Teagasc economists have just released their Situation and Outlook Report for the Irish primary agriculture sector for 2012 (proceedings here and presentations here). In 2011 there was a significant and welcome recovery in farm incomes (up 33% over 2010) although this was entirely due to higher prices and higher subsidies – the volume of agricultural output (at basic prices) remained unchanged despite slightly higher volume consumption of intermediate inputs.
The Teagasc view is that the value of gross output in agriculture will fall back slightly in 2012, due to a combination of lower production in some sectors and lower prices in others. There will be some savings on input costs, but lower subsidies in 2012 (due to a carryover of payments in 2011) means that operating surplus in agriculture is expected to fall by 12%.
This compares to the estimate in the latest ESRI Quarterly Economic Commentary (August 2011) that gross value added at factor cost in agriculture, fishing and forestry would rise by 10% in 2012 (while the GVA and operating surplus concepts are not the same, they are sufficiently close to expect that they would move by similar percentage changes).
It is not clear if this discrepancy is due to a downward revision of price prospects for 2012 in the last six months since the ESRI forecast was prepared, or whether the two agencies have formed different views on the underlying buoyancy of the sector.
In commenting on the impressive performance of agrifood exports in 2011 – according to Bord Bia they accounted for 25% of the overall growth in export earnings in 2011 – , the Irish Exporters’ Association noted:
The continued rapid expansion in this sector will have a very wide ranging impact on the economy as a whole as there are a wide range of producers, sub-suppliers and added value manufacturers in the sector who should now have the confidence to expand their workforce.
However, the success of the export sector in the past two years has not yet translated into a noticeable increase in the demand for jobs. A new IIIS Discussion Paper by one of my former graduate students uses a recently constructed Social Accounting Matrix of the Irish economy for 2005 to calculate multiplier values for the food and drink industry and compares them with other traded sectors.
The multiplier values illustrate the different degrees to which individual economic sectors are embedded within the economy and the strength of the indirect and induced effects of an exogenous increase in the demand for sector output. The results confirm that an expansion in the food and drink industry has greater multiplier effects for the rest of the economy than an expansion of the modern manufacturing sectors, although the differences are not as significant as sometimes supposed.
For example, an exogenous increase of €100 million in exports from the food and drink industries would lead to a total increase in output of €200.9 million and additional value added (GDP) of €74.7 million. A similar increase in the exports of the chemical industry would lead to a total increase in output of €159.6 million and additional value added of €60.5 million (some of which would be repatriated as profit outflows).
A similar injection of €100 million in additional exports would increase household income by €36.4 million and €25.9 million, respectively. The calculated employment multipliers are 10.3 per €1 million of additional output in the food and drinks industry and 3.5 for a similar increase in output in the chemical industry. However, much of the employment change attributed to the food industry would show up in the agricultural sector, and particularly for this sector there is reason to doubt that using the average employment intensity to infer employment changes in response to marginal increases in output is valid.
What the multiplier values do not show is whether the spin-off effects of an increase in export earnings differ depending on whether the export increase is driven largely by prices or by volume. Intuitively, one would expect stronger feedback effects from a volume increase (because of the increased level of activity as well as the positive respending effects) than from a similar increase in export demand arising from higher prices (where the main impacts are due to the respending of higher profits and wages alone).
The fact that much of the recent growth in the value of output of the agri-food sector has come from increases in prices rather than volume may help to explain the limited impact this growth has had on employment to date.