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Professor Gerry Boyle: Agri-food sector provides a beacon of opportunity

THE agri-food sector was the Cinderella sector during the Celtic Tiger years. More recently it has become a beacon of opportunity. Overall the medium-term prospects are positive, despite market-price volatility.

Ambitious growth targets have been set for the sector in the Food Harvest 2020 report. If this growth and expansion is achieved, it's estimated that up to 34,000 jobs could be created, depending on the employment intensity of the expansion of the different sectors. However, to make this happen and to realise the potential of the sector, significant investment will be required over the next few years. Farmers and agri-businesses will only invest if there is economic stability. In the context of the forthcoming fiscal compact treaty an outcome that promotes macroeconomic stability will be critical to ensuring the necessary investment for growth will be forthcoming.

The farm organisations, the major milk, meat and grain based agri-food businesses, along with small food producers have come together to support the Stability Treaty, as they see it as necessary for economic stability.

The agri-food sector accounts directly for about 7pc of GDP and employment and 10pc of exports. But its indirect effect is even greater. Every €100m in exports contributes nearly €50m to GNP, compared with about €20m for the pharma and ICT sectors. Indeed, in recent times, the growth performance of the sector has been behaving more like the latter sectors than the so-called traditional sectors.

The medium-term prospects for the agri-food sector are favourable. The world is facing a structural food deficit. Population and income growth, dietary and urbanisation changes coupled with low growth in yields and limited new land availability for cultivation will ensure demand for food will tend to lag supply for the foreseeable future. With nine out of every 10 cattle and over 80pc of dairy products produced in Ireland being exported, exchange rate stability is absolutely critical to underpinning a positive future for the sector. Last year, agri-exports hit a record €8.9bn, which was an increase of about 12pc on the previous year. The sector is absolutely dependent on a benign exchange rate environment for export demand; 41pc of our exports depend on sterling and another 25pc on non-euro currencies. Reasonable exchange rate stability is necessary for a favourable trade environment for the sector.

There is much discussion about the need for a fiscal stimulus in the current economic circumstances. However, in a small open economy, a demand stimulus can only be expected to be successful if it is implemented by several countries in concert. A supply stimulus involving a boost to investment can succeed in elevating the economy's productive capacity provided the investments are carefully selected. Targeted public investment can directly impact on economic growth but it can also leverage additional private sector investment. Macroeconomic stability will be crucial, however, to creating the right climate for private investment to flourish.

The agri-food sector is likely to undertake significant investment in the next few years to capitalise on the prospects presented by the growing world demand for food and, in particular, the abolition of the milk quota in 2015. The ambitious targets set out in the Government's Food Harvest 2020 for dairy (+ 50pc in volume), beef (+ 40pc in value), pigs (+ 50pc in value) underline the nature of the structural change that is in store for the sector in the next few years.

The macroeconomic environment will be critical to ensuring the required investment to achieve these growth targets is actually put in place.

INVESTMENT will be required both at farm level and in processing activities. At farm level, farms will need to invest in animals, animal housing and facilities, milking parlours and milk storage. New entrants especially will need to undertake significant investment. For every 1,000 new entrants an investment outlay of at least €200m and upwards will be easily required.

Additional investment will also be needed in the processing of the raw material which will flow from the added growth in production. In the case of the additional milk that is likely to be produced after 2015, investment will definitely be required as current processing facilities are close to capacity. The scale of the investment which will actually be needed will depend on many factors, including whether new sites will have to be developed for the additional processing capacity. Economies of scale will dictate the scale of new plants to be constructed. Based on the construction of a further five to six cheese or whole milk powder plants to process an increase of 50pc in milk supplies, an estimated €350m to €400m investment could be required (excluding working capital, utility and environmental impact assessment costs, etc.).

In the case of meat processing the problem is generally one of excess capacity rather than constrained capacity. With the exception of perhaps the processing of pigmeat, the need for new investment in plant is unlikely to be a constraint on achieving the Food Harvest growth targets.

So for the agri-food sector to fulfil its potential a stable macroeconomic environment is required to provide confidence for farmers and food firms to invest in their businesses, increase the output of the sector, grow export earnings and provide much-needed employment.

Professor Gerry Boyle is Director of Teagasc

Irish Independent