1. The Future Environment and Opportunities for Irish Agriculture Alan Matthews Trinity College Dublin Agricultural Consultants Association of Ireland Carrick-on-Shannon 11 March 2005

2. Background trends Let’s first set the context – What has been happening in Irish agriculture over the past decade?

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

4. Rising share of direct payments

5. Composition of operating surplus in agriculture Decoupling WTO reduced protection Rural development

6. 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

7. 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?

8. Share of production-related payments in value of output

9. 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

10. Output effects of decoupling in Ireland (% change) FAPRI Teagasc INEA ItalyTrinity IMAGE Beef-9-25/-35-20 Total cows -14 Sheep-12-21 Cereals-18/-25-40 Wheat Barley-4

11. 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

12. Composition of farm numbers Source: AgriVision 2015 Report

13. 2002 Data, Baseline* and Luxembourg Agreement Reform Scenario** Projections Farm Group20022015* Baseline 2015** Reform % Change Viable Farms38,70030,00040,000↑33% Viable Large FT16,3258,5007,000↓18% Viable Small FT3,6001,500 n.c. Viable PT18,77420,00031,500↑58% Non-viable PT37,000 45,000↑22% Transitional60,40038,00020,000↓47% Good Demography22,8808,0005,500↓ 31% Poor Demography17,56617,0008,500↓ 50% Micro20,0008,0006,000↓ 25% All136,000105,000

14. 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

15. 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?

16. 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

17. 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?

18. 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

19. 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%

20. Effect of tariff cuts on butter prices, €/tonne Unfavourable world market Favourable world market EU support price (2008)2,140 Estimated world market price 1,1701,575 Current EU import tariff1,8961,898 New tariff (-60% reduction)758 New EU minimum import price 1,9282,333 Impact on EU price-10%none

21. Effect of tariff cuts on SMP prices, €/tonne Unfavourable world market Favourable world market EU support price (2008)1,697 Estimated world market price 1,6501,800 Current EU import tariff1,118 New tariff (-60% reduction)447 Impact on EU pricenone

22. 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%

23. 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

24. 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

25. The future challenges for Irish agriculture Direct payments WTO reduced protection Rural development ?

26. 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]

27. 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]

28. 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]

29. 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]

30. 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