CHAPTER 10
Agriculture, Rural Development
and Food - Postscript
Alan Matthews
1 INTRODUCTION
Chapter 9 in The Economy of Ireland introduces the topic of agricultural, rural
development and food policy. Much of the chapter is devoted to identifying where
market failures might exist, and where a role for government policy can be justified.
Developments since the publication of the chapter confirm many of its conclusions,
while also posing new challenges. In this update, we survey some of these
developments while relating them to the themes in the original chapter.
2 DEVELOPMENTS IN THE FARMING SECTOR
Two developments are worth highlighting here. The first was the publication by
Teagasc of its annual National Farm Survey for 2008. This showed that the average
family farm income in 2008 was €16,993 (just slightly ahead of the €16,680 figure for
2006 quoted in the original chapter, but a decline of 13.7per cent on the excellent
2007 outcome when farm prices rose substantially). Direct payments averaged €17,
467 per farm, or 103per cent of family farm income. Thus, for the first time ever, the
average direct payment received by each farm (the transfer from EU and Irish
taxpayers) was higher than the family farm income. This dependence of farm income
on public transfers is clearly a source of vulnerability for farm families given the need,
highlighted by An Bord Snip Nua, for heavy cuts in government spending, including
agricultural transfers. The trend in the farm-level figures is also borne out by the
CSO’s Economics Accounts for Agriculture which provide the macro picture. The
CSO figures are more comprehensive because they include sectors such as pigs,
poultry and stud farms which are not covered in the National Farm Survey, and where
direct payments are not relevant. Nonetheless, the CSO figures showed that direct
payments in 2008 amounted to almost €2 billion out of an operating surplus in
agriculture (the measure closest to family farm income) of €2.3 billion in that year.
The main reason for the decline in farm incomes in 2008 was that farm prices fell
back from the high points reached in 2007 and early 2008, while costs remained at
previous levels. Farm prices have continued to fall in 2009 across a wide range of
commodities, and even dairy farmers, usually considered to be the most profitable
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THE ECONOMY OF IRELAND
sector of Irish agriculture, complain that the market price does not cover their costs of
production. Price trends are reported in the Department of Agriculture, Fisheries and
Food’s monthly Fact Sheet on Irish Agriculture. While cattle prices in 2009 are below
2008 they are still above 2007 levels. However, milk prices have fallen to 22c/litre in
April 2009 compared to an average of around 32-35 c/litre in the previous two years.
Diagrams showing recent price trends for beef cattle and milk are shown in Figure 1.
The volatility of farm prices highlighted in the diagrams has traditionally been one of
the long-standing arguments for government intervention in agricultural markets.
Figure 1. Irish commodity price trends 2007-09 for beef and milk
Source: Department of Agriculture, Fisheries and Food, Fact Sheet on Irish
Agriculture, July 2009
The original chapter highlighted the unusual nature of the 2007-08 price spike
and asked whether this was simply a flash in the pan or indicated the start of a new era
in which food prices would no longer continue their secular fall in real terms. It was
always clear that prices would fall from their 2008 peak; high prices will always
induce a supply response which will tend to push prices back to their long-
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AGRICULTURE, RURAL DEVELOPMENT AND FOOD
equilibrium. However, the question is whether in future this long-term equilibrium
price is likely to rise in real terms. The chapter drew the cautious conclusion that, in
the medium term, real farm prices would tend to gradually rise largely in line with the
expected rise in energy prices. The current low prices in the dairy market reflect a
temporary phenomenon: a relatively small over-supply in the world market as
production increased in response to high prices in 2007 and 2008 while global demand
has fallen since September 2008 because of the global recession. They are thus more a
symptom of underlying volatility rather than an indicator of long-run trends.
3
THE POLICY ENVIRONMENT
The CAP Health Check was successfully concluded in November 2008, striking a deal
which will shape the CAP through to the end of 2013. From an Irish perspective, one
of its most important elements was to confirm that milk quotas would be finally
abolished in 2015, with quotas to be increased each year between 2009 and 2013 in
order to ensure a ‘soft landing’. By gradually expanding the quota in the years up to
2015, it is hoped to avoid a situation where a sudden increase in EU milk production
when quotas are abolished could destabilise the market. However, a larger quota
means additional milk, and this will put downward pressure on EU milk prices over
the next few years. For this reason, some farm organisations campaigned to stop the
quota increases as a way of controlling supply and keeping milk prices higher than
they otherwise would be. The Health Check decision, however, confirmed that the EU
intends to push ahead with its reforms to give a greater market orientation to
agricultural policy, which will benefit more dynamic farmers and farming regions who
will no longer be constrained by quotas as well as consumers who will have access to
cheaper milk.
The Health Check also decided on a further shift of CAP resources from direct
aids to rural development through additional ‘modulation’ or transfer of 5per cent of
direct aids to specified rural development measures. For the first time, an element of
progressive modulation was introduced where farmers in receipt of the very largest
payments – over €300,000 – were modulated an additional 4per cent. There was a
further weakening of the intervention system for some commodities, as well as
agreement to further decouple the Single Farm Payment from production in those
countries where some coupled payments remained. Ireland had already moved to
complete decoupling in 2005. All in all, the Health Check confirmed the overall
direction of CAP reform in a market-oriented direction, even if it did not propose
extensive changes to the market regimes. It was also noteworthy as possibly the last
CAP reform to be decided entirely by the EU Council of Ministers if the Lisbon
Treaty comes into force. This Treaty would give the European Parliament powers of
co-decision in agricultural policy with the Council of Ministers for the first time –
presently, the Parliament only has the right to be consulted on agricultural policy
matters. It is interesting to speculate whether a greater role for the Parliament will see
agricultural policy reform after 2013 move at a slower or a faster pace.
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THE ECONOMY OF IRELAND
The other main influence on the policy environment for agriculture highlighted in
the original chapter was the disciplines on agricultural support negotiated in the World
Trade Organisation. Negotiations on a further substantial reduction in trade-distorting
agricultural supports in the Doha Round broke down in July 2008, despite substantial
convergence around the shape of a possible final package. Since then, world leaders
on numerous occasions have reiterated their support for an early resumption and
conclusion of these negotiations, but trade liberalisation is a hard act to sell in the
midst of a global recession, and so far this rhetoric has not been followed up by deeds.
The main impact of an agreement would be to make the already unprofitable Irish beef
industry even more unprofitable as tariffs against cheaper imports from Latin America
would be reduced.
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RURAL DEVELOPMENT
Rural development policy is concerned with measures intended to address the
economic and social needs of rural communities. The original chapter emphasised the
close relationship in Ireland between the objectives of balanced regional development
and rural development, given the predominantly rural nature of the more
disadvantaged regions in the Border counties, the Midlands and the West. Investment
priorities for rural development were set out in the 2007-2013 National Development
Plan, notably in its Agriculture and Food Development Programme and the Rural
Social and Economic Development Programme.
Progress has been made on delivering on some of these investment priorities.
Significant investments have been made in regional and local roads. A start was made
on construction of phase one of the western rail corridor. In early 2009, the
government awarded the contract for the National Broadband Scheme which will
deliver broadband services to the one third of the country, mainly rural areas, not
currently covered, with a target completion date of September 2010. Funding was also
provided to support the physical, economic and social infrastructure in rural areas
through a variety of programmes, including the CLÁR Programme, the Community
Development Programme, the Local Development Social Inclusion Programme, the
Rural Social Scheme, and various Gaeltacht and Island schemes.
With the sharp deterioration in the public finances, many of the investments
envisaged in the National Plan will be rigorously re-examined to see if they yield
value for money. The rural economy has a very high dependence on construction and
public sector jobs, both of which are likely to contract in the immediate future.
Maintaining rural employment and population numbers will thus prove a major
challenge. Success will depend on whether the investments that have been made to
date in improved roads and telecommunications, as well as in education and R&D,
will be sufficient to maintain the competitiveness of rural areas as a place to locate
and start new businesses in an increasingly globalised environment.
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AGRICULTURE, RURAL DEVELOPMENT AND FOOD
5
AGRI-ENVIRONMENT ISSUES
The original chapter focused on three issues at the interface of agricultural production
and the environment; the role of agri-environment policy in encouraging farmers to
produce public goods such as enhanced biodiversity for which they would not
otherwise be remunerated; the potential of biofuel production as an alternative energy
source; and mitigation and adaptation strategies for agriculture in relation to climate
change policy.
The principal agri-environment policy, the Rural Environment Protection
Scheme, has already fallen victim to government spending cuts. The latest scheme,
REPS 4, was closed to new entrants in July 2009 while payments to farmers enrolled
in REPS 3 were cut in the supplementary budget earlier in the year. The demand for
environmental services is income-elastic, so while these measures were driven by the
difficulties in the public finances, it may not be unreasonable to assume that the
willingness of the public to pay farmers to provide these services may also have fallen
as a result of the recession.
The original chapter noted that higher energy prices had been a major stimulus to
the increased interest in using agricultural feedstocks to produce solid and liquid
biofuels. Government policy is now framed by the commitments undertaken as part of
the EU renewable energy and climate change package agreed in January 2009. The
two most important commitments are a target of 20per cent of energy from
renewables by 2020, and a target of 10per cent for renewable fuels used in transport
(either biofuel or renewable non-bio electricity) by 2020. In fact, Ireland has set its
own domestic target of 40per cent of its energy supply from renewables by 2020
(mostly from wind), though some observers think this is unrealistic given the current
low share of renewables supply. Ireland is now required to draw up a National Action
Plan by June 2010 showing how it intends to meet these targets for submission to the
Commission.
The debate about the sustainability of biofuels and their impact of food prices has
already influenced government thinking. While committed to the EU 2020 target, the
government announced in September 2008 that it was relaxing its previous interim
target of a 5.75per cent share by 2010 to 4per cent. At the same time, it published a
discussion paper proposing an obligation system on oil companies as an alternative to
the current excise relief system as a way of meeting these targets. This would require
the oil companies to incorporate the specified proportion of biofuels in their supply of
oil, thus passing on the additional costs to consumers, whereas excise relief is an
incentive subsidy of uncertain effect whose cost is met by taxpayers. Although the
first biodiesel plant has been set up at New Ross, it is more likely to make sense in
Ireland to use agricultural resources to produce renewable heat and electricity rather
than liquid biofuel. Ireland will thus meet a large part of the obligation targets when
they are decided through imported biofuel. Economic evaluations of biomass crops
such as miscanthus (also called elephant grass) and willow suggest that miscanthus
can be a profitable crop for farmers although uncertainty about yields and the future
price level, as well as the lengthy production lifespan associated with energy crops,
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THE ECONOMY OF IRELAND
deter risk-averse farmers from adoption. The government has made establishment
grants available to farmers to address this market failure.
The target for greenhouse gas emissions adopted as part of the EU’s climate
change package also sets a demanding challenge for Irish agriculture. The overall EU
target is to reduce greenhouse gas emissions by 20per cent compared to 1990 levels,
and this might be increased to 30per cent if there is an agreement on a successor to
Kyoto I at the Copenhagen climate change conference at the end of 2009. This overall
target is divided between the ‘trading’ sector (those sectors and large firms involved in
the EU’s Emissions Trading System, ETS) and the non-ETS sector. The latter, in
which transport and agriculture are the two main sectors, has an EU reduction target
of 10per cent over 2005 levels, which is differentiated by member state. Ireland’s nonETS sector reduction target is 20per cent by 2020 over 2005 levels. This is the most
demanding reduction among the EU member states, and reflects our relatively high
per capita income when the burden-sharing was decided. As even stabilising transport
emissions would be a considerable achievement, this suggests that the burden of
meeting the target could fall mainly on agriculture. One helpful element in the new
EU legislation is a flexibility provision which will allow some trade in emissions
between the non-ETS sectors of member states. So if other member states have
surplus emission credits or have access to lower-cost ways of reducing non-ETS
sector emissions, it may be cheaper for Ireland to buy credits to cover its emissions
than to try to reduce emissions directly. In the agricultural sector, this would mainly
mean a reduction in livestock numbers.
6
FOOD PROCESSING AND FOOD SAFETY
The original chapter highlighted the growing importance of food safety assurance in
the marketing of processed food products. It examined the economic case for
government regulation and discussed the institutional framework for food safety
regulation both at EU level and in Ireland. The economic importance of a food safety
scare was dramatically highlighted by the discovery of elevated levels of dioxins in
Irish pigmeat in December 2008. As a result, all Irish pork and bacon products from
pigs slaughtered in Ireland after 1st September 2008 were recalled from both the home
and export markets. Consumers were advised, as a precautionary measure, not to
consume Irish pork and bacon products and to dispose of any purchased since that
date.
The product recall was taken as a precautionary measure, even though the public
health advice was that no one was likely to become ill, let alone die, from consuming
the contaminated pigmeat. Mindful of the mishandling of a similar Belgian dioxin
case in 1999 which led to the fall of the government there, the government wanted to
reassure consumers that public health was given priority in the handling of the
incident.
The contamination was sourced back to a small feed mill recycling bakery and
confectionery waste for animal feed. The incident highlighted two weaknesses of the
food hygiene control system. The first weakness was that the remit of the Food Safety
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AGRICULTURE, RURAL DEVELOPMENT AND FOOD
Authority of Ireland, the agency established to enforce food law, does not cover the
whole food chain. It only has responsibility for food safety from the farm gate
onwards, while animal feed and animal health controls on the farm remain the
responsibility of the Department of Agriculture, Fisheries and Food. The Department
argued that the plant, which converted food waste into animal feed, was low-risk and
it was inspected annually to determine that it was in compliance with the hygiene
regulations. However, given that contaminated feed has been the source of many
major EU food and animal health crises, this level of risk assessment for this type of
plant may need to be reviewed.
A second weakness concerned the food traceability system. This was introduced
as a legal requirement in the EU food system in the 1990s in the context of dealing
with animal health, disease control and disease eradication. The legal requirement on
the food business operator is to be able to trace one step forward and one step back.
The system worked exactly as it should have at farm level. When the contaminated
pork was identified at factory level, this could be traced back to the farmer suppliers,
who in turn could identify the source of their feed. This meant that the other customers
of this feed plant in both the Republic and Northern Ireland could be quickly traced.
The difficulty concerned the traceability system beyond slaughter. Although less
than 10per cent of pork products were potentially affected by the contamination
(sourced from the nine farms which had purchased contaminated feed from the single
mill), 100per cent of product had to be recalled. In Denmark, a sophisticated
traceability system would allow Danish rashers purchased by a customer to be traced
back to a particular process in a particular plant at a particular time on a particular
day. No such system operates in Ireland. Although the Department of Agriculture,
Fisheries and Food has set up a review group to consider what improvements in food
bio-safety can be made, it highlights the extra costs this would imply for processors
and the tight profit margins in which they operate.
The processors refused to resume slaughtering of the 90per cent of pigs from
farms which were not involved in purchasing the contaminated feed until they got a
promise of compensation from the government to cover the cost of the product recall,
which was duly granted. The potential cost to taxpayers might be up to €200 million.
The call for compensation throws into relief the hidden costs of the conveniencedriven, industrialised food processing and distribution system which has come to
dominate our food supply. In many ways, this system is an incredible
accomplishment. It has driven food costs down to their lowest ever in real terms while
increasing variety and availability. But the major weakness of the system, with its
growing concentration of supply chains, is its increasing vulnerability to risk, and the
increasingly catastrophic nature of that risk if something goes wrong. In this incident,
a single relatively small feed mill was able to close down an entire sector of the agrifood industry.
As a general principle, it is unacceptable that the taxpayer should be asked to foot
the bill if a food safety problem occurs. The food industry has successfully
externalised the cost of this risk to other agents. If the cost of this risk were properly
factored into the operations of food companies, the much-vaunted efficiency costs and
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economies of scale might appear less convincing, and the playing field relative to
smaller, more local and more decentralised food systems would be levelled.
7
CONCLUSIONS
This update underlines the point made in the conclusions of the original chapter that
government intervention plays a significant role in the agricultural, rural development,
environment and food areas. There is thus a continuing role for economic analysis in
helping to design appropriate policies and institutions.
8