The Future Environment and Opportunities for Irish Agriculture

Alan MatthewsTrinity College DublinAgricultural Consultants Association of IrelandCarrick-on-Shannon11 March 2005

Background trends

Let’s first set the context– What has been happening in Irish agriculture over

the past decade?

Output falling, income flat (taking account of implementation of MTR)

Rising share of direct payments

Composition of operating surplus in agriculture

Premia and arable aid

Market returns

Rural development payments

0

500

1000

1500

2000

2500

Premia and arable aid

€ m

illi

on

Decoupling

WTO reduced protection

Rural development

Three modal shifts facing Irish farming

The move from production-related support to the Single Farm Payment

The move from competing in a protected market to competing against the rest of the world

The move to a new relationship with society and the rest of the food chain

Output effect of decoupling – greatly underestimated?

Sharp decreases in the gross margin from beef, sheep and cereals enterprises– Next slide shows the share of DPs in revenue– Shares in gross margins even higher

60% for cattle rearing and cattle other 65-75% for cereals (47% on farms > 100ha)

– Data from 1998 NFS (Breen and Hennessy 2003)

– If farmers no longer have to produce to be eligible for payments, what will happen?

Share of production-related payments in value of output

57% 60% 65%

43% 40% 35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cereals Beef Sheepmeat

Output DPs

Estimates of supply response to decoupling

Relatively few studies FAPRI-Ireland completed study in January 2003

using partial equilibrium model Later studies incorporated WTO effects as well as ‘pure’

decoupling

Results from general equilibrium models show much higher supply responses to decoupling

– INEA Italy– Trinity IMAGE model (tentative results)

Likely to observe much greater reductions in output than commonly predicted

Output effects of decoupling in Ireland(% change)

FAPRI Teagasc

INEA Italy Trinity IMAGE

Beef -9 -25/-35 -20

Total cows

-14

Sheep -12 -21

Cereals -18/-25 -40

Wheat -1

Barley -4

Changing Irish farm numbers

Current farm numbers from the National Farm Survey (NFS) categorised by economic and demographic viability, full and part-time status, and size (Frawley & Commins 1996)

– Viable: Farm has the capacity to remunerate family labour at average agricultural wage & provide a 5% return on non-land assets

– Non-viable: Farm income is insufficient to remunerate farm labour and earn return on non-land assets of at least 5%

– Large Size: Farm labour supplied is greater than 0.75 labour units– Full-time status: Neither the farmer or farmer’s spouse has an off-

farm job– Good demography: Farmer is 55 years of age or less, or an

identified heir is less than 45 years of age– Poor demography: Farmer is over 55 years of age, no identified

heir of less than 45 years of age

Composition of farm numbers

Source: AgriVision 2015 Report

2002 Data, Baseline* and Luxembourg Agreement Reform Scenario** Projections

Farm Group 2002 2015*Baseline

2015** Reform

% Change

Viable Farms 38,700 30,000 40,000 ↑33% Viable Large FT 16,325 8,500 7,000 ↓18%

Viable Small FT 3,600 1,500 1,500 n.c.

Viable PT 18,774 20,000 31,500 ↑58%

Non-viable PT 37,000 37,000 45,000 ↑22%

Transitional 60,400 38,000 20,000 ↓47% Good Demography 22,880 8,000 5,500 ↓ 31%

Poor Demography 17,566 17,000 8,500 ↓ 50%

Micro 20,000 8,000 6,000 ↓ 25%

All 136,000 105,000 105,000

Scenario Projection Summary

Increase in Part-time farming– Only 8,500 viable farms with no off-farm income

Due to increased off-farm labour market participation Increased female labour market participation

– But larger number (around 25,300) viable farms where farmer is working full-time on farm

– Decline in transitional farm category

– Off-farm income sources allow non-viable farms to remain as viable farm households

Future of direct payments

Fixed in nominal terms to 2013 (so gradual decline in real value)…

…but even nominal reductions required under the ‘financial discipline’ mechanism if Pillar 1 funding is inadequate

2007-2013 Financial Perspective still to be agreed Pressure to focus on Lisbon Agenda objectives If ‘1% club’ succeed, Pillar 1 funding likely to be reduced Will accession costs for Bulgaria and Romania be

funded additionally?

WTO and the liberalising agenda

Framework Agreement August 2004– Agreed to eliminate export subsidies and other

forms of export supports by some end date– Substantial reduction in trade-distorting domestic

support on a harmonising formula– Substantial reductions in tariffs based on a tiered

formula– Sensitive products can be designated, but must

provide greater TRQ access– Special safeguard remains under negotiation

Effects of eliminating export subsidies

In absence of export subsidies– EU market prices must fall to world market level for export

commodities (dairy products).. – .. Or to world market plus tariff protection for commodities

with 100% or less EU self-sufficiency (beef, sugar if very tight quota regime remains in place)

Key transition issue will be the time pattern for eliminating export subsidies

– Timeframe, downpayment?

Effect of more liberal market access

Only possible to make some illustrative calculations in absence of firm negotiating proposals

Results are very sensitive to estimates of the size of the tariff cut, future level of world prices in US$, future exchange rate between US$ and €, whether EU market is in surplus or not, and expected increase in tariff rate quota access

Effect on tariff cut on beef price

EU support price (basic intervention price)

€2,224

Estimated world market price

€1,200

Current EU import tariff €1,922

New tariff (-60% cut) €769

EU minimum import price €1,969

Impact on EU price -11%

Effect of tariff cuts on butter prices, €/tonne

Unfavourable world market

Favourable world market

EU support price (2008) 2,140 2,140

Estimated world market price

1,170 1,575

Current EU import tariff 1,896 1,898

New tariff (-60% reduction) 758 758

New EU minimum import price

1,928 2,333

Impact on EU price -10% none

Effect of tariff cuts on SMP prices, €/tonne

Unfavourable world market

Favourable world market

EU support price (2008) 1,697 1,697

Estimated world market price

1,650 1,800

Current EU import tariff 1,118 1,118

New tariff (-60% reduction) 447 447

Impact on EU price none none

Effect of tariff cuts on white sugar price

EU support price (based on Commission reform proposal)

€421

Estimated world market price €210

Current EU import tariff €419

New tariff (-60% cut) €168

EU minimum import price €378

Impact on EU price -10%

Rural development funding – a new relationship with society?

Commission’s proposal for Pillar 2 funding 2007-2013 foresees large overall increase– From 10% on average 2000-06 to 25% in 2013

Divided into three axes, with minimum spend per axis– Improving competitiveness of farming and forestry– Environment and land management– Diversification and rural development

Rural development measures – what role for public goods?

Modernisation and structural adjustment measures Disadvantaged areas scheme

– Criticised by Court of Auditors Agri-environment scheme

– Must show added value to cross-compliance– Public must see they are getting value for money as

national share of funding will be larger in future– Net benefit to farmers much lower than direct payments

Greater share of funding to non-agricultural sectors in future

The future challenges for Irish agriculture

Premia and arable aid

Market returns

Rural development payments

0

500

1000

1500

2000

2500

Premia and arable aid

€ m

illi

on

Direct payments

WTO reduced protection

Rural development?

AgriVision 2105 Themes for Action

The continued role of public policy in agriculture and food Developing a competitive Irish agriculture Industry

– Public policy should facilitate the market based development of the sector

– Public policy that facilitates the consolidation of farm structures

– Improving links between agriculture and food industries

[Recommendations 1-9]

Building the knowledge base of Irish agriculture– Recommends the improved provision of resources for research and

education that enhances the productivity and competitiveness of Irish agriculture

[Recommendations 10-14]

AgriVision 2105 Themes for Action

Building a knowledge based Irish food industry– Public support for food research and development (R&D), education, and

marketing should be continued and improved, with Future NDP giving priority to Food R&D

– Encouraging increased food research collaboration between the food industry, research institutes, and the Universities

[Recommendations 15-20]

Developing a competitive Irish food industry– Develop links with agriculture that allow both industries to get ahead of

the competitiveness curve in responding to consumer demands– Re-examine the current milk quota reallocation policy so as to ensure the

development of a competitive milk production and processing industries– Promotion at an EU level of Country of Origin labelling

[Recommendations 21-31]

AgriVision 2105 Themes for Action

Managing the regulatory environment

– So as to provide necessary safeguards without prejudicing the

competitiveness of the industry

– So as to encourage food industry rationalisation that enhances the

competitiveness of the Irish food markets and the Irish food industry

[Recommendations

32-36]

The all-Ireland dimension

– The agriculture industries, North and South, face similar competitive

challenges

– Co-operation in policy and between firms that enhances the

competitiveness of the industries should be encouraged

[Recommendations

37-38]

AgriVision 2105 Themes for Action

Supporting the public good output of Irish agriculture– Recognition of the multifunctional role of agriculture and the need for

public support for the provision of public good outputs from agriculture– Recommends that, in so far as possible, the Brosnan report on the final

implementation of the Nitrates Directive in Ireland be followed– Supports the continuation and extension of REPS

[Recommendations 39-42] Strengthening rural development

– Agriculture no longer the only vehicle for rural development– Successful rural development will depend on broader Irish economic

policy– Encouraging the work of Comhairle na Tuaithe in resolving issues

involved in the recreational use of the countryside

[Recommendations 43-50]

Conclusions

Following CAP reform and given likely further global trade liberalisation public policy must facilitate the development of market orientated agriculture and food industries.

Continued and improved public support for R&D and education that enhances the knowledge basis of Ireland’s Irish agriculture and food industries will be essential in improving their competitiveness

Agriculture’s role in the provision of non-food outputs such as a healthy rural environment will become more important and deserving of recognition