ANALYSIS:Main farming body's apocalyptic vision belies the reality that a WTO deal would be in Ireland's interests, writes Alan Matthews.
AS THE WTO talks took place in Geneva this week, the Irish Farmers' Association (IFA) was warning of a catastrophe for Irish agriculture and the wider economy if proposals were agreed. Newspaper advertisements warned of 50,000 farmers being put out of business, 50,000 job losses in food processing and ancillary services, and a €4 billion annual loss to the Irish economy.
Every interest group has the right to state its case, but IFA figures bear no relationship to any likely reality. Not only is it frightening its own members, its campaign is highly damaging to Ireland's economic future.
A WTO deal, while unlikely in the near future, would be in Ireland's interests. Agriculture would experience a small fall in prices and output compared to what might happen in the absence of a deal (though any likely fall in prices would be less than the price increases seen for agricultural commodities in the past 24 months).
The impact on the food industry would be broadly neutral in employment terms, while the much more important industrial and particularly service sectors stand to gain.
The IFA predicts a WTO deal would put 50,000 farmers out of business. There are 132,700 farm holdings in the country, although only 109,100 persons identified themselves as farmers in 2006. Is it credible that between one-third and one-half of all farmers would disappear with a WTO deal?
Examining the sources of farmers' income suggests this is highly unlikely, even if the IFA's apocalyptic warnings about a WTO deal had any credibility. Farmers now depend on the decoupled single farm payment for 50 per cent of their income.
A further 25 per cent comes from payments for agri-environment services and other public goods (Reps, forestry, less favoured area payments).
In addition, around 42 per cent of farmers have an off-farm job and 82 per cent of farms have off-farm income from either the farmer or spouse. Thus the income obtained from farming - the element affected by a WTO outcome - only accounts for about 8 per cent, on average, of farm household income.
Despite the turbulence in agricultural policy and incomes in recent decades, the fall in farm numbers shows remarkable stability, at less than 2 per cent per annum. Even if market income from agriculture were reduced by a half, which is well beyond the IFA's worst nightmare, the impact on the slow structural change in Irish agriculture would be minimal.
The IFA makes extremely pessimistic claims about the likely negative impact on prices of a WTO deal. A more careful examination suggests these claims are not warranted. Because of the key role of beef in the negotiations, I take this as an example.
The IFA claims beef prices would fall to 200 cent/kg. Beef prices in recent months have fluctuated between 300 cent/kg at Christmas to 350 cent/kg in the spring, and around 336 cent/kg now. So the IFA predicts prices will fall by 33-40 per cent.
Beef is a highly protected product in the EU. While the EU average bound tariff on agricultural products is between 23 per cent and 30 per cent (depending on how the calculation is done), the tariff equivalents on the two main types of beef imports, frozen boneless beef and fresh/chilled boneless beef, are an astonishing 124 per cent and 88 per cent, respectively.
While the precise tariff cut to be applied to these high tariffs has not yet been agreed, it is likely to be around 70 per cent. Such a cut over a short period of time would indeed have major consequences for cattle prices here.
However, the EU has said it intends to treat beef as a sensitive product, in which case the tariff cut will be only 23 per cent. Assuming that the beef tariff is binding, and that a WTO round has no effect on world prices, this would lead to a fall in the EU domestic price of these beef types of around 11-13 per cent.
However, the reduction in cattle prices will be significantly less, of the order of 7-8 per cent, in part because larger EU import demand will help to lift world prices, thus offsetting some of the tariff cut, and in part because not all cuts of meat will be subject to import competition. This is a far cry from the IFA projection of a fall of 33-40 per cent.
Beef industry figures argue that a disproportionate amount of their profit comes from the high-value cuts likely to be subject to import competition, particularly from Brazil, so that the price they can pay farmers will have to fall by more. On the other hand, the Brazilian import price is very sensitive to the exchange rate between the Brazilian real and the euro. On the back of Brazil's commodity export boom, the real strengthened against the euro from 3.8 real/euro in 2004-06 to 2.8 at the beginning of 2007 and 2.5 in June of this year, making Brazilian beef less competitive in Europe.
The appreciation between January 2007 and June 2008 alone was equivalent to an additional 10 per cent tariff on Brazilian beef, or almost half the size of the tariff cut on beef that might be expected to take place over five years as a result of a WTO deal. If Brazil does gain from a WTO deal, its currency would be expected to strengthen further.
Classifying beef as a sensitive product will also mean that the EU must offer an expanded tariff rate quota (a tariff rate quota is a fixed volume of imports allowed to enter under a much lower tariff rate than the normal one). While the size of this quota is still being negotiated, it is likely to be between 4 per cent and 6 per cent of domestic consumption. For the EU 27, this could be between 335,000 and 500,000 tonnes.
However, beef imports in 2007 amounted to 588,000 tonnes, and the EU Commission projects, even without a WTO deal, that this figure will increase to 743,000 tonnes by 2014, and even more if beef tariffs are cut by 23 per cent. Thus, imports under the tariff rate quota will just displace imports the EU would have had to purchase from third countries anyway, given that it is now a significant deficit area for beef.
As total employment in the food industry (excluding beverages and tobacco, not directly affected by tariff cuts) is around 38,000, the IFA's figures predict a total meltdown of the Irish food processing sector.
In fact, many areas of the food industry will benefit from a WTO deal. They will face lower tariffs in overseas markets (which will benefit the dairy industry, in particular) as well as gain access to cheaper raw materials. The extent of the decline in meat processing jobs will depend on how beef prices evolve in light of rising global demand and higher feed costs for Ireland's main competitors, as well as the WTO deal, and on how farmers respond if prices do fall.
Cattle numbers have proved surprisingly resilient in the face of the large effective price cuts under the recent Cap reform. Even if throughput falls, much of the employment in meat plants consists of non-Irish nationals recruited specifically for this work, so we should not exaggerate the impact on the Irish labour market. On balance, these offsetting gains and losses to different food sectors will leave total employment broadly unchanged.
More importantly, supporting Irish agriculture through very high tariffs represents a serious drag on the job-creating potential of the manufacturing and services sectors. Tariffs on food products raise the cost of living, which increases the wages that the non-farm sector has to pay. And by raising domestic food self-sufficiency in Europe, these tariffs raise the value of the euro vis-a-vis foreign currencies, imposing a further tax on exports of non-farm goods and services.
The removal of this discrimination against the non-farm sector would see the creation of many more non-farming jobs. These jobs would be more productive than the farming jobs lost, thus resulting in a significant increase in average earnings.
These gains would occur even without the additional market access opportunities created by a WTO trade deal.
There is significant potential for job gains to Irish firms from a negotiated deal in this area as well as manufacturing, as a statement from the Irish Exporters' Association made clear earlier this week.
A vociferous agricultural sector can make its case, but should not be allowed to dominate the debate with questionable predictions of its imminent collapse.
• Alan Matthews is professor of European agricultural policy at Trinity College Dublin