OPINION: Outlook for agricultural commodities and lifting of milk quota presents greater opportunities
THE AGRI-FOOD sector went unnoticed during the Celtic Tiger, but who would have thought just a year ago that the market value of Glanbia today would be greater than the value of our banks? We need to re-focus our attention on the sector and ensure its potential for growth, exports and jobs is realised.
It is our largest indigenous industry and in the recession it can play a key role in reinvigorating the economy.
The economic importance of the sector has remained more or less unchanged over the last 15 years, but its contribution to the wider economy has declined due to the rapid expansion of the non-agricultural economy.
In 1995, the primary agriculture sector accounted for about 7.5 per cent of GDP. By 2007, this share had declined to just over 2 per cent (€4.2 billion), or 6 per cent when food and beverage processing are included.
In employment terms, the share has always been higher and in 2007 the wider agri-food sector accounted for about 9 per cent of total employment.
While the statistics chart the decline in importance of agriculture nationally, digging a little deeper reveals the importance of agriculture to the local economies and to our international balance of payments.
Unlike many other sectors, agriculture is dispersed geographically and is more important to some regional economies than national statistics suggest. In the Border, Midlands, West and Southeast regions primary agriculture’s economic importance is treble the national average at over 6 per cent and its employment share is about 10 per cent. Its significance for regional economies is even more apparent given that over 35 per cent of GDP in 2006 in these regions was from construction and traditional manufacturing. Both sectors have declined sharply in the last year.
This will have boosted the dependence on agriculture, as many farmers would have relied on these other sectors for part-time employment.
A recent report by Brendan Riordan for the Department of Agriculture showed that on average, the import content of the output of the agri-food sector is significantly lower than other sectors of the economy.
The fact that firms in the agri-food sector are mainly Irish owned means profit repatriation to other countries is lower than in the wider manufacturing sector.
When these factors are considered, Riordan has shown that for every €100 of agri-food exports about €50 is added directly to GNP compared with only €19 for non agri-food exports.
The analysis of Ireland’s balance of international payments showed that in 2005, the net foreign earnings of the agri-food sector amounted to 32 per cent of the total net earnings from primary and manufacturing industries, compared to about 16 per cent of exports in primary and manufacturing industries in the same year.
Agriculture is not insulated from the recession, but is likely in the short run to be less affected than other parts of the economy because of its export orientation and because of the contribution of EU transfers. The vast majority of Irish agricultural and food output is exported to other EU markets because demand for food is relatively insensitive to changes in income, reduced spending power in our export markets is not expected to significantly affect the volume and value of food exports.
The EU-funded transfers amounted to a significant €1.6 billion last year and these are unlikely to be reduced in the short run. The Irish fiscal crisis will mean subsidies funded by the exchequer may be reduced and this will negatively affect agricultural sector income.
However, most subsidies received by Irish farming are funded by the EU. Thus with the non-agricultural economy contracting, the importance of agri-food is set to increase.
There are also some prospects for growth in production and exports. Agricultural commodity markets, especially those in the EU, have been experiencing increased price volatility over the last few years. 2006, 2007 and part of 2008 witnessed record prices for dairy and grain products, driven largely by the competition for land use between food and biofuel production, macroeconomic growth in countries like China and a drought in the southern hemisphere. The latter half of 2008 and the start of 2009 have seen very high prices followed by very low prices. The global recession has dampened short-term demand, while upward movements in supply, in response to the high prices, have led to a severe market correction.
While greater price volatility is likely to characterise future agricultural commodity markets, the trend level of prices is expected to recover as global demand is set to outstrip global supply in the medium term.
Thus despite economic difficulties, the medium-term outlook for agricultural commodity markets is positive. Global demand for food products increased rapidly over the last number of years, and while this pace of growth may not be maintained, the trend in demand is upwards.
On the supply side, agricultural production in the southern hemisphere has been hampered by severe droughts. While there is much used land available for production, most notably in Brazil, the prospect of bringing significant tracts of this land into cultivation in the medium-term is poor. Moreover, global yield growth has slowed down considerably in recent decades.
Hence significant increases in supply are unlikely and the medium- to long-term outlook for international agricultural commodity markets is positive.
Irish dairy producers are experiencing severe competitiveness difficulties, largely due to the strength of the euro. Notwithstanding these difficulties, Ireland is one of the most competitive countries in Europe for milk production.
Our climate is ideally suited to a low-cost, grass-based milk production system, similar to New Zealand. Research by Teagasc has shown that in the past 10 years Ireland has been one of the lowest cost milk producers in Europe.
However, our ability to grow our dairy industry has been constrained by the milk quota system, which limits the amount of milk that can be produced here. This system is being slowly dismantled and policy states that quotas will be removed by 2015.
The removal presents Ireland with the opportunity to become a significant world player in the dairy market. Due to our small population base and relatively large sector, exports account for a significant proportion of internationally traded dairy products in the EU.
However, potential exists to expand. Research by Teagasc suggests that at the milk prices that are likely to prevail once quotas are removed, Ireland could increase national milk supply by 20 per cent without any significant investment at the farm level. Results from animal production research suggest that if farmers can exploit the advantages of new technologies and management practices, there is potential to expand further.
Any expansion in the production of milk will have positive knock-on effects for growth and employment in the food processing sector.
In the longer-term, the main threat to the future growth of the agricultural sector is likely to emanate from policy reform, particularly the need to meet our greenhouse gas commitments while protecting the sustainability of the sector in the context of further liberalisation of international trade.
It is important to stress that agriculture emissions are falling and Teagasc projections indicate that this reduction will continue.
Nevertheless, the imposition of significant reduction targets for emissions from agriculture could have negative implications for agricultural production, exports and jobs. Teagasc has an active programme of research in emissions abatement, and is committed to ensuring the farm sector is aware of what can be achieved through practical abatement technologies.
Despite the international recession, the push for freer world trade continues, and while a World Trade Organisation agreement has not yet been reached, it is likely the outcome of these negotiations is likely to have a negative impact on our agriculture sector. In particular, proposals to reduce the import tariffs on beef products coming into the EU would have adverse effects for the competitiveness of our beef exports.
Agriculture is Ireland’s most important indigenous sector. Unlike many other sectors, the long-term outlook for agricultural commodity markets is positive and Ireland is ideally placed to exploit these market opportunities.
Prof Gerry Boyle is director of Teagasc