Glass half-full for Irish farmers anticipating end of the quota era

EVEN if you do not know one end of a cow from the udder, the herds you see dotted in fields across the country still represents the single brightest news story on our national economic landscape.

While the conventional wisdom may warn off those pining for potential on far-off green fields, there is a definite bonanza grazing away within our milk industry.

This is because in 2015 one of the most controversial features of our involvement in the EU is to be consigned to history.

In an instant, this will provide an opportunity to release almost 30 years of pent-up potential in Irish farming and offer the chance to generate €1bn in additional revenues for the dairy sector.

For people unaware of the importance of this 2015 watershed, it is the moment the milk quota will be scrapped.

The biggest problem is that the exuberance of those preparing for three years’ time has left the country on the brink of a multi-million euro fine for overproduction this year.

And if the industry cannot pace itself correctly, these fines will continue to fall on farmers until the quota systems is ended.

The 2015 development has been described as a champagne bottle waiting to be uncorked, teasing an industry which must stay restrained until then to steer clear of hefty fines hanging over countries that break the quota rules.

The quota-related projections for investment and income for the farming sector and the wider economy appear generous.

Yet Agriculture Minister Simon Coveney is adamant the trends are all in Ireland’s favour.

He said that, in 1984, when the quota was introduced, Ireland and New Zealand were each producing five billion litres of milk products.

Today, we deliver the same amount from a reduced sector and New Zealand sends 19bn litres on to the international market.

Mr Coveney believes we can catch up on the New Zealand farmers. And his department’s projections are buoyed by the fast-growing populations in developing countries and especially an inflating international middle class with a taste for finer, more protein-based foods.

“We are about to move out of a very restrictive quota system… Basically this will take the industry out of the straitjacket,” he said.

Mr Coveney said we have to learn from New Zealand’s mistakes and avoid the level of indebtedness that followed its period of agricultural growth.

He is also keen to retain the natural social structure of the countryside and not surrender the parlours to big commercial operators.

This means the department and Teagasc have been trying to arrange courtships among neighbouring farmers through rolling discussion groups to see greater community partnership businesses.

The Government has also used recently announced tax incentives to encourage partnership models, overseas training and the handing over of farms to younger entrants.

Mr Coveney said it is a case of helping farming families to transfer assets to keep a business viable because, in France, the average field changes hands every 70 years but in Ireland it does so every 400 years.

“We need to introduce economies of scale into Irish farming while at the same time keeping intact the family farm structures,” he said.

Teagasc, and its research engine at Moorepark, has been the principal driver of the farm revolution in both structure and technology.

It has pushed discussion groups among dairy operators to pool ideas and foster partnerships.

Its efficiency programme to advise and encourage good practices is now in its third year.

Teagasc is investing in ideas and developing opportunities to showcase to farmers the profit potential available if they adapt their businesses.

But while getting the Irish herd to produce is one struggle, getting a quickly perishable product to a global market is another.

Industry leaders recognise Ireland has a lot to learn from the likes of New Zealand in terms of maximising the international export side of the expansion.

Ireland would never have enough people to satisfy supply, so the developing world is where the diplomatic and trade delegation efforts have focused on.

In advance of this the Government, food agencies, exporters, diplomats, co-ops, producers and farmers are busily preparing their techniques, markets and skills to exploit the opportunity fully.

In particular, efforts have been made to court African, Chinese and Russian trade routes where the shift in diets and appetites plays best into Irish hands.

This is because there is a growing demand for cheeses and processed foods, which have a much longer shelf life and can be transported for longer and more cheaply.

“Population trends tell us the kind of foods people are going to want in 10 years’ time,” Mr Coveney said.

Gráinne Mulligan, from the department’s trade division, said there is quite a lot of strategic planning already under way to exploit the opportunities that will present themselves outside of Europe.

The large co-ops and state agencies have set up offices in Northern Africa and China, hoping to build demand for the moment Ireland is set free.

However, because of strict rules set by the European Commission, Ireland must, on one hand, prepare for a windfall but, on the other, continue as if nothing is happening.

This peculiar situation, along with booming prices, has left farmers exposed to potential fines if the country’s exuberance results in us exceeding out quota by spring 2012.

Farmers are walking a tightrope at a time when they can make unusually strong profits on the market but will be punished if they step over the line.

Going into the winter, farmers in north Cork had produced 4% more milk than they should have. By the end of January the entire country was within a fraction of a percent of breaching its limits and triggering an automatic superlevy fine.

A fine is almost certain to be imposed after the Apr 1 deadline but the effort to restrain production will have to continue until 2015.

This will be done by removing uneconomic animals from the herd and reducing milking.

Ireland has been trying to squeeze a better “soft landing” system out of a very reluctant Europe.

One concession would be to alter the date when the quota is abolished.

Setting it on Apr 1, 2015, means that, in January, February and March of that year, farms must run their businesses with the restraint of previous years.

But after dawn on April Fool’s Day they will also have to own the animals and be ready with the facilities to produce as much as they can.

This is seen as a completely impractical bureaucratic set-up, and one which Irish diplomats have been trying to make more feasible with the “soft landing”.

However, efforts to negotiate this with the help of allies in Denmark, Belgium and the Netherlands have been met with stonewall refusals from the French and German governments.

At the moment the big two powers are not for turning and the best advice from Mr Coveney and the department is for farmers is to constrain supply in line with the quota if they want to avoid the superlevies.

The situation has been exacerbated by the temptation of rising milk prices throughout the year. The health of the milk market since a depression in 2008 and 2009 has been remarkable.

The chief economist in the Department of Agriculture, Ann Derwyn, said that, at present, Ireland is already exceeding the export targets set by the Food Harvest 2020 plan.

And she said there is “huge potential” coming down the line because of our ability to deliver high quality, environmentally friendly food to international consumers.

“What we want to do is produce good quality food in an environmentally sustainable way,” she said.

Ms Derwyn said Ireland had unique advantages against competing dairy herds.

Its mild climate and grass growth meant that animals could be kept outside for longer, feeding on better food than the factory-style operations seen on the continent.

Meanwhile, the income for Irish farming families surged this year.

According to the Central Statistics Office the biggest gain was among those involved in crops but dairy farms saw their take-home pay rise by 27% in 2011.

According to Ms Derwyn, this ray of positivity is not restricted to the households involved.

This is because of the particular characteristics of the Irish agricultural sector and the fact that more of its profits stay in local communities than seep out of the economy or remain in business accounts.

She said the economic multiplier linked to farming, which reflects the portion of every euro in revenue which is spent locally, is higher in farming than other industries.

“The great thing about farmers is that if you give them money they spend it,” said Mr Coveney.

This feature means a good future for dairy is a good future for the businesses around its core.

In a country where the economic contagion has tended to drag incomes the other way, the end of the milk quota is a tonic rural Ireland has been craving.

Dairy industry will require up to €2.8bn in loans from banks

In the next eight years farmers are expected to require investment of up to €200,000 each to make the most out of the abolition of the quota and come into line with anti-pollution directives

To squeeze the most out of the potential bonanza after 2015, the dairy industry has estimated it will need between €1.9bn and €2.8bn in loans.

The dairy expansion activation group highlighted an immediate need among farmers to improve the way they present their applications to the banks so that they can justify the amount of new money needed.

On the plus side, Irish dairy farms are, by and large, free from the type of crippling repayment plans weighing down other businesses.

In a report published by the dairy sector earlier this year, it estimated there are 18,000 dairy farmers with an average family income of €56,000.

This is linked to €96,000 worth of farm debt with annual output for these operations put at €115,000.

It means for every €15 worth of milk sold they owe €1 in interest on loans.

In the next eight years farmers are expected to require investment of up to €200,000 each to make the most out of the abolition of the quota and come into line with anti-pollution directives.

About a quarter of this will be in buildings and a third will be used to buy new cows.

This may be lower if extra animals can be accommodated within existing farms and no additional infrastructure is needed. Different studies have suggested that to increase a herd costs in excess of €4,000 per cow.

So its expected that the €96,000 currently owed by dairy farmers will jump by up to €80,000 by 2020.

But farmers are well placed to pay this back and the financial institutions are alive to this.

In the autumn, Ulster Bank announced it was funding Shinagh Estates Dairy Farm near Bandon, Co Cork with €500,000 worth of start-up capital. This move was noteworthy for a few reasons:

* Firstly, it was a 300 acre farm which in 2011 shifted its business from cattle to become a demonstration dairy operation to showcase the difficulties and potential for milking herds.

* Secondly, it was a collaborative exercise between four West Cork coops, Teagasc and Carbery Foods.

Although the project itself is unique, the act of bringing bodies together showed the benefits and necessity of pooling resources.

* Thirdly, it was further proof of an increasing appetite among banks to lend to farmers.

Other parts of the economy have been starved of credit and this was the case for many in the agricultural sector through to 2010, when all industries were tarred with the same brush.

However, statements from the likes of the head of business banking at Ulster Bank, Declan Fitzgerald, show the mood has matured. “The EU Commission’s decision to phase out milk quotas by 2015 will continue to make milk production an attractive business in Ireland. We are delighted to demonstrate our commitment to the farming sector,” he said.

This was further supported by Sean Farrell, head of agriculture at Bank of Ireland’s business banking.

In a paper presented to a recent Teagasc seminar on dairy production, he said the bank was very much “open for business” for dairy farmers.

But John Trethowan, of the Credit Review Office, has told farmers money will not come easy and it is critical to improve efficiency before looking to expand. He said farm deeds will no longer be sufficient to justify a large loan and must be accompanied by business plans.

Quota brought price stability to milk market

The European Commission quota system helped change the make-up of the milking industry in Ireland.

When the quota was introduced in 1984 there were more than 68,000 people employed on dairy farms.

Today there are fewer than 18,000 and this is due to fall by a further 5,000 by 2020.

After a difficult and controversial beginning the quota brought a measure of price stability to the milk market.

However, it greatly restricted Ireland’s ability to react to demand.

During the same time Ireland began changing the way it looked at the international market for milk.

Traditionally it was reliant on butter. While this is still a mainstay of production it has sought to compete with the likes of Holland in the lucrative cheese stakes.

In 10 years between 1990 and 2000 there was a 66% increase in cheeses coming off production lines.

Three-quarters of this was prepared for export.

Despite the quota we still were able to deliver to the export markets, increasingly looking to mainland Europe and lessening our reliance on Britain.

The abolition of the quota will not see the same number of farmers as in the 1980s, the policy has been to consolidate businesses, form partnership and herald an era of large-scale sustainable farming.

Until now the average dairy herd in Ireland is 50 cows.

When the quota is abolished this is expected to rise to between 85 and 100 cows by 2020.

Key facts

* €1bn boost in milk-related incomes from the abolition of the milk quota with an even greater knock-on for the rest of the economy.

* 2.5bn extra litres of milk will be produced from Ireland in 2020 if the ambitious 50% increase in production is achieved.

* 300,000 more dairy cows will be needed to meet the target, up from the current 1.1m herd.

* €120m worth of extra beef will be produced from male animals born during the drive to increase the cow population.

* 5,000 farmers will leave the sector. Despite the growth in the industry, this is due to incentives to increase farm size and pool resources.

* 15% of the world’s baby formula is made from Irish dairy products.

* 36 million people could be fed by the output Ireland’s agricultural industry.


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