One of the most important reforms to the Irish agricultural sector in modern times takes place this April when the EU brings the milk quota system to an end
First published in the January 2015 Ireland edition of Accounting and Business magazine.
The abolition of the milk quota will trigger a radical restructuring of the dairy sector in Ireland. Milk quotas were introduced in 1984 to limit public expenditure, control milk production and stabilise both milk prices and milk producers’ incomes. There has since been a substantial reduction in the number of dairy farmers in Ireland, from 68,000 in 1984 to 16,000 by 2010.
A comprehensive assessment - Economic impact of the abolition of the milk quota regime - of the likely impact of the ending of milk quotas, has been published by the European Commission. It predicts that abolition of milk quotas will lead to Irish dairy production increasing by 4.4 per cent, causing a decline of 10 per cent in raw milk prices. Butter and milk powder production rises in these projections by 5 per cent to 6 per cent, with prices falling 6 per cent to 7 per cent. Production of cheese and fresh milk products is predicted to rise by 1 percent, with prices declining by 4 per cent to 6 per cent. Irish agricultural income is projected to fall - unless counteracted by increased exports - by 4.5 per cent.
"Irish agricultural income is projected to fall - unless counteracted by increased exports - by 4.5 per cent."
According to Teagasc - Ireland’s agriculture and food development authority - milk production in Ireland may increase beyond the levels predicted by the European Commission report. Teagasc suggests that milk production may rise by approximately 18 per cent by 2017, with about 60 per cent of dairy farmers planning to increase production and a small number of farmers - less than a thousand - re-entering the dairy market. But, Teagasc argues, the best-performing third of dairy farms earned average profits of nearly €2,500 per hectare last year, which is around four times the profits of the weakest third of dairy farms. This suggests that many farms need to increase efficiency and adopt more innovative farming practices.
David McGee, a consulting partner at PwC, argues that Ireland can be a world leader in the agri-food industry - providing it modernises. ‘We have all the ingredients in Ireland to become the Silicon Valley for food and be a world leader for food innovation,’ he says. However, he warns that this requires Ireland to take advantage of technological advances to increase yields, reduce the use of energy and water, and extend produce shelf life. If it does this, Ireland can exploit global demographic change.
‘Doing what we are doing now will not satisfy these future needs and wants,’ he told the recent Future of Food Summit. ‘Ireland needs to further invest in the industry to position it as a leading food centre of excellence. This includes leveraging existing technological know-how to significantly increase profit margins and putting the funds in place to support our food start-ups.’
Irish agriculture minister Simon Coveney is also in no doubt that the industry must adapt. He told a recent conference on managing volatility in a post-quota world: ‘We are on the cusp of the most fundamental change to Irish agriculture in a generation. Since 1984, the industry has operated within a quota environment. The shackles come off next April and following that we will have an exciting mix of opportunity and challenge for all stakeholders, farmers and rural Ireland, processors and manufacturers, agri-business and exporters. It is timely that we take stock of where we stand in terms of our preparedness for this new era.’
"We are on the cusp of the most fundamental change to Irish agriculture in a generation."
Aidan Cotter, chief executive of Bord Bia, is positive about the prospects for the sector. ‘The growth in the global demand for food, combined with shifting dietary habits towards more protein-based foods and dairy products, is relentless,’ he says. ‘It is driven by a population growing at 75 million people a year and double that number joining the middle classes.
‘This means that over the next 10 years a market three times the size of the EU, in buying power terms, is being created, principally in Asia but also Africa, now home to more than three-quarters of the world’s population. With 40 per cent of its exports already destined for international markets, principally to these regions, as our dairy industry expands it is well positioned to benefit from the sustained growth in demand for dairy products.’
In other words, to convert the European Commission’s projections of falling agricultural incomes into an opportunity for growth depends on the capacity of the industry to export. China has, in recent years, become one of Ireland’s most important target markets – it is the sixth largest market for Irish agricultural exports. Dairy exports to China doubled in the last two years, to €270m, with agri-food exports trebling over three years. Total agri-food exports to China were valued at €390m in 2013 and that is expected to have increased to €500m in 2014.
Trade mission success
Coveney recently led a trade mission to China, which included 37 leading agri-food and agri-services companies - several of which reported contract completions as a result of the mission. The minister’s objective was not only to support the sale of Irish dairy products, but also to promote beef exports and, over the longer term, poultry products.
The government is taking a very hands-on approach to the development and enlargement of the agri-food sector. A 10-year plan for the agri-food industry is being produced with industry leaders, to be published next year. This follows what is regarded as the success of the Food harvest 2020 report, which focused on the themes of smart, green and growth.
"it is the old economy of agriculture that is thriving"
The Department of Agriculture points to various Food harvest 2020 interim targets having been met, most notably with the primary agricultural sector growing by a third in four years. In addition, employment in agriculture has risen significantly. In the decade leading up to Food harvest 2020, sector employment fell by 1,500: in the last four years it has risen by about 4,000.
It is surely significant that while Ireland’s ‘new economy’, based on financial services, has collapsed, it is the old economy of agriculture that is thriving.
"A 10-year plan for the agri-food industry is being produced with industry leaders, to be published next year."