Speech by Professor Gerry Boyle, at ICOS Conference on Medium term outlook and future challenges facing Irish agriculture in Fermoy, Co. Cork

15 October 2008

Outline

The economic importance of the agri-food and wider bio-sector
The medium-term outlook for Irish agriculture
The GHGs challenge
The Water Framework Directive challenge
The challenge of ‘motivating the next generation’
Concluding remarks

Economic significance of the bio-economy

An unnecessary tendency to be defensive about the economic importance of the agri-food sector
There is no need for this prevalent attitude as …
The sector, while diminishing in significance, is still of enormous economic importance and …
Given the global food and energy scarcities this importance is likely to be enhanced and …
In a time of general economic downturn the bio-sector bucks the trend …

Nailing an important misperception

New estimates by Brendan Riordan show that the bio-sector is of greater economic significance than previously thought
Conventional metrics inappropriate, e.g., % exports, GNP, etc.
Correct focus should be on the contribution of sector to ‘net export earnings’
Bio-sector advantages … low import content of exports … low rate of profit repatriation … CAP inflows

Bio-sector gross exports, € m., 2005

agr, for & fish	580
meat and meat products	1857
fish and fish products	202
processed fruit & veg, etc	36
dairy products	1137
grain products	16
prepared animal feeds	151
other food products	9489
beverages & tobacco	830
Total bio-sector	14298

Source: Riordan, 2008

Economic significance of the bio-sector, € m., 2005

	Gross exports	GNP
Total bio-sector	14298	6863
pulp and products, recorded media, software, etc	12601	2394
chemicals, incl. pharmaceuticals	29657	5635
electrical goods, incl. computers	29052	5520
Other non-bio	6320	1201
Total all sectors	91928	21613
Bio–sector % total	16	32

Source: adapted from Riordan, 2008

Outlook for agriculture to 2020

Outlook for agriculture under current policies is fairly positive
Better than thought possible even two years ago
- Dairy product prices unlikely to dip much further but volatile
- Beef prices to hold up well given EU deficit
- Suckler cow welfare scheme will aid profitability
- Cereal prices back considerably (due to good harvest internationally) but are still above intervention levels
- Higher output prices are important for farmers, given the escalation in many input prices

Dairy outlook

EU dairy product prices are projected to decrease by 2020:
- But are projected in general to be higher than the levels observed in 2006
- Remember prices recently have been very high
Milk Price in 2020
- EU milk price is projected to be 30 cent per litre
- IRL milk price of 28 cent per litre

Beef outlook

Short term outlook the best for some time
- New Suckler Cow Welfare Scheme (SCWS) payment
- Higher beef prices (Brazilian beef ban)
But EU beef tariffs are only partially effective
- Beef imports into EU are likely to resume at some point
EU beef imports increase out to 2020
- up over 20 percent (to 800 thousand tonnes)
Cattle reference price in 2020
- EU 11 percent higher
- IRL almost 8 percent higher

Outlook for other sectors

IRL sheep production to continue to fall
- But rate of decline is slowing
- Positive price outlook as EU sheep market tightens
- Export supplies from third countries may be limited
IRL cereals outlook positive
- Elevated price levels over the medium term
- Prospects are good (under right weather conditions and favourable input prices)
IRL pig sector to face difficult conditions
- Animal welfare and environmental issues
- Set to impact on production costs

Inputs: Baseline Outlook

Sharp rise in expenditure in 2007 and 2008
- High energy prices driving inflation in many input items
Input prices set to remain at elevated levels
- Unless energy prices drop back
Considerable uncertainty about the medium term prospects for energy prices
- Oil price projections average anything from $70 to $130 per barrel from various sources
- Creates uncertainty about feed, fertiliser and fuel costs

The GHGs challenge

Range of measures could be used to achieve targets
- Teagasc active in examining way to reduce emissions though changing farm practices such as animal diet, nutrient management etc.
- But these methods alone are unlikely to deliver the target level of reduction
Agriculture may come under pressure to find other solutions, e.g. reduction in cattle numbers
- Important to know what the cost of these strategies might be for the sector

Analysis of GHGs reduction

Agriculture GHGs of 18.99Mt CO2 Equivalent (in 2005)
About 28% of total emissions
Required reduction could be -20% or -30%
Reductions are assumed to be phased in over the period 2011 to 2020
Adjustment assumed to fall on the suckler herd
- If the adjustment were spread across all of agriculture the impact on beef output would be smaller
- No similar changes assumed in other EU or international markets

-20% Scenario Results vs. 2005

Total cattle population
↓ 25%
Suckler cow inventory
↓ 55%

-30% Scenario Results vs. 2005

Total cattle population
↓ 37%
Suckler cow inventory
↓ 84%

Reductions in GHGs: conclusions

GHG reduction targets could have major negative implications for Irish agriculture
Agricultural production would have to contract substantially
Unilateral action would be most expensive route
Multilateral action would lift prices
Reductions in Irish GHGs would be more than offset by increases in competitor countries (e.g. Latin America)

The Water Framework Directive (WFD) challenge

Water standards to be more demanding … shift to ecological criteria … not a ‘drinking quality’ standard
Draft plan for 8 River Basin Districts (RBDs) to be produced by year end
Very challenging targets likely for Surface, Ground and Estuarine waters
Potential adverse economic implications for our most progressive farming areas
Teagasc to present analysis of economic impact of WFD at special conference on November 12th

Overall objectives of WFD

Maintain “high status” where it exists – pristine sites .
No deterioration in existing status - biological/ecological, physico-chemical and hydromorphological status.
Achieve at least “good status” by 2015.

River Basin Districts (RBDs)

Comprises
- river catchments (including lakes)
- groundwater,
- estuaries & coastal waters associated with all these areas.

Estuarine and Coastal WQ

The challenge of motivating the next generation …

Proposition: the next generation will only want to participate in the potential offered by the exploitation of our bio-resources if the returns to all factors employed at least match that available from alternative uses …
A key concern for the next generation will be the returns likely to accrue to their own human capital
Farmers sons and daughters have the highest participation rate in 3rd level education (87%) – the returns to this investment will increasingly be the benchmark against which farm returns will be compared
It’s important that we’re realistic about what that benchmark is likely to be …

Benchmarking farm income for the farmer of the future …

What we can say is that it will not be the average level of male industrial earnings which equals about €35,000 at present
Research suggests that the expected annual gross earnings of a male working permanently in a professional/managerial grade in the Irish public sector, aged say 45, who has a degree and who has experienced a relatively long tenure of employment is about €110,000.
The comparable private-sector would be about 85% of this level ...

Benchmark income …

This benchmark would need to be adjusted for the net advantages associated with the farming way of life …
Assume this is 20%, then the benchmark gross annual income would be about €88,000 or about 2.5 times average industrial earnings …
We could call this the “adjusted benchmark income” (ABI)
Illustrative only – no allowance for greater volatility of farm income, pensions etc.
But allows focus on the requirements for the individual to be competitive …

What will it take to achieve the ABI?

A focus on entrepreneurship and innovation – “farmerpreneurs”
Aim to achieve optimum return on all resources
An emphasis on resource management rather than labour input
Farmer will have to be highly educated … both in technical and business disciplines
Complete openness to new business models, e.g. partnerships, etc. will be needed and …
Sufficient scale of land, animal and labour resources …

Achieving the ABI – some insights from the Teagasc Roadmaps

	Low performance	High performance
Dairying
Required land (ha)	81	28
Required cows	154	78
Suckler beef
Required land (ha)	284	140
Required animals (LUs)	454	307
Dairy beef
Required land (ha)	202	95
Required animals (LUs)	405	266

Source: Teagasc Roadmaps

Concluding remarks

A relatively benign outlook for the agri-food and wider bio-sector
But vigilance in recognizing the challenges ahead & in dealing with them …
GHGs … WFD … ‘Motivating the next generation’
A key message: surmounting challenges requires us to harness the power of knowledge

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