Stepping up to the Plate: Capitalising on a Historical Opportunity for the Irish Agri-Food Sector
Professor Gerry Boyle and Dr Lance O’Brien, The MacGill Summer School, Glenties, Co. Donegal, Ireland
Let’s start with a few facts.
Ireland is a major exporter of food, valued at over €8 billion in 2010. The recent ‘Food Harvest 2020’ report sets a target of €12 billion by 2020. In global terms, Ireland is currently the 5th largest exporter of beef, 4th largest of butter and 10th largest of skimmed milk powder. In addition, over a short period, exports of Infant Milk Formula from Ireland have grown to account for 16% of the world’s supply and because of recent investments this is likely to quickly increase to about 20%. Ireland’s export dependency is unique within the European food sector with more than 80% of products such as dairy and beef exported.
The agri-food sector makes a much more significant contribution to the net inflow of funds to the Irish economy than its share in the official statistics suggest. Net foreign earnings of the ‘biosector’ have been estimated to contribute approximately 30% of the total net earnings from primary and manufacturing industries. This is approximately double the sector’s contribution to exports and substantially in excess of the contribution provided by the pharma and ICT sectors. This is down to the low import dependence of food exports and the low levels of profit repatriation among food processing firms
Despite these well known facts, it is fair to say that for several years now the agri-food sector has been relegated to the status of a ‘sunset industry’ in economic policy making and public debate. Yet of late its importance appears to be enjoying a renaissance in our consciousness.
Recently, the sector has been the subject of a significant number of national and international conferences and analyses. Within Ireland there would also appear to be a broad acceptance that the future of the Irish economy will become increasingly dependent on the sector as the leading indigenous industry. If the economy is to achieve sustainable growth, there is a widespread acceptance that emphasis must be refocused on the export sector, in which the food and drink sector plays a key role. For many of us directly involved in the sector, this sudden rediscovery of its importance hardly comes as a surprise, given the outstanding growth and performance of our leading food companies over many years and the internationally competitive status of our cereal and dairy sectors, in particular.
Targeting growth through sectoral policies
In the current national economic crisis there is an understandable preoccupation with macroeconomic and public finance policies but future growth will also require the resurgence of our exporting sectors. In a small open economy we are price takers and our ability to grow our exports will depend, in the first instance, on the growth in international markets. For the last decade or so the global markets for food have been undergoing extraordinary change. Population growth has been spectacular at the equivalent of nearly a new Germany every year. Urbanization has proceeded in tandem and it is projected that by 2050 nearly 90% of the world’s population will be located in urban centres. Most of these developments are taking place in Asia and in China and India in particular. When one adds the impact of rising incomes we can begin to understand the profound change that has taken place in dietary habits in these countries over a relatively short period. Countries such as China, in particular, have switched diets towards animal-based proteins and away from cereals.
There is another profound and related trend which also augurs well for our food-exporting industries. The price of agricultural products, when adjusted for inflation, has tended to trend downwards by an annual rate of 1%-2% per annum for the past century or more. This trend has only been punctuated during the two world wars and the oil price crises of the 1970s. But in 2008 and more recently, global food markets have experienced unprecedented price spikes. The really interesting question is whether these recent developments are transitory or, represent more long-term changes.
Are we, in fact, witnessing a structural shift in a century old trend?
Of course we don’t know for sure but many of the underlying drivers of food prices do suggest that something quite substantial is happening. The demand changes are certainly structural in nature and unlikely to be reversed in the short to medium term; although the dietary effects are mainly income related and may be subject to check from time to time. This factor will be more than offset, however, by the prospect of ‘peak oil’ and the absorption of so-much of the world’s grain harvest for biofuel. In the US alone, within a short five years, over 30% of corn production will be consumed in bioethanol plants.
But it’s also apparent is that there are structural changes evident in the global supply of food, notwithstanding the weather related droughts that have afflicted supply in a number of countries in recent years. While there is plenty of cultivable land available on a global basis, only a tiny fraction of this land is becoming available for food production every year. A much more worrying development is that while we experienced an almost 4% per annum growth in grain yields in the 30 years up to 1990, there has been a substantial slippage since then and on current projections over the next 20 years or so yields may only grow by about 1% per annum. From a scientific viewpoint this is depressing news, especially when we don’t really understand the underlying causes.
From the perspective of a food-exporting nation we are therefore presented with real opportunities to grow our exports to new and expanding markets. Moreover, the terms of trade in these markets can also be expected to improve, while there is a strong likelihood of tremendous volatility around an upward trend.
However, we cannot afford to become complacent. The UK’s Royal Society, in a recent Foresight Report, bluntly states that to “address the unprecedented challenges that lie ahead the food system needs to change more radically in the coming decades than ever before, including during the Industrial and Green Revolutions”.
The Irish agriculture and processing sector must espouse fundamental changes if it is to fully capitalise on the benign scenario that has just been painted. Winning new markets places an imperative on being competitive. There has to be a renewed emphasis at both primary and processing sectors on the improvement of productivity and efficiency. At farm level, there is still a huge degree of variation in farm performance between the upper and lower tiers of producers and there is huge dependence on direct payments to support the extremely important beef sector. Our land structure and its mobility and the quality of the labour force continue to act as constraints on further development. In addition, we must face up to the implications for the sector of implementing very demanding Greenhouse Gas reduction targets.
Actions supporting long-term competitiveness
Competitiveness actions are needed to support
first, the creation of “economies of scale” that will drive the needed structural adjustment, targeting farms and food-industry firms;
second, the promotion of “quality-based” competitiveness that concentrates on the production and effective marketing of quality differentiated products, both domestically and internationally; and
third, the enhancement of “innovation-based” competitiveness, designed to strengthen the generation and adoption of innovations that reduce production costs as well as improving the wide spectrum of product quality characteristics demanded by consumers.
‘Economies of scale’
Although farm size alone is not an unambiguous indicator of the structural strength of a farm, nevertheless, it does help to identify the medium to long-term sectoral competitiveness’ challenge. While the trend of increasing farm size continues in Ireland – up from 26 hectares in 1991 to 32 hectares in 2007, in other respects the structure of farming has disimproved over recent decades. An ever increasing proportion of the utilized agricultural area is now in the hands of part-time farmers, and while this may assist in underpinning the rural economy, it may have adverse implications for agricultural development and may, at best, retard the process of land rationalization and land mobility.
It is not that ‘scale economies’ in primary agriculture are very large but there is a minimum level of scale at which fixed costs can be financed and too many of our farms are below this critical level. There is also scope for rationalization in the processing of our food but the evidential basis for comment is much more limited because of the absence of publicly available data. The prospect of a substantial increase in milk production following the abolition of quotas in 2015 has focused attention on the need for our milk processing sector to secure economies in areas of milk processing efficiency, marketing and innovation.
Land fragmentation has also worsened in recent decades and the age structure of farmers has deteriorated as well. Increasingly, there is a decline in the number of farmers in intensive enterprises with operators whose further potential is undermined by the low level of land mobility, while the proportion of farms in the more extensive systems is continuously growing.
There is a clear market failure in the operation of our land market. The market does not function to ensure that the sector operates in the most efficient manner. Bright young people in Ireland with the capability to transform the productivity of our land base, unlike their counterparts in a country like New Zealand, have little chance of a career in agriculture unless they’re lucky enough to inherit land.
For Irish farmers, competing on product quality differentiation is a realistic goal. This is a key goal of Food Harvest 2020 which is to build on the clean green image of Irish food production and using it as a basis for competing in premium quality food markets. There is now a wealth of ‘high-level’ of inter-country comparative evidence that Ireland is highly competitive on the basis of its relatively low carbon footprint for its dairy and beef exports. A substantial national research effort will be needed to verify Ireland’s broader sustainability credentials in aspects such as water usage and biodiversity. Significant investment to brand and market these credentials will also be required.
The increased competition that the Irish agri-food sector will be exposed to in the less distorted, less protected market environment envisaged in the years ahead means that competitiveness will crucially depend more than ever on maintaining an ‘innovation-based’ competitive edge. By this we mean a competitiveness based on research and technology transfer. The ability to maintain this competitive edge depends on our capacity to continuously produce and rapidly adopt technological innovations across a broad range of areas.
Modern day food production demands a wide range of skills and knowledge as well as technology – not only the traditional skills that have always been associated with primary crop and livestock production and the processing of food, but increasingly the technical and economic expertise required to capitalise on scientific advances. Moreover, the emphasis on sustainability is setting new challenges: not only to produce more food more competitively, but to do so whilst addressing other goals, such as the conservation of water, the reduction of greenhouse gas emissions and the protection of biodiversity.
There is a consensus that one of the most crucial drivers of future food supply is the rate of growth of yields due to the application of new science and technology. New knowledge is also required for the food system to become more sustainable, to mitigate and adapt to climate change, and to address the needs of the world’s poorest. These challenges will require solutions at the limits of human ingenuity and at the forefront of scientific understanding. No single technology or intervention will provide all of the answers, but there are real gains to be made by integrating bio-technological, agronomic and agro-ecological approaches. Because of the significant time lags in reaping the benefits of research, investment in new knowledge needs to be made now to solve problems that will arise in the coming decades.
Given the scale of the challenge of feeding 9 billion people in 2050, new technologies (such as the genetic modification of living organisms and the use of cloned livestock and nanotechnology) should not be excluded a priori on ethical or moral grounds, though there is a need to respect the opinions of people who take a contrary view. The human and environmental safety of any new technology needs to be rigorously established before its deployment, following a process of open and transparent decision-making. Decisions about the acceptability of new technologies need to be made in the context of competing risks (rather than by simplistic versions of the precautionary principle); the potential costs of not utilising new technology must be taken into account. More open public debate is needed on these issues, not only for the sake of export-dependent agri-food countries like ours but more especially for those countries that are again facing famine with a depressing frequency.
Competitiveness as a political priority
To us at any rate, the economic logic of promoting export–led growth as a national recovery strategy and the need, in particular, for government to adopt a menu of pro-competitiveness policies is incontrovertible. We’re not so confident, however, about the politics of this approach. As Ireland struggles with its large budgetary deficit and the cost of bailing out its banks, will the Government be able to focus on competitiveness in the key sectors of the economy and implement the coordinated policies and investments needed? We sense that there is not complete ‘buy in’, at the wider political or bureaucratic level, of the potential of our agri-food sector in the drive for economic recovery. The intention is impressive as witnessed by Food Harvest and so is the rhetoric but there is something missing. What appears to be missing is an absolute acceptance of the fully-fledged role that a natural resource sector, like agri-food, can play in the development of a modern economy. The Irish stance in this regard, we submit, contrasts unfavourably with countries such as New Zealand and Finland. In particular, given the timescale involved in bringing new technologies to the stage of uptake, we don’t have a comprehensive approach at political or bureaucratic levels to supporting ‘innovation-based’ competitiveness. This message is clear from the example of Finland.
Historical developments in Finland and its geographically marginal location have enhanced Finnish awareness that a successful economy and society can only be achieved if there is consensus on the larger goals. Since World War II, the Finns have managed to rise to various economic challenges and to push for reorientation and modernisation at various stages. Finnish willingness to embrace technological change has always been a particular asset.
One essential source of the current success of the Finnish economy has been the explicit consensus at a political level that knowledge transfer is key to economic development. Earlier than any other European country, Finland declared knowledge-intensity and technological superiority to be strategic policy objectives. Strengthening Finnish innovation achievements has become the common goal of the private sector, science, politics and public administration. Regardless of the coalition in power or the stage of the economic cycle, this has led to a consistent Finnish research, technology and innovation policy.
The state support apparatus for innovation is very different in Ireland to that in countries such as Finland and New Zealand. One very obvious difference is the virtual absence of research agencies in Ireland. With the exception of the agri-food sector, science-based innovation support in Ireland has been primarily delivered by the higher education institutes (HEIs). This model is not generally well suited to delivering on the needs of industry for science-based support which is commercially focused. In recent years national funding programmes such as PRTLI and SFI together with Enterprise Ireland have worked to nudge HEIs towards a more commercial focus in their research and innovation programmes. However, without an agency infrastructure along the lines of the acknowledged successful NZ and Finnish models it is likely that this approach will always fall short of what is required.
The agri-food sector is the one exception where the sectoral needs of an industry are substantially provided by a state agency, namely Teagasc. Teagasc in one guise or another has been responsible for delivering the innovation needs of our agri-food sector for over 50 years when the Agricultural Institute was established with financial support from the Marshall Plan. In a period of acute public finance constraints it is understandable that a commitment to innovation support will tend to wane. The costs of innovation support are large and the benefits, while often substantial, are risky and long-term in nature. There is also competition from more socially desirable spending needs. In these circumstances no area of state expenditure can be immune from the spending axe. But neither is it unreasonable to expect that the determination of spending priorities should result from a transparent and coherent assessment.
If we look at the targeted reductions in public employment it is evident that it has been decided that state agencies like ours are manifestly wasteful and thus need to bear a disproportionate burden of the overall required cut. Employment in the Civil Service is slated to decline by about 1600 or 4.4% between 2011 and 2014 while agency employment is set to decline by around 1200 or, at 11%, about double the proportionate level of the Civil Service. It is clear that this outcome is not the result of a painstaking process of service prioritisation as when we look across departmental votes we can see that typically the required fall in numbers is about twice the level in the NCSAs as opposed to the civil service departments. The question I want to ask is what law of nature has decreed this outcome? There is an evident danger that in our zeal to kill off or severely weaken the ‘quangos’ we can in the process kill off access by stakeholders to excellent and economically worthwhile services that have been built up over generations and that have, by and large, served the state and society well.
But there is another issue which concerns what has become popularly known as the lack of ‘joined-up’ government. It’s a long time since the former Taoiseach John Bruton produced his document “A Better Way to Plan the Nation’s Finances” which argued for a programmatic approach to decisions on public expenditure. A modern economy cannot be managed by a traditional ‘Vote’-based approach to public expenditure management which dates back to the old British model. Yet it is evident in so many decisions regarding expenditure and employment cuts that the ‘Vote’-based model drives the outcomes. Examples include education and research expenditure.
What will the future look like?
We want to conclude by looking to the future.
There is a good basis to anticipate that traditional agricultural and food products will enjoy a sustained recovery in real prices over the long term. At the same time, the scope of the sector to generate value will be considerably enhanced. The value-conversion capacity of our land resources has the scope for considerable expansion into the future. A Foresight report published by Teagasc in 2008 concluded that in the longer term the focus will no longer be on the agri-food economy, but on the bio-economy, which embraces the latter but also encompasses the production of bio-fuels and a potentially large range of non-fuel bio-products. The key resource in realising the potential of this new bio-economy will be the capacity to create, transfer and deploy useable knowledge so as to underpin, profitability, competitiveness and sustainability.
It shouldn’t be forgotten that our natural resources permit not only the production of physical products, but also the provision of services such as recreation and tourism. These services have a value to users and are also expected to grow in the years ahead. Value will be generated for the owners and managers of our natural resources by both the public and private sectors. Our natural resources are also becoming increasingly appreciated because of their intrinsic value in areas such as natural beauty, biodiversity and water quality. The preservation and enhancement of these will require continued public subvention because of their public-good nature.
As a country we are blessed with abundant resources (especially our grasslands) for the production of food, bio-energy and other bio-products. We have a strong government commitment to investment in the generation of knowledge and in education and training. We have an emerging generation that has only known the era of the ‘Celtic Tiger’ and who are brimming with confidence to take on the challenges of the future. There is a good future in farming and the wider bio-economy, but that future cannot be taken for granted. Young people need the education, the knowledge and the mindset to embrace the possible. They also require a political system that wholeheartedly embraces the potential that’s on offer.
 Gerry Boyle is Director of Teagasc and Lance O’Brien is Head of Strategy and Foresight with Teagasc. We would like to thank our colleague Dr Kevin Hanrahan who provided advice and help in the preparation of this paper.