Agri-food sector ready for spotlight
THE expression Export or Die is tailor-made for the Ireland of 2011.
A strong performance, with a record trade surplus in June, has played its part in an improvement in international market sentiment towards the country.
The rebound in outbound trade since 2009 has been led by the multinational sector, but indigenous industry played its part, the food and drink sector in particular.
In 2010, the sector, which accounts for almost one in six manufacturing jobs, recovered almost all of the ground lost in 2009, with exports increasing in value by 11% to just under €8 billion.
Figures for the first five months of the year, released by the CSO this week, provide plenty of reassurance.
While agri-food firms as a whole delivered an increase of almost 20%, sales overseas of dairy products rose by 47%. Total food and drink exports rose 15.5% while dairy exports were up by just over 30%.
The surge is being driven in part by high food commodity prices, boosted by a mix of quantitative easing, poor harvests and trouble in the Middle East.
The figures coincide with the release of strong interim figures from Kerry Group and Glanbia, leading brokers to revise upwards their full-year forecasts.
While rising energy input prices will skim off a fair bit from the bottom line, the impression is of a sector that is setting an example.
The food sector is tied closer to the wider domestic economy than other stellar export performers like pharmaceuticals, which are dominated by multinationals.
According to a UCD report, the Importance of Agriculture and the Food Industry to the Irish Economy, every €100 in agricultural output creates an additional €72 in output across the country.
This “output multiplier effect” is 18% higher than the average of all other manufacturing sectors.
It is estimated that Irish farmers spend close to €4bn a year on agricultural inputs, mainly within 35km of their farm.
Of course, the skies are never entirely free of cloud. Finance remains a huge bugbear, particularly for expansion-minded SMEs. Agriculture Minister Simon Coveney has identified this as “potentially the biggest issue” facing producers.
On the primary production side, many Irish dairy farmers are at risk of exceeding their milk quotas, which raises a real prospect of fines from Brussels and could also put the brakes on production in the autumn.
Mr Coveney is seeking a more accommodative approach from the European authorities, in view of the fact that the quota system is due to be scrapped in 2015.
Joe Gill of Bloxham Stockbrokers believes the likes of Kerry Group have a major role to play.
“The big companies have weathered the last two to three years remarkably well — they are primed to do big deals,” he says.
He believes companies like Glanbia could play a key role in supporting an expansion in milk production — Glanbia will soon decide whether to spend between €50 million and €100m on a world-class milk dryer in this country.
He points to a financing mismatch: while the big players are inundated with expressions of interest from global financiers, artisan firms seeking to expand risk seeing their growth plans being choked off.
The answer, in his view, is co-ordination of investment by the Government through Enterprise Ireland in SME producers.
“We need to find ways of tapping private capital. Larger firms could take a stake, while the banks could get involved in providing working capital.”
Ireland’s grass-based system of production is well-suited to the post-2015 climate, but farm supports are being reduced and Irish farmers are ageing rapidly. In Gill’s view, the problem is not the age of farmers, but rather the small scale of many Irish farms. “You may see consolidation,” he says.
However, while land prices have fallen by close to 60% from their peak, values remain high compared to Britain and France. This is due to farmer conservatism and a reluctance to trade in land which has been held by families for generations.
State bodies like Bord Bia and Teagasc don’t lack vision for the sector. A year ago, Bord Bia commissioned the first major report on the sector in association with Harvard University Business School, Harvest 2020.
Ambitious targets have been set out and Bord Bia has focused on developing new approaches to marketing, production and sales among emerging firms.
According to Tara McCarthy, director of Consumer Foods, Bord Bia, farm output will have to be carefully managed in the run up to 2015 and the lifting of quotas. On the processing side, there has been real progress despite a tightening in margins.
“The ingredients and nutritionals business is booming. The biggest challenge in the past three years is that prepared foods firms, with a strong bias towards the British and UK market, have been under severe pressure, with falling consumption and retail price discounting.”
Diversification into new markets has been greatly assisted by a strategy known as “Co-opetition” where otherwise competing firms have joined forces. The Irish Dairy Board has joined with the Tipperary-based Grubb family to market the latter’s Cashel Blue cheese under the Kerrygold label in North America, using the brand strength and sales clout of Kerrygold. A new group-labelling system is assisting Irish firms on their home turf.
Bord Bia is trying to ensure that messages about the “greenness” of Irish products are backed up in reality. Proof of the genuinely green nature of the production methods in use are required under a new eco-quality assurance scheme.
Innovation is being fostered in various ways. The industry has traditionally worked closely with third level, UCC being a leading exemplar. Teagasc recently opened a nutraceuticals research facility aimed at the fast-growing market of functional foods for the more health conscious.
Irish leaders here include Glanbia with its supermilk products and ranges of yoghurt. Bord Bia has been working with clients like Flahavans and Irish Pride to support marketing and product innovation.
The Waterford-based Flahavans is used as a case study by the board. Flahavans’s strong research focus has produced a range of 18 new products. It has added dried foods to its traditional porridge offerings, in sachets, aimed at the younger consumer. Exports account for over 20% of output.
Focus groups were used to test products first.
Over the past decade, the challenges faced by Irish food and drink companies have altered. Threats posed to the beef industry by BSE have receded. However, the dramatic contraction in the domestic economy combined with a squeeze in Britain have forced a change in strategy upon companies. Best placed have been leaders such as Kerry Group which has played the long game and husbanded resources during the boom.
The squeeze on the banks and on the national finances means that the players will have to join forces if they are to break into export markets. This week’s data shows that the prizes on offer are considerable if producers and processors are willing and able to grab the opportunities on offer.
- January to March 2010: €1.64bn
- January to March 2011: €1.895bn
- Beef: €368m
- Beverages: €246m
- Dairy: €550m
- Pig meat: €98m
- Poultry: €51m
- Prepared foods: €377m
- Seafood: €120m
- Sheep meat: €35m
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