Contact: Mr John Tyrrell, Director General
INTRODUCTION
Much background analysis and consultation on the development of the Irish agri food sector has been undertaken and completed in recent years. Most recently, this includes the report of the Food Industry Development Group, the report of the Beef Task Force and the Strategy for Rural Development which have been published earlier this year.
The Agenda 2000 agreement sets a framework for E.U. policy support and the E.U. budget allocation up to 2006. The FAPRI study which is ongoing provides an analysis and projection of the impact of the CAP Reform and other policy changes on production, prices and incomes.
This submission sets out the views of the ICOS and its member co-operatives in response to the request from the Agri Food 2010 Committee for submissions.
ROLE OF CO-OPERATIVES
The very small scale position of individual farmers in the market place puts them at a disadvantage in the market if they act alone. Markets for agricultural commodities are characterised by a small number of large buyers, purchasing commodities from a large number of relatively small producers. By combining to form co-operatives, farmers can overcome their weak bargaining position.
Co-operatives can overcome market failure to provide access for farmers to farm inputs and services which are not available from other sources. Through co-operatives, farmers can adapt their production to meet market needs and so improve the efficiency of the market. Finally, co-operatives can help farmers to manage risks associated with agricultural production such as weather, variability of product quality and the geographical spread of farms.
Support and encouragement should be provided by the State and E.U. with policies and resources for co-operatives to encourage existing co-operatives and where necessary the formation of new co-operatives. Co-operatives have a need to adapt to the new market circumstances. Because of the particular commitment of a co-operative to a geographical area and the role which co-operative members play, co-operatives are different from other business forms and do not have the same freedom to move location to source raw materials. Government should take this into account in competition legislation to facilitate the formation of co-operatives and consolidation of co-operatives where this benefits the producer members. Government and the E.U. should also provide increased financial support to co-operatives in particular for training and development of staff and board and committee members, innovative research, product development and marketing.
CHALLENGES FACING THE AGRI FOOD SECTOR
Over the next 10 years the Irish agri food sector will face a number of challenges. Policy changes, commercial and trade issues, competition and lifestyle/income expectations will all have a bearing on the development of the sector.
Before the end of 1999, negotiations on the Millennium World Trade Round will begin. The outcome of these negotiations will have a significant bearing on Irish farmers, Irish food businesses and therefore on the Irish economy.
Enlargement of the European Union is another major policy development which will have an impact on Irish agriculture as the E.U. adapts its agriculture and other policies to harmonise the systems between the E.U. and the applicant countries.
Growing power of multiple retailers provides both a threat and an opportunity to the primary and processing sectors. It can be a threat because the bargaining position may become imbalanced due to the very large scale and the growing geographic spread of some retailer groups. It may be an opportunity if a processor can become a preferred supplier and has differentiated products sufficiently to create a consumer demand which the retailer needs. If listed with the major retailers, huge potential is opened up.
New practices in product distribution combined with electronic shopping, international marketing, Single European Currency, globalisation and reduction in trade barriers make for a more competitive trading environment for businesses.
At farm level, the trend of declining numbers employed in agriculture has continued. This places a pressure on those remaining in agriculture to use technological advances to improve productivity and to reduce the labour demand due to labour cost and shortages.
COMPETITIVENESS OF THE PRIMARY AGRICULTURAL SECTOR
The farm structure in Ireland is small, thus even with a significant increase in average farm size, our cost structure will not enable the sector to compete at world prices. Direct payments to farmers will continue to be essential because of the relative world scale disadvantage, differences in costs, and more demanding production standards. The sustainability of direct payments must be fully examined and supported in the context of value for the taxpayer and the need for income support to maintain rural areas.
Ireland's average farm scale is insufficient to maintain competitive income and return on investment. It is necessary to address this issue and ensure that producer returns can be improved to provide a standard of living comparable to other industries. A strong increase in the average size of enterprises should be encouraged and facilitated. It must also be acknowledged that such growth is necessary and acceptable for the development of the agri and food sector. Leasing should be made more attractive and a package of measures should be introduced to give effect to this. In addition, the off-farm income limit for the Farm Improvement Scheme should be raised above the limit of £16,000. Tax incentives (similar to Section 23) should be introduced to encourage scaling up of the size of farm enterprises. In addition, Capital Acquisitions Tax and Capital Gains Tax should be applied in a way which encourages structural adjustment and is consistent with building a more competitive agricultural sector.
The cost:income ratio in agriculture has shifted. There is a need to restore this to a level which provides an incentive for farmers to invest in the sector and to obtain a satisfactory living from their farming enterprise. Income improvement will result from improving the quality and timing of product for the market. Increasing the scale of farming should also improve income while not increasing cost proportionately. The possibility of providing tax incentives to encourage development of the sector should be examined.
Agenda 2000 will reduce the relative competitiveness of grassland compared with intensive production based on cereals and concentrates. The negative impact on Ireland's relative position will need to be addressed. A mechanism to maintain the competitive position of grass silage should be found so as not to leave Ireland's grass based production system at a disadvantage. This should include an E.U. premium for grass silage equivalent to that of cereals.
With the drop in E.U grain prices, marginal grain producers such as Ireland have suffered most due to the decline in grain production had dropped. Grain will be imported into grain deficit countries like Ireland. This will mean that we will have higher production costs than some other countries such as France or the U.K. Ireland should seek a remedy for this disadvantage - such as an equalisation scheme for this extra transport cost. The E.U. cereal regime should be managed in a way which takes full recognition of the impact of reduced feed self sufficiency on our livestock sector.
Alternative employment opportunities in the economy are creating labour shortages and increasing the cost of employed labour on farms. This is contributing to a rapid structural change in farming. This factor is likely to result in an increase in the average farm size, but labour shortages may restrict the growth in the number of larger farms where employed labour is required.
Partnerships may provide the answer to this problem. Encouragement and recognition should be given to farmers forming partnerships to allow sharing of resources, specialisation and thereby increase the efficiency of the partnership unit. This could also allow sharing of milking facilities, machinery etc.
Government should facilitate the formation of partnerships by removing the obstacles to them e.g. herd numbers, quota rules, taxation etc. The purpose should be to ensure that between 2-5 farmers can combine their assets to create a genuine commercial partnership and create value for the partnership.
The Farm Relief Services have experienced a shortage of skilled operators as a problem. The reason is that they cannot compete with the rates being paid in other sectors of the economy. The wage difference between permanent agricultural workers and semi or low skilled workers is 40%.
Initiatives need to be undertaken to relieve the labour shortage in agriculture. The Government and the E.U. should permit farmers who have taken the Farm Retirement Scheme to take up employment with the Farm Relief Service Co-operatives. A further initiative could be the introduction of an incentive to encourage overseas employees to work with the Farm Relief Services.
In order to facilitate the structural development of farms, a positive attitude needs to be taken to succession. Measures should be taken which encourage planned succession, for example, using tax incentives or permitting quota grouping between farms.
Farmers are finding increased competition in the land market. Business people now see land (not only development land) as a good long-term investment. The low returns generated from farming mean that farmers increasingly cannot viably fund current land prices. A mechanism needs to be found which will have the effect of giving an advantage to people with formal training in agriculture by providing them with priority access to agricultural land (which is a limited resource).
Training of farmers should be a priority for the future. Farming techniques are advancing and farmers have to rely to a greater extent on using new technology, computers, and business methods to increase the efficiency of their farming operation. Good quality, relevant training and re-training programmes should be available to farmers as part of the programme to update Irish agriculture.
An intensive advisory service is needed which must focus on reducing on-farm costs and adopting best farm practice.
Farmers and the support agencies (including the Department and Teagasc), in conjunction with co-operatives should explore how technology and biotechnology improvements can be used to help improve efficiency and incomes on farms, while not compromising consumer concerns about health and safety.
The next W.T.O Round may reduce tariff protection against imports of the main agricultural products. The E.U. is also expected to come under pressure to reduce the volume of subsidised exports to the world market. If the E.U. concedes on either of these points, it will have the effect of reducing the E.U. price for milk, beef, pigmeat and other important agricultural outputs.
The Irish Government and the E.U. must strongly resist any concession on either of these important issues. The European model of agriculture was strongly advocated and endorsed by the Council of Agriculture Ministers and the European Council in the Agenda 2000 decision and will have to be defended in the forthcoming W.T.O. negotiations. Direct payments to farmers for support price reductions have been a feature of the CAP since the 1992 reforms and must be continued into the future.
The E.U. should also ensure that in the W.T.O. negotiations, credit be given for the higher environmental standards which are being applied in many countries. This is not a trade distorting measure. Those applying high standards to improve the environment should not be undermined by those who don't.
MILK QUOTA SYSTEM
In order to create an incentive for young people and those capable of developing dairy farm enterprises, the opportunity should be provided to enable such farmers to develop to a level of milk output which is viable. By 2010 a level of 70,000/80,000 gallons could well be the viable level of production and our current policies should be adapted to anticipate this.
Those farmers who do not use their milk quotas should be obliged to dispose of their quota. Failure to do so within a relatively short time scale should result in the permanent loss of that quota.
It follows that only active milk producers should have access to or ownership of milk quotas.
The options for the most efficient means of restructuring quota and managing transfer of quotas require careful consideration. The system must be loaded in favour of active milk producers and those capable of becoming and remaining viable.
The cost of acquiring restructured milk quotas has to be considered. This becomes an ongoing cost for the acquiring producer, thus with the likely phasing out of milk quotas after 2008, the focus should be on gradually decreasing the cost of milk quota for restructuring.
In order to ensure that restructuring occurs in an orderly manner, and in order to provide smaller scale producers who have the capability and means to develop, there is need for a phased approach to allow some opportunity for producers to grow to a commercial level. Without such a measure, some regions of the country could lose quota to other regions because the rate of exit and speed of uptake of available quota will vary between regions and co-op catchment areas.
COMPETITIVENESS IN THE PROCESSING AND MARKETING OF FOOD
The dairy sector in Ireland has a very large co-operative involvement. Co-operatives have traditionally paid out a high price for milk (which is one of their objectives) and have only retained what they need to further develop their business. In effect, the price paid to farmers reflects the commercial price for milk plus their dividend or reward for co-operative ownership. In view of the significant challenges facing the sector, increased levels of re-investment will be required in plant, research and development, marketing and training.
Return on investment and margins in primary food processing is lower than for many other industries. This has an impact on capital investment decisions and on the further development of the sector.
The dairy processing sector will face significant costs for investment to replace or upgrade equipment. Most plants are over 20 years old and will require substantial investment before long. This will add to the demand for capital in the sector.
The Government should encourage the development of new and existing indigenous businesses in the food sector with capital grant supports and tax incentives similar to that provided to multi-national firms which have been encouraged to establish production plants in Ireland.
Competition on the developed consumer market of the E.U. is strong as dairy and food businesses focus on increasing their share of the higher value market. This is partly a response to reduced export subsidy and competition with low cost producers on world commodity markets. While commodity and food ingredient production will continue to be important for the Irish food sector, we need to encourage increased research and development and product development to increase producer and business returns on a sustainable and consistent basis.
Agenda 2000 price cuts for butter and S.M.P. which will apply from 2005 will have a disproportionate effect on Ireland because of our heavy dependence on those products. There is a need to develop a portfolio of products which are not as susceptible to changes in support policy.
To encourage investment in the food industry in order to exploit market opportunities, significant structural funding from national and E.U. sources will need to be provided. Significant changes have occurred in lifestyle, demographics, consumer expectations and eating habits, and the Irish food industry will require investment to ensure that it can meet these changing market needs. The supports available to the food industry should be enhanced so that an increased commitment can be given to building a sustainable, quality value added and consumer driven Irish food industry.
Ireland's peripheratity puts exporters at a cost disadvantage. Being the only E.U. Member State with no direct land, tunnel or bridge contact with Continental Europe, provides an opportunity for Ireland to obtain support for measures to address this disadvantage. Distance from the market will limit Ireland's possibilities to export fresh product or products with a high moisture content. Greater effort and resources needs to be put into research, development and marketing of dairy products. E.U. and state support for marketing, training and research should be targeted increasingly at in-company investment rather then towards institutional providers. As Ireland is a commodity producer of agricultural products, all efforts must be made to reduce costs, for example research into reverse osmosis to reduce transport costs for milk.
The New Zealand dairy industry has recently committed over £10m per year for a 5 year period to investigate the potential of biotechnology. This is on top of the estimated £16m invested annually in research and development. Ireland's food industry should link technology to business at a strategic level. It is necessary to adapt cultures and values and put greater emphasis on market orientation. The level of spending on research and development in our dairy industry is considerably lower than in many of the multinational firms which have strong brands, growth and customer focus.
The E.U. dairy regime is coming under increasing pressure due to budget and GATT restrictions. This could jeopardise the sustainable development of the sector in Ireland. It is important that the needs of the sector are taken into account through:
The agri food sector, farming and rural development should be given preferential treatment by introducing tax rates below those applying to other sectors. In addition, incentives should be given for information technology development, so as to attract people to rural areas. A preferential tax rate should be considered.
Infrastructural improvement will greatly benefit the food sector. Good road, rail and sea transport is essential and this should be facilitated by funding from structural funds and other sources.
A poor infrastructure represents a hidden cost to farmers and processors and seriously impedes the development of the industry. Population concentration in the main cities highlights the need for good infrastructure in rural areas where many food processing plants are located.
Environmental improvements will be required to meet more stringent conditions and this is driving up costs compared to international competition. Compliance and related costs should be reasonable in order not to reduce competitiveness. Any increases in standards should only be required where the product/market provides returns for such investment. There is a need for greater levels of research into the design of systems which meet the higher environmental standards.
There is increased emphasis on quality, safety and marketing from the market place. Ireland's reputation and standing on these issues is strong but needs to be developed on an integrated basis, from primary production through to marketing.
Training of farmers and operatives in the farm and food processing sectors will be a key mechanism to improve competitiveness, income and quality of output. However, it is also necessary to continue to develop management skills and the skills of food business directors. Assistance should be provided to businesses to enhance the quality of leadership and direction of the sector. This should include support for development of the skills of directors and management of food businesses.
INDUSTRY STRUCTURE
Agriculture support policy is likely to be stable for the next three of four years. This provides an opportunity for the dairy processing sector to prepare for the increased competition which will follow the next W.T.O. Agreement. Restructuring options have to be carefully considered and evaluated. However, steps will need to be taken to ensure that the industry will be properly structured to meet the competition and match the demands and expectations of customers.
Dairy industry manufacturing and marketing consolidation is happening in New Zealand, Holland, Germany and Denmark, increasing competition for Ireland's exporters. Ireland's processing capacity will need to be consolidated in order to maintain its competitive position.
RETAILERS
Government and consumers want to have low food prices in order to keep inflation low. But low food prices should not be borne only by farmers. It is possible to have low food prices alongside a fair return to the primary producer, however, this would require a reduction in the margins further along the value chain including retailer margins. In France, the Government has recently introduced legislation obliging retailers to display two price labels on their fruit and vegetables - one label shows the price paid to the producer, the other shows the retail price to the customer. This increased the transparency in pricing and the return to producers and others in the chain.
NEW TECHNOLOGY
The debate about genetically modified organisms, organic foods etc. will have long term implications for farmers. It is vital that good leadership and advice is urgently provided so that farmers can make informed decisions and be prepared for any radical changes.