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Independent.ie

Thursday 27 April 2017

Agri-food industry needs some brave policy decisions

John Connelly, Coillte Project Manager; Caitlin Rigney, who is doing research on Greenhouse Gases emissions from re-wetting peatland forests and Dr Catherine O'Connell from the Irish Peatland Conservation Council photographed at Schohaboy Bog in Co Tipperary last week.
John Connelly, Coillte Project Manager; Caitlin Rigney, who is doing research on Greenhouse Gases emissions from re-wetting peatland forests and Dr Catherine O'Connell from the Irish Peatland Conservation Council photographed at Schohaboy Bog in Co Tipperary last week.

Joe Gill

The Irish Agri-food industry is undergoing a period of dynamic and rapid change. How our policymakers shape strategies to support the industry's development will determine the contribution this key sector makes to employment and growth for decades to come.

I believe that any debate about the industry's future has to be split in to two distinct issues:

the physical production of food on the island of Ireland,

the development of globally relevant agri-food corporations that are led and managed from Ireland.

These are two very different challenges. What we could produce on farms and in factories located in Ireland may differ from the profile of the companies and co-ops that are establishing global footprints. The former must focus on exploiting comparative advantage in Ireland while the latter should concentrate on creating shareholder value.

When assessing any country's competitive strengths the subject of comparative advantage has to arise. Absolute advantage, in economics, means being more productive or cost efficient than another country, whereas comparative advantage relates to how much productive or cost efficient one country is than another.

Green grass is our ultimate source of comparative advantage. Our geography, ample supplies of clean water and relatively low levels of on farm debt all combine to deliver a knock-out advantage in producing food off grass.

Milk and beef are the two products that best perform in these conditions, and have increasing resonance in a world while provenance is key.

To optimise that form of food production efficiently we must acknowledge the natural laws that underpin grass production. Grass growth is prodigious and low cost during summer while it is weak and expensive in winter.

Our focus therefore should be on having farms and factories organised to flex with natural order.

Such a system is not all sweetness and light.

Post milk quotas the Irish dairy industry could double or treble in size over coming decades but to ensure full throttle competitiveness farms and factories will have to scale up.

We'll need fewer and larger farms together with fewer and larger processors if the ambition is to be the go-to source of high quality bulk dairy and beef products in the Northern Hemisphere.

Alongside the development of Ireland as the world's most efficient source of high quality bulk food we must also nurture and support the development of globally competitive enterprises that are led from Ireland.

The track record is already impressive as a combination of co-ops, private companies and the unique Irish co-op/plc vehicles have created an eco-system of businesses with global reach.

Kerry, AIBP, Glanbia, Greencore, Origin Enterprises and Ornua are examples of businesses that are developing international competence.

That is being achieved by investing in and acquiring businesses that add products, markets and distribution channels which help create equity value for shareholders.

Growing these businesses is a complex subject. Adding businesses abroad is easy if you have a chequebook.

Creating equity value is more difficult. The key test is to buy businesses that create a return on capital employed that exceeds the cost of that capital.

Kerry did that by investing in ingredient technologies. Glanbia diversified in to performance nutrition. Origin expanded its asset light agronomy services in the UK and Central Europe. Greencore moved aggressively towards a food-to-go portfolio.

These examples are pathfinders for the entire Irish Agri-food sector. While success can be measured by the stockmarket value of companies like Kerry (€11bn) and Glanbia (€5bn) the scope to create something far bigger is crystal clear.

Ireland has the management skillsets to grow and develop competitive enterprises worldwide that could at least double the equity value in the sector from Irish bases.

Government, financiers, third level institutions and state bodies like Enterprise Ireland and Bord Bia have to create the framework in which such enterprise flourishes.

Joe Gill is Director of Corporate Broking with Goodbody Stockbrokers

Indo Farming



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