Zealand has preferential trade agreements with China. “What Ireland exports to China is based on a EU agreement. We can’t do bilateral agreements with big economies.”

As a result, the Department of Agriculture is looking at markets where Ireland is less constrained, such as Russia, actively cultivating trade and diplomatic links. Nonetheless, China remains a serious market for Ireland. The scale of the forthcoming demand from there means that its demand cannot be met from New Zealand alone, while our competitive disadvantage due to tariffs is offset by the fact that a larger constituent of Ireland’s dairy output is in the infant formula sector, one of the key areas of growth in China.

Linked to the issue of market penetration is the development of new products. As well as increasing visibility in non-EU markets, there is widespread belief that Ireland needs to ensure it is producing the kind of product that is in demand in new markets, and ones that add value.

Already, private companies have led the way in terms of product development and innovation. Companies such as Glanbia have identified the commercial value of whey, for example, once seen as a by-product of cheese but now used as a key ingredient in the sports nutrition, infant and elderly food markets.

A co-ordinated policy exists at national level. The €20 million Food for Health programme, a joint research initiative between the universities, private companies, Teagasc and relevant Government departments, is working to identify and develop nutritional ingredients and functional food products from dairy, particularly in the high-value neutra- ceutical field.

Teagasc is also playing a key role at producer level, working closely with farmers to improve the quality of their produce by focusing on animal health, nutrition and breeding issues, moves that also lead to more cost- competitive production.

Encouraging better farming also has knock-on effects on Ireland’s sustainability agenda. Bord Bia, the State body responsible for marketing Irish food and drink abroad, has made significant strides in marketing Ireland as a “green” producer. Cultivating Ireland’s image as a green, island economy, which benefits from its mild, moist climate, is a key strand of Ireland’s branding strategy. Bord Bia’s chief executive Aidan Cotter believes that is a key differentiating factor for Irish products, one that helps to ensure premium placing and price for product.

An independently-verified sustainability scheme for beef farmers, which measures the carbon footprint of Irish farmers, has been in place since May. To date, the carbon footprint of 13,000 farmers has been assessed and a pilot programme for the dairy sector is near completion.

Ireland’s grass-based method of agriculture and natural water supplies are also key advantages in the battle against climate change. As Prof John Sweeney of the Irish Climate Analysis and Research Units (Icarus) at NUI Maynooth points out, one of the central paradoxes of food production systems is that agriculture accelerates climate change.

“Ireland’s grass-based system of agriculture is much more sustainable than, for example, intensive feed lots in place in other parts of the world,” he says. “Nonetheless, if we increase natural greenhouse emissions through farming, we will have to pay.” One of the challenges of the industry, he says, is to increase agricultural productivity sustainably by non-intensive means.

But apart from the dairy industry, what other opportunities are there for the agri-food sector?

Ireland’s meat industry, which represented 30 per cent of exports last year, is booming, again thanks in part to record prices for meat products, though the fact that the beef market is still controlled means there is limited scope for expansion. Beef, for example, is not sold into China, though Ireland benefits from the fact that the EU has a ban on US hormone-treated beef.

Ireland is the largest beef exporter in Europe and the fourth largest in the world. It is all a far cry from a decade ago when Ireland’s beef industry was in crisis. One of the fallouts of past meat scandals is that Irish beef is one of the most regulated meat products in the world.

The industry has also successfully changed its market focus. While in the 1990s about half of Irish beef went to non-EU countries such as the Gulf states, now 98 per cent goes directly on to the shelves of European retailers. Irish processors have built up direct relationships with the top retailers across Europe, rather than depending on the wholesale market. Again, Ireland’s natural green image is key to branding Irish beef as a high-priced, premium product.

Irish pork has also managed to recover from the dioxin scare in late 2008. Last September, a delegation made up of China’s leading pork companies, three of which are among the 10 largest food companies in the world, visited Ireland. The trade visit followed one a few months previously by Bord Bia to China, at which the agency made a presentation on the capabilities of the Irish food industry to 500 Chinese meat industry leaders at the annual China Meat Association conference.

China, which was the last country to reopen its market to Irish pork following the scandal in May 2010, accounts for half the global production and consumption of pork and is expected to increase its imports by about 20 per cent as domestic demand outstrips supply. Minister for Agriculture Simon Coveney is also due to visit China in the coming months as part of a trade mission.

Other areas of growth are in the prepared foods, artisan and SME sector. A number of small, privately-owned Irish companies are making their mark. Companies such as Shannon-based ABC Nutrition and Wexford-based Dragon Nutrition have made strides in the sports nutrition market, while the sale of John Teeling’s Cooley Distillery to US drinks company Beam for $95 million illustrates the potential that can follow from investment in Irish food and drink products.

However, there is concern that there is insufficient research and development taking place at a small business level. Shane Dempsey, head of consumer foods at Ibec, says that lack of finance, increasing business costs and the buying power of retailers are pushing down investment in innovation, which is needed if small businesses are to move up the next scale and enter export markets.

“There is support available from State agencies such as Enterprise Ireland, Teagasc, Bord Bia and the Department of Agriculture,” he says. “What’s needed is a coordinating agent to pull companies together with relevant researchers and to connect these up to the available support.”

He says that the imbalance of power between large retailers and suppliers means that retailers have been able to push the cost of promotions, needed to stimulate customer spend, on to suppliers, leaving less money for investment in product development. The sector is also looking to target venture capital funding, traditionally not a finance stream associated with small consumer foods businesses.

Smaller producers need to take their lead from the big multinational producers, who have shown how developing new products and identifying added value, albeit on a larger scale, allows them to compete internationally. More importantly, innovation will ensure that Irish producers, benefit from what is going to be one of the defining global trends of the coming generation, the swell in global population and the inevitable demand for food that brings.

The ABC of finding new export markets

SHANNON-BASED ABC Nutrition is one private enterprise that has successfully carved a niche for itself in the food industry.

The company was founded in 2007 by William Wixted and Sean McNamara, both of whom had significant experience in the agriculture and food science. The pair recognised that the sports nutrition industry was gaining traction in the US, and saw an opening.

“A lot of eyebrows were raised when people heard what we were planning,” recalls McNamara. “Times were different then. The construction boom was still going on. It was a difficult decision to make at the time.”

The company, which produces whey-based powders and other nutritional supplements hired its first employee, UCC food graduate Laura Fahy, as business development manager.

Starting with one small contract in the UK, it now exports to 15 countries, and more than 90 per cent of its product is exported.

“For us it’s all about new markets,” says Sean McNamara. “Securing 2 to 4 per cent of the German market, or

5 per cent of the UK market, for example, would be huge for a small company such as ours.”

The products’ shelf life, which is longer than traditional dairy products, is one of the business’s key advantages. The company targets prospective buyers directly, sending samples to potential partners within 24 hours if necessary.

As well as its production facility in Shannon, RD and product development is the driving force behind the business, according to McNamara, who himself has a PhD in nutrition.

Named Irish exporter of the year last year by the Irish Exporters’ Association, ABC Nutrition has 10 employees.