Agriculture plants seeds for growth
One of the interesting features of the recovering economy is the fact that agriculture has reclaimed its place as a strong force for economic growth.
During the boom years, it’s fair to say that this stalwart of Irish economic performance over many decades did not experience the same growth as other sectors. Fast forward to 2015 and it’s an altogether different story, with excellent potential for growth and job creation.
The biggest opportunity on the horizon is the abolition of milk quotas in April. While we believe the 50% increase in milk production targeted under Food Harvest 2020 can be achieved, this will depend on a number of factors, most importantly the prevailing milk price.
Average milk prices payable to Irish farmers have been within a range from 31c to 37c per litre for the past few years. 2015 will see average milk prices significantly lower than this owing to strong increases in global dairy production over the past 12 months. The market outlook beyond 2015 remains favourable and there is strong evidence that dairy farmers are gearing up to take advantage of the new regime.
The agri land market is particularly active. Bank of Ireland alone is approving the purchase of over 400 acres of land per week and we estimate that more than €1bn of farm investment will be required in the short term to fund the expansion in dairy farming.
Milk quota abolition comes at a time when agricultural commodity prices including milk are becoming increasingly volatile. As a significant net exporter of agricultural commodities, Ireland is particularly exposed to the impacts of global food supply and demand shocks.
In addition to the dairy market volatility, average 2014 beef and grain prices were both 10% below 2013 levels. We know dairy incomes will most likely reduce and that some farmers will also be dealing with superlevy fines if they supply in excess of their quota in the final year of the regime. Some will need financial support.
We would encourage farmers to prepare realistic cashflow assumptions based on their best estimate of income and expenditure for 2015 and discuss this with their bank as soon as possible. Ultimately, while the price that the farmer receives is important, what is essential is the margin earned and the cost of inputs is just as important a driver of this.
Commodity prices are expected to fluctuate far more than we have been used to and the management of this will be a key challenge.
Average family farm incomes for 2014 are estimated to be around €25,000. However, this masks very different experiences between full- and part-time farmers and between dairy and less profitable non-dairy farms.
Research has shown that, from an overall general economic perspective, investment in agriculture in Ireland produces a far bigger return than investment in other sectors, because agriculture sources 71% of raw materials and services from Irish suppliers, compared to 44% for manufacturing companies. Growing output is highly unlikely to result in significant additional income if an inefficient base is present from the outset. This is particularly true if extra land and/or labour are going to be required.
We know from the Teagasc Profit Monitor Data that there is a difference in net profit of over €700 per cow (or 147%) between the top 10% and the bottom 10% of dairy farmers completing monitors. To add further perspective, employing somebody on a full-time basis at approximately €35,000 per year and at average efficiency amounts to the profit from an additional 40 cows, and that’s assuming there are no further amendments necessary to fixed costs such as land charges or depreciation.
Key questions for all dairy farmers ahead of next year’s change should be, ‘where am I now and where do I want to be in five years’ time, and what do I need to do to get there?’
Some farmers will choose to expand while others, depending on factors which may include family circumstances, may wish to remain at current levels of production and will decide that improving efficiencies within their current resources is the best way forward.
Farmers should focus on making business decisions that will take into account the price challenges and potential volatility that they are likely to experience. In addition, financial institutions that are serious about supporting this very important sector in the economy must be prepared to help customers manage this volatility when structuring repayment terms taking account of factors such as fluctuating prices, variable weather patterns, and others.
This has informed our own product development for this sector. However, despite the obvious challenges ahead, we remain optimistic for the future of the agri sector as the Irish economy continues its positive growth trajectory. Sean Farrell, head of agri, Bank of Ireland
Investment in agriculture produces a far bigger return than investment in other sectors
