Irish Economy
Focus on Irish food industry's bigger potential than chemicals or high tech
By Michael Hennigan, Finfacts founder and editor
Sep 24, 2014 - 7:52 AM

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Last week after the OECD issued its pathbreaking proposals on reform of the international corporate tax system, two Harvard Business School academics were in Dublin advising on how the Irish international food strategy could be improved - - it was an interesting juxtaposition not because we should forego future FDI (foreign direct investment) job opportunities in chemicals or high tech but the food sector has the greatest long-term potential for the economy.

We wrote last May: "It's striking how the tech industry has made the terms 'startup,' 'entrepreneurship' and 'innovation' synonymous with itself in public and policy settings in Ireland and elsewhere, with the help of fawning politicians and technology journalists."

The concept of the cluster is also synonymous with high tech but Prof Michael Porter of the Harvard Business School, has pointed to an important innovating cluster [pdf] in California: the wine-producing Napa Valley.

The following headlines in recent days suggest the food industry is doing very well but they mislead:

Irish Independent: "Agriculture Minister Simon Coveney said that Irish food exports were up 40% to €10bn in four years with huge expansion opportunities for dairy, beef and prepared foods."

Irish Examiner: "...four years later the turnaround has been dramatic. With exports having grown by 42% to €10.3bn, the Department of Agriculture expects that the 2020 target of €12bn is well within reach and may be exceeded."

These headlines relate to a Department of Agriculture report [pdf] using 2009 as a base but in 2010-2013 global cattle and milk prices rose by 39% and 27% respectively while "the cereal industry has benefited greatly from the strong international grain prices and up to end 2013, had shown a 62% increase in value."

The claim that Ireland produces enough food to feed 35m people compared with its population of 4.6m has been used in recent years by the minister, farm leaders and others (we have been unable to find a source for this calculation) while in Denmark with a population of 5.5m, claims in various publications range from 15, 20 or 30m people.

The 2013 trade data show exports of food & drink: Ireland €10bn, Denmark €16bn and the Netherlands €80bn -- the country of 17m people generates 7.5% of global exports in agricultural and food products, surpassed only by the US (which has a surface area 296-times greater); 4 Dutch companies are included in the global top 40 food & beverage companies: Unilever, Heineken, VION and Royal FrieslandCampina. 654,000,000 kg of cheese exports puts the Netherlands , the 4th-largest worldwide.

The Irish food trade surplus as a ratio of exports has fallen from 61% in 1990 and 52% in 2000 to 31% in 2013 while today Denmark produces four times the Irish output of potatoes and has a trade surplus ratio of 37%.

Direct employment in agriculture, fisheries and forestry - -  mainly in farming is at about 110,00  while in 2013 according to Forfás, 39,000 people were employed in indigenous food firms and 6,000 in foreign-owned food manufacturing firms.

Almost one-third of Irish farmers have other jobs.

The mainly foreign-owned pharma and medical devices sector, which account for 60% of goods exports, has had stable employment in the low 40,000 for a decade while during that period the priority for governments has been increasing the research intensity of the economy.

There is no evidence that the FDI sector has increased R&D activities in Ireland but there is an opportunity to raise innovation in the indigenous sector.

At a seminar organised by Bord Bia, the State's food and drinks promotion agency, Professor David Bell of Harvard Business School said last week that Ireland was still stuck in the trap of selling commodities instead of added-value product. “Commodities are known for low margins and high volatility, which is obviously not what you want.”

He added: "The future has to be one where value is added before food is exported.”

We wrote in 2009: "Ireland is mainly a commodity food producer but who would have thought that Irish farmers would find an outlet with a gin producer for milk that is used in Baileys Irish Cream (the registered trademark omits the apostrophe!) - - now a world class brand? Swiss company Nestlé - - the world’s biggest food company-- has 5,000 people directly involved in R&D and has 28 research centres across the world."

Food will always have a demand but with innovation, areas of concern such as health provide opportunities.

There is also a challenge on the supply side and the reluctance to promote reforms in agriculture.

In France it's not unusual for a young person from a non-farming background to become a farmer and 8.7% of farmers are under 35 while 12% are over 64 years of age.

The comparable Irish rates are 6.8% and 25.3%.

The resources sector is the backbone of value creation in Iceland's economy because of its high contribution to exports and over 80% of all exports stem from the fishing industry, tourism and energy production.

So despite upcoming changes in the international taxation regime that will impact the FDI sector, Ireland can set a priority for a change to focus on its own natural resources.

This may involve slaying some sacred cows.

Land much cheaper in France

We wrote the following last April: Irish land transactions have fallen in recent decades and EU cash payments unrelated to production; pensions; site sales and short-term lettings or conacre give an incentive to older farmers not to sell while multi-year leasing, which is common in Europe is not in Ireland.

In the early 1990s, over 30,000 hectares was being traded per year, about three times the amount that currently comes to the market, it is very hard for young people who do not inherit farms to get into the sector - - so much for ministerial twitterings on entrepreneurship.

Teagasc, the Irish public agriculture development and research authority, said in its 2012 annual report that "only about one-third of farms are economically viable farm businesses. Almost 26,104 farm households are economically vulnerable, i.e. the business is not viable and neither the farmer nor the spouse works off the farm. The availability of off-farm employment opportunities continued to contract in 2012 and the number of farmers working off the farm fell for the sixth consecutive year. The proportion of farmers also engaged in off-farm employment fell from 30% in 2011 to 27% in 2012....The average direct payment - - mainly via the EU's Common Agricultural Policy - - per farm was €20,534 comprising 81% of farm income.

In France there is a bias towards helping young farmers (under 40) not only in buying land but also in finance support and it has been estimated that 30% of farmers have no prior family connection with agriculture.

SAFER (Les Sociétés d'aménagement foncier et d'établissement rural) was established by the French government in the early 1960s, when 56% of all French farms were smaller than 10 hectares and it comprises 27 not-for-profit bodies that have the objective to help local agriculture and rural trades to thrive while protecting the environment.

It has a particular objective to bring young people into the sector who may not have a prior family connection with farming.

"We are interested in agricultural or other rural properties - - it could be an inn or café and the mairie might ask us to buy it. If it's an inn, we would look for an innkeeper to take it on to maintain the area's economic vitality," a spokeswoman told Connexion, an English language newspaper in France. “Or we might buy a piece of land that needs to be protected to safeguard nature and biodiversity."

A pre-emptive right might be used, for example, where a farmer is planning to sell to a Parisian but a young local farmer, who needs to expand, asks SAFER to intervene.

SAFER will usually buy at the asking price, but it should be a reasonable market price.

"Say a rich Californian wants to buy a vineyard at 10 times the market price, which would push up the prices of agricultural land in the area and make it unaffordable to local farmers, SAFER may pre-empt. Or if a billionnaire decides they want to buy the whole wine production of the Languedoc..."

Where SAFER makes its own, lower, price offer, the seller can refuse and withdraw the sale. SAFER pre-empts only after permission from the state and on advice from its "technical committee", a panel of local experts including representatives of chambers of agriculture, banks, agricultural insurers and unions, local councils and the state.

SAFER says 38% of land it sells is to install or add to holdings of young farmers.

France also has tools to enable the combination of all the production factors into a “farm fund” to facilitate the transfer of the farm. Another measure includes the possibility of increasing the pension of an older owner of a farm if he/she sells the farm to a younger successor. The EU says France's policy for younger farmers "seems to be the most extensive and also includes several measures focused on new entrants in agriculture, such as farmland preservation from urbanisation and other uses, direct support to new entrants in local and regional policies."

The French system did not evolve without protest however in 2010, SAFER acquired 74,800 ha of land, worth €791m. In 2011, it supported the installation of 1,220 young farmers, including 730 from non-agricultural backgrounds (60% of all installations for 2011).

Why not? What other area of entrepreneurial activity requires that?

According to Savills, the estate agents, in 2007 in France each field changed hands at least once every 70 years, but in Ireland on average a field changed 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, had the cheapest land.

Land was about €6,000 a hectare compared with almost €60,000 in Ireland - - the most expensive in Europe in 2007. In the later years of the bubble in Ireland, demand has been boosted by purchases of 'lifestyle farms', especially within 100 km of Dublin, coupled with the increasing trend of 'off-farm' employment leading to commercial farmers in effect becoming 'hobby farmers.'

In France the average price of arable land in 2012 was €6,560 per hectare / ha and in Ireland in 2013 the price was €23,200 / ha.

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