Economics: Farming has become the forgotten productive sector of the Irish economy in recent years. A quarter of a century ago, agriculture stood on the economy's commanding heights. In 1983, agricultural output accounted for almost 10 per cent of gross national product (GNP). Farming employed 189,000 people, or one in six, of the national workforce, writes Paul Tansey.
In the intervening decades, agriculture's place has been usurped first by the foreign-inspired take-off in Irish manufacturing industry and later by the construction boom and the sustained expansion in services. These new forces relegated agriculture to a minor supporting role in the national economic game.
By 2006, agricultural output comprised just 2.6 per cent of GNP while the agricultural workforce had shrunk to 117,000. As a result, only one in 20 of the national workforce is now employed on the land. The long-run decline in its relative economic importance had shunted farming to the sidelines of the Irish economy.
Now, though, agriculture is reasserting itself. Irish farming is staging something of a revival. The value of agricultural output at producer prices increased by €429 million or 8.2 per cent last year, as shown in Table 1.
Steep increases in producer prices for milk and cereals explain the increase in the value of farm output in 2007. Producer prices for milk increased by 25 per cent while cereals prices rose by almost 70 per cent last year. Thus, the increased value of Irish farm output last year was wholly attributable to rising prices. Production volumes in Irish farming declined marginally in 2007 and remain lower than in 2000.
In sum, Irish farm incomes earned from agricultural production have been levered up by the global surge in basic commodity prices. The most striking example of this trend is the doubling of the value of Irish cereals production in the space of two years.
The dramatic recent upward shift in global food prices reflects structural shifts in international demand and supply conditions. These shifts have been discussed in a recent paper* by the chief economist at the Irish Farmers Association (IFA), Con Lucey.
On the demand side, global demand for food is increasing due to rapidly rising incomes in the newly emerging Asian economies. The potential scale of this growth in demand is difficult to understate.
China and India, the fastest-growing of the emerging Asian economies, support 2.4 billion people, or 37 per cent of the world's population.
Moreover, tastes are changing in these markets due to urbanisation and westernisation. As a result, consumption of meat and dairy products in Asia is forecast almost to double between 2000 and 2030.
On the supply side, climate change is reducing the productive capacity of many warmer agricultural regions. Scarcity of water is now becoming a major constraint on global food supplies. Already, droughts in Australia have reduced dairy output by some 15 per cent and this has been a proximate cause of the steep ascent in global milk prices.
Rising energy prices are also diverting crops from food production to energy production. In the United States, corn is being channelled in increasing quantities to the production of ethanol.
Thus, at a global level, demand for food is increasing steeply, while supply growth is restricted both by climatic factors and by the reallocation of land from food production to energy production. In these circumstances, food prices can only move in one direction.
Because these demand and supply changes are structural rather than cyclical in nature, they are less likely to be reversed. In other words, food prices look set to stay high. Irish consumers are already feeling the pinch of rising food prices at the retail level.
In the 12 months to January, average food prices in Ireland increased by 7 per cent. During this period, both milk and bread prices advanced by 20 per cent.
If this is bad news for consumers, though, it is good news for farmers. Rising prices mean rising incomes. This is particularly important for dairy farmers, where production volumes are restricted by the corset of milk quotas.
Livestock remains the largest single component of Irish farm output and livestock prices slipped last year. However, since the beginning of 2008, livestock markets are reported to be firmer, with prices hardening by 10 per cent to 15 per cent. Additionally, the extraordinary rise in cereal prices during 2007 may induce some cattle farmers to switch to grain production.
Thus, in a remarkable reversal of fortune, Irish farming is advancing while the construction industry is stumbling and manufacturing is struggling with competitive losses. There's a future in farming again. Life on the land is looking up at last.
• Con Lucey's The Changing Price Environment for Food Products, Irish Farmers Association, February 2008.
