Ireland needs to shape its own agriculture to 2020 and beyond

When one looks just five years ahead it might be tempting to argue that there is not much scope for significant change in Irish agriculture in that time frame. However, the relatively recent history of Irish agriculture shows that it is possible to see remarkable shifts in such time periods. For example, between 1987 and 1992 the suckler herd grew from under 500,000 to around 900,000 cows and between 1984 and 1989 ewe numbers doubled from two to four million. Of course, these changes were driven more by policy than markets and the policy landscape has changed considerably since then.

More generally, a complex interaction of policy, markets, economic forces, physical factors and technology determine the pattern of land use and agricultural output in Ireland (see Figure 1). Within this, economic theory would suggest that farmers will adopt the system that provides the greatest level of profit.

However, farmers are not exclusively focused on profit maximisation. They have multiple goals, and this must be taken into account.

The drivers shown in Figure 1 cannot be viewed in isolation. There is a complex web of interdependency which impacts on the profitability of farming, as well as the relative profitability of different farming systems. It is only possible to consider some of the possible drivers in this article, but this does not mean that others may not be equally or more important.

Policy

As the earlier examples for sheep and suckler cows highlighted, the CAP has been one of the greatest drivers of agriculture in Ireland due to the high dependency on support.

While there may be some unknowns in its practical implementation, the new CAP, which will take us up to 2020, is now virtually in place and few further surprises are likely. In particular, as Alan Matthews suggested recently, there seems to be no provision for a mid-term review, so it is unlikely that we will have the equivalent shock of the Fischler reforms of 2003 between now and 2020.

The most obvious policy impact will be the removal of dairy quotas in 2015. This has the potential to have the most direct impact on Irish agriculture. The extent to which Irish agriculture can benefit from the liberalisation of the dairy regime will depend on its ability to overcome challenges such as lack of land mobility, land fragmentation and the ageing farming population.

Given the removal of dairy quotas and increased volatility in the dairy market, the market management instruments within the CAP may be important in determining the ongoing profitability of dairying. A key question is how effective they will be in providing a floor to the market in times of market downturns.

Beyond the CAP, the EU talks with the US (Transatlantic Trade and Investment Partnership – TTIP) and South America (Mercusor) have generated much debate and dire warnings for agriculture in Ireland. This said, the TTIP in particular has the potential to provide wider economic gains to both the EU (and Ireland) and the US. Although I am always wary of such exercises, this gain has been estimated as the equivalent of €545 for every family in the EU.

The difficulty for the agricultural sector is that the gains from trade are not uniform. There are always losers, as well as winners, in such agreements. And the losers are generally in the most protected sectors.

The real unknown is the extent to which agricultural trade will be opened up to help achieve the potential gains that are coveted in the wider trade of goods and services with the US and South American markets.

Financial barriers to trade (e.g. tariffs) are only part of the trade discussions. There are many more thorny issues which have long been at the heart of EU/US trade disputes, such as hormones in beef and genetic modification. The question is whether, like the Canadian free-trade agreement, these sensitive areas (or commodities) are largely left out of the final agreement, or whether meaningful liberalisation takes place.

Successful conclusion to TTIP may allow significant access for Irish beef to premium markets in the US. On the other hand, increased imports of US commodity beef to Europe will lead to competition for Irish beef products.

Markets

An obvious challenge for Irish agriculture is our small domestic market and the fact that it sits on the edge of Europe. Therefore it is reliant, to a great extent, on market developments in other countries. Much has been written about the growth in demand for food, both from population growth and the rise of the middle classes in emerging economies. However, at present relatively little of our production goes outside of Europe and therefore current European trends (which do not suggest much growth for our key commodities) are more relevant for determining demand in the near future.

However, there may be growth in terms of specific products – eg health and lifestyle products – or scope for Ireland to grow its share in existing markets. This said, the potential for significant growth may come from outside Europe and it will be Ireland’s ability to take advantage of this growth that will determine future profitability and hence production.

Given our dependence on exports, a key issue is how supply will change globally over the next five years in response to the positive signals from increasing demand. As we can see in dairy, where supply has recently outstripped demand growth, there seems to be considerable potential, in the short-term at least, to boost global production of commodities that are important to Irish agriculture. This may dampen prospects for real growth in the value of Irish output. This is particularly a problem for the less profitable sectors of agriculture.

Natural environment

The natural environment can have a very direct impact on agricultural productivity, as the wet summer of 2012 and the cold spring of 2013 have highlighted. While it is generally accepted that one of the main impacts of climate change will be an increase in extremes in weather (droughts, floods etc), the extent to which this will place a constraint on the development of Irish agriculture over the next five years is uncertain. However, the spring of 2013 should serve as a reminder that we need to consider the resilience of our farming systems and not just be focused on output growth.

Regulations put in place to protect the environment can also influence the direction agriculture can take. In this respect, the question is how much will environmental regulations alter the development of agriculture up to 2020? The answer is probably a lot less than those concerned for the environment would hope and not that much beyond what is happening now.

Technology

There are a range of technologies that can significantly change the way we farm. Some are in the process of being adopted (eg sexed semen), while for others it is, perhaps, too early to know their likely impact. For example, there has been much talk about the potential of big data in terms of bringing either cost efficiencies or opportunities to add value. However, it is hard to gauge how it will affect supply chains in general and farming in particular.

Numbers and areas

So where does this leave us in terms of predicting changes in land use and livestock numbers for 2020? In general, the removal of quotas and the bounce in production that this will generate will still be resonating in 2020. Therefore, I am predicting growth here. There is little to suggest that the fortunes of the suckler herd are likely to change dramatically and therefore there will be ongoing downward pressure on numbers (partly relating to the growth in dairy).

However, I am not sure there will be a dramatic fall, as suckler production seems generally immune from general economic laws such as supply and demand. For similar reasons, while I feel the sheep flock will decline, it will be by a relatively small amount. Elsewhere, I am taking the safe option and forecasting little change in overall tillage or forestry areas.

Shaping Ireland's future

For me, the issue is not really about how many cows we have or areas of crops, but how profitable and resilient the industry will be in 2020 and beyond. Little that I have discussed up to now seems to indicate that the profitability of the sector will be markedly better than it is currently and this is a concern. The real challenge is whether the sector can shape its own future so that it provides value to all those in the chain – this will be key to ensuring sustainability. One important change that occurs to me is the need to find ways to separate ownership from use. For example, the structural challenges preventing expansion at farm level could be met through innovative business partnerships that allow individuals to remain independent and yet reap the benefits of collaboration and scale.

Land may not legally change ownership but, in effect, the use of the land will move between farms to a greater extent. Put simply, if every farmer formed a partnership with one neighbour we could effectively half the number of farm businesses. Innovative relationships will mean that while we will maintain a large farm population with the associated cultural and social benefits, farms will benefit from having scale in the market. This will enhance the overall efficiency and competitiveness of Irish agriculture.

As has been argued within the pages of the Irish Farmers Journal, it is also possible to see the separation of ownership from use as a potential solution to overcapacity in beef processing. Alliances could mean that beef processors share facilities, dramatically improving utilisation and reducing costs. These alliances could also be on the marketing side as “premium Irish beef” is marketed to the world as an identifiable product.

A similar logic can be applied to the dairy co-op business. While many have argued that we need to dramatically reduce the number of co-operatives, the problem is not the number per se but the fact that too many are operating individually in terms of processing and sales. This general openness to collaboration does not just have to work horizontally (between farms or between co-operatives) but can be used to improve things through the supply chain as well. Closer integration between the various stages of the chain could lead to significant benefits.

In conclusion, there are at least two futures for Irish agriculture. One is where it allows outside forces to determine its path with little change in (the lack of) profitability. The other is where it begins to positively shape its own future. The latter requires major changes in the way Irish agrifood operates, but the rewards are potentially much greater.