Good news on the farm

Teagasc colleagues have produced their mid-year assessment of the likely outturn for output and incomes in Irish agriculture in 2010. The main message is that there is a solid recovery in gross margins in dairy and cereals from the awful year in 2009 and also a positive outlook for sheep (helped by the recent announcement of support under the new Grassland Sheep Scheme), but no change is expected on cattle farms where low or negative profitability will continue.  Overall, the Teagasc assessment is that both total agricultural output and incomes should increase by around €300 million this year, which will be an increase of 18% on the operating surplus in agriculture in 2009.

The improvement in the agricultural economy is largely driven by the recovery in dairy prices. Monthly producer prices for milk taken from the Teagasc report are shown in the diagram since January 2006. The chart highlights the volatility experienced by dairy farmers over the past four years, with the highs of the second half of 2007 and the first half of 2008 followed by the lows of most of 2009. How to address volatility in agricultural markets in general, and the milk market in particular, has emerged as one of the key questions in the debate on the shape of the CAP post-2013 given the gradual dismantling of market management instruments. My own contribution to this debate emphasised that risk management is primarily the responsibility of individual farmers. Public policy has a limited role to play, not least because public safety nets tend to simply displace what farmers themselves should be doing to avoid and manage price risks.

The improving agricultural economy also provides a good platform to  achieve the ambitious growth targets set out in the recent  Food Harvest 2020 report [Disclaimer: I was a member of the committee which produced this report].  The purpose of this report was to highlight the role that the agri-food sector could play in Ireland’s economic recovery and to identify the constraints to fulfilling this potential. The target set was an increase of €1.5 billion in the value of output from the agriculture, fisheries and forestry sector by 2020, which would be a 33% increase on the 2007-2009 average. The report contains useful suggestions on how to improve the competitiveness and efficiency of farm production, although the vulnerability of the sector to changes in CAP support policies and the low or negative profitability of beef production which is the single largest commodity sector remain huge sources of concern.

26 thoughts on “Good news on the farm”

  1. Not more sheep on the Irish Highlands !

    The mountains have never recovered from the 1980s when vast numbers of EU subsidised sheep scoured the blanket bogs of its little nutrients until all was left were bog hags and massive erosion.
    The econimics of highland sheep farming is now completly skewed by EU subsidises that sustain this madness where a large amount of energy going into production creates a useless fleece.
    Serious consideration should go into abandoning this practise and shifting production to Highland cattle for beef and Kerry cattle for specialist diary production.
    This will remove the scourge of bracken on our hillsides and increase the productivity and agri tourist potential of our hills enormously – also given the fact it is a more labour intensive business then leaving sheep on the hillside for most of the year it will help sustain some viable population in our remote rural areas.
    But then again the natural inertia of our older farmers will prevent any new ideas from taking hold.
    Lets just farm subsidises and hope we can grow bungalows once the winter storms of this financial hurricane blows over.

  2. Alan,

    Like Christianity (the non-dictatorship/Pontius Pilate type) and much else, it would be a good thing if the aspirations are realised by 2020.

    I don’t wish to disillusion you but my prediction is that by 2020, the adjective ‘smart’ will be discredited well before then and it won’t even be used for mobile phones as every mobile will be a smartphone.

    And as for those vehicles called steering groups and taskforces, what can we expect: a horse or a camel?

    “It is therefore recommended that a steering group should be established to oversee the development of the brand and to report regularly to industry, producers and government on progress. This group should develop a realistic plan for the gradual development of the brand over a three to five year timeframe with clear milestones and benchmarks and a feasible funding arrangement.”

  3. On the day the Taoiseach launched this report, I had a look at the websites of the Depts of Agric and Taoiseach and it hadn’t been uploaded online.

    Glancing through it now, what strikes me is that there isn’t very much in it that would worry New Zealand’s Fonterra which accounts for more than one-third of international trade in dairy products.

    It has been argued that Irish dairy production is fragmented and has concentrated on low margin products.

    Sweden has been a bigger producer of cheese than Ireland.

    I note that Glanbia had a representative in the group.

    What was interesting about Glanbia’s effort to offload its low-margin Irish dairy business to allow it to concentrate on cheese production in places like the US, was that it did not evoke even a whimper from policymakers.

    There is much about developing brands but where is the company that can achieve this?; marketing campaigns by State agencies are just side issues.

    The world’s biggest food company Nestlé has more than 5,000 working in R&D.

    http://www.finfacts.ie/irishfinancenews/article_1017985.shtml

  4. An historic moment. The first time the words ‘good news’ have ever been used in the title of a thread on Irisheconomy.ie. I do hope this isn’t going to set a precedent. We have the site’s reputation to think of.

    I’d be disappointed if the increases are as low as 300 milion euros in 2010. I’d be hoping for in the region of 600 million euros increases in both the aggregates Alan Matthews mentioned, although obviously very small and difficult-to-predict changes in output prices, input prices, and volume of output have a disproportionate effect on them, so I wouldn’t bet my house (even at its derisory Morgan Kelly valuation) on achieving these targets.

    A 300 million euros increase in final agricultural output in 2010 would only be about 6pc, which wouldn’t be that great considering it fell by almost 20pc in 2009. But, by May 2010 seasonally-adjusted agricultural output prices in Ireland were up by 11pc on the average for 2009, and rising. It is very difficult to predict changes in the volume of agricultural output, as it is so dependent on the weather. But, milk output in 2010 looks as though it will be well up on 2009. In the early months of 2010, milk output was well down on 2009 because of the arctic weather, but in recent months has come back strongly, up 6.5pc in May 2010 compared with May 2009 and up 10.9pc in June 2010 compared June 2009. That leaves the cereal harvest, about which I’ve seen no figures for this year. But, last year the weather was awful at harvest time, so there must be at least a chance that it too will be up this year, although, as I say, the cereal harvest in Ireland is especially difficult to predict, and the outlook for it can change over the course of a few days, depending on the weather.

    So, as of now, I’d be quite disappointed if the increase in the value of final agricultural output in 2010 is less than 12.5pc, this being composed of an approximately 2.5pc increase in final output volume and an approximately 10pc increase in output prices. This would equate to an approximately 600 million euros increase in the value of final agricultural output. If that were achieved, I’d expect the increase in net agricultural output and the operating surplus to be even higher, as input prices in 2010 are down. Obviously, if the weather for the rest of 2010 is as bad as last year, or global prices collapse, none of this will happen. But, as of now, these look reasonable targets.

    There are a number of wider economic implications arising from the strong turnaround in agricultural output, prices and incomes, that Alan Matthews has highlighted.

    First, consumer price deflation will end more quickly than predicted – food price inflation in Ireland is quite likely to be positive by the end of the year if the recent trend in global agricultural prices is maintained.

    Second, it will affect the price of agricultural land. Gross value added in Irish agriculture fell by almost 50pc between 2007 and 2009, and net value added fell by over 80pc in the same period. This is bound to have played a large part in the fall in the price of agricultural land in that period. The causes of these large falls in gross and net value added in Irish agriculture were (a) the collapse in global commodity prices due to the global recession (b) an increase in input costs to Irish agriculture (c) a 5pc fall in the volume of Irish agricultural output due to dreadful weather. In 2010, all these factors have been reversed, although the ground lost between 2007 and 2009 will not have been fully recovered in 2010. But, given average weather (ie mild winter and a summer closer to this one than the past three) in 2011 and a continuation of recent global price movements, it could well be fully recovered by 2011.

    Third, it will affect employment. In recent quarters the fall in agricultural employment in Ireland has made a disproportionate contribution to the overall fall in employment. In the last quarter for which figures have been published (2010 Q1, overall employment in Ireland fell by 17.3 thousand. But, of this, the fall in agricultural employment contributed no less than 6.2 thousand, or 36 per cent, which is vastly disproportionate. While I’d be surprised if agricultural employment were to increase on the back of the improvement in agricultural output and incomes that Alan Mathhews highlighted, it could well stabilise, which would mean that only a relatively small further improvement in non-agricultural employment would be required for overall employment to increase.

  5. @Alan

    The focus of the Teagasc assessment is again on the most cushioned, and in many cases subeconomic, sector of Irish agriculture – the CAP fattened sector. The continuation of CAP is a shameful practice and wasteful. Many farms are not economic. They should go the way of all businesses. Sell up and let economies of scale prevail in the real unsubsidized market. Look at the efficiencies achieved in the pig industry. It is a miracle it survives in Ireland.

    Sorry to sound a curmudgeon, but we need to get beyond subsidies and the implicit protectionism they contain to push down production costs in Ireland.

  6. wheat prices are up 71% on the month and it looks like the warm summer was a little too hot in russia/ukraine, likely spike in commodity prices could help a lot of farmers here. they might be the hidden ‘smart economy’ that all of us overlook.

  7. @ John the Optimist

    You only have to note the number of comments to see when a case is good news here. As I live and work in a farming area I have known of the good news on the ground (sic) for some time. Milk output and prices are up significantly as are cereal prices for this harvest. There is a monstrous multiplier effect from increased farm incomes in that farmers are great spenders when in the money so like you I would say the growth in income will be significant. The problem for Irish farmers over the last number of years has been the cheque in the post in aid from the EU which is a curse on Irish farming unlike in New Zealand where milk output has doubled in the same period since the EU brought in stupid quotas. Irish farmers could easily double output here if the shackles from the EU were taken off years ago. This will change in the next few years when quotas are progressively removed.

  8. That certainly is good news. Whether the increase is €300m or €600m it’s a lot of money and it would be a great boost to rural communities right around the country. As TRP says, farmers have a high propensity to consume so a lot of this income will end up in the local economy. That should keep a few thousand more in work.

  9. @TRP

    You are totally correct. If the heading of the thread had been ‘Bad news at the bank’ rather than ‘Good news on the farm’, there would be 200 posts by now.

    I totally agree with you about quotas. Get rid of them asap and let Irish farmers produce as much milk as they can sell. At the time they were introduced (must be 25 years ago now), milk output in Ireland was growing very rapidly. It has been frozen at an artificially low level ever since.

    Over the years, Irish farmers have often been portrayed as inefficient and lazy by the urban-biased Dublin 4 media. However, I remember reading a few years ago that cereal crop yields in Ireland were the highest in the EU. Not sure if that has still been true in the past few years of very bad summers, but it was then.

    Ireland needs a strong agricultural industry for both economic and social reasons. A strong agriculture will weaken the grip that Dublin 4 has on the country. As you say, Irish farmers are great spenders when doing well. Also, they are more likely to spend locally than urban people, more likely to go to Galway races than to Greece for their holidays, more likely to spend money going to see their local GAA teams than going to Old Trafford or The Emirates Stadium every weekend. I am not attacking people who do that, as I do it myself sometimes. But, it is essential to have the economic and social heart of the country, which the agricultural sector is, doing well, as the multiplier effects are much greater than for other sectors.

  10. Indeed, the improvement foreseen in agricultural output and incomes this year is largely a rebound from the lows of 2009, but not the less welcome for that. The question is how to sustain this growth for the remainder of this decade, particularly in a context where the volume of output from primary agriculture has remained static now for the past two decades. In contrast, the food industry has had a terrific record in terms of output growth, largely by adding value to the raw material. Here the concern must be that the ‘easy’ opportunities have been exploited (for example, much Irish beef was sold as a commodity product in third country markets a decade ago, whereas now 99% of Irish beef exports are exported within the EU mostly to supermarket customers) and that continued innovation will be more difficult.

    This is where the Food Harvest 2020 report comes in. Of course, as with any document prepared b 31 people in a relatively short time, there are compromises and inconsistencies. But the main messages of the report are clear. The Irish agri-food sector needs to become more competitive. This will require substantial restructuring at both farm and industry level. The highest environmental standards will have to be met, but this should be seen as an opportunity (hence the Brand Ireland proposal) rather than simply as extra costs. And the main responsibility for achieving these changes rests with the industry. The report (exceptionally for one dealing with agriculture) is not a shopping list for more government support. Although there are recommendations for increased spending in some areas, it is accepted that these would have to be offset by decreases elsewhere (admittedly this is a soft budget constraint in our current fiscal circumstances, but it would not be realistic to expect a producer-dominated committee to go further than this).

    There will be opportunities over the next decade. Real food prices will be higher than in the past decade, though so will energy-related input costs, so whether these will translate into improved terms of trade for agricultural producers is yet unclear. Higher energy costs will create new markets in renewables, mainly biomass but also wind and biogas, while the abolition of milk quotas from 2015 will also be positive.

    The challenges are also clear. Irish agriculture is far too dependent on CAP support and EU transfers will decrease after 2013. Whether we can bring about the necessary increases in farm size in the context of our family farm structure is uncertain, given the problems with land mobility, but lower land prices would be helpful. And the tensions between the goal of increasing agricultural output and lowering agriculture’s environmental footprint should not be underestimated, as Keith’s comment above alludes to. If the ‘smart economy’ concept helps to protect spending on agricultural R&D which I think is a critical lever in addressing some of these challenges, then it will have paid for itself, even if as Michael suggests it will be seen as a redundant idea in a decade’s time.

  11. @Alan Matthews

    hence the Brand Ireland proposal

    To be successful, ‘Brand Ireland’ needs to mean what it says and cover the whole island of Ireland and not just 26 counties of the island of Ireland, with another ‘Brand something else’ covering the remaining 6 counties. No one outside Ireland is interested in such artificial divisions. Agriculture should be totally integrated on an All-Ireland basis as soon as possible. I think there would be very little objection to this from north of the border these days.

  12. @Alan Mathews – thanks for keeping us up to date on the agriculture & food sectors.

    You write “If the ‘smart economy’ concept helps to protect spending on agricultural R&D which I think is a critical lever in addressing some of these challenges, then it will have paid for itself”. I am not so sure. As far as primary production is concerned a lot of existing knowledge is not used by the producers and adding more through R&D is not going to do much to either output or the environmental footprint. The real issue is not the available knowledge but the willingness or ability of primary producers to take up innovations (usually innovations from the last century or indeed the one before). In my experience only the commercial core of primary producers are likely to do so and they are the minority.

    The key problem in primary production is the need for structural change, a need that was obvious decades ago but which both policy makers and lobby groups keep avoiding – the recommendations of the report on this issue seem a bit limp.

  13. @Edgar

    Whether low total factor productivity in agriculture is due to farmers not having access to productive technologies or is due to lags in adopting these technologies is a widely-debated issue and actually something we now have a lot of evidence on in Irish circumstances. There is indeed some evidence of technical inefficiencies which if they could be reduced would lead to a significant increase in output. But I would argue that making new technologies available is actually more important, particularly given the difficulties (costs) of raising average levels of efficiency.

    It is true there are a range of management capabilities on Irish farms (just as there are differences in the productivity of ESRI researchers). Raising average efficiency levels (ie. adopting existing technologies) would help to increase output on a once-off basis, but we also need technical progress (i.e. the discovery of new technologies). Modern agriculture is a highly dynamic activity with exciting technological advances, but also facing severe challenges (adaptation to climate change including water stress, lowering its environmental footprint) and we need research to show what makes sense in Irish conditions.

    The evidence on the use of technology on Irish farms comes from production frontier analysis using either parametric stochastic frontier analysis or non-parametric data envelope analysis. These are techniques which allow the relative importance of changes in technical efficiency and technical progress to be measured. In my 2001 paper in the Economic and Social Review with Suzanne O’Neill, we found an average technical efficiency level of between 65 and 70 per cent with a slight upward trend over the 1984-98 period.

    This suggests the potential to increase output by around 30% if all farmers operated at the same level as the ‘top’ farmers who form the frontier. However, the difficulties of raising average technical efficiency levels should not be underestimated. Virtually all of the improvement in total factor productivity in recent years has come from technical progress rather than from ‘catching up’ in terms of average technical efficiency. A non-technical summary of results can be found in a chapter I co-authored in a 2007 Forfas publication on Perspectives on Irish Productivity.

    This work has been carried on by my colleague at Trinity, Carol Newman, and Teagasc researchers James Caroll and Fiona Thorne. In one of their papers, they suggest that the overall inefficiency score for Irish dairy farming is 20%, implying that output could be increased by 20% if all dairy farmers operated at the maximum level of efficiency. I think it makes sense that the figure for dairy farms is lower than for agriculture as a whole, and that we expect to find a longer ‘tail’ of less efficient producers in cattle farming. However, the multiplicity of cattle systems and data problems makes it more difficult to carry out statistical analysis of this kind for cattle.

    In other work, they have calculated how the average efficiency of Irish farm sectors compares with other EU countries using DEA analysis. In dairying, Ireland is ranked on the frontier in the group of fully efficient countries (where France, for example, has a score of 0.833). In cereals production, Ireland falls just outside the group of fully efficient producers but still comes in 7th in the EU overall. This suggests that, at least for these sectors, improving our competitiveness within the EU will depend more on technical progress than it will on improving average efficiency levels.

    I would not disagree with you, though, that the recommendations to encourage structural change are a bit limp – but what proposals would you have liked to see there?

  14. I would also question the prospects for the performance of long term bonds where bondholders are locked in, i.e. they cannot alienate their bond.

  15. @ Alan – I have not followed the literature on this closely (I can remember your paper with Suzanne O’Neill and of course as a fellow contributor to the Forfas volume I also saw your paper there) but can speak from personal experience. There are simple and very cost effective managment techniques that I was using in the later 80’s which non of my farming neighbours use now. In some cases the sons are worse farmers than the fathers. The dairy farmers tend to be the most efficient by a very long shot, primarily through good grassland management – but grassland management is not rocket science i.e. this knowledge is easy to disseminate and apply.

    There is no doubt that the most efficient farmers would gain from technical progress but I would suggest that the 20% to 30% possible effiicency gain would outweigh the probable marginal benefits from further innovation i.e. I would concentrate on achieving that 20-30%.

    I take your point about having to adapt to climate change but even there a lot is known from other countries that have had a different climate (we should avoid reinventing the wheel). On animal breeding (one of the recommended areas for research) other countries (e.g. France) are way ahead of us – again there is no point in doing this research if my neighbours are happy with some cross bred bull.

    How could we encourage structural change? Good question. Getting rid of production rights (quotas) is a first step. Treating the sector like any other sector is another important step. I would argue that past (and some current) policies have sustained the poor structure through subsidies. For example if farmers had to meet the cost of complying with the nitrates directive etc. instead of getting huge subsidies, then the lower productivity farmers may well have had to call it a day.

  16. As the CSO gathers data on agricultural land sales, it seems odd or maybe not given the vested interest in secrecy, that no data is available on the bonanza income for farmers from rezoning.

    They have collected at least €4bn from roadbuilding sales alone.

    The national average price for Irish farmland was €21,145 per acre in 2008 – – the highest in Europe — representing the drop of 16.8% from 2007. The average in Great Britain during 2008 was £4,200 per acre (€4,726) – – up 21% on 2007.

    According to Savills in 2007, in France, each field changes hands at least once every 70 years, but in Ireland on average a field changes hands every 555 years! Total annual turnover in Ireland was less than 0.2% of the total acreage. Countries with sales restrictions, such as France, are cheapest. Land is about €6,000 a hectare, compared with almost €60,000 in Ireland in 2007, as French land must be offered first to young local farmers.

    With so little land coming on the market and then at economically unproductive levels paid by rich aspiring “lifestyle” farmers, it could hardly be a positive for the national economy.

  17. @Michael Hennigan – good point. The CSO used to publish land price data but that series was discontinued (I think in 2005). Anecdotally it appears that roads money was used to buy farms elsewhere driving up the price further.

  18. If there was a Euro based futures market in milk products then I as a dairy farmer would be able to manage my risk. Unfortunately one cannot stop a cow milking when prices change and bring her back when they improve!

    The structural problems of land ownership have consistently limited farm reform. The suggestion that we could double our milk production in the next 10 or so years is totally implausible when you look at land ownership (stopping existing farmers expanding), fluctuating milk price and the huge capital cost of setting up a greenfield dairy farm inhibiting newcomers.

    Historically I don’t think a single European country has seen an increase in dairy farmers in 30 years- the opposite has been true.

  19. @ Danny

    One can either avoid risk, manage risk or learn to cope with risk. Until recently, the EU Commission (read taxpayer) managed the dairy market in such a way that you and other EU dairy farmers could more or less forget about price risk. Since 2006, you now know that you live and work in a world where milk prices can fluctuate, so the question is what do you do about it. Milk prices are likely to be among the more volatile agricultural prices in future because (a) small changes in the quantities available can have a big influence on world market prices because of the relatively small amount of milk traded; (b) the length of time before there are increases in milk production as a result of price changes; and (c) delayed reaction of the demand to changing dairy commodity prices.

    You are absolutely right that there is no reason at all why you should not be able to hedge your milk price at least within a season. This requires a functioning futures market. Such a market has not yet emerged in the EU because there was never a demand for it before now. It is up to you and your fellow dairy farmers together with the coops to investigate and promote an EU-wide futures market for dairy products. There will still be some basis risk, i.e. a futures market trades in a standardised commodity, it will never quite match the product mix and quality that you produce, but still the degree of risk you would face would be much less than on the spot market. Michael Keane and Declan O’Connor of UCC have written a good report for the European Dairy Association where they discuss volatility in dairy markets and how to manage it. They report that a number of bodies are actively looking to launch a futures market for dairy products.

    Apart from offloading price risk in this way, every dairy farmer will have to learn to live with price volatility from one season to the next. This may mean income diversification on some farms (where the spouse takes an off-farm job); it may mean building up savings. The point is that lots of other businesses and professions must live with price and revenue risk, and there is no reason why dairy farmers cannot do likewise.

    There are certainly many different views on the feasibility of expanding milk production, and getting access to suitable land (i.e. a neighbouring farm) is indeed a huge constraint. EU schemes and subsidies have kept the demand for land higher than it would have been otherwise. So has the demand for land from non-farm sources that Michael mentions above. Both factors are likely to be less influential in the decade ahead. On the other hand, the absence of off-farm jobs would seem to be a factor making it less likely that farmers let go of their land. So you may well be right that the 50% increase (not a doubling) of milk production by 2020 compared to the 2007-09 average sought by the Food Harvest report is not feasible. But it seems right to set the target so that we can at least measure the extent of our failure, if that is the case.

  20. @Alan Matthews:
    “Apart from offloading price risk in this way, every dairy farmer will have to learn to live with price volatility from one season to the next. […]”

    Is it possible that production of such products as cheese and butter could be (or even is) used as a way of storing a surplus? Or are the cheese-and-butter producers inflexible?

    I ask out of ignorance (but with a fondness for good cheese).

    bjg

  21. @Brian

    Indeed, some storage of dairy products is permitted under the EU market regime for milk. The public system works by storing either butter or skim milk powder, but not cheese (the idea is that butter supports the fat price component and SMP the protein price component in the milk). However, the Commission can also introduce aids for private storage to encourage processors to hold product off the market temporarily, and this can include cheese.

    To prevent the re-emergence of the infamous butter mountains of the 1980s, when public intervention storage became the main ‘market’ for many processors, there are now strict limits on how much of these products the EU is allowed to buy, although these limits can be exceeded in the case of a severe crisis on the milk market, and indeed they were during the 2009 crisis. Around 4% of annual butter production and 30% of annual SMP production were purchased into public intervention last year. This works to provide a floor under the EU milk market because it is totally closed to “discretionary” imports, i.e. apart from those which come in under bilateral and multilateral agreed quotas.

  22. Alan,

    I agree with your comments and do think farmers have been mollycoddled for too long so that they regard state support as a ‘right’ not something they have work for. Any transition from state support to free market (sort of- agriculture has had state involvement since the Pharaohs) is going to be difficult and it is hear where the state has to be proactive- free up the other rules that constrain agriculture.
    For example it is terribly difficult for me to rent land ‘officially’ and long term because other farmers are afraid of losing their entitlements or are tied into EU schemes. These rules have to be looked at. If there is to be a ‘free’ market for selling milk there has to be a ‘freer’ market for producing it.

    Incidentally I would guess that the average production of milk per labour unit has increased vastly in the last 15 years. We have gone from 3 people producing under 500,000 litres to 3 people producing 1.3 million. I know alot of work has been contracted out but the efficiencies of scale in silage making, slurry spreading ploughing etc have to have an impact. And I for one have just milked 194 cows in under two hours before breakfast!

  23. @Danny Haskins – very good point about renting/leasing land. This is an irish issue though – in Germany in excess of 50% of the agricultural area is leased (about 80% in East Germany).

  24. Kalr,

    spiking wheat prices may or may not help. But where the lord giveth he also taketh cause animal feeds used for finishing off cattle and in the winter period will be more expensive as a result

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