Table 1.6. Distribution of Family Farm Income by system and area, 1997

Source: Teagasc, 1997 National Farm Survey

In Table 1.7, the regional distribution of farm incomes for the same year shows the highest incomes in the East and South East of the country, while the lowest incomes are to be found in the border areas and the Western counties of Galway, Mayo and Roscommon. Clearly, this distribution is linked to the regional concentration of farming systems referred to above.

Table 1.7. Family Farm Income by region*, 1997

Source: Teagasc, 1997 National Farm Survey

A feature of farm incomes in recent years is the growing contribution made by direct payments. While the average contribution for all farming systems amounted to 62% in 1997, as may be seen in Table 1.8, this varies across the different farm enterprises. For dairy farmers, direct payments contributed 22% of FFI, while drystock sectors are entirely dependent on direct payments for their farm incomes.

Table 1.8. Direct payments as a percentage of Family Farm Income (1997)

Source: Teagasc, 1997 National Farm Survey

Where direct payments constitute more than 100% of farm incomes, the costs of production, exclusive of returns to family resources, exceed the market value of output.

The National Farm Survey also provides information on distribution of direct payments across the various income groups in farming. Table 1.9 shows that farmers whose FFI was less than £5,000 in 1997 accounted for 40% of the survey population but received only 20% of total direct payments. However, at the other end of the distribution those farmers with farm incomes in excess of £15,000 accounted for 25% of the total population but received 44% of total payments.

Table 1.9. Distribution of direct payments by income group – 1997

Source: Department of Agriculture and Food, 1998 Annual Review and Outlook for Agriculture and The Food Industry

The analysis of farm viability is an issue which has received an increasing amount of attention in recent years. Teagasc defines a viable farm as one which has the following characteristics: (a) the capacity to remunerate family labour at the average agricultural wage and (b) the capacity to give an additional 5% return on non-land assets. Two other dimensions of viability are also considered which relate to the household demographics and the presence of off-farm employment. Households with poor demography are characterised as having a householder over 55 years of age and nobody under 45 years of age.

Table 1.10 shows how Frawley and Commins categorised the viability of Irish farms. In 1994, 44,000 farms, or 29% of the total, could be termed viable. These farms were typically large-scale units on good soils with a dairy enterprise and substantial levels of farm investment. Another 39,600 farms or 26% of the total were categorised as non-viable but having off-farm employment. These were typically small to medium-sized farms with a drystock enterprise, low farm incomes and a heavy dependence on direct payments.

Table 1.10. Farms in different viability categories, 1994

Source: Frawley and Commins, (1996), The Changing Structure of Irish Farming, Trends and Prospects

Non-viable farms with good demographic status accounted for a further 40,500 households. These were generally small-scale dairy and drystock farms, with high production costs, limited access to further resources and considerable dependence on direct payments. The residual group of farm households were those which were non-viable and had a poor demographic status. These accounted for almost 19% of the total and consisted of smaller holdings where the operator was beyond retirement age and household income was largely based on pension payments. Further evidence of the importance of off-farm income is provided by Teagasc's National Farm Survey which shows that in 1997, there was an off-farm source of employment on 43% of all farms. Their analysis also showed that the likelihood of a farmer having an off-farm job is strongly related to the system of farming involved. For example, over 30% of farmers in drystock systems have off-farm employment, compared with 21% of tillage farmers and 10% of dairy farmers.

1.2. Trends

While the overview of the current characteristics and structure of the farming sector outlined in the previous section is a useful starting point for the analysis in this Report, it is also instructive to consider how some of these key indicators have evolved over the recent past, taking 1980 as a starting point. However, it should be borne in mind that this particular year was one in which farm incomes were at a record low following a boom period from 1970 to 1978. The record for this period is comprehensively documented in Sheehy (1988).

1.2.1. Volumes

Table 1.11 shows how the volume of Agricultural Output, Input and Product have developed over the period 1980 to 1998. The volume of agricultural output grew rapidly up to 1992 at an annual rate of 2.7%. However, the trend in the post-MacSharry reform era is one of stagnation. For the entire 19 year period, the annual growth rate was 1.8%. The record for the volume of inputs was somewhat uneven throughout the 1980s, but increased steadily in the 1990s with the exception of a once-off fall in 1997. The overall picture is of a 60% increase in the volume of inputs between 1980 and 1998 or an annual increase of 2.6%, well ahead of the growth in output. Because input volumes increased faster than output volumes, the difference between the two, called Gross Agricultural Product, increased only at 1.0% per annum.

Table 1.11. Indices of the volumes of agricultural output, input and product, 1980-1980, 1980 = 100

Source: Derived from Department of Agriculture and Food, Compendium of Irish Economic and Agricultural Statistics 1997 Edition and 1998 Annual Review and Outlook for Agriculture and The Food Industry

1.2.2. Prices

Table 1.12 shows that for output prices, the 1980s were a period of rapid increase. The situation throughout the 1990s has been much more variable, with a steady decline evident since 1995, reflecting a delayed market reaction to the MacSharry reforms as discussed in Section 2.2.6 of this Report. The trend in input prices over the period broadly reflects the rate of inflation generally. It is characterised by a steep increase in the early 1980s, some variability in the following years and a period in the early 1990s during which it remained constant. However, the trend in the last few years has been a downward one.

By examining how output prices have changed relative to input prices, a Terms of Trade figure can be derived. This is also presented in Table 1.12. The record over the period studied is a very mixed one and no obvious trend is discernible. However, what is clear is a steady decline in the terms of trade since the mid- 1990s. Normally, this would have an adverse effect on incomes, but during this time, direct payments were growing rapidly, so that incomes actually increased for much of this period, as can be seen in Table 1.13 below.

Table 1.12. Indices of output and input prices and Terms of Trade, 1980-1980, 1980 = 100

Source: Derived from Department of Agriculture and Food, Compendium of Irish Economic and Agricultural Statistics 1997 Edition and 1998 Annual Review and Outlook for Agriculture and The Food Industry

1.2.3. Farming Incomes and Employment

Table 1.13 shows that aggregate income from self-employment in agriculture in real terms exhibited considerable fluctuation throughout the 1980s with the early years of the decade being particularly poor ones, as explained above. Throughout the 1990s, the picture is again characterised by a high degree of variability with income peaking in 1996 and declining thereafter. Trends in agricultural employment since 1980 are also presented in Table 1.13. As outlined in Section 1.1.1, there are two ways in which these can be measured. However, irrespective of the approach taken, a similar trend is observed which is a strongly negative one.

Table 1.13. Incomes and employment in farming, 1980-1980

Source: Derived from Department of Agriculture and Food, Compendium of Irish Economic and Agricultural Statistics 1997 Edition; 1998 Annual Review and Outlook for Agriculture and The Food Industry and EUROSTAT, The Agricultural Situation in the European Union

Labour Force Survey statistics on the Principal Economic Status of workers indicate a fall of 38% in the agricultural labour force between 1980 and 1998, equivalent to a fall of 2.6% per annum. Using the alternative measure of labour in AWUs gives a reduction of 33% or 2.2% per annum. Table 1.13 also shows average incomes in farming per family worker in real terms for the period 1980 to 1998. This is estimated by dividing aggregate income from self-employment in real terms by the total AWUs worked by family labour in that year. The results show an increase in the 1980s from a very low base in 1980 and a high degree of variability throughout the 1990s with a steep fall at the beginning of the decade. In subsequent years incomes rose substantially but have declined since 1995.

1.2.4. Exports

Table 1.14 summarises the export performance of both primary agriculture and the agri-food sector since 1980.

Table 1.14. Value of agri-food exports, 1980-1980

Source: Derived from Department of Agriculture and Food, Compendium of Irish Economic and Agricultural Statistics 1997 Edition and 1998 Annual Review and Outlook for Agriculture and The Food Industry

The overall picture is one of sustained growth which was particularly strong in the latter half of the 1980s. The trend throughout the first half of the 1990s was also strongly positive. However, for both primary agricultural exports and the wider agri-food sector, the trend is a negative one thereafter. In the case of the agri-food sector, this decline can be explained to some extent by a re-classification which occurred in mid-1996, whereby many edible products which had been categorised as food products were redefined as industrial products.While a complete set of figures is not yet available for 1998, the data up to September of that year show an increase of 10.5% in value of agri-food exports on the same months in 1997.

The issue of this sector's contribution to net foreign exchange earnings has already been outlined. This amounted to 32% of the total in 1995, while a similar study conducted in 1988 estimated the sector's contribution at 42% (Riordan, 1988). However, as the author of the more recent study points out, this diminution over time reflects the expansion in the manufacturing sector in the intervening period, rather than any absolute decline in the importance of the agri-food sector.

1.2.5. Farm Household Income

The position in 1995 with respect to FHI is outlined in Section 1.1.4. Trends are considered in this section. There is limited detail on the evolution of FHI given that the principal data source, namely the Household Budget Survey, is taken on only a seven-year basis.

Nevertheless, what is clear from Table 1.15 is the declining share of income from farming in total FHI. In 1973, this accounted for over 70% of total farm household income, but by 1994, this had declined to almost 54%. By contrast, the contribution from other sources, which largely consists of income from off-farm employment was almost 35% in 1994, compared to just under 20% in 1973. There was also considerable fluctuation in the contribution of transfer payments to total incomes over the period.

Table 1.15. Composition of farm household income 1973-1973

Source: Derived from Central Statistics Office, 1997, Household Budget Survey 1994, Preliminary Results

1.2.6. Area of Holdings

Table 1.16 shows that the total number of farms in the State fell by over 12% in the period 1991 to 1998. However, the number of farms with less than 20 hectares fell at a much faster rate with the reduction from 41,800 to 29,000 representing a 31% decline.

Table 1.16. Number and per cent of farms by size in Ireland, 1991-1991

Source: Derived from Frawley and Commins, (1996), The Changing Structure of Irish Farming, Trends and Prospects and Department of Agriculture and Food, 1998 Annual Review and Outlook for Agriculture and The Food Industry

At the other end of the scale, farms of more than 50 hectares actually increased by 6%, while there was little change in the number of farms in the other categories.

Chapter 2

CAP Reform To Date

2.1. Extent of Agricultural Protection

The trends outlined in Chapter 1 have occurred under the influence of the Common Agricultural Policy (CAP). The CAP consists essentially of mechanisms to discourage or prevent access to EU markets for foreign agricultural produce and to subsidise the export of surplus EU production. The CAP is the Western European version of protectionist agricultural policy which is virtually a universal phenomenon.

The extent of that protection is nowadays measured by Producer and Consumer Subsidy Equivalents (PSEs and CSEs) which were developed by the OECD for this purpose. The PSE measures the value of transfers from domestic consumers and taxpayers to producers resulting from government intervention in a given year (Cahill and Legg, 1990). The CSE is the value of transfers from domestic consumers to producers and from taxpayers to consumers from government intervention. It measures the implicit tax imposed on consumers by agricultural policies and is generally presented as a negative subsidy.

In Table 2.1 below, estimates of PSEs and CSEs are expressed as percentages of the gross value of production - including coupled direct payments - and consumption for selected countries in 1997. The data show widely differing degrees of agricultural support across OECD countries, ranging from highly protected agricultural producers and heavily taxed consumers in countries such as Japan and Switzerland to countries such as New Zealand where agricultural protection is effectively non-existent. The EU and Ireland are intermediate.

Table 2.1. Estimates of PSEs and CSEs for 1997 in selected countries, % of production value

Source: Derived from OECD (1999) and O'Connor (1998).

2.2. CAP Reform

All businesses, whether operating in free markets or in protected markets, are subject to changing economic and technological circumstances over time. These exert downward pressure on profit margins which is transmitted to producers through competition in the market place. Farmers are not exempt from such pressures.

The critical economic variables for farmers are demand for and supply of agricultural products, and their most important characteristic in protected markets is the tendency for supply to expand more rapidly than demand. In free markets this would lead to falling prices and falling incomes unless productivity can be increased. In protected markets governments have to decide how to react. They usually opt to slow down the rate of price reduction, in which case surpluses will grow. To avoid this a government may impose supply control along with price reduction to contain surpluses within acceptable limits. Government intervention moderates the impact of market forces, but it does not suppress it. Rather the forces continue to operate through a veil of government regulation. The reform of the CAP over the years is the EU's response to these pressures.

Because the environment is continuously changing, reform is on-going. It is essential therefore to take a long-term perspective in evaluating reforms rather than to consider them as a once-off and terminal exercise. Agenda 2000 is but one more in a long series of CAP reform packages outlined below, and such reforms will continue for as long as the CAP will continue.

2.2.1. The Original CAP

The CAP was originally implemented in the 1960s as a compromise among the six original member states of the EU, each of which had their own protectionist policy for their farmers. Ireland therefore joined a fait accompli in l973.

The CAP offered an escape from dependence on a low priced and restrictive British market. Access to a high priced European market of some 300 million consumers was a dominant consideration in the arguments in favour of joining the EU. It promised a doubling of family farm income per family worker and - despite considerable economic turbulence in the 1970s - it had delivered on that promise at the end of the transition period to full membership in 1978 (Sheehy, 1988).

2.2.2 Structural Policy

There are two branches under the CAP in the forms of market price support and socio-structural policies. These are reflected in the CAP budget which consists of two sections, the Guarantee Fund and the Guidance Fund. Originally guidance expenditure was intended to be a sizeable part of total expenditure, but in fact it has never exceeded 10% of the total.

The heyday of structural policy was in the 1960s when there was a great upsurge of interest internationally, led by the OECD (1965). This was an era of full employment in most developed countries, so the policy of encouraging labour to leave farming, thereby enabling more rapid enlargement of surviving farms, made good economic sense. It was against this background that the Mansholt Plan was launched in 1968 (CEC, 1968). It had the ambitious aim of restructuring EU farming by 1980 into a mixture of commercial farmers and part-time farmers, having encouraged large numbers of non-viable farmers to exit the industry. This was to be achieved by a combination of selective investment aids to potentially viable farmers and retirement incentives to non-viable farmers.

The debate on these proposals dominated the arguments at that time on the merits of Irish accession to the EU. As it transpired the original Mansholt proposals proved to be quite unacceptable to EU politicians, who proceeded to dilute them. This coincided with a slow-down in economic growth, aggravated by the energy crisis of 1973 which ushered in an era of growing unemployment. Indeed, the ink was scarcely dry on the decisions regarding the Mansholt Plan when the EU did a U-turn under the CAP with the introduction of the Disadvantaged Areas Scheme (DAS) in 1975. The aim of this Scheme was the very opposite of the Mansholt Plan, namely, to encourage non-viable farmers to remain in farming in poorer areas (Fennell, 1997).

2.2.3. A Prudent Price Policy

Even in those early years of EU membership, storm clouds were gathering. The Commission repeatedly warned of growing agricultural surpluses and even more rapidly growing budgetary costs for disposing of these surpluses. The agricultural Ministers understandably were reluctant to take unpalatable action, but were finally prevailed upon to do so in 1977. In that year a prudent price policy was agreed which turned out to involve cutting real prices of farm produce by some 3% per annum. That policy continued up to 1993.

In the 1970s most authorities, including most agricultural economists, believed that such a price cut would discourage production and stimulate consumption sufficiently to contain surpluses within tolerable limits (see the Siena Memorandum, 1984). The record now shows clearly how wrong they were: the 3% price reduction had little noticeable impact. Yet Ministers found it impossible to agree on a more severe price policy. The Commission had no option but to reach for the other instrument available to curtail surpluses, namely, direct supply control.

2.2.4. Direct Supply Control

This was already in operation for sugar beet from the beginning of the CAP, in the form of quotas at farm level. In 1983 the Commission proposed that a similar restriction be put on milk, then the most costly commodity for the budget. Ireland opposed this initiative on the grounds that it would stifle our underdeveloped dairy industry, but as the message sunk home that the only alternative was a swinging cut in prices, the lesser of the two evils was accepted. In fact since then those farmers who have a decent sized quota have become strong supporters of the approach because it delivers a high and stable price, though for a limited quantity. On the other hand farmers with little or no quota have been retarded from expanding production or from entering the industry.

2.2.5. Stabilisers

Quotas solved the growing milk problem by providing an effective method to control production. Other commodities remained free to expand and did so with the result that the budget cost of the CAP continued to soar. The Commission had to move again, and in 1988 persuaded the Ministers to add a stabiliser approach to the prudent price policy and quotas already in operation. Under the stabiliser policy, a maximum guarantee quantity was set for commodities such as grain, and if farmers collectively exceeded that ceiling an automatic cut in prices was triggered.

Again this approach failed because the Ministers could not face up to the price cuts that were involved. Production continued to grow with new technologies being adopted in their various forms of biological, agrochemical and mechanical innovation. In addition, the management ability of farmers was improving all the time to further boost production.

Up to this time the reforms of the CAP were driven mainly by internal pressures expressed in the size of the CAP budget. Despite all the reforms and repeated efforts by Finance Ministers to control it, the budget continued to grow. Finally, in 1988 they moved to put in place a set of binding controls. In particular they put a definite ceiling on the cost of price supports. That ceiling had a real growth factor built into it, but it still was a firm constraint on the further evolution of the CAP.

2.2.6. The MacSharry Reforms

The stabiliser approach proved quite inadequate to curtail production. Something more radical was called for and was implemented in the MacSharry reforms (CEC, 1991). These reforms were decided upon in the context of the Uruguay Round trade talks which were progressing at the same time. They consisted of three main components:

_reduced prices for beef and cereals offset by direct payments to farmers;

_extension of supply control beyond sugar and milk, where it already applied, to beef, sheep and cereal/oilseed/protein/linseed crops; and

_a set of accompanying measures.

Support prices were cut between 1993 and 1995 by 15 per cent in the case of beef and 30 per cent in the case of cereals. The revenue loss to farmers resulting from these price reductions was to be offset by premia paid to farmers per head of livestock in the case of beef and area aid payments per hectare in the case of the crops.

Supply control was extended to cereal/oilseed/protein/linseed crops and to beef and sheep by capping the direct payments at the level of production prevailing in a base period before the reforms were put in place. Any production beyond these levels would be sold at the new lower prices but without compensation. In addition, for the crops, land set-aside at specified levels was required to qualify for receipt of the compensatory payments, and in the case of livestock extra premia were paid for low stocking rates to promote extensification of production.

The accompanying measures (AMs) consisted of three schemes: one to promote afforestation; a second to encourage early retirement of farmers; and a third as payments for the public good of improving the rural environment under the Rural Environment Protection Scheme (REPS). MacSharry underlined the new importance of the environment by proclaiming that farmers nowadays have a dual function, namely, the traditional one of commodity production and a new one as guardians of the countryside.

When MacSharry revealed his proposals in 1991 he was bitterly attacked by the farming organisations. So it is interesting now to look back in Table 2.2 at the outcome in terms of prices and incomes.

Table 2.2. Outcome of the MacSharry reforms, 1992 = 100

Source: EUROSTAT

The price outcome varied from one country to another but was similar for both Ireland and the EU-15 as a whole. Commentary is confined to Ireland. Beef market prices, instead of falling by 15% between 1992 and 1995, actually rose by some 10%. At the same time, the premia and area aid payments agreed in 1992 were being introduced, so that farmers experienced a very substantial windfall gain in those years. However, beef prices did begin to fall after 1995 and by 1998 had finally fallen in line with the earlier reduction in support prices. The story for cereals was along the same lines. Cereal prices were again higher in 1995 instead of being 30% lower. Only by 1997 had they fallen in line with support prices.

The movement in farm incomes over the years is a function of many factors other than the price of beef and cereals. Yet such doom and gloom had been propagated in debates on the MacSharry proposals that it is relevant to review the outcome as shown in Table 2.2.

Farmers' aggregate FFI in Ireland actually rose by 19% between 1992 and 1995, and allowing for the continuing fall in the labour force, the average income per worker increased by 28% over this period. However, incomes did fall in 1997 and 1998, but on a per worker basis they were still 21% ahead of the base year 1992. Of course around these averages there were enormous deviations from farm to farm.

The evolution of the AMs is also of interest. The prospective value of these was impossible to quantify in any meaningful way because their detailed operation and their uptake were unknown. Nevertheless, the Department of Agriculture and Food did go on record as saying that they could amount to £55 million per year. The budget provision for them in 1999 is £318 million. Under REPS alone there are over 40,000 farmers participating requiring a budget allocation of £173 million.

2.3. Agenda 2000 and Its Impact

The most recent increment to CAP reform has been the Agenda 2000 decisions of March 1999. These were made against a background of continuing over-production. They also anticipated a new trade agreement after 2001 and enlargement of the EU in the new millennium. The budget as usual provided a tight constraint on the cost of the reforms, with the real growth element of the existing ceiling being eliminated leaving only nominal growth in line with inflation. This was done despite the extra cost of enlargement which had to be budgeted for.

In effect Agenda 2000 is a second tranche of MacSharry reforms containing the same basic ingredients of support price reduction, compensation, supply control and funding for rural public goods. Each of these aspects is considered in turn.

The support prices of beef, cereal/oilseed/protein/linseed crops and milk are to be further reduced to bring market prices closer to international trading levels and to the levels prevailing in the countries to be embraced in enlargement. The price reduction for beef is 20% and for cereals it is 15%, both to be phased in by 2002/03 for beef and 2001/02 for cereals. Milk support prices, which escaped retrenchment under MacSharry, are to be reduced by 15% over three years but not to begin until 2005/06.

The problems of predicting the effects of these kinds of changes were highlighted by the outcome of the MacSharry reforms. Whether or not market prices will fall in line with support prices remains to be seen. There are good reasons to expect markets to be firmer up ahead than they were in 1998, as argued later in Section 3.1, but a great deal depends on how the Commission actually manages markets around the lower levels of support. This is particularly the case for Irish beef which has still to recover from the BSE disaster and the consequential renationalisation of EU beef markets. While markets for all three commodities are likely to firm up, there is little prospect of the kind of windfall gains after the MacSharry reforms. If market prices do reflect the reductions in support prices they should lead to some increase in demand within the EU, thereby helping to reduce market imbalance. In addition, more high value added production may be saleable in Third Countries without export refunds, giving further relief.

The adverse impact on incomes of these support price decreases will be cushioned by increased premia and area aid as shown in Table 2.3. For beef the existing suckler and steer premia are to be increased and there is to be a new slaughter premium payable on all cattle output including steers, cows, heifers, bulls and live exports. Dairy farmers will for the first time join beef farmers as premia recipients in 2005, as they will be compensated for the income reduction caused by cheaper milk. The compensation for oilseed/linseed crops will be phased down to the level of the new cereal premium by 2002/03, while the reference price system for these crops, agreed in the MacSharry package, will be removed in 2000/01. Overall the extent of the compensation in this case is not as generous as in the MacSharry reforms. The official estimate, on the assumption that market prices will fall to the same degree as support prices, is that the beef sector will gain some £52 million per annum on full implementation, while arable farmers will lose £19 million per annum and dairy farmers will gain £41 million on an annual basis. When the new direct payments are fully in place, total direct payments will account for some 80% of total income. Farmers would of course prefer to receive higher prices than to be so dependent on visible and therefore vulnerable direct payments. But high prices cannot be retained against the pressures for reform of the CAP.

Table 2.3. Current and Agenda 2000 rates of premia and area aid, when fully operational

a. In addition to the Agenda 2000 beef premia shown there is a further £25 m from the national envelope to be phased in by 2002.

b. Payable on all output of steers, heifers, bulls, cows and live exports.

c. Heretofore only dairy cows plus those male steers, suckler cows and ewes submitted for premia were included in stocking rate calculations, but from 2000/01 all animals on the farm will be included.

Source: Department of Agriculture and Food

The impact of Agenda 2000 on farming income has been quantified by the FAPRI-Ireland team (Donnellan et al, 1999). They first established a baseline scenario which maintains existing policies up to 2007 and they contrast this with the results derived from incorporating the Agenda 2000 decisions into their analysis. Their results are reported as follows in their Executive Summary:

“The cumulative effect of these sectoral changes is a reduction in Gross Agricultural Output of 9 per cent due to the reforms. However, the reforms make provisions for increased direct payments to producers in all of the main commodities. The effect of these increased payments is for total subsidies to Irish agriculture to increase by 42 per cent on the baseline situation by 2007. With expenditures on inputs projected to remain practically static under the reforms, overall incomes by 2007 are up 9 per cent on the baseline income figure and are almost equal in nominal terms to the 1998 actual figure.”

In assessing the gains/losses of Agenda 2000, the outcome for consumers should be included. Farmers and others choose to ignore the effect on consumers of CAP reform, including the beneficial effect for their own families as consumers. There is a widely held view among agriculturalists that farm-gate price reductions flow into black holes in the post farm-gate processing and distribution sectors and never reach consumers. While it is true that reaction at processing and distribution levels is lagged and is confounded by other changes taking place in those sectors, it cannot be the case that these downstream sectors can pocket any increased margins that arise. If they had such oligopoly powers they would not have to wait for CAP reform to grab extra margins; they could do it any time. Nor would they have to compete to sustain margins; they could set whatever margin they wished.

Therefore, a portion of farmer losses through lower prices must be included as gains to Irish consumers on such produce as is consumed in Ireland. The sum arising from the Agenda 2000 agreement is of the order of £75 million. It follows that if Irish farmers are over-compensated for their loss in revenue by £74 million, and if Irish consumers benefit to the extent of a similar amount, the national economy embracing both producers and consumers is gaining to the tune of £150 million.

2.4. The Uruguay Round Trade Agreement

The year 1985 was a historical turning point for agricultural policy. The main trading nations of the world entered into negotiations under the General Agreement on Tariffs and Trade (GATT) - now replaced by the World Trade Organisation (WTO) - having agreed that there should be “substantial progressive reductions in agricultural support and protection”.

Since virtually all countries of the world (with the exception of New Zealand and perhaps Australia) protected their domestic markets against outside competition by policies such as the CAP, the GATT talks were a brave new initiative. Progress was painstaking, but finally after eight years of argument the Uruguay Round Trade Agreement (URTA) was signed. It covers the period 1995 to 2001, and for the first time in history it has brought global agricultural policy under global rules except for those countries not yet in the WTO. China and Russia are among 30 countries currently negotiating membership. The main commitments made by all countries under the URTA relate to (i) reduced domestic support, (ii) increased market access and (iii) reduced export subsidies. These are described below.

Also included were an agreement to use scientific evidence to solve disputes regarding sanitary and phytosanitary standards and a Peace Clause which ensures that the growing value of direct payments cannot be challenged up to 2003 provided the overall level of support does not exceed that agreed in the URTA.

Domestic Support: Domestic support is measured in the URTA by an Aggregate Measure of Support (AMS). This is calculated for the major commodities as the difference between internal support prices and world prices multiplied by the quantity produced. The EU result for the base period, which was chosen to be 1986-1986, was €81.0 billion per annum. The base period happened to be one of very low world prices and therefore with a high AMS. World prices are frozen at base period levels, so that the AMS can only be reduced by lowering internal support prices.

The reduction agreed in the URTA is €13.8 billion per annum. This is not commodity specific, so it may be achieved by reducing the support for different commodities by different percentages. Credit is given for any reductions made since 1986, and in the case of the EU such reductions more than fulfilled the requirement. This is the case even though much of the price reduction is offset by the premia and area aid under the MacSharry reforms.

These payments were exempted from the disciplines of the trade agreement - or were placed in a blue box - against the wishes of other agricultural exporting countries who argued that only payments fully decoupled from current production should receive such treatment.

The conditions for exemption were that such payments are based on fixed areas and yields, that they are made on 85% or less of the base level of production and that livestock payments are limited to a fixed number of head.

Market Access: The second pillar of the URTA is the promotion of increased market access. This is done in two ways: by a reduction in tariffs and by a provision for minimum access opportunities.

Before the URTA agricultural trade was restricted by a host of mechanisms ranging from customs duties - fixed amount duties and ad valorem duties, variable levies - the most important instrument of protection under the CAP, quotas on imports, so called voluntary restraint which really meant involuntary restraint etc. Because of the complexity of these mechanisms it was necessary to convert them into a transparent alternative if progress was to be measured in reducing protection. This was agreed early in the Uruguay Round negotiations and was called tariffication. It involved replacing all non-custom duty forms of protection by an equivalent fixed sum tariff.

The basis of the new tariffs was the average gap for each commodity between the external price and the internal support price plus 10% in the base period 1986-1986. Low world prices in that period helped to inflate the level of the tariffs. For example, in the case of milk products (butter, skim milk powder, cheese and other milk products), the opening tariffs were so high as to exclude all imports. Even after the agreed 36% reduction by 2001/02 in the case of butter, cheese and other products and a 20% reduction in the case of skim milk powder, imports are still very limited.

Because it was realised that the new tariff arrangements would lead to very little increase in trade during the URTA, a provision for minimal access was agreed. This was done by a preferential tariff-quota mechanism whereby the in-quota tariff was set at 32% of the full tariff at year one of the URTA. The agreed minimum was defined as 3% of domestic consumption in 1995/96 rising to 5% by 2001/02, while levels of access prevailing in the base period 1986-1986 are retained if they exceed these amounts. Under this system, there are some extra imports from Third Countries.

Export Subsidies: Export subsidies are routinely used under the CAP, and are used occasionally by the USA and some other countries. Over the past few years there has been an increasing tendency to use export credits rather than explicit subsidies, as the credits are not subject to control under the URTA. These are the most provocative aspects of the CAP for the EU's trading partners. It is not surprising therefore that their curtailment was on the agenda in the Uruguay Round negotiations. It was agreed that, by 2001/02 for each commodity, the volume of such exports must be reduced by 21% and the expenditure on them must be reduced by 36% compared with specified base period levels. There is of course no limit on exports not requiring subsidies. The ceilings on subsidised exports for some key commodities are shown in Table 2.4.

Table 2.4. Maximum quantities of subsidised exports from the EU under the URTA, ‘000 tonnes

Source: Department of Agriculture and Food

The restriction on export subsidies is the URTA commitment most likely to have an impact, the precise magnitude of which will depend on how EU production and consumption evolve up to 2001. The EU now has to manage each commodity market to avoid surpluses which require subsidies for export but which exceed the export ceiling.

2.5. Direct Payments

The compensatory direct payments, in the forms of premia and area aid, were the most original component of the MacSharry reforms. No such payments were available for the more gradual decline in prices which had occurred over the years. They have joined the headage payments in the Disadvantaged Areas, the REPS area payments and the ewe premium to become a central part of agricultural subsidisation, accounting in 1998 for 60% of aggregate Irish FFI. They are to be further extended under the Agenda 2000 decisions, so that by 2003/04 direct payments will account for 80% of income. The rationale and the future evolution of these payments are therefore of critical importance. The rationale is considered below and the future evolution is discussed in Section 3.4 of the next chapter.

There is no general requirement to compensate people for a change in policy. Outside of agriculture such compensation is sometimes paid, such as productivity allowances and redundancy payments, but more often than not people are left to adjust on their own initiative.

Compensating farmers has long been advocated by agricultural economists in the context of trade liberalisation (see for example, Brandow, 1955 and Van Riemsdijk, 1977). However, the concept of compensation has always been that of payments not linked to current production but based on some historic criteria of output, income etc. Also, these payments would be phased down over time to ultimately disappear as agricultural resources adjusted to free trade prices.

This is not the concept introduced by MacSharry. The Commission made it quite clear that the new compensatory payments proposed were designed to fully compensate all but the largest farmers, and the Council of Ministers increased the proposed payments to ensure that most of the larger farmers also received full compensation. Furthermore, any suggestion that the payments would be reduced over time was rejected out of hand.

Several issues arise in relation to direct payments including the loss to be compensated, the linkage with production, the duration of the payments and the capping of payments by size of farm. These are analysed in turn below.

The Loss to be Compensated: The Commission has never spelled out its precise meaning of full compensation. Agricultural economists would have in mind compensating for income loss, but the MacSharry calculations were based on revenue loss. Now since income equals revenue minus costs, there was a possibility from the beginning that the new payments would actually over-compensate rather than just fully compensate for income loss. This possibility becomes a probability if the level of payments are not adjusted down over the years. Any reduction in unit cost of output, either by a lower volume of inputs or falling input prices, would translate into over-compensation, ceteris paribus. Of particular importance here are the on-going reduction in farm labour, increasing yields and improving husbandry. The generosity of such payments does not end at this. The level of compensatory payments was calculated in relation to the fall in support prices rather than in market prices. Therefore, if market prices did not fall in line with the reduced support levels, income would also increase, ceteris paribus. As seen in Table 2.2, this did happen in the early years of the MacSharry reforms.

The over-compensation of the MacSharry payments was not likely to be repeated in Agenda 2000, especially in the context of a very restrictive budget. As already seen in Section 2.3, the increased payments proposed by the Commission were less than the full revenue compensation of MacSharry and remained less for most member states, even though the Council of Ministers increased the sums proposed. In the case of Ireland beef and dairy will be over-compensated, with crops being under-compensated. If income loss is to be avoided for crops, then arable farmers must experience output price reductions less than the reduction in support prices, or trends in input prices and volumes must be favourable. Only time will tell whether the newly agreed payments are sufficient to fully cover income loss as farmers and markets adjust to the new environment. The FAPRI-Ireland analysis in Section 2.3 concludes that they do.

The Linkage with Production: Coupling refers to the extent of the linkage between direct payments and current production. If the payments are fully coupled with current production by being paid per unit of product without limit, then they will encourage expansion and trade distortion, just as would an equivalent degree of price subsidies.

If the payments are fully decoupled by, for example, being based on production in some previous period rather than on current production, then there is no direct incentive for expansion, though an indirect incentive may arise by virtue of the availability of the payments to fund investment.

Finally, if the payments are made for a reduction in output, as in the case of set-aside and extensification, they may be said to be negatively coupled with current production. The coupling status of the present direct payments is analysed below.

The DAS headage payments encourage farmers to retain sufficient stock to draw down the payments, so they are coupled to this extent. However, the total payments are limited per farmer and category of stock, so they are far from being fully coupled. They may be said to be quasi-coupled.

The area payments under the REPS are probably more decoupled, as there is no direct incentive to expand production; indeed there may be an incentive to extensify production thereby becoming negatively coupled. In addition, the payments are restricted to 40 ha per farmer.

The ewe premium is a form of deficiency payment, as the level of premium in any one year is based on the difference between market prices in the previous year and a target price. However, the premium is payable only on a base herd size, and beyond 1000 ewes per farmer in Disadvantaged Areas and 500 ewes per farmer in other areas the premium is reduced by half.

The premia and area aid payments introduced in the MacSharry reforms and extended under Agenda 2000 are also quasi-coupled. They are linked to numbers of stock and area and yield of crops at the levels prevailing before the reforms were introduced. They are not paid on production above that level - or they are decoupled from extra production. They are also decoupled from quality of produce, as there is no quality requirement for payment. Farmers with more than 15.13 hectares of crops must meet the prevailing set-aside requirement, which is a form of negative coupling. Furthermore, all sized farmers can opt for voluntary set-aside and receive payment for the set-aside area greater than if a crop were grown. Under Agenda 2000 this payment is to be the same as for the grown crop (see Table 2.3.). Member States are free to apply a ceiling to voluntary set-aside and thus limit this option.

Duration of Payments: There is a concern among farmers that the direct payments might not be sustained over time. They are more visible to the public than equivalent transfers through higher prices, and as a consequence they are more vulnerable to criticism, especially where the payments per farmer are high as for large cereal farmers.

The appropriate duration of direct payments depends critically on the purpose of these payments. The Commission argued in the MacSharry reforms that the premia and area aid payments would continue into the future as they were part of an exercise to alter the method of farm income support but not its level. As indicated above, agricultural economists would see such payments as facilitating resource adjustment and being phased out over time as the resources in agriculture are either retired or moved to alternative employment.

But alternative employment might not be available for people leaving agriculture. In that situation the loss of employment from trade liberalisation is a permanent one which calls for either permanent compensation or alternative employment creating policies. Given the age structure and relative immobility of EU farmers, a good economic case can be made for continuing the payments for the lifetime of the present generation of farmers but not for their successors. These would have to decide whether or not to enter farming at the lower prices but without compensation.

In so far as the payments are for the provision of public goods, such as maintenance of rural population, rural environment and rural landscape, the payment should be permanent, or at least it should continue for as long as society is willing to pay for such goods. In the final analysis the duration of compensation is a political decision, as is the future of any other policy instrument.

Capping of Payments: Setting a limit to the amount of payments per farmer, now termed modulation, is mainly a question of equity. Under the DAS there is a limit - currently £4,000 - on the total payments that any one farmer can get. Similarly, under the REPS, area payments are limited to 40 hectares. In the case of the ewe premia, which were already in operation before the MacSharry reforms, modulation also applies because beyond 1000 ewes in the Disadvantaged Areas and 500 ewes in other areas the premia are reduced by half.

Capping was proposed by MacSharry in 1991, but the proposals were diluted by the Council of Ministers. An upper limit of 90 head was agreed for the steer beef premium, but no limits were imposed for suckler cows or for cereal/oilseed/protein/ linseed crops. In the Agenda 2000 negotiations the idea was again proposed by the Commission to be again rejected by the Ministers.

2.6. Ireland's Gains from the CAP

Expected benefits from the CAP were perhaps the dominant reason originally for Ireland's desire to join the European Community. These benefits subsequently materialised, though not in as smooth a flow as had been anticipated. Today, in 1999, the benefits still accrue despite the controversial reforms of the CAP over the years, especially the introduction of the superlevy on milk in 1984 and the MacSharry reforms implemented between 1993 and 1995.

The gains and losses from the CAP are usually quantified in terms of budgetary flows. This is an inadequate methodology for a number of reasons. Many of the budgetary flows which are attributed to one country have effects in other countries. For example, expenditure in Ireland on beef intervention and export refunds benefits the EU market as a whole and therefore should be allocated across the EU beef market rather than being entirely credited to Ireland.

In addition to budgetary flows there are also trade flows which are just as real in economic terms as budgetary flows. These arise by virtue of a country, as a member of the EU, being able to export agricultural commodities to other member states and receive the high EU prices rather than having to sell them at world prices if it were not an EU member.

The budget and trade flows for recent years are shown in Table 2.5. The budget flows are calculated by deducting Ireland's estimated contribution to FEOGA from its receipts.

Table 2.5. Benefits of the CAP to Ireland 1995 to 1997, £m

Source: Department of Agriculture and Food, 1997 Annual Review and Outlook for Agriculture and The Food Industry

The Trade flows are calculated by estimating the price gap which exists between the Irish producer price for a commodity and its world market equivalent and applying this gap to the volume of Irish exports and imports to and from other EU countries. In the years shown, the benefits from the combined budgetary and trade effects of the CAP amounted to over £1.7 billion which equates to over 4% of GDP in those years.

The favourable budget balance unfortunately is not going to continue forever. As Ireland's economy grows, its contribution to the EU budget will grow, while at the same time its receipts will diminish. This is already happening in the Structural Funds but will also tend to happen under the CAP in the years ahead.

Consumers are a party to EU transfers as well as producers. High prices under the CAP are a gain to producers but are a loss to consumers. The net gain or loss will depend on the proportion of agricultural output consumed in the country in which it is produced and the proportion exported. In a fairly self-sufficient country like Germany, for example, the loss to consumers approximately offsets the gains to producers, so there is little net effect other than that caused by misallocation of resources. In the case of Ireland where some two-thirds of output is exported, high CAP prices are paid mainly by foreign consumers. For every £1 which an Irish farmer receives under the CAP, some 70 pence comes from foreign consumers while 30 pence has to be paid by Irish consumers. Irish consumers could in theory be compensated, but the national economy would still be a net gainer. Nowadays it is price reductions that are at issue as have already been considered in Section 2.3.

Chapter 3

Market and Policy Prospects

The evolution of agricultural policy in the years ahead will be dominated by further efforts to liberalise agricultural trade. These will build on the foundations already laid in the URTA. Thus the direction of change is clear, but the pace of change is not. Resistance to further liberalisation is very strong, as was evident from the prolonged GATT negotiations leading to the URTA.

Progress will be influenced by the state of global supply/demand balance, as depressed world markets are a major obstacle to trade liberalisation. The markets for Ireland's main commodities have been very weak in 1998, but as presented below there is a reasonable prospect that firmer world markets will prevail early on in the new millennium. Subsidised exports will have diminished under WTO policing; global demand will resume growth if the many high population, low income countries especially in Asia, recover their high rates of economic growth; and expansion of production may be moderated by environmental, health and animal welfare concerns.

Direct payments to farmers will play a crucial role in the process of trade liberalisation. They are the instrument that will reconcile the economic imperative of trade liberalisation with the political imperative of supporting incomes in farming by means which will not unduly distort trade.

In this chapter the prospects for markets at both EU and global levels are first reviewed. The implications of enlargement are then analysed. This is followed by an argument that trade liberalisation will continue into the future despite the strong resistance to it. The next step in that direction is negotiations for a new trade agreement. The implication of this for the CAP, including the future of direct payments, is analysed later on the chapter.

3.1. Market Outlook

At the outset it is important to spell out the assumptions under which these sets of market prospects are presented. In the case of the forecasts for European markets, the principal source used is the study published by the European Commission in late 1998 entitled Prospects for Agricultural Markets 1998-1998. Key assumptions in this analysis are that agricultural policy will remain in its pre-Agenda 2000 form over the forecast period, that a successor to the URTA will not have come into operation and that the existing URTA commitments regarding imports and subsidised exports are fully respected. Consequently, these projections are status quo forecasts and provide a benchmark or baseline against which the impact of changes in policy can be measured.

The forecasts which relate to global markets are based principally on a study by the United States Department of Agriculture (USDA) entitled USDA Agricultural Baseline Projections to 2008, published in February 1999. In this case again no change in the agricultural policy environment is assumed and there are specific assumptions regarding macroeconomic conditions, weather and international developments.

3.1.1. EU Market Outlook

With regard to developments in EU markets, the underlying macroeconomic assumptions are that inflation within the European Union will grow at approximately 2% per annum until 2005, while the projected level of GDP growth will be approximately 3% per annum. Population within the European Union is projected to increase by a total of 2.5% over the forecast period.

In the cereals market, the Commission's analysis is that the period up to the year 2005 is likely to be a difficult one. Increasing area and yields are likely to raise production well over internal consumption and total stocks are likely to increase considerably over the forecast period. Quantities exported are expected to stay strictly within the limits set by the URTA agreement and significant unsubsidised exports are unlikely under expected market and exchange rate conditions.

In the beef sector, the expectation is that consumption will continue its gradual recovery from the BSE shock until 2002, after which time it will return to its long-term declining trend. From 2001 onwards, higher levels of production combined with lower internal and external demand arising from the URTA constraints are likely to affect the beef market balance and lead to an accumulation of stocks by the end of the forecast period.

Pigmeat consumption is expected to show a modest rate of growth of less than 0.5% per annum throughout the forecast period, while production is expected to grow at a slightly higher annual rate of approximately 0.7%. Total exports of pigmeat are expected to reach 1.1 million tonnes in 1999 and will remain at this level for the remainder of the forecast period. By 2005, it is expected that approximately 60% of these exports will be unsubsidised.

In the poultrymeat sector, strong growth of almost 2% per annum in consumption is anticipated until the end of the forecast period, while production is expected to increase at a slightly higher rate. While projected subsidised exports of poultry are roughly in line with the URTA limits, unsubsidised exports have been increasing in recent years. However, this rate of increase is unlikely to continue over the forecast period because of increased competition on world markets from other exporting countries.

For sheepmeat, the expectation is for a slight downward trend in both production and consumption combined with a slight increase in imports in response to improved market access for some countries outside the EU.

In the dairy sector, quotas will remain in place until the end of the forecast period and production is expected to decline slightly by 2005. With regard to dairy products, cheese consumption is expected to grow by about 1% annually, while it is expected that the decrease in subsidised exports due to the URTA commitments can be only partially offset by an increase in unsubsidised exports. It is expected that cheese production will continue to rise, but at a lower rate than that of internal consumption. With regard to butter, the trend in consumption in the recent past has been steadily downward with some stabilisation in the last few years. However, it is expected that a further decline of around 1% per annum will occur between now and 2005 while butter production is also expected to decrease slightly. Imports of butter should remain stable while levels of exports are expected to rise substantially over the period though remaining within the URTA commitments. For skim milk powder, forecasts indicate a further drop in consumption mainly due to reduced animal feed use. Production is projected to decline also, but to a lesser degree than consumption. Imports are expected to increase due to URTA market access commitments, while subsidised exports will be limited.

EU agriculture will continue to operate under the CAP internally and under the URTA externally. The Commission will have to manage the various commodity markets to remain within the constraints of the available budget and the URTA. In general, total production for each commodity cannot exceed what can be sold (i) on EU markets having allowed for imports into those markets and (ii) on Third Country markets with the aid of export refunds. In some limited cases, for example high value added cheese, additional exports are already possible without export refunds. This requires external prices to be equal to or greater than internal prices.

Non-subsidised exports may also be possible with other commodities from time to time as external prices fluctuate. Of course the lower the level of internal prices, the greater the likelihood of this happening. Hence the reduction in prices in the Agenda 2000 agreement improves this prospect. In the case of cereals in particular, the internal price will be lowered so much by 2001 that unsubsidised exports will be possible whenever external prices firm up, which is most likely to happen for milling wheat. For beef, however, even the 20% reduction agreed will still leave internal prices well above any likely external market level.

In addition to the export refund constraint, the CAP budget may also restrict production. Whether this will arise will depend on the demands on the limited budget to fund the increasing level of direct payments, the export refunds and the various other supports that remain under the CAP. The Commission will be carefully monitoring events to avoid any crisis.

In managing the markets the Commission has basically two instruments available, supply control and price. For the main commodities of interest to Ireland, supply control is available as a very effective weapon. In the case of milk, the quota can be readily adjusted, for cereals set-aside can be varied and for beef the premia entitlements can be altered - the most effective option here of calf slaughter not being acceptable to most member states on animal welfare grounds.

Price management is available as an alternative, or as a complement, to supply management. The links between support price levels and market price levels have been greatly weakened over the years, a movement that has widened the scope of the Commission to influence the market outcome. The management of export refunds is particularly effective. Thus, whether beef market prices will fall by 20%, as agreed in Agenda 2000, or by more or less will depend to a large extent on how export refunds are manipulated.

With some luck, neither extra supply control nor further price reductions will need to be invoked in the immediate years ahead, or until a new trade agreement succeeds the URTA. However, there is a price to be paid for this stability. On EU markets the prospects are for static or slowly declining demand for Ireland's main exports, dairy products and beef, and on external markets, where expansion is more likely to occur, the EU's share is increasingly restricted by the limitation on the use of export refunds under the URTA. In these circumstances the EU will continue to lose market share to other exporters who are free to expand. This loss will continue for as long as export refunds are necessary, or for as long as EU prices exceed international trading prices.

3.1.2. Global Market Outlook

According to the USDA forecasts which analyse global market conditions up to 2008, growth in global trade for most agricultural commodities will continue to be sluggish during the next 2 to 3 years due to weakened demand associated with the Asian economic crisis and the drop in effective demand in the key Russian market for the meat trade (USDA, 1999). This is particularly important in the context of developing economies where rising incomes could allow consumers diversify their diets and include more meats and other higher valued food products. For transition economies, growth is expected to remain strongest amongst the countries that are further along the transition path, such as Poland and Hungary. The expectation is that world GDP will grow by about 2.9 per cent annually through to 2008. With regard to world population growth, Africa and the Middle East are projected to have increases of approximately 2.5% per year, while growth rates in Asia and Latin America will be of the order of 1.4% per year. Population growth in developed and transition economies is expected to be less than 0.5% per annum over the same period.

In the longer term, commodity trade overall is projected to strengthen, with trade volume for most commodities expanding faster than in the 1980s and 1990s. Projected growth is driven by the anticipated recovery of the Asian economies within three to four years. Rising per capita consumption of meat, feed, wheat and vegetable oils driven by higher incomes and urbanisation across developing countries are the key sources of the strong projected growth. Future developments in China and the former Soviet Union are among the key uncertainties in the outlook.

World commodity prices are expected to remain depressed in the near term because of weakened global demand and increased competition. Prices are projected to strengthen over the medium term, as supplies adjust and a recovery in Asian demand is added to steady growth in other regions.

In the cereals sector, demand is expected to grow robustly over the next decade at a faster rate than in the 1980s and 1990s, despite a slowdown in the early years after 2000. Developing regions, especially China, Latin America, North Africa and the Middle East, are expected to lead world growth in feed grain demand over the next decade. With regard to supply, world production of both milling wheat and coarse grains is forecast to increase substantially. Most of the growth in production will be generated from higher yields, since area is not expected to expand significantly. Prices for both wheat and coarse grains are projected to reach a low point in 1999/2000 after which a gradual rise is anticipated until the end of the forecast period.

World beef production is forecast to increase by approximately 1.3% per annum over the forecast period. Much of this increase will occur in the non-OECD zone, led by China and Brazil. Global beef consumption is expected to rise gradually in relation to income growth. In most developed countries, beef demand is expected to stagnate, as consumers continue to substitute pigmeat and poultry meat for beef. This development is likely to be particularly pronounced in the USA. Most of the increased beef demand is likely to come from the Asian economies. Growth in demand is likely to outpace that of production in a number of countries, leading to increased trade. Strong import prospects, coupled with limited growth in beef production, especially in some OECD countries, will result in rising beef prices over the medium to long term.

The medium and long-term outlook for pig meat is characterised by a renewed increase in world production, consumption and trade. Yet prices for pigmeat are expected to remain rather stable or even to decline in the medium term, reflecting increased competition from poultrymeat and sustained productivity growth.

The outlook for poultrymeat is the most favourable of the main types of meat, with prices expected to remain firm over the medium term, supported by strong demand.

With regard to the dairy sector, milk production is set to expand in a number of countries mainly outside the OECD area, and international trade should be stimulated from increasing demand for most dairy products. Dairy prices on world markets are predicted to be above the levels experienced in the early 1990s. These relatively optimistic price forecasts are explained by growing import demand and lower subsidised exports from some of the main players on world markets. The likely impact from both factors is expected to be tempered by the rising world milk production.

3.2. Enlargement

After the Agenda 2000 negotiations, there are two further milestones confronting agriculture, namely enlargement towards Central Europe and the Millennium Trade Round. Enlargement is considered in this section to be followed in the next section by the new trade round.

Early on, agreement was reached for associate membership between the EU and most of the Central European countries. Now negotiations are under way for full membership with six countries, namely, Poland, Hungary, the Czech Republic, Slovenia, Estonia and Cyprus. Negotiations with a further four applicants - Bulgaria, Latvia, Lithuania and Romania - follow later.

These 10 countries have a population of 105 million and have more employed in agriculture than the EU-15. They will increase the arable area of the EU by 42 million hectares or by 55%. All except Poland have inherited a conglomerate style of agricultural structure, with huge farms by Western European standards and often embracing upstream and downstream activities within the agriculture unit. This is in sharp contrast to the small family farms structure in the present EU. They are also very poor relative to existing EU members, at an average of about a quarter of EU living standards (Buckwell 1994, Tangermann 1994 and CEC 1995).

There are obvious threats from enlargement for existing member states relating to competition for market share and increased demands on the FEOGA budget. These could be cushioned by delaying the date of accession: the Irish Farmers' Association advocates a 10 year period of negotiation and a further 10 year transition period. Such a protracted outcome is unlikely, as there is a general expectation that some if not all of the six countries now negotiating membership will be full members by 2005.

In any case the threats have receded for a number of reasons. Production in those countries will be subject to supply control for as long as supply control applies in the EU - which will be at least until after 2006. Therefore, they will not be able to expand to increase market share even if it will be profitable for them to do so. Furthermore, their production has been so disrupted by their transition from the Communist command economies to market economies that it will take them some years to fully recover; this is especially the case in livestock production which is the main concern for Ireland. In the long-term, competition from these countries could intensify depending on whether or not their scale advantages and their dependence on hired labour will outweigh the advantages of the smaller family farms of the present EU.

The level of prices prevailing is one of the important factors influencing production. Most of the applicant countries allowed prices to fall more or less to international trading levels in the early years of transition, thus creating a very large gap with EU price levels. Over time mounting pressure from their fledgling farming organisations is forcing up their price levels, while EU prices have been falling under CAP reform. So by the time of accession there will no longer be large price gaps to be bridged.

The threat to the budget has also diminished as the required provision is already built into the Agenda 2000 package of reforms. The cost of enlargement at €45 billion is only a fraction of some wild estimates made earlier on. To a considerable degree this is due to the EU decision not to extend to these countries the premia and area aid paid to present EU farmers. The applicant countries are fighting this decision, but their bargaining position is weak. However, the creation of a two-tier CAP will cause problems after accession.

3.3. The Millennium Trade Round

Despite the modest steps to lower protection in recent years under the URTA and the MacSharry and Agenda 2000 reforms of the CAP, there is still considerable resistance by most farming organisations in the EU to any further trade liberalisation. This is understandable because they know that the closer they are pushed to free trade the lower the average level of prices will be and the greater the degree of price instability. One of their hopes, on the basis of recent USA experience, is that the USA leadership of trade liberalising countries will be weaker than in the Uruguay Round.

The USA in 1996 enacted a new agricultural policy in their arable sector which is much more radical than the CAP reforms. The new policy, christened Freedom to Farm, eliminated set-aside and reduced the accompanying deficiency payments support to safety net levels. These were replaced by fully decoupled direct payments which are being phased out over a six-year period.

These reforms left USA farmers totally exposed to world prices which happened to fall sharply in 1998 causing a corresponding drop in incomes. The Congress in response introduced a set of emergency measures valued at $6 billion. Over half of this went to increase the new decoupled payments by 50% and most of the rest was for crop disaster relief. USA spokespersons argue that this was a once off event and that the phase out of the decoupled payments will continue. But the emergency action in 1998 raises doubts about USA credibility as they face into the next trade round.

3.3.1. Criticisms of Protection

The very substantial gains to Ireland from the CAP are described in Section 2.6. Because Ireland's gains are so great, any reforms of the CAP are a threat. If Ireland could choose the CAP for the EU, the approach almost certainly would be one of continuing high protection of the EU market with supply control being more strictly implemented to contain EU production within available markets. Those markets would be increasingly confined to the internal market, as exports without subsidies would not be possible and other exporters would force the EU to limit the extent of export refunds. This approach has been termed a Fortress Europe stance.

But of course Ireland, which accounts for only 1% of the EU economy, cannot dictate to the EU. Its role is largely reactive rather than proactive with the aim being to minimise the damage from the recurring reforms. Therefore, it is important to understand the forces of change that are at work, even though one may not agree with them. These are outlined below.

The URTA succeeded in reversing the tide of ever growing protection which had prevailed since the 1930s. This U-turn in global agricultural trade policy was not a mere coincidence. Rather it was a reflection of changing economic and political circumstances which are undermining the traditional political motives for protection. These motives have varied over time and by country, but generally they can be reduced to the following three concerns:

1.Supporting farmers' incomes;

2.Promoting agricultural growth and food security; and

3.Preserving rural society.

The need to support the incomes of poor farmers is not being challenged. Criticism relates to the attempt to do this indirectly by protecting agriculture from competition rather than by the universal practice outside of agriculture for dealing with poverty, namely, direct income payments.

Supporting the income of farmers by maintaining high prices behind agricultural protection is not a very effective approach. It is estimated that under the CAP only about one-third of all transfers to agriculture from consumers and taxpayers combined goes to increase farmers' income. The remainder accrues to upstream/downstream industries, or goes to pay for extra resources employed in farming in response to the high protection, or is offset by depressed world prices brought about by increased dumping of surplus production.

Furthermore, maintaining high prices is inequitable in that it benefits producers in proportion to their turnover. The MacSharry emphasis in 1992 on 80% of supports going to 20% of farmers is still widely remembered. This inequity is becoming more evident as farms grow larger, and as price supports are being replaced by more visible direct payments. The concentration of production is also undermining the key political concept of the family farm which has had a powerful influence in sustaining public support for agriculture. There can be little doubt that if agricultural policy, instead of being inherited, had to be constructed today to deal with the problems of the industry, it would be a policy of direct income support for those farmers deemed to be in need of it, accompanied by low prices either at or near free trade levels.

In addition to the ineffectiveness and inequity of high price policies, critics also emphasise the waste of such policies in the form of excessive surpluses they generate. But a wealthy world that afforded the arms race can quite readily afford the cost of food surpluses if that was all that was involved. In rich countries the farmers' share of the consumers' pound spent on all goods and services has declined from around 30 pence at the turn of the century to a mere 3 pence today. Consequently, a relatively large increase in the efficiency of farming would not be of major significance to the well-being of society. The immorality of surplus production is a greater public concern than its cost. The public is being alienated by the focus on excessive food stockpiles, which are made to appear all the more incongruous when juxtaposed with pictures of famine.

Given these stockpiles the arguments for agricultural growth have lost any validity they had in the past. These arguments have had an economic dimension and a food security dimension. In a developing economy agricultural growth can make a valuable economic contribution provided it is not being achieved at excessive high prices. In developed countries agricultural growth can also benefit individual farmers or a group of farmers, such as Irish farmers within the EU. The strategic argument for food security was a compelling one in the warring world before and after World War II. As memories of such wars recede its appeal has diminished, and the disintegration of the USSR has consolidated this view. Food security today is an important issue for poor countries, but it is hardly a tenable case for agricultural protection in rich countries.

If the income and growth props of agricultural protection are being eroded, perhaps the socio-political concern to preserve rural society will survive - and suffice. Certainly up to this point the political influence of farmers around the world is showing remarkable durability. While farm populations continue to decline, the geographic dispersal of the farmer vote and the special arrangements which exist in some important countries to favour that vote, have enabled farmers to retain disproportionate power. Of the three major trading blocks today - the EU, the USA and Japan - only in the EU are there no special arrangements in favour of farmers in the voting system. The USA has its two Senators per State regardless of the State's population, and the Japanese have a gerrymander of obsolete constituency boundaries which give much more representation per rural vote than per urban vote. For these reasons among others the diminution of public support for protection is gradual.

Agreement to reopen negotiations on another trade round was part of the URTA. These negotiations, already christened the Millennium Round, will begin formally towards the end of 1999 and will extend the progress already made under URTA.

As the Commission sees it:

“The Uruguay Round Trade Agreement which is now being implemented foresees new negotiations to start in 1999. It is of course, still too early for any reliable forecast of how the international debate will develop, but it can be expected to broadly follow the lines of the Uruguay Round: “further reductions of support, increase of market access (e.g. through further reductions of tariffs and tariff equivalents), and further reductions of export subsidies and subsidised export quantities, are certainly subjects that will appear on the agenda” (CEC, 1995, p.14)

While the URTA is not having major short-term effects, as seen in Section 2.4, its real significance is that it has put in place a foundation which will be built upon in future trade agreements. The challenge with the crystal ball then is to judge the degree to which each of the three dimensions of the URTA - domestic support, market access and export subsidies - will have to be further modified. The line up in the negotiations can be readily anticipated. The trade liberalisers will again be mainly the USA and the Cairns group of countries. They will be seeking an accelerated movement towards free trade. The EU will enter the talks on the basis of the CAP reforms already agreed and will undoubtedly wish to slow down the liberalisation process.

At the same time the EU will have to contain its surpluses within the URTA limits. Given the various pressures, commitments under the URTA will probably have to be extended to meet the demands of the EU's trading competitors and the scope of the CAP budget. The actual situation will vary by commodity and by each of the three headings of the URTA. Each heading is examined in turn to illustrate the issues involved.

3.3.2. Domestic Support

As outlined in Section 2.4, the AMS for the EU in the base period 1986-1986 was €81.0 billion and this had to be reduced to €67.2 billion by 2000. The level after the MacSharry reforms was some €47.5 billion, excluding about €31 billion of direct payments placed in the blue box. The Agenda 2000 reforms will further reduce the EU AMS through the reductions in support prices involved. The value will have fallen to less than €40 billion in 2002/03 and will fall further in later years as the dairy support prices are reduced. Therefore, any reduction in the next trade round would have to exceed €27 billion before further lowering in support prices would be necessary. An annual rate of reduction more than double that in the URTA would be feasible on the basis of the reforms already agreed. However, this conclusion is entirely based on the EU direct payments continuing in the blue box, a prospect which is considered in Section 3.4. below. Furthermore, there will be demands to break up the AMS into commodity specific components.

3.3.3. Market Access

The tariffication of trade barriers under the URTA and their reduction over time was explained in Section 2.4. It is pointed out there that the agreed reductions are unlikely to permit much increased trade because the reduced tariffs are still extremely high. Further reductions in a new trade round could allow imports in depending on the size of the reduction, the level of world prices prevailing and the level of EU support prices. The situation is illustrated in Figure 3.1 where P_EU represents the EU Price, P_W is the typically lower Third Country price and P_I is the import price resulting from adding the tariff to P_W.

Figure 3.1. Market access in a new trade agreement

The level of protection is measured as the distance between P_I and P_EU, and in the position shown the EU market is well protected from imports. If, however, the tariff is reduced to the distance between P_W and P_EU, while P_EU and P_W remain unchanged, then protection is eliminated and imports become possible. If on the other hand P_EU is reduced, as in the case of beef, cereals and milk in Agenda 2000, ceteris paribus, the protection of the EU market is increased. If P_W were to rise, ceteris paribus, protection would also be increased. The actual outcome therefore depends of the interplay of the three price levels. For any given level of tariff, low world prices and/or high EU prices would tend to facilitate imports. The reduction in support prices under Agenda 2000 will therefore help to secure the internal market for the commodities involved. Any further reduction in tariffs will of course have the opposite effect.

As tariffs fall, internal prices will begin to be influenced by world prices. Since world prices fluctuate widely over time, declining tariffs will provide effective protection in times of high world prices but will undermine internal prices in periods of low world prices. This exposure to price fluctuations will become a serious issue for EU farmers in the years ahead, as tariffs are progressively reduced. A Safety Clause is included in the URTA, under which additional duties may be imposed if either the volume of imports or the price of imports exceed defined levels. But this will protect against extreme fluctuations only.

The USA and Canada have operated insurance schemes for their crops to deal with this instability problem. In the Irish and European context perhaps the best insurance in the years ahead will be the availability of direct payments and of off-farm income. These tend to be stable from year to year and thereby dilute the variation in farm incomes. Even already the average farm household in Ireland receives about half of its Household Income from off-farm sources, while a further half of the farming income comes from direct payments, as seen in Section 1.1.4. Therefore, only one-quarter of the Household Income comes from the market place and is subject to fluctuation.

The other aspect of market access described in Section 2.4 is the minimum access requirement. Whether this will be retained in the next trade round is not clear. Its raison d'etre will recede as tariff reductions progress; in the case of dairy products, for example, a linear projection of URTA tariff reductions into the future would quickly make it redundant. In other words, increased access to domestic markets would follow from reduced tariffs with or without specified minimum rates of access.

3.3.4. Export Subsidies

The provocative nature of EU and to a lesser extent USA export subsidies for other agricultural exporters is emphasised in Section 2.4. Because of this the remaining export subsidies are certain to be targeted in the Millennium Round. It will be difficult for the EU to defend the practice, even though EU farmers - and Irish farmers in particular - are dependent on it to maintain internal prices.

The limit on EU production of each commodity is now defined as domestic consumption minus imports plus subsidised export plus feasible unsubsidised exports. If the EU is compelled to further reduce the quantities that can be exported with subsidies, it will have to either intensify supply control or reduce internal prices sufficiently to be able to export without subsidies. This was one of the important motives for the Agenda 2000 reforms, but even with that agreement in place, export refunds will still be required for most commodities most of the time. In terms of Figure 3.1, export refunds will be necessary whenever P_EU exceeds P_w.

3.3.5. Shrinking Market Share

For as long as EU exports require export refunds, Third Country market share must fall, as other exporters are free to expand while the EU must contract to remain within its market limits. This process is already well in train. Between 1990 and 1998 the EU shares of the global markets fell as follows: for beef from 18% to 12%, for butter from 32% to 22%, for skim milk powder from 35% to 18%, and for cheese from 51% to 39% (Irish Dairy Board, personal communication).

The continuing EU decline in market share is currently camouflaged by the crisis in international agricultural markets, but it will resume its downward trend when market growth resumes. Furthermore, any concessions made in the Millennium Round regarding market access will cause the EU share of EU markets to shrink as well as shares of Third Country markets.

3.4. The Future of Direct Payments

The rationale for direct payments was explained in Section 2.5 and their future is considered here. That future will be framed in the context of the European Model of Agriculture as promoted by the Commission in Agenda 2000, and subsequently supported by the EU Heads of State. To quote the Explanatory Memorandum of Agenda 2000:

“This (the European Model) is not the same model as pursued by our major competitors elsewhere. There are many differences between ours and theirs. Seeking to be competitive should not be confused with blindly following the dictates of a market that is far from perfect. The European model is designed to safeguard the earnings of farmers, above all keeping them stable, using the machinery of the market organisations and compensatory payments.

The fundamental difference between the European model and that of our major competitors lies in the multifunctional nature of Europe's agriculture and the part it plays in the economy and the environment, in society and in preserving the landscape, whence the need to maintain farming throughout Europe and to safeguard farmers' incomes”.

The general economic requirement which reconciles direct payments with trade liberalisation is that such payments be decoupled from current production or even be negatively coupled. Until the latter stages of the Uruguay Round negotiations, the only subsidies to be exempted from WTO discipline were categories of government expenditure not directly encouraging production, including research, training and extension, pest and disease control, marketing and promotion, crop insurance programmes, resource retirement programmes and infrastructure services.

3.4.1. The Extent of Present Coupling

The basis for exempting the EU direct payments is that they are associated with production limiting programmes and are therefore partially decoupled. The extent of decoupling for each of the four main categories of payments - DAS payments, REPS payments, ewe premia, beef premia and area aid payments - is considered in detail in Section 2.5.

The Agenda 2000 decisions provide a somewhat greater degree of decoupling in a few ways. DAS payments, which are now paid on a headage basis are to be converted to area payments, presumably leaving farmers greater freedom to produce what they wish without affecting entitlements. The phasing in over the next three years of a common rate of payment as between cereal/oilseed/linseed crops will reduce distortion caused by the current differentiated payments shown in Table 2.3. The area payments for set-aside land will be reduced from their present level to equal the payment for a grown crop. While this will make voluntary set-aside less attractive, the overall reduction in support prices should operate in the opposite direction.

Supply control remains in place to complement lower prices in reducing market imbalance. In the case of milk, quotas are to continue until 2008 with an increase in the Irish quota of some 3% to be implemented in 2000/01 and 2001/02. A decision on the continuation or termination of the milk quota beyond 2008 has been postponed to an interim review which the Commission will undertake in 2003 “with the aim of allowing the present quota arrangements to run out after 2006”.

In the case of beef there are several elements which will tend to reduce production, though by how much is impossible to say. The base herd for premia entitlement is to be reduced by nearly 5%, while the dairy herd will continue to shrink under the influence of the milk quota. The age of the second payment of the steer premium will be reduced from 22 months to 21 months, and this should lower carcass weights to some degree. The lower price levels agreed will tend to reduce the number of animals being retained in excess of the premia entitlements. Also the inclusion of heifers as part of the suckler herd qualifying for premia will substitute some maiden heifers for cows which would have produced calves. The incentives for extensification have been increased and this should further reduce production.

Supply control for crops will continue, with compulsory set-aside at 10%. In addition, the sharp price reduction for crops may push more land into voluntary set-aside.

Increased emphasis on cross compliance in the production of public goods, the details of which have yet to be announced, should also reduce output.

The EU has a good case for the retention of the present blue box arrangement. While there is a degree of coupling involved which encourages production, there is also strong negative coupling which, as outlined in Section 2.5, discourages production. The issue in trade negotiations then should be a pragmatic one as to whether the supply effect of the negative coupling outweighs the supply effect of the positive coupling. A definitive answer to this question would require elaborate modelling of EU agricultural supply response, a study which has not been done. On the demand side there is no argument as the reductions in commodity prices encourage consumption and thereby reduce trade distortion.

3.4.2. Full Decoupling

In contrast to the pragmatic approach of the EU, other countries persist with a doctrinaire view. This ignores the fact that full coupling is not an absolute state but rather a question of degree. What is called “full” decoupling probably still encourages some expansion by virtue of the availability of the direct payments to fund investment. Furthermore, research and development is exempt from censure, even though they are very powerful sources of expansion. Other vital inputs are also exempt, such as irrigation which is usually heavily subsidised.

Yet, international pressure for fuller decoupling will continue and grow. Those in favour of trade liberalisation within the EU will align themselves with like-minded external interests in this pursuit. The prospective enlargement of the EU will support their cause, because the continuation of the present form of payments in the EU in the absence of such payments in the new members would greatly distort competition.

The EU will be very reluctant to further decouple payments. Full decoupling of the USA type described in Section 3.3 above, would be a radical initiative in EU agricultural policy. It could have serious implications for the volume of production, as farmers would no longer be required to produce to qualify for payments. Some farmers who are efficient enough would probably still expand in these circumstances, while the less efficient would contract. The net effect would be a worry for upstream and downstream industries, the activities of which would have to adjust accordingly. Of course cutbacks in production should be welcomed by the EU as a contribution to reducing surpluses, which have a low or even negative marginal value for the EU. >From the Irish perspective, however, such marginal production still has substantial national value, because the cost of disposing of it is funded largely by other member states.

The coupling of payments with production would not be so important an issue if the payments were being rapidly phased out. A phasing out over six years as in the current USA legislation would be politically impossible in the EU. There could, however, be some movement towards phasing down the payments. This was raised in the Agenda 2000 negotiations under the label of degressivity. The Commission argued that these reductions were warranted as they could be offset by productivity gains over time, as resources - including labour - adjusted to the changing economic environment.

There would also be a very important political consideration with full decoupling in that it would expose the direct payments to growing criticism as to their purpose. Once decoupled from production, the rationale for such payments would have to be either for the production of public goods or as an income supplement. In both cases the payment of large sums to large farmers would be difficult to justify to EU taxpayers, and capping of payments per farmer - now known as modulation - would be fostered after its rejection in both the MacSharry and Agenda 2000 negotiations.

Furthermore, the case for central EU funding would be weakened, and the threat of renationalisation increased. >From the beginning of the CAP common financing has been reserved for price support policy under the Guarantee part of the budget. This was extended to embrace the MacSharry and Agenda 2000 premia/area aid payments which are seen as a substitute for price support. Co-financing is used for schemes under the Guidance part of the budget, such as investment grants to farmers and to the food processing industry and headage payments under the DAS. The Commission has striven to limit national aids under the Rome Treaty articles on competition to “aid to facilitate the development of certain economic activities or of certain economic areas where such aid does not adversely affect trading conditions to an extent contrary to the common interest” (Art. 92,3(c)). Despite this there are many actions to-day which are fully funded by national governments including research and advisory services, marketing etc.

In the beginning then the boundaries between fully community funded activity, co-funded activity and fully nationally funded activity were fairly clearly defined. But over the years, some member states wished to extend their national support. The insistence of the West German government on compensating its farmers for monetary losses as the Deutsch Mark revalued is an important example. As early as 1984 one agricultural economist was driven to write about “gradual renationalisation of the CAP” (Bublot, 1984).

In recent years the monetary levies have finally been abolished in the Single Market, but provision continued at German insistence for co-funded transitional compensatory payment after revaluation. Member states continue to pursue national initiatives, while at the same time the Commission itself has relaxed its vigilance. In Regulation 2078/92, environmental aid is allowed with no pre-set limits on the amount that can be paid by national governments. This opens the way for member states who wish to do so to top-up EU subsidies according to national objectives, even if this should affect competitive positions. Already under this Regulation, France has been permitted to pay aids on grassland and Austria, Sweden and Finland, have received wide scope in their Accession Treaties for national supplementation of EU policies (Wilkinson, 1994).

In the MacSharry reforms the premia/area aid are common funded and that is to continue under the Agenda 2000 agreement. However, the Accompanying Measures are co-funded. Co-funding of the premia/area aid payments was proposed by the German presidency in the Agenda 2000 negotiations, but it was not accepted.

For as long as the payments are seen as substitutes for price support, common financing remains logical. But if these payments are further decoupled, then the debate on the source of financing will be reopened. Indeed, that debate is already long under way as, for example, in Chapter 5 and 6 of Anderson et al (1994). It is argued there that if the purpose of direct paymentss is a national objective to produce public goods or to supplement low incomes, their funding should be from national sources, as in the case of public goods and social welfare expenditure generally. The principle of subsidiarity is invoked to support this reasoning, as is the argument for better targeting of agricultural expenditure. It would be very difficult for countries like Ireland seeking to maintain EU funding to counter these arguments.

3.4.3. Area Payments as a Compromise

A possible compromise would be the conversion of all direct payments into area payments linked to land but not proportionate to current production. Such area payments would not be fully decoupled, as they would retain some land in production which would otherwise be withdrawn. Of the various direct payments now in use those under the REPS are closest to meeting these decoupling criteria.

The area aid payments for crops are also land linked, but farmers are required to grow crops to qualify for the payments - except on set-aside land. These could be further decoupled by making the payments on historic production regardless of current production. The DAS payments are to be changed from headage to area payments, as agreed in the Agenda 2000 package. The extent of linkage to current production on the new arrangement is not yet known. The beef premia are on a headage basis. They would have to be transformed to land based payments and again decoupled from current production. The same would apply to the ewe premia.

Area payments appeal to those farmers who feel they are not adequately benefiting from headage payments. Advocates of change in Ireland include heifer producers where no payment applies, and male store cattle finishers who may receive no direct payment if the premia are already drawn on the cattle they purchase.

The grievance of the heifer producers will be lessened when the Agenda 2000 decisions are implemented, because heifers will then be eligible for the new slaughter premium and they can also be included as suckler cows up to 20% of the herd.

The grievance of the male store cattle finishers is questionable because the headage premia, at whatever stage in production they are actually paid, should be transmitted through competitive markets to all male cattle producers. In other words, male store cattle on which the premia have been drawn should trade more cheaply than equivalent animals entitled to the premia. Such transmission also means that beef farmers in general experience some leakage of the premia to dairy farmers, in so far as dairy calf prices are bid up in anticipation of the premia. Switching to area payments would stem this leakage.

Area payments also have attractions from the administrative point of view. Once the system was established it would be much easier to police than the procedures now required to identify animals and crops for payment. Furthermore, area payments are appropriate for compensating for disadvantage and for promoting better environmental and landscape management. The transformed ewe premia and beef premia could be pooled with area aid, the DAS payments and the REPS payments to form a comprehensive area payment where the level would be differentiated according to degree of disadvantage and the provision of public goods.

The major argument, from the Irish perspective, against switching to area payments is the risk that the country might not maintain the national take it achieves under the current headage system. Whether or not Ireland would lose in a change to area payments would depend on the manner in which that change took place. Technically it is possible to make the transformation with little or no redistribution among either farmers or member states, but the threat to the Irish take would remain.

Chapter 4

Competitiveness of Irish Agriculture

The Agenda 2000 negotiations led to a satisfactory outcome for Irish farmers as analysed in Section 2.3. This will be the economic framework for agricultural development in the immediate years ahead. It will be the opening position of the EU in the new trade round negotiations to begin next November. It will also be the basis for the on-going enlargement negotiations.

The future of Irish farming will be largely determined by these EU level events, but there will also be important influences at the Irish level. In particular, the ability of the Irish economy to maintain rapid economic growth will be a decisive factor. Furthermore, the competitiveness of Irish agriculture in an increasingly open world will be largely a national responsibility.

These topics are explored in Chapter 4, with particular reference to the policies that Irish governments can pursue to maximise the economic potential of Irish agriculture in a sustainable manner, while maintaining rural viability and the optimum number of family farms.

4.1. The Celtic Tiger and Agriculture

No account of the trading environment for Irish agriculture in the decade ahead would be complete without reference to the extraordinary growth achievements in the economy in recent years. A benign confluence of key variables has produced annual average GNP growth of 6.0 to 6.5% since 1990, which is far above that of Ireland's trading partners. The main variables have been identified in the Fitzgerald et al Report from the ESRI as:

(i)Demographic trends which led to increasing numbers in the population of working age, falling dependency rates, rising female participation rates, and significant net immigration;

(ii)Industrial policy which successfully used low tax rates, along with other inducements, to attract multinational investment to Ireland;

(iii)Moderate wage/income increases affording a very significant increase in profits and underpinning strong competitiveness; and

(iv)The influx of EU Structural and Agricultural funds.

(Fitzgerald et al, 1999)

Turning to the future the ESRI team identify a number of obstacles to continued rapid growth. They state that “in particular there is a risk that rising expectations and the problems of congestion may have an adverse effect on competitiveness and ultimately on employment and growth” (p.65).

Assuming that an adequate public investment programme in infrastructure is undertaken, they project as their best estimate an annual growth rate in GNP of 5.1% for 2000 to 2005 and 4.3% from 2005 to 2010. While these growth rates are less than the experience of the 1990s, they are still much higher than is expected in any other EU member state. If attained, this growth rate would provide a continuing strong demand for labour, at 2% per annum in the first half of the next decade and 1.5% per annum in the second half. The phasing down of Structural Funds from the EU is built into the assumptions of this analysis.

The links between growth in the macro-economy and agriculture arise both on the demand and supply sides of agriculture. Demand for food is increasing from rising purchasing power and growing population, but the link between purchasing power and demand is weak in a relatively high income country like Ireland; in technical terms the income elasticity of demand is low for the commodities which dominate agricultural output. Yet the high rates of economic growth projected, along with population growth of up to 1% per annum depending on the extent of immigration, should boost domestic demand for dairy products and meats by some 2% per annum. Even this increase would still not be significant for Ireland's main commodities, beef and milk, because so much of these are sold on export markets - nine-tenths of beef output and two-thirds of dairy output. The areas that will benefit significantly from a buoyant economy are the value added sectors, convenience foods and eating out. But most of the extra demand involved here accrues to manufacturing and services rather than to farming.

The most important links between a dynamic economy and agriculture are through the factor markets - labour, land and capital - rather than through product markets as described above. The strong demand for labour in the Irish economy is now very clear. The increased demand is being met by the demographic trends outlined above. There is also probably a siphoning of labour from farming into other occupations or into higher education. The evidence for this at this point in time is mainly hearsay, as agricultural employment statistics of June, 1998 do not show any acceleration of outflow. However, a 1998 survey of 400 farmers in Co. Meath reported six in ten experiencing problems in hiring labour; half cited their inability to compete with off-farm employment as the problem (Rural Development Unit, 1999). The scarcity is most acute for dairy farmers, machinery contractors and fruit and vegetable growers. The much publicised fall in applications for Agricultural College places is also significant as is the arrival of robotic milking machines in Ireland.

The Push/Pull model of labour adjustment states that the rate of outflow of labour from agriculture is influenced by push forces, such as low incomes and/or poor social conditions in farm work, and by pull forces of better wages and conditions in other forms of employment. There has never been as strong an alignment of these forces in favour of non-farm employment, as has existed in the past few years and is likely to continue for some years ahead, if the ESRI projections are realised. This will have profound implications for the future of Irish farming which will be developed in Sections 5.2 and 5.3 below.

Land markets are also affected by rapid economic growth. There is the direct effect of land being sold for development at prices reflecting the strong demand for that purpose. Often the proceeds of such sales are used to purchase replacement agricultural land, thereby indirectly pushing up the price of agricultural land. Demand for agricultural land is also boosted by non-farmers whose incomes are increasing rapidly and who see land as a good investment for residential and agricultural purposes. These effects are especially large in the very thin land market prevailing in Ireland.

The increase in land prices recorded in recent years is shown in Table 4.1. Land prices have risen sharply - by 59% between 1995 and 1998. It would have been expected that the weather and income difficulties in farming over the past few years and the uncertainties in the run-up to the Agenda 2000 decisions would have dampened down prices, but no such effect is evident. The acceleration in price increases in recent years points to further increases in the immediate years ahead. In the longer run the treatment of direct payments will be critical. Full decoupling of these payments would have a strong deflationary effect on land prices, whereas a continuation of the present degree of coupling, or even a swing to area based payments as discussed in Section 3.4.3, would have little effect.

Table 4.1. Average annual price of agricultural land, 1990 to 1998

Source: CSO Statistical Bulletin, various issues.

Finally, we turn to the third factor of production after labour and land, namely, capital. Capital for investment in farming including land purchase comes from sale of other assets, accumulated savings, grants or borrowing. The impact of selling land for development has been treated above. Savings are a function of incomes, and in general farm incomes should hold their present value in the immediate years ahead while non-farm incomes of farmers will grow. Grants have been curtailed in recent years, yet grants for farm buildings accounted for nearly 25% of construction output between 1994 and 1998 (Gahan, 1999). Given the cutback in Structural Funds discussed in Section 5.4, the percentage contribution is likely to be less in the future. On the other hand, the outlook for low interest rates provides a positive incentive for farming as for all other businesses.

4.2. Competitiveness

The competitiveness of Irish agriculture will become an important issue whenever EU agriculture emerges from its present supply control regime. Unfortunately, as many commentators have pointed out, the concept of competitiveness is not easily amenable to measurement given the multi-faceted nature of the term and the lack of consensus in the literature in relation to its definition. However, there is general agreement that the essence of competitiveness is the ability to profitably maintain or increase market share. If countries, sectors or individual producers can do this, then they are competitive. If they cannot, they will not survive in the long run (Kelly et al, 1998).

Analysis of agricultural competitiveness is complicated by the fact that it is just one of a number of agricultural policy goals, many of which are potentially conflicting. This dilemma was explicitly articulated in a recent NESC report which pointed out that “…the wish to maintain a particular farm structure and standards of production in relation to inputs, environment, quality and animal welfare …may inhibit the further attainment of competitiveness in production.” (NESC, 1996)

4.2.1. The Degree of Agricultural Competitiveness

In this analysis, Irish agriculture's competitive position is examined on the basis of a range of indicators related to output growth, productivity, prices and costs. With regard to output growth, data in Table 1.11 show that the average rate of increase over the last two decades was almost 1.8% per annum. This is significantly higher than that of our European competitors. However, this growth has been highly input-intensive (Matthews and O'Connor, 1998). With regard to productivity indicators, Ireland's performance is quite mixed, with comparative studies showing that Irish milk yields are consistently lower than elsewhere in the EU, while crop yields are consistently higher. Beef performance is difficult to compare because of substantial differences in beef production systems across countries. Studies also show that Irish agriculture has a relatively low labour productivity compared to the EU average, although the gap has been closing in recent years due to the faster rate of increase in this country.

Price comparisons with our European competitors also yield unfavourable results, partly because of distance from export markets but mainly because of poorer quality. Recent data relating to milk prices shows the Irish price as the second lowest of 10 member states at 100.6 pence per gallon in contrast to the highest priced milk in Italy of 129.5 pence per gallon (ZMP statistics as reported in the Irish Farmers' Journal 19/’6/’99). Similar differentials exist in the cases of beef and lamb.

While costs of production are a key determinant of competitiveness, their measurement raises serious problems relating to data availability, methodology and interpretation. First, there are few sources of harmonised data which can be used for international comparisons. Second, given that most commodities are produced on multi-product farms, there may be problems in allocating costs across a number of enterprises. Third, production may be reliant to varying degrees on family-owned labour, land and capital. Because these resources have no explicit market price, an opportunity cost must be imputed to them which is an arbitrary exercise. Sometimes, only those costs which have explicit market prices are analysed, but for long run analysis, which is the analysis which matters, all costs must be included.

This problem can be illustrated with respect to a number of studies on the cost competitiveness of Irish agriculture, the results of which are summarised in Tables 4.2 to 4.4 below (Boyle 1992, 1998, Connolly 1997, Kelly et al 1998).

In Boyle's 1998 study on comparative production costs for a number of commodities, the analysis is conducted on the basis of both cash costs and economic costs. Cash costs are those enumerated for farm accounts purposes and include variable costs, overhead costs, interest charges and depreciation. Economic costs include these cash costs plus imputed costs for owned land, family labour and owned capital. The results in Table 4.2 show that, on the basis of cash costs alone, Ireland has the lowest milk production costs among the EU countries shown. When imputed costs are included, however, the ranking among the EU countries changes to make Ireland marginally less competitive than France, the U.K. and the Netherlands.

When comparisons are made with selected non-EU producers on the basis of cash costs, Ireland emerges as more competitive than the USA or Canada but less so than either Australia or New Zealand. When imputed costs are included, Ireland remains marginally more competitive than Canada but less so than the USA. No equivalent comparisons were made for Australia and New Zealand because of data unavailability.

In relation to cereal costs, Table 4.2 shows Ireland and France as the most competitive among the EU countries on the basis of cash costs alone. However, on the basis of full economic costs, Ireland slips considerably in the rankings.

Table 4.2. Production costs for milk and cereals, £/’000kg., 1997

Source: Boyle (1998), The Competitiveness of Irish Agriculture

Table 4.3 shows comparative beef production costs for a number of EU member states expressed as a percentage of the value of output. When the cost of family labour is excluded, Ireland again emerges as a low cost producer with only Italy and Belgium of the countries shown having lower cost ratios. However, the picture again changes dramatically when an imputed cost for family labour is included.

Table 4.3. Estimates of beef production costs as a percentage of output value, average of 1984 to 1986

Source: Boyle (1998), The Competitiveness of Irish Agriculture

On this basis, Ireland is one of the least competitive of all EU producers, with only Italy exhibiting a higher cost to output ratio. The relatively good competitive performance of Irish producers on the basis of cash costs alone is also borne out in recent studies on the competitiveness of the sheepmeat and pigmeat sectors (Connolly, 1997 and Kelly et al, 1998). The results in Table 4.4 show that farm production costs for both sectors are lower in Ireland than in either the UK or France.

Table 4.4. Total farm production costs for sheep and pigmeat, £/kg.

Source: Derived from Kelly et al, (1998), The Cost Competitiveness of the Irish Pig Industry, Teagasc and Connolly (1997), Competitiveness of Irish Sheep Production, Teagasc

In summary, on the basis of cash costs alone, Ireland has comparative advantage in grassland-based enterprises and in cereals However, for long-run competitiveness, all costs including the imputed costs of family owned resources must be considered and on this basis, Ireland's performance is much less impressive. All of the studies quoted above relate to historical costs before the impact of the Celtic Tiger Economy is taken into account. As argued in Section 4.1., the economic boom is having a major impact on the opportunity cost of family labour. This will weaken the competitiveness of Irish farming as it will be less attractive for prospective farmers to incur the increasing costs of full-time farming by comparison with farmers in competitor countries which do not have this economic boom.

As a supplement to cost comparisons, a structure-conduct-performance paradigm is sometimes used in the analysis of competitiveness (Matthews and O’ Connor, 1998). With respect to structure, Irish agriculture suffers from a number of weaknesses, given that farm size is small, incomes are low and the human capital endowment is weak.

With respect to industry conduct, the sector is characterised by a relatively small proportion of commercial operators. A large proportion of the sector consists of mixed-income farmers where off farm income is the dominant income source and there is a further section of elderly farmers. The conflicting goals of agricultural policy considered in Section 5.4 of this Report also have implications for the conduct of the sector. Policy is often torn between the need to protect the sector from market forces on the one hand and the need to stimulate and promote structural change on the other.

With respect to performance, Ireland's strong growth in output combined with increased levels of input use and a low rate of productivity growth has already been noted. In addition, prices received by Irish producers are lower than in all other EU countries reflecting geographical remoteness and lower quality of produce. With regard to costs of production, Ireland performs well if a valuation for family owned resources is excluded, but poorly if full costs are taken into account.

4.2.2. The Competitiveness of Grass

There is a widely held view that Ireland's grass based systems of dairy, beef and lamb production have competitive advantages over grain-based production in other countries. The basis for this belief seems to be the in situ use of grazed grass whereby harvesting and storage costs are avoided, though these advantages do not extend to silage. The bias in favour of grass and silage is sustained by erroneous comparisons of the costs of grazed grass energy, silage energy and grain energy.

Agriculturalists have persisted over the years in calculating the cost per unit of grain energy by dividing the market price per tonne by the number of energy units per tonne. The costs involved in this calculation are the total costs, since the market value of grain covers all costs: factor (i.e. land, labour and capital) and non-factor (i.e. fertiliser, other chemicals, machinery etc). At the same time the cost of grass and silage energy is got by dividing the non-factor costs of grass and silage by the number of energy units involved, ignoring the factor costs or assuming they are zero.

When these two non-comparable sets of costs are compared, the results show grass and silage in an artificially favourable light. If, however, the opportunity costs of land, labour and capital, which vary from one farm situation to another, are added in for grass and silage to put it on a comparable footing with grain costing, the cost advantage of grass and silage is considerably reduced and in the case of silage it is likely to disappear in many farm situations. Using proper costing, silage can be a very expensive feed.

In addition, there are several disadvantages in grass and silage production which are rarely acknowledged. The irregular pattern of growth, both within seasons and between seasons, is at variance with market requirements of steady flows and consistent quality of product and causes the much criticised seasonality problem in Irish processing and marketing. The energy in forage is used less efficiently than is usually assumed when comparisons are made with grain. The intake of forage feed is more restricted than for grain by the stomach capacity of the animal. There is a substantial cost involved in silage to prevent pollution which does not arise in the cases of grazed grass and grain. Finally, the complex production system of animal/grass inter-relationships requires a standard of husbandry management beyond the capacity of many farmers, compounding the great variability in quality of product.

As grain becomes cheaper, falling by a further 15% in the next few years under the Agenda 2000 agreeement, as pollution control becomes more costly and as markets increasingly require consistency in the quantity and quality of product, the disadvantages of grass and silage will become more evident. Grassland farmers have been increasing grain use in their production systems since the mid-1970s and will continue to do so in future years. Of course, grass will continue to grow and to be used in grazed form, while the relative economies of silage making will continue to deteriorate. The naive belief that grass/silage has some intrinsic advantage over grain will be increasingly challenged.

4.2.3. Policies to Improve Agricultural Competitiveness

The competitiveness of an industry is not defined for all time but rather is a dynamic relationship which changes over time as markets and technologies change.

Government policy has an important role to play in improving agricultural competitiveness. This can be effected through a range of channels including research and development, training and education, grant aid schemes and structural policy. In recent years, the funding for much of the activity in these areas has been through the Structural Funds. Consequently, the future scope and direction of such policies are under threat by the reduction in this source of funding unless national resources fully offset the shortfall. Some of the key channels of agricultural competitiveness policy are considered below.

Education and Extension: A characteristic of Irish agriculture is the low level of human capital among farmers, reflecting the generally low educational level of the past generation of new entrants and the low take-up of formal training courses. Frawley and Commin's 1996 study showed that, based on the National Farm Survey of 1995, only 27% of farmers had any agricultural training. There have been improvements in recent years since the introduction in 1983 of the Certificate in Farming (CIF) as the key training programme for new entrants to farming. Since its introduction, over 11,000 farmers have completed the programme. Assuming an average of 2,000 new entrants per year over that period, this still means that only one-third of new entrants over the past fifteen years received this basic level of training.

However, the position has improved in recent years. The 1995 National Farm Survey found a much higher level of training and education among the youngest cohort of farmers (under 27 years), with almost 70% receiving some agricultural training and just over half having completed the Certificate in Farming. Notwithstanding these improvements, education levels in agriculture have been described as “appallingly low” in a recent ESRI study on the future demand for training in agriculture. (Irish Farmers’ Journal, May 29^th, 1999).

Teagasc is the main provider of vocational education and training for people making careers in agriculture and also carries out an extensive programme of in-service training for practising farmers. In its recent strategy document, Teagasc (1998) cites increased competitive pressures in farming as the rationale for making substantial changes in their training and education programmes. The restructuring involves the introduction of a number of new training programmes in addition to changes in the manner in which programmes are delivered and in the minimum entry requirement. Future developments include the establishment of a three year Diploma in Agriculture which will become the recommended training programme for people embarking on a full-time career in commercial farming. The Certificate In Farming will continue to be the minimum requirement for training for full time farming. An advanced training programme is being devised for practising farmers who want to update their business knowledge or skills. It will feature implementation of codes of practice on food safety/quality, environmental protection and animal welfare.

The other arm of Teagasc's farm management development activity has been the agricultural advisory service whose task is the provision of farm management advice and the transfer of research findings and technological advances to farmers. A restructuring of the Teagasc advisory service is also under way. Four priority advisory programmes have been identified. These include a programme to improve competitiveness, a rural viability programme, a sustainable farming programme and a food quality and safety programme.

The delivery of services to these programmes will mean that Teagasc's advisory resources will be reorganised into two new services. The current Farm Tech Service will become the Technology and Business Service and will take primary responsibility for transfer of technology and the development of business management services, targeting the 20,000 most intensive full-time farmers. The current Farm Viability and Rural Enterprise Services will be amalgamated to provide a Rural Viability Service and will target 60,000 less intensive, smaller full time and part time farmers.

Science, Technology and Innovation Policy: Technology has a key role in improving the agricultural sector's competitiveness, either through developing new products, by improving the quality of inputs or by increasing the efficiency of production. Technological progress occurs as a result of national investment in research and through technological spillovers generated by research in other countries.

A characteristic of agricultural research in the past was that a very high proportion was funded by the public sector. There is widespread agreement that the rates of return to investment in agricultural research are high. Boyle and Ryan (1992) showed internal rates of return on State investment in Irish agricultural research of approximately 26%. While there was a pronounced decline in State involvement in agricultural research in Ireland throughout the 1980s, this situation has been redressed to a significant extent in recent years by the use of Structural Funds, as can be seen in Tables 5.3 and 5.4 of this Report.

A recent report to the Irish Council for Science Technology and Innovation stressed the importance of technology transfer as a vital link in the innovation chain in the agri-food sector (Science and Technology Foresight Ireland, 1998). A heavy emphasis was placed on the importance of research dissemination to ensure that primary scientific information is built upon and transferred to the sector for product and process improvement. The need for greater “ownership” of public research programmes, with particular regard to inter-institutional co-operation was also stressed. Proposals for policy changes included the development of a national manpower strategy for science and technology including mechanisms for more effective training and encouragement of greater mobility of researchers.

A key issue which is emerging in relation to technology centres around biotechnology. The productivity improving potential of biotechnology arises from two channels: improved knowledge of genomes as they arise in nature allows plant and animal breeders to understand better the particular genes which code for traits of economic value and improves the efficiency of conventional selection methods, while genome modification through transgenesis makes it possible to add a DNA fragment coding for a function that is not naturally present in an organism, and thus transform the organism through means not used in nature. It is principally the latter process which has given rise to concern among consumer and environmental groups (Matthews and O’ Connor, 1998). The use of Genetically Modified Organisms (GMOs) in Ireland is licensed by the Environmental Protection Agency. The Minister for the Environment recently issued a position document on GMOs and the environment as part of a consultation process due to be completed before an EU overhaul of GMO policy and labelling of GM foods. At present, there is intensive debate in Europe on this issue and the outcome remains unclear.

While biotechnologies are the most high-profile of the new farm technologies, important contributions to raising future farm productivity will also be made by the adoption of information technology as well as through continued advances in the more traditional areas of chemical and mechanical technology. Ensuring that Irish farmers can access and apply the latest techniques and knowledge will continue to be an important policy objective.

Productivity Policies: Productivity policies refer to the range of government initiatives which are designed to improve the productivity and competitiveness of farming. They include, for example, grant aid schemes for capital investment, installation aid for young farmers and aid for farm diversification. This type of expenditure is currently channelled through the FEOGA Guidance Fund under the Operational Programme for Agriculture, Forestry and Rural Development for 1994-1994. It will be assessed in Section 5.4.2. below.

Land policy: The principal objective of land policy in the agricultural sector relates to improving the structural profile and increasing the sustainability of Irish farming systems (Department of Agriculture, Food and Forestry, 1997). This issue will be considered in Section 5.2.1. of this Report.

Taxation Issues: The tax code contains a number of concessions designed to promote agricultural competitiveness. These concessions can be classified into measures designed to simplify the tax code with the objective of reducing the compliance burden faced by farmers; encouraging the early and orderly transfer of land to young farmers and encouraging levels of on-farm investment and increased stocking.

In terms of measures to encourage early land transfer, concessions include the exemption from income tax of rental income from medium-term leases. Younger farmers are also encouraged to invest in their farms via the provision of full tax relief on investment in stock. Under Capital Acquisitions Tax law, concessions effectively exempt most farm transfers from this tax for parent-child transfers and only those in excess of £1.85 million are taxed. Farmers over 55 are exempt from Capital Gains Tax if land is transferred to their children. Under stamp duty law, transfers of agricultural lands to young farmers attract only one third of the normal duty payable. Measures to encourage investment include write-offs against tax on certain measures such as pollution control works. Under accelerated capital allowances, farmers are allowed to write off 50% of the cost of the investment. In addition, the full amount of VAT incurred in such expenditure is refunded.

Chapter 5

Structural Change in Farming

The current structure of Irish farming in terms of area of farms, incomes and demography is described in Section 1.1. of this Report. Recent trends are analysed in Section 1.2. The subject is revisited here to consider the evolution of structural change in the years ahead and to assess the policy options available to influence it.

5.1. The Dynamics of Structural Change

As pointed out in Section 2.2., farming like all other businesses is subject to changing economic and technological circumstances over time. New technologies, which may be categorised as chemical, biological and mechanical, come on stream from both private and public investment in the invention and adoption of new or improved methods of production. Investment in these usually boosts supply. In addition, new quality standards, such as health, animal welfare and environment, are imposed which may not increase supply but still require investment outlays. A good current example of these are the new hygiene and pollution control measures being required of farmers. At the same time the ability of farmers to exploit new opportunities or to cope with new challenges is growing, as each new generation is better educated and trained than the outgoing generation.

Demand increase derives primarily from growing population and real incomes. Unfortunately for farmers neither of these variables has much impact on the quantity of food demanded in well fed developed countries. Any increased expenditure on food is likely to go on more value added, such as more convenience, more eating out etc. In developing countries the prospects are somewhat brighter as argued in Section 3.1.2.

Supply tends to grow faster than demand and exerts downward pressure on prices received by farmers. This is not mirrored in animal feed prices but other input prices tend to remain constant in real terms over time, so there is no compensation from this source for falling output prices. The result is pressure on profit or income margins, often referred to in agriculture as the price/cost squeeze. Government intervention in agricultural markets moderates these pressures, but it does not suppress them. Therefore, farmers have to react to cushion the consequences.

There are two distinct categories of reaction, namely, adjusting the farm business to improve farm income and/or diversifying into off-farm employment to supplement farm income.

Farm adjustment is effected mainly by the larger commercial farmers who have the human and financial capacity to offset declining unit margins by increasing productivity. In their effort to maintain or increase their living standards, they are induced to adjust their output and input mix over time. They may change output mix away from less profitable towards more profitable enterprises; or they may expand the output of a given enterprise. In the process they also change the input mix. Typical adjustments on the input side are increasing mechanisation and energy use, increasing fertiliser and agrichemical use, decreasing labour use, and increasing land area farmed per farmer.

Because farm adjustment requires continuing investment and a high standard of personal skills, many farmers do not have the capacity to adjust their farm business in a manner which would enable them to maintain their living standards. Many of these may be able to secure off-farm employment to supplement their farm income and thereby maintain or increase their total income. The record on this is documented in Chapter 1.

Others are not so fortunate and are faced with a declining income over time in farming. They are in effect caught in a process of creeping redundancy. In the case of employees the redundancy experience is usually a sudden one at the time when employment ceases; but in the case of self-employed people, such as farmers, the process is an extended one because as income is eroded the farmer continues farming, there being no better option available. In many cases their welfare is enhanced by schemes more or less targeted towards low income farmers. In this regard the DAS, the REPS and the new Farm Assist Scheme are of great importance.

There are therefore three outcomes among farmers to changing economic and technological circumstances:

1.Some can successfully adjust their farm business and continue as commercial farmers;

2.Others can diversify their efforts into off-farm employment to supplement their farm incomes; and

3.The remainder, who fail to make either of these responses, continue in farming until retirement or death, even though they experience a declining income.

On retirement or death their holdings pass to a new generation. In the Irish context they are most likely to be inherited by a relative of the outgoing farmer who may be a full-time farmer or may already have off-farm income. In this way the farm survives either as a full-time or part-time business. Alternatively, the farm may be leased or sold by the inheritor and thus probably become amalgamated with another farm to increase the area farmed.

Most but not all of the structural change occurring happens at the inter-generation stage as above. But any farmer at any time may enlarge or reduce the area farmed by leasing or through the land market. Also an existing farmer or spouse may find off-farm employment to supplement the farm income.

5.2. Increasing Scale of Farmers

Relating to the first category they must increase the scale of their farms if they are to remain competitive. The scale of a farm may be increased within a given area of land by increasing the intensity of farming. Beyond the limit of intensification extra land has to be either rented or purchased.

5.2.1. Access to Land

The small extent of long-term leasing in the Irish tenure system means that much of the renting is on the 11 month conacre basis. The short duration of conacre is advantageous to the owner who retains the flexibility to exploit the market from year to year, but it is disadvantageous to the renter in two ways: the uncertainty of tenure from year to year and the high level of rents which are bid up by farmers with surplus overhead capacity.

In recent years there seems to have been a substantial increase in medium term leasing, though statistics are not yet available to quantify the extent of it. Rents from medium- term leases are tax exempt - currently up to a limit of £6,000 in a lease of 7 years or more, and the operation of some newer schemes is also encouraging the practice. Nearly half of all transfers in the Farm Retirement Scheme (FRS) are by medium-term leasing, two-thirds of which are between relatives and the other third involve outsiders. Furthermore, about one-third of the land required for enlargement in the FRS is on a medium term lease. The enlargement condition is now to be replaced by a viability requirement, the details of which have still to be spelled out but is likely to involve some degree of enlargement for many farmers. The exclusion of conacre in favour of medium and long-term leases in the Installation Aid Scheme and the REPS is also promoting longer leases.

The increasing availability and attractiveness of off-farm employment expected in the immediate years ahead may increase the overall volume of land being rented, as more owners opt out of active farming while retaining ownership of their land. In so far as this may be the case it would facilitate enlargement for those continuing in farming. However, the level of rents to be paid will continue to reflect the benefits of the direct payments as well as market returns. Only fully decoupled payments would remove this effect and lead to lower rents reflecting market returns alone.

Enlargement of farms by land purchase has special difficulties in the Irish tenure system. The scope of the market is exceptionally narrow, with most land transfer being via inheritance rather than though the open market. Studies back in the late 1960s and early 1970s showed that at that time the land market accounted for about 20% of all transfers, which by international standards was very low (Macra na Feirme, 1973 and NESC, 1977). More recent evidence since 1990, from data assembled by the CSO in compiling their land price series and shown in Table 5.1, indicates that the land market has shrunk dramatically. In the early years of the series the 20% share was recorded but last year the area reporting accounted for as little as 5.2% of all transfers.

Table 5.1. Volume of land sales in Ireland, 1990 to 1998

a.The total agricultural area of the country is taken as 5.0 million ha.

b.The total transfers per annum is taken as 3.3% of the total agricultural area. This implies that the average functional life of farmers is 33 years.

Source: CSO, Statistical Bulletin, various issues

The reasons for this are far from clear. To the extent that land which would formerly have been sold is now being leased either in conacre or on a medium term contract, the change would not adversely affect overall mobility. But if such land is being retained and worked by present owners, as encouraged by the DAS and the REPS, it will further increase the barrier to the enlargement of farms as required for competitiveness.

Data on the reduction in farm numbers and the increase in average farm area cannot be readily compared before 1991 because of changes in methodology in that year. Between 1991 and 1998 the number of holdings has fallen by 16% or by 2.5% per annum, and the average area of holding has increased accordingly. CAP reform is intensifying push forces on farmers and the current and prospective boom in the economy is increasing pull forces. Therefore, past trends are not very relevant as a guide to the future. The signals are for a rapid increase in part-time farming, a decrease in conacre, a sharp increase in medium-term renting, but great difficulty in enlarging farms by land purchase.

5.2.2. Access to Milk Quotas

Milk quotas have become a valuable asset side by side with land, so their role in structural change also needs to be considered. The original endowment of quota per farm was based on the volume of milk production on each farm in 1983, the year before the quota was introduced. The number of farms with quotas and the distribution of quota between farms has changed over the years under the management of the Department of Agriculture and Food. That management amounts to a regulated market system where quotas are bought or leased under specified conditions and subject to priorities in favour of smaller producers.

It is interesting to compare the outcome of this approach with the outcome from free markets in the period preceding the introduction of quotas. There are some reservations regarding the comparability of the data over the years especially the very large number of herds with 1 or 2 cows in 1974. These are omitted from the results shown in Table 5.2.

Table 5.2. Numbers of dairy herds by size pre quota and under quota and annual % rates of change

a. December 1973 distribution of dairy cow numbers taking an average yield of 640 gls. to convert cow numbers to gallons.

Source: 1974 data from Irish Statistical Bulletin, December, 1974; 1983 and 1997 data from the Department of Agriculture and Food

The annual rate of reduction in the number of dairy farmers was 4.5% between 1974 and 1983 before quota compared with 4.1% since the quota was introduced. These are remarkably similar outcomes from two entirely different processes. The decline in small producers between 1,000 and 10,000 gallons accelerated under the quota, the fall in medium size herds of 10,000 to 19,000 gallons slowed somewhat under the quota and the increase in the number of larger herds slowed to one-quarter of its pace pre-quota. However, the total number of producers over 10,000 gallons remained fairly constant throughout the two periods.

With respect to the future, there are good reasons to expect an upsurge in the numbers leaving dairying in the next few years. Dairy farmers have the same pull opportunities in the Tiger Economy as everybody else, but many have special push influences in the form of the requirement to invest in facilities to meet new dairy hygiene and pollution conditions. It is known that many farmers in the smaller size categories have no plans to make such investments, and some of those who wish to comply and remain in dairying will find they cannot afford to do so. Many of these will switch to drystock farming and others, if they are not already part-time, will become part-time. Some may sell their farms and leave farming altogether, but the option of retaining ownership and leasing the land and buildings will prove attractive to some of those wishing to cease active farming.

The upside to these developments will be a rapid enlargement of the surviving dairy farmers. This will be facilitated by a fall in the price and rent of quotas brought about by a decline in demand and an increase in supply.

5.3. part-time Farming and Labour Outflow

The availability of off-farm employment for people who wish to continue in farming depends on (i) the overall rate of job creation in the economy relative to growth in the total labour force and (ii) the location of new jobs within commuting distance of their farms.

Substantial unemployment has prevailed in Ireland for as long as statistics have been compiled on the subject. In recent years Ireland has finally shaken off its dismal history and has entered a new era of rapid employment growth. Even though the labour force is growing, as outlined in Section 4.1.3, there are increasing scarcities arising, especially of skilled workers. In this environment it is easier than ever before to become a part-time farmer. Existing farmers or their spouses may seek and find off-farm employment, or a person may inherit a farm but opt to continue in off-farm employment.

Of course the employment boom is not spread evenly throughout the country and there are remoter areas where off-farm opportunities are not within commuting distance. Improving transport infrastructure is, however, extending the commuting range. There are also many proposals under consideration to strengthen the regional dispersion of jobs, such as those outlined in Section 6.3 below. If such proposals are implemented they will further increase off-farm employment opportunities. part-time farming is also helped by improved education and training of people entering farming. Teagasc is proposing to make the Leaving Certificate a requirement for entrance into their agricultural training courses. While this will improve the ability as full-time farmers, it will also enhance their prospects of off-farm employment should they wish to pursue that option.

In the exceptionally favourable labour market now prevailing there is an acceleration of off-farm employment. The National Farm Survey carried out by Teagasc shows the percentage of farmers and/or spouses who have off-farm employment growing from 31% in 1993 to 43% in 1997 (Teagasc, 1998). Furthermore, if the ESRI's best estimate of future growth is realised, the situation will continue to be favourable for those opting for a part-time farming career.

Sometimes the option of part-time farming is considered to be inferior to farm enlargement as a solution to the price-cost squeeze. In earlier times there may have been concerns about loss of production, as part-time farmers are likely to practice more extensive farming than full-timers (Higgins, 1983). Such a concern makes little sense in the surplus production environment of today.

The expected acceleration of structural change in the immediate years ahead will increase the rate of outflow of workers, as well as decreasing the number of farms in the country. The decline in the agricultural workforce since 1980 is shown in Table 1.13; it amounted to an annual rate of decline of around 2.5%. Given the radically changed environment of the Celtic Tiger and in particular the unprecedented intensity of push/pull forces on farm workers, the future rate of decline must be considerably more than in the past. Because there is no precedent to be guided by, it is not possible to objectively quantify what the future rate of decline will be. A doubling of the past rate of decline will not be a surprise to the authors.

The impact of such a rapid rate of decline on farming incomes is interesting. The income projections from the FAPRI-Ireland analysis are reported in Section 2.3 as a continuation of current aggregate levels in nominal terms. If it is assumed that the numbers employed in farming will fall at an accelerated rate of 5% per annum, while inflation will remain at about 2% per annum, then real income per farm worker would grow at 3% per annum, or a total of 30% between now and 2007. This rate of increase would scarcely be in line with expectations for income growth in the rest of the economy, and of course would be achieved as a result of a 37% reduction in the farming workforce.

5.4. Structural Policy

In the absence of government intervention, free market forces would operate to squeeze out smaller and less efficient farmers, thus enabling larger and more efficient farmers to grow. Governments everywhere in the world intervene in agricultural markets as seen in Section 2.1. Conceivably that intervention could be confined to price policy in protected markets, while continuing to allow structural change to be determined by protected market forces alone. In reality all governments intervene in structural policy also. As indicated above numbers of farms are falling at some 2.5% per annum despite government intervention.

5.4.1. Structural Policy Under the CAP

Structural policy for agriculture in the EU embraces a wide variety of schemes. They can be classified into two groups, those dating back to the early years of the CAP and funded from the Guidance Section of FEOGA and the Accompanying Measures introduced in the MacSharry reforms which are funded from the Guarantee Section of FEOGA.

The Guidance Fund is combined with the Regional and Social Funds and are known collectively as the Structural Funds. The expenditure of Structural Funds is organised in a Community Support Framework (CSF) into Operational Programmes which span a number of years; the first ran from 1988 to 1993, the current one covers the period 1994 to 1999, and the third one now in preparation will be for the seven year period 2000 to 2006. The current Operational Programme for Agriculture, Rural Development and Forestry (OPARDF) embraces a wide variety of measures and sub-measures as outlined in Tables 5.3 and 5.4 below. Most of these impact on farming inside the farm gate, but a few, such as Installation Aid and Milk Quota Restructuring, help to increase the area of farm.

The inclusion of the Compensatory Headage Scheme as a structural measure has been criticised, as it is mainly an income support scheme (Fitz Gerald et al, 1999). It pays an average of about £1,300 per annum as headage payments to farmers in Disadvantaged Areas which now account for 75% of the agricultural area of the country. Such a scheme, whatever its merits as an income supplement, must retard rather than accelerate structural reform by slowing down the rate of exit from farming and the take up of off-farm employment opportunities. The fact that it attracts some 54% of all EU funds spent on agricultural structures gives it a heavy weighting in this regard.

In the MacSharry reforms agreed in 1992, a set of three Accompanying Measures (AMs) were included, namely, a Rural Environment Protection Scheme (REPS), an Early Retirement Scheme (ERS), and a Forestry Development Programme (FDP). Under the REPS farmers are invited to draw up an environmental farm plan to meet the requirements of the Scheme. In return they receive annual payments on the first 40 hectares of their farms. Supplementary measures have recently been introduced to pay enhanced rates to farmers in the REPS who are in areas of special concern. These are described in Section 6.3. The ERS funds a pension to farmers aged between 55 and 65 years, if they retire from farming in favour of qualified entrants. The FDP subsidises the planting and management of trees and provides annual premia per hectare for 20 years after planting.

These three AMs have become a major stream of revenue from the EU, as may be seen in Table 5.4. The 1999 estimates are used rather than the average over the 1994-1994 period, as a historic average for these schemes would conceal their very rapid growth in recent years. The sum involved for 1999 at €299.0 million is 60% greater than the annual flows to agriculture and food from the Structural Funds.

The extent of future funding of the Structural Funds is being currently decided, along with its allocation among the various measures and sub-measures and also between the two new regions in the country, the Objective 1 Region and the Objective 1 Region in Transition.

Table 5.3. Operational Programme for agriculture, rural development and forestry, 1994 - 1999

Source: Operational Programme 1994/1999 for Agriculture, Rural Development & Forestry,

Table 5.4. EU funding of structural & Accompanying Measures, 1994-1994, € million/annum, 1999 prices

Source: Department of Agriculture and Food

It is already known that the Structural Funds accruing to Ireland are to be halved in the new Community Support Framework. This reduction will be offset to some degree by increased national funding. Also the funding of the DAS is to be switched from the Guidance Section of FEOGA to the Guarantee Section which is more in keeping with the purpose of this scheme.

The extent of Guarantee funding of the DAS and the AMs may be under less pressure than the Guidance funding. Up to this stage EU funds for these measures have been sufficient to meet their rapidly growing demands. However, in the new National Development Plan it will be difficult to replicate this outcome.

5.4.2. Criticisms of Structural Funds Use

The use of Structural Funds has been evaluated at mid-term and again more recently in the context of overall national investment priorities for the period 2000-2000. These evaluations will influence the outcome of the new CSF and are therefore worth summarising.

In the recent evaluation by an ESRI led team the priorities were stated as follows:

“Top priority should be given to investment in public physical infrastructure - roads, public transport, sanitary services, social housing and social, cultural and recreational infrastructure.

While still very important, investment in human capital will not require a major increase in resources in the next planning period because of falling numbers of young people. It will, nevertheless, still play a vital role in expanding the supply of skilled labour.

Research and development, while requiring quite limited public resources, remains an important element in expanding the economy's productive capacity.

While in the past considerable resources, both government and EU, have been devoted to promoting investment in the market sector, this should no longer be a major priority in the future. As a result, we recommend a scaling back in public resources devoted to promoting investment in industry, services, tourism, agriculture, and energy and telecommunications. This scaling back will be a gradual process, which will free up resources to finance the much-needed investment in physical infrastructure. The scaling back in public involvement will be more than made up by increased commercial sector investment in areas such as energy and telecommunications.” (Fitz Gerald et al, 1999, pp. xi-xii)

Translated into figures, the annual increase in the volume of public capital expenditure overall would be about 6.7%, whereas there would be no increase for agriculture and forestry. Within the overall framework of reduced priority for productive sectors, the ESRI team differentiated between different kinds of investment.

Subsidies on private capital investment arise in a number of the measures and sub-measures of the current OPARDF (pollution control, animal welfare, farm hygiene, alternative enterprises etc). The ERSI team argue that “it is difficult to identify a market failure rationale in many cases. The most compelling market failure rationale for most of these interventions is that small scale producers are likely to face substantial capital constraints because of imperfection in capital markets. The payback from many of these investments may well stretch to 20 years, yet the typical type of finance available will be at most for 5 to 7 years”. The team concludes that there is justification for maintaining some continuing support for the subsidisation of on-farm investment with the main proviso that support is targeted exclusively to “small scale” producers.

The team have no reservations about the Installation Aid and Early Retirement schemes. They see these as a priority in accelerating the “notoriously slow” structural reform to better meet the challenges of trade liberalisation in the immediate years ahead.

Similarly, increased investment in research and development is desirable and, given its public good nature, much of that investment must come from the public purse.

With respect to advisory work the team differentiates between commercial advice and small farmer advice. They see no good reason for subsidising the former and would target small farmers for publicly funded advice including the REPS. They also advocate an advisory stimulus fund to promote the provision of advisory services by the private sector to compete with the efforts of Teagasc.

In their recommendations the team did not define what they meant by a small farmer, but “ideally it should take account of all household resources as proxied perhaps by total household income”. In discussing the DAS and the REPS, they are more explicit for they “recommend that both measures should be targeted to farmers on the basis of a total household income threshold”. They also recommend that “there should be some consideration to giving these schemes a greater developmental focus by linking payments to cross-compliance requirements, such as farm retirement and leasing of land.”

5.4.3. Policy Conflicts

As with most areas of public policy, there are inherent conflicts in the objectives of structural policy. There is the desire on the one hand to moderate the decline in the number of farmers, while at the same time promoting the competitiveness of the industry. This dual objective is illustrated in the Irish case by the clause in the Constitution stating that “the State shall direct its policy towards securing that there may be established on the land in economic security as many families as in the circumstance shall be practical”.

Similar sentiments occur in the terms of reference for this Report which demand that “particular attention will be paid to public policy mechanisms which will assist in maximising the potential of Irish Agriculture and assist in the survival of the maximum number of family farms”. This is an example of the universal conflict between equity and efficiency inherent in all forms of market intervention. But it is more than this, as the aim of minimising the decline in numbers derives from a concern about rural viability as well. That viability depends on the maintenance of an adequate number of households in rural areas. Therefore, if the decline in the number of farming households is not offset by increasing non-farming households, the future of the rural economy is threatened.

The conflict among goals has intensified over the past decade or so with the increasing awareness of the environment. The role of EU farmers was broadened in the MacSharry round of reforms from efficient commodity producers to embrace the production of public goods in the forms of a clean environment, an attractive rural landscape and greater attention to animal welfare and food safety. These topics are treated in more detail below in Sections 6.2 and 6.3.. There are therefore multiple goals in modern farming and the task of reconciling them falls to governments, Irish and EU. The Irish reconciliation may be found in the Strategies of the Department of Agriculture and Food (1998).

Given the multiple goals of EU agriculture it is not surprising to find conflicting policies. In the present complex of structural policies described in Tables 5.3 and 5.4, there are a number of schemes to improve efficiency of farms within their present structure, including grants for On-farm Investment, for General Structural Improvement and for Farm Diversification. There is also provision of funds for Research, for Advisory Services and for Human Resources. Three schemes are targeted at improving the structure of farms, namely, Installation Aid for Young Farmers, the Early Retirement Scheme and Milk Quota Restructuring.

Side by side with these efficiency measures there are two schemes which slow down structural change, namely, the DAS and the REPS. In fact, the current EU annual funding for these two schemes as shown in Table 5.4 amounted to €246 million or 58% of the total funding for Agriculture and Food. The additional co-funding of these schemes from the Irish Exchequer is distributed similarly. Therefore, the total expenditure under Structural Policies and Accompanying Measures can be decomposed into 42% promoting efficiency and 58% promoting the public goods of rural viability and environment.

The balance of expenditure as between efficiency and public goods has been criticised by Fitz Gerald et al (1999, pp.235 to 248). But in the final analysis it is the EU authorities who have the responsibility to strike this balance. The Irish authorities to date co-fund the EU initiatives including schemes which are not compulsory - only the REPS is compulsory, so there is little evidence of any divergence between the priorities of the EU and Ireland.

In the new National Plan under preparation, Ireland is likely to have to increase the amount of co-funding to offset some of the cutbacks in FEOGA funds. This will test the compatibility between the two sets of priorities: Irish taxpayers may be less willing to promote public goods than are EU authorities.

5.4.4. Policy Differentiation

Where public funds to promote efficiency are limited, a choice has to be made between channelling the funds to selected farmers or spreading the funds among all farmers. The latter would result in the larger commercial farmers receiving most of the money, while small farmers would get little. Eligibility for assistance under existing schemes is already restricted, but it may have to be further tightened in response to the expected reduction in funds in the next Operational Programme. The approaches to this are considered below.

As trade liberalisation continues over the next decade, there is a strong case for priority for those farmers who are at risk but who have the human, physical and financial resources to expand and compete. These may be called potentially viable farmers to distinguish them from viable and non-viable farmers. Potentially viable farmers do not have sufficient scale to earn reasonable incomes with prevailing policies, but with appropriate assistance could attain that scale. The policy challenge is to identify such farmers and to provide them with public support that would enable them to become viable.

Any definition of viability is subjective. The Frawley/Commins threefold set of criteria consisting of economic, demographic and employment variables was described in Section 1.1.4. Applying their methodology to the 145,000 farmers in 1998 would give a distribution today of 42,000 viable farmers, 37,000 potentially viable farmers, 28,000 non-viable farmers and 38,000 part-timers.

Treatment of Off-farm Income: The treatment of off-farm income in assessing viability is one of the important issues that has to be faced. Many farmers today have low farm income but have significant off-farm income to supplement their farm income and provide a satisfactory household income. Spouses may also contribute by working off-farm. Off-farm earnings of the farmer are considered in determining eligibility for most schemes now in operation, as shown in Table 5.5. These could be stiffened if desired by increasing the portion of farm income required or by decreasing the portion of off-farm income permitted. Spouses’ earnings are ignored in these criteria and their inclusion is another possibility. Indeed, it could be argued that where the sum of the farm income and the off-farm income of both farmer and spouse are in excess of the industrial wage the household is viable, in which case the farmer would not be eligible for public funds for agricultural development. This would be a much tighter criterion than currently prevailing in Irish development schemes. part-time farming seems to be viewed more favourably in the new Draft Regulation on Rural Development, but any move towards more lenient treatment for part-time farmers in the new schemes will have to recognise the adverse impact on full-time farmers.

Table 5.5. Maximum income criteria (a), and maximum receipts (b), under development schemes, 1999

Source: Department of Agriculture and Food

Area and Age Limits: There are many other ways within the various schemes to strengthen the targeting if desired. Two in particular might be cited. An upper limit could be set on the areas of land to be transferred in the ERS, since the larger farmers have already achieved viability. And the payments under the DAS to farmers aged 66 years or more could cease, as they are now eligible for the contributory old age pension. Such a change would have the further advantage of greatly reducing the conflict between the DAS and restructuring.

Maximum Receipts: Also shown in the Table 5.5 are the maximum receipts under the various schemes. These are all relatively small amounts, which are in sharp contrast to the unlimited amounts receivable under area aid and as beef cow premia. Modulation has been deferred in the Agenda 2000 agreement, but as argued in Section 3.5, it will surface again in future CAP reforms.

Tiered pricing: In addition to the targeting which is operated under present schemes, further possibilities are available. Tiered prices, where prices decline as the volume of production per farmer increases, were operated in Ireland for milk in the years immediately preceding EU accession. They are a powerful means of discriminating in favour of small farmers who would receive the highest prices for limited output and would be free to expand their production within and between the tiers, and farmers would be free to any enterprise. In these ways it differs from quotas which are a serious obstacle for smaller producers attempting to enter dairying or to expand. Tiered pricing has never got on to the EU agenda. In 1983 the option received one paragraph of attention in the Commission paper proposing the quota (CEC, 1983).

Allocation of National Envelopes and Quotas: The national envelopes that have been created in the beef and dairy sectors and the extra milk quota that has been agreed will have to be allocated.

Tiered Advisory Services: The provision of an advisory service to farmers is a further area where targeting is practised. The ESRI team advocated a privately financed commercial service for larger farmers, reserving the publicly funded service for “small farmers” and for public goods schemes such as the REPS. Teagasc has already moved in this direction and is reorganising its services into a Technology and Business Service for some 20,000 of the more intensive full-time farmers and a Rural Viability Service for the remainder. These plans may be adversely affected by the absence of specific provision for advisory services in the new Draft Regulation on Rural Development (See Sections 4.2.2 and 6.3).

Land Policy: A final area where targeting has been practised is land policy. The Irish Land Commission for a hundred years intervened in the land market to purchase land which it resold to small farmers. This was abandoned in 1984 largely on cost grounds, as by then most purchases were of small areas where the costs of acquisition and resale were difficult to justify. The policies now in place focus on issues such as earlier farm transfer under the ERS and encouragement of medium-term leasing as discussed in Section 5.2.1. These attempts to increase land mobility are offset to an unknown degree by schemes which reduce mobility, namely, the DAS and the REPS.

Forestry Versus Farming: A further area of conflict in land policy is the competition between incentives for afforestation and incentives to continue in farming. The incentives for afforestation are very substantial; they fully cover establishment costs and include an annual premium for 20 years which varies by the type of trees planted. In addition all profits from forestry, including grants, premia and timber sales, are exempt from income taxation.

The aim under the Operational Programme for Forestry was to plant 25,000 ha each year between 1996 and 2000 and 20,000 ha per year after that. While overall planting reached 24,000 ha in 1995, the hectarage in 1996 was 21,000 and in 1997 and 1998 it fell to 14,000 each year. The competition is likely to increase in future as land prices continue to rise and DAS payments are switched to area payments from headage payments over the next few years. Increased incentives for extensification under the Agenda 2000 agreement will further tilt the balance against forestry. These issues are currently being examined by a Forestry Forum which is expected to report shortly.

5.4.5. The Clare Action Group Proposal

An interesting proposal to target aid to potentially viable farmers is being promoted by a dairy action group in Co. Clare (Mannion et al, 1999). They have researched in detail the population of dairy farmers in the county to establish their resource endowments and their interest in continuing in dairying. They have shown that with no change in milk quota or production efficiency, the incomes of most of these farmers will decline by some 12% between now and 2006.

They propose a Business Development Package for farmers who are under 35,000 gallons in size consisting of (i) 50% investment grants for dairy buildings and related farm infrastructure to a maximum of 45,000 gallons, (ii) full tax relief on milk quota purchase up to 35,000 gallons, (iii) full stock relief on an increase up to 16,000 gallons and (iv) a 50% advisory support grant. Full implementation of the Package would approximately double the farm income compared with the no development situation.

They estimate that 1,000 out of the total of 1,800 dairy farmers in Clare would qualify for the Package and that about half of these would implement the full Package, consisting of enlargement and improved efficiency, the other half settling for improving efficiency only. At national level there are some 24,000 farmers supplying less than 35,000 gallons annually and 14,000 of these would be likely to participate.

The overall investment under the Package is costed in detail and amounts to £610 million. Of this the farmers themselves would invest £413 million or 68% of the total, public funds would contribute £157 million or 26% of the total and £40 million is sought from the dairy industry to subsidise loans for quota purchase.

Chapter 6

Beyond the Farm Gate

The purpose of this chapter is to outline some important developments and emerging issues in a number of key areas which are inextricably linked to the farming sector. The areas considered are the food industry, food marketing issues, the agri-environment and rural development.

6.1. The Food Industry

The contribution of the food industry in Ireland to national wealth and employment has already been outlined in Chapter 1. A notable feature of the industry is its rapid rate of growth in recent years. The volume of output in the food manufacturing sector grew by 64% between 1987 and 1996, while the value of food output increased by 60% over the same period. Net output, which is a measure of the processing and marketing margins on food products, increased by 114% over the same period. All of this expansion was achieved against a backdrop of much lower growth of about 20% in the output of the farm sector over the same period (Harte, 1999).

The recently published report of the Food Industry Development Group highlights the satisfactory performance of the sector in terms of its contribution to the national economy. It also points to the expansion opportunities which are likely to arise in the future, particularly in the areas of prepared consumer foods and food ingredients (Department of Agriculture and Food, 1998). At the same time, the competitive pressures on the industry are likely to increase with growing concentration of purchasing power at retail level and with policy developments at EU and international level.

The report also identified a number of additional challenges which need to be addressed if the opportunities which lie ahead are to be exploited. There are general problems within the sector such as scale-related difficulties and an over-reliance on commodity-type products and there are particular problems in certain sectors of the industry.

The beef sector has been the subject of number of recent initiatives including a strategic review and a Task Force which attempted to reach agreement on a rationalisation and investment plan for the industry. The overall conclusions of the strategic review are that the competitiveness and viability of the sector are being inhibited by a number of factors. These include over-capacity at the primary slaughtering and processing levels and the absence of a co-ordinated approach in Third Country and EU markets resulting in significant discounting among industry members in the market place. Other factors identified include the absence of a quality incentive at production/processing level with virtually all cattle bought on a flat rate basis and the absence of a strategic focus for the sector because of a polarised perspective on issues between processors and producers.

The strategic review concludes that in order to secure the future of the beef sector, a number of initiatives must be taken. Foremost among these is a radical rationalisation of the sector to reduce the number of processors from 20 to between 4 and 6. Their recommendation as to how this should come about is a self-funded buyout scheme where the benefits to the stayers fund the payments to the goers. The Task Force failed to agree on how this fund would be financed.

Another recommendation is that market groups should be established to build partnerships between producers and processors in pursuit of particular markets. Price signals to producers should be strengthened which would reward producers for good quality animals and penalise those supplying animals of inferior quality. The decoupling of the premia from quality aggravates the situation, though curiously quality is rewarded in the live export trade in weanlings. According to the review, the potential exists to improve the profitability of the sector by between £120-£160m per year.

With regard to the other meat sectors, the Food Industry Development Group Report forecasts that growth prospects lie in the high value added sectors. Realisation of these prospects will require increased attention to innovation as well as product and market development, animal welfare and environmental considerations. In the case of the poultry sector, major rationalisation and restructuring will be required to boost its competitiveness.

A recent analysis of the dairy industry concluded that its strengths were in the areas of technical expertise, operational skills, skilled personnel and a healthy national image. Negative factors included relatively high costs, specifically in relation to labour, energy, warehousing and distribution, and a lack of specific skills in engineering and marketing (O’ Connell et al., 1997). With regard to the policy environment in which it operates, the study suggests that the industry has been facilitated by a regime that has discriminated in its favour.

However, the CAP has also reinforced some characteristics of the sector such as seasonality. This has worked against the long-term development of products and has allowed for the survival of a relatively fragmented production structure. Furthermore, in a changing policy context, the sustainability of present performance is questionable. With the prospect of a continuing move towards trade liberalisation, the industry will be left with a product portfolio which is likely to come under increased competitive pressure. The issues of the appropriate product mix for the industry and the future opportunities for market growth are to be addressed in a new study to be completed by Teagasc later this year. In addition, a strategic review of the dairy sector has also been announced by the Irish Co-operative Organisation Society (ICOS). Its purpose will be to identify key areas of change which will allow the sector to remain competitive into the future.

In relation to other sectors of the food industry, the Food Industry Development Group Report states that opportunities exist for increasing value-added in the fruit, vegetable and egg sectors. This could offset some of the competitive disadvantages which arise from scale difficulties and peripheral location. While provision was made in the Structural Funds to modernise grading, handling and storage facilities, there remains a need for further investment if these sectors are to compete in an increasingly demanding marketplace.

The prepared foods sector is one which has been identified as having excellent growth prospects. However, this sector also exhibits particular scale difficulties where factors such as small size combined with its early stage of development puts it at a severe disadvantage in a highly competitive international market. Furthermore, there is considerable dependence on the UK market, which means that in the event of the Euro strengthening, it could be exposed to significant competitive pressures.

Growth prospects in the food ingredients sector are also favourable and will be driven by the requirement to develop new products or processes in response to a rapidly developing and increasingly competitive market.

All developments within the food industry will be underpinned by strict adherence to the highest possible standards of food safety and quality assurance. The principal Government initiative in this regard is the recent establishment of the Food Safety Authority of Ireland. Its mission statement is to provide reassurance on food safety to Irish consumers and to consumers of Irish food abroad by ensuring that the best food safety and hygiene practices are observed in Ireland. Priorities for the authority will be to agree binding service contracts with all bodies that have a role in food safety and to monitor relevant infection and disease levels in animals, in food and in the consumer population.

Other recent developments include the launch of the National Beef Assurance Scheme in 1997 with the aim of providing credible and independently backed assurances about the safety of beef and restoring consumer confidence in the wake of recurring food scares (Department of Agriculture and Food, 1998). The Scheme will be implemented in full during 1999 and will operate by enforcing common high standards of production and processing and by providing an effective animal identification and tracing scheme. An Bord Bia also operates quality assurance schemes in the beef and pigmeat sectors. It has also commenced development of an egg quality assurance scheme and the parameters have been agreed for a quality assurance scheme for lamb. An Bord Glas operates a quality auditing scheme for horticultural food products.

6.2. Food Marketing Issues

While changes in the structure of the food industry and in consumer preferences are of most direct interest to food processors, they ultimately impact on the demand for products at farm level. As noted in the recent Food Industry Development Group Report the food consumer has been the primary driver of many of the changes currently being observed in the way products are manufactured and marketed (Department of Agriculture and Food, 1998). Consumers today are more concerned with healthy eating and convenience and have increased expectations in terms of quality, innovation and variety, stemming from affluence, travel and more sophisticated tastes. There is also a growing awareness of, and concern about, issues of animal welfare and environmental impacts relating to food production.

Changing lifestyles will continue to support greater demand for convenience foods with increasing numbers of working women, reduced leisure time and the decline of the traditional family unit contributing to an erosion of the traditional patterns of eating. The trend towards the sale of complete meals is already evident in most European food markets. Restaurant service, home delivery and fast food service are other areas of high growth which are closely allied to increasing prosperity and lifestyle changes. For example, eating out in Ireland currently accounts for about 20% of food consumption while in the UK it is almost 30% and in the USA it is over 50%.

Retail concentration in Europe is growing. In many national markets the top five retailers control up to half of all food sales. In Ireland, three multiples currently account for over 50% of retail sales and the trend towards greater concentration at both retail and distribution level is likely to continue.

If farmers are to respond effectively to these changing trends, there will have to be increased integration between producers, processors and retailers. More formalised quality assurance procedures which go right through the production system will also be required and farmers’ production methods will be increasingly prescribed via new forms of contractual arrangements.

6.3. Agri-environmental Policy

The Sustainable Development Strategy for Ireland, published in 1997, commits the agriculture sector to the promotion of sustainable agriculture; the promotion of high quality food from a high quality environment and the maintenance of the character of the countryside in terms of its landscapes, habitats and species. There has been a gradual increase in the amount of environmental regulation of the agricultural sector. The most important measures to date include the requirement to seek planning permission for large intensive livestock units, the issuance of codes of good farming practice in watersheds vulnerable to nitrate pollution, and measures to limit the pollution of waterways from slurry and silage effluent (Scannell, 1995). Under the 1996 Waste Management Act, local authorities have powers relating to the supervision of farmers’ nutrient management. However, Ireland's extensive farming systems mean that agricultural production here is relatively unaffected by environmental regulation. At the same time, as shown in Table 5.4, significant support for on-farm investment in pollution control has been provided in the form of grant aid under the Control of Farm Pollution Scheme and the Farm Improvement Scheme. Over £23 million was paid in 1998 under both schemes.

Ireland's most important agri-environmental programme is the Rural Environment Protection Scheme (REPS). As outlined in Section 2.2.6, this scheme was introduced as part of the Accompanying Measures of the MacSharry reforms in 1992. Its objectives are to establish farming practices and production methods which reflect the increasing concern for conservation, landscape protection and wider environmental problems; to protect wildlife habitats and endangered species of flora and fauna; and to produce food in an extensive and environmentally safe manner.

Since its inception, REPS has attracted 40,000 participants. As a result, 1.3 million hectares of agricultural land or 28% of the total are being farmed in accordance with REPS standards. It is envisaged that up to 50,000 farmers will join REPS with expected spending of £350 million by the end of 1999 (Department of Agriculture and Food, 1999). The take-up of the Scheme to date is mainly among smaller farmers. The principal disincentive for larger farmers arises because, while payments of £125 per hectare are made only up to 40 hectares, REPS measures must be implemented on all lands managed by the farmer.

As already outlined in Section 5.4.1, an improved REPS package, applying to Natural Heritage Areas and commonages, has recently been drawn up and will extend the support arrangements which were originally confined to Special Areas of Conservation. Payment under this new scheme will be £80 per acre for the first 100 acres, £8 per acre between 101 and 200 acres and £6 per acre between 201 and 300 acres.

An issue with as yet unpredictable consequences for agriculture concerns its impact on greenhouse gas emissions. The Kyoto Protocol, agreed in December 1997 under the UN Framework Convention on Climate Change, set targets for developed countries to limit emissions of an aggregate of six greenhouse gases, carbon dioxide (CO₂), nitrous oxide (N₂O), methane (CH₄), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF₆). It is expected that Ireland will adopt a national target of limiting the growth in emissions of its three main greenhouse gases (CO₂, N₂O and CH₄) to 15% above 1990 levels by 2010. This is well below the range of emission rates expected in the absence of new policy measures. In a recent study to analyse policy measures which might be introduced in Ireland to limit or reduce CO₂ and other greenhouse gases, agriculture was identified as the largest single source of emissions in Ireland (Environmental Resources Management, 1998).

From an international perspective, Ireland's emissions profile is very different from that of other countries in the EU. In particular, the low levels of population and relatively large agriculture sector means that methane and nitrous oxide emissions are a significant proportion of total emissions and are difficult to reduce because they are inherent in agricultural production. The study showed that in 1995 the agriculture sector contributed 78% of total methane emissions, 73% of total nitrous oxide emissions and 33% of the aggregate of the main three greenhouse gases. With regard to the source of these emissions, 60% are from ruminant animals and almost 40% from soils. While ruminant animal digestion is the largest single source of emissions, it is also likely to be the most difficult source to tackle. Options put forward in the report to address this problem include altered feeding regimes; improved animal digestion through genetic engineering; and stock reduction.

6.4. Rural Development¹

Rural development has been receiving increasing emphasis in EU policy over the past decade or so. This was largely in response to two events: the need to reform the CAP and the move towards a Single European Market. A commitment to economic and social cohesion was incorporated into the Single European Act and the Structural Funds were reformed. To draw down these Funds member states were required to prepare multi-annual national plans for different sectors in the form of Operational Programmes. There was a particular focus on integrated rural development in the poorer regions of the EU. All of Ireland was classified as an Objective l region and thereby qualified for maximum assistance. The size of the Funds was doubled between 1989 and 1993 and funding was further boosted in the MacSharry reform package of 1992 by the inclusion of the Accompanying Measures as described in Section 5.4.1.

In Ireland the response to these EU promptings was enthusiastic. A Pilot Programme for Integrated Rural Development in 1988-1988 was a testing ground for a bottom up approach and was followed by the EU LEADER Initiative in 1991-1991 and by LEADER II in 1994-1994. A new impetus was given to diversifying agricultural production in the context of limiting surplus production. County Enterprise Boards were set up to stimulate small-scale enterprises at local level with the support of the 1994-1994 Operational Programme for Local Urban and Rural Development.

6.4.1. Various Rural Development Initiatives

Rural development today is promoted by a very wide variety of initiatives with differing origins and funding. First there are the FEOGA Guidance measures as listed in Tables 5.3. and 5.4. Most of these relate to conventional farming, with only the Farm Diversification (and perhaps the Advisory Service for Farm Viability and Rural Enterprises) relating to new enterprises.

Next there are the Accompanying Measures which are funded from the FEOGA Guarantee section. These relate to the environment, to farm retirement and to forestry. Third there is the LEADER II EU Community Initiative with its own separate funding outside of FEOGA. It provides financial assistance to local action groups with public and private partners engaged in innovative measures for the development of local rural areas.

Fourth there is INTERREG II, another EU Community Initiative with its own funds which was originally established in 1990. It assists North-South border areas to overcome development problems and to encourage cross-border co-operation in order to maximise growth potential. It covers all of Northern Ireland except Belfast and counties Cavan, Donegal, Leitrim, Louth, Monaghan and Sligo in the Republic.

Fifth there is the Local Urban and Rural Development Operational Programme which caters for non-farm measures for the development of the wider rural economy. It supports individuals, firms and local groups to establish or expand viable businesses through the provision of a range of support services at local level. These services include direct financial assistance for small enterprise development, business information and advisory and counselling assistance. Funding is also available for the physical renewal and economic regeneration of areas in the major cities and country towns and villages.

The funding of these rural development initiatives is shown in Table 6.1. It has amounted to £166 million a year which is a significant sum, though it is only about a tenth of the expenditure on CAP price supports.

Table 6.1. Funding of rural development initiatives exclusive of conventional farming and forestry, average annual amounts, 1994-1994, £m

Source: Department of Agriculture and Food

O'Hara and Commins (1998) have assessed these policies as follows:

“Two models of rural development are currently in operation in Ireland, each of which is associated with a set of EU support measures. The first has a narrow agricultural focus and is associated with the CAP. It is articulated in Sub-Programme 1 of the Operational Programme for Agriculture, Rural Development and Forestry 1994-1994.

Parallel to this is a second model which is an area-based approach and emanates from a series of measures and supports to rural development which, although originating in Brussels and supported by Structural Funds, have been adapted and shaped by the Irish State. This model of rural development is locally based, often referred to as bottom up and associated with LEADER and the Local Development Programme. It is multidimensional, involves partnership and participation and encompasses a much wider constituency than farming. Most importantly, it is active and empowering in orientation. Although largely conceived and guided from the top, programmes and initiatives in this model have generated sufficient local autonomy to raise concerns about representation and accountability.

These conditions present a challenge to the Irish State in the new century: to set out a clear national agenda for rural development policy and its articulation with other sectoral policies. While Ireland's success in obtaining and utilising Structural Funds in a creative manner has to be acknowledged, the sum of the efforts in relation to rural development has not as yet amounted to a coherent or comprehensive national policy for the development of rural areas.”

6.4.2. Various Administrative Agencies

These various local initiatives are administered at national level by different Departments and State agencies and at local level by a number of organisations which complement the elected local government authorities.

County Enterprise Boards were set up in 1993 to stimulate economic activity at local level, primarily by the provision of financial and technical support for small enterprises. Membership of each Board includes a local authority manager and four elected members. Their expenditure is provided by the local authorities on a recoupment basis. County Tourism Committees stimulate and co-ordinate projects in the tourism sector at county level which feed into Regional Tourism Organisations.

Partnership Companies were set up in 1991 to tackle poverty in disadvantaged areas. The target groups are the socially excluded and the long-term unemployed. There are now 38 Partnership Companies including some LEADER Groups. The Boards are tripartite, comprising State agencies, social partners and local communities. Elected public representatives are not included. Associated with the Partnership Companies are Other Communities - smaller community groups in non-designated areas - and Sectoral Organisations which provide supportive functions.

Area Development Management Ltd (ADM) is an independent agency which was established in 1992 to channel European funding to the Partnership Companies and associated groups. It manages that part of the Local Urban and Rural Development Programme relating to disadvantaged areas and communities.

A recent addition to the above agencies has been the Western Development Commission with a brief to promote development in the five Connacht counties along with Donegal and Clare. It has a fund of £25 million over six years.

The manifest complexity of this entire development organisation has attracted criticism from time to time. But there has been some effort to incorporate mechanisms to ensure linkages between the different agencies and to reduce unnecessary overlap. The work of the County Strategy Groups is particularly relevant here. The groups were established under the terms of the Local Urban and Rural Development Operational Programme. They comprise the chairpersons of the County Enterprise Boards, Partnership Companies, Community Groups, LEADER Groups, County Tourism Committees and the County Manager. A representative of the Department of the Taoiseach acts as the liaison between the local Groups and the Department of the Taoiseach.

The need for better co-ordination of activities is obvious. Many proposals have been made, for example, NESC (1994), the Rural Advisory Group (1997), a Task Force (1998) and Fitz Gerald et al (1999). The challenge is to integrate the various local agencies, while promoting the bottom up approach, and building on the many successful local development groups which have been formed in recent years. These local groups must have a larger share of the ownership of their projects and, along with all other agencies in rural development, they should be made accountable to the people they serve. They should have the right to put forward development proposals to be considered for inclusion in county and national development plans.

The Government has accepted a recommendation to create County Development Boards to build on the work of the Strategy Groups. The Department of Agriculture and Food is currently preparing a White Paper on the basis that rural development is a broader concept than agriculture policy and that it represents a multi-dimensional, integrated process dealing with economic, social, cultural and environmental conditions of rural communities. It is intended therefore that the focus in the White Paper will be on the physical and social conditions of people living in rural areas, on economic development, on addressing rural poverty and social exclusion and on improving the capacity of rural communities to participate in their own development (Department of Agriculture and Food submission to the Dail Joint Committee).

A further issue to be addressed is the overlap in the border counties between LEADER and INTERREG. There is a strong case for targeting LEADER towards those counties not benefiting from INTERREG.

6.4.3. Agenda 2000

Under the Agenda 2000 agreement a new single Regulation on Rural Development, now in draft form, will replace nine previous Regulations. However, the content is rather similar to the present FEOGA Guidance measures and deals predominantly with farm development and farm structures, rather than with rural development in the broader multi-sectoral dimension. Support for alternative enterprises will continue, but no specific provision is made for advisory services or research. Minimum environmental requirements must be met under all elements of the Regulation. The general approach is to provide a menu of measures from which the member states will select their preferred mix. There should thereby be greater devolution of responsibilities and more flexibility in implementing programmes. The emphasis on multi-disciplinary, multi-sectoral area based principles enunciated in the Cork Declaration (1997) is not reflected in the new Regulation.

Community Initiatives are to be reduced from 13 in number to 3 and the overall budget will be reduced from €14.6 billion to €10.9 billion. The three initiatives surviving relate to cross-border co-operation which will receive half the total funds, rural development and inequalities in the labour market. There will therefore be an INTERREG III and a LEADER III. In all three Initiatives the Commission wants a sharper focus encompassing themes that are complementary both to each other and to mainstream programmes. The Commission believes that there are too many small scale and costly projects.

6.4.4. Rural and Regional Development

The goals of rural development can only be met in the context of balanced regional development. Consequently, rural development requires a regional planning framework.

There has long been a commitment to promote balanced regional development. For example, grants available for industrial development have for decades been differentiated by region and central government services have been relocated out of Dublin. Over the past decade the EU Structural Funds have played a major part in the improvement of infrastructure. Yet the Western Development Commission were able to point out that of 102 grant aided industries in total for the country in 1997 and 1998, only 12 were in the seven counties it spans and five of the twelve were in Galway. Institutionally, Forfas, IDA Ireland and Enterprise Ireland administer the national policies on industrial promotion. There are eight regions with eight Regional Authorities.

The ESRI team concluded that:

“in order to correct the apparent spatial disparities and to prevent a possible worsening of this situation, an explicit regional development strategy is required. This strategy should set out programmes to promote public and private physical capital formation as well as investment in human and knowledge capital. It should promote development in each region in a way that makes the maximum contribution to the overall national objective of increasing growth potential, maximising sustainable employment and convergence between regions in gross value added” (Fitz Gerald et al, 1999, p.110).

They advocate that key towns/cities should be selected as development nodes, and these nodes, through a hub and spoke mechanism, would be the development centres for their rural hinterlands (Fitz Gerald, 1999, p.267). The aim should be to ensure that most rural areas would be within commuting distance of employment centres, but they recognise that there are certain rural and urban areas that suffer particular problems of disadvantage that might benefit from additional targeted, area-based actions.

In response to criticisms of regional policy, two new Group Regional Authorities are to be established with the tasks of (i) promoting the co-ordination of local authority and public services in their areas, (ii) advising the Government on the regional dimension of the National Development Plan, (iii) monitoring the general impact of all EU programmes for assistance, and (iv) managing regional programmes in the next Community Support Framework. The last task is a major innovation, as this role has been the exclusive preserve to date of Government Departments. The regions will be called Southern and Eastern and BMW (Borders, Midlands and West). The existing eight Regional Authorities will remain, at least for the time being. In addition, IDA Ireland has announced a major increase in regional emphasis in its operations. The new focus aims to deliver, in the next 5 to 10 years, more than half of all new jobs from greenfield projects to the BMW region.

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Proceedings of the Joint Committee

Wednesday, 22 June, 1999

1.The Joint Committee met at 4.15 p.m..

2.MEMBERS PRESENT

The following members were present:

Deputies John Brady, Paul Connaughton, John Ellis (in the Chair), Michael Finucane, Michael Moynihan, Willie Penrose, Michael Ring and P.J. Sheehan and Senators Peter Callanan and Feargal Quinn.

Professor Séamus Sheehy, U.C.D. and Dr. Deirdre O'Connor, U.C.D, Consultants to the Committee were also in attendance.

3.DRAFT REPORT ON THE FUTURE OF IRISH AGRICULTURE

The Chairman brought forward the draft Report which was read as follows:

Foreword, agreed to

Glossary, agreed to

Executive Summary, agreed to

Chapter 1, agreed to

Chapter 2, agreed to

Chapter 3, agreed to

Chapter 4, agreed to

Chapter 5, agreed to

Chapter 6, agreed to

Appendices, agreed to

Table of Contents, agreed to

Title to the Report, agreed to

Draft Report, agreed to

Ordered: To report accordingly.

4.ADJOURNMENT

The Joint Committee adjourned at 6.17 p.m.

APPENDIX 1

Membership of the Joint Committee

APPENDIX 2

Joint Committee on Agriculture, Food and the Marine

ORDERS OF REFERENCE

Dáil Éireann

13th November, 1997, (** 28th April, 1998), Ordered:

(1) (a)That a Select Committee, which shall be called the Select Committee on Agriculture, Food and the Marine, consisting of 14 members of Dáil Éireann (of whom 4 shall constitute a quorum), be appointed to consider suchC

(i)Bills the statute law in respect of which is dealt with by the Department of Agriculture and Food and the Department of the Marine and Natural Resources, and

(ii)Estimates for Public Services within the aegis of those Departments, as shall be referred to it by Dáil Éireann from time to time.

(b)For the purpose of its consideration of Bills under paragraph (1)(a)(i), the Select Committee shall have the powers defined in Standing Order 78A(1), (2) and (3).

(c)For the avoidance of doubt, by virtue of their ex officio membership of the Select Committee in accordance with Standing Order 84(1), the Minister for Agriculture and Food and the Minister for the Marine and Natural Resources (or a Minister or Minister of State nominated in their stead) shall be entitled to vote.

(2) (a)The Select Committee shall be joined with a Select Committee to be appointed by Seanad Éireann to form the Joint Committee on Agriculture, Food and the Marine to considerC

(i)such public affairs administered by the Department of Agriculture and Food and the Department of the Marine and Natural Resources as it may select, including bodies under the aegis of those Departments in respect of Government policy,

(ii)such matters of policy for which the Ministers in charge of those Departments are officially responsible as it may select,

(iii)the strategy statement laid before each House of the Oireachtas by the Ministers in charge of those Departments pursuant to section 5(2) of the Public Service Management Act, 1997, and shall be authorised for the purposes of section 10 of that Act,

** (iv)such Annual Reports or Annual Reports and Accounts, required by law and laid before either or both Houses of the Oireachtas, of bodies under the aegis of the Department(s) specified in paragraph 2(a)(i), and the overall operational results, statements of strategy and corporate plans of these bodies, as it may select.

Provided that the Joint Committee shall not, at any time, consider any matter relating to such a body which is, which has been, or which is, at that time, proposed to be considered by the Committee of Public Accounts pursuant to the Orders of Reference of that Committee and/or the Comptroller and Auditor General (Amendment) Act, 1993.

Provided further that the Joint Committee shall refrain from inquiring into in public session, or publishing confidential information regarding, any such matter if so requested either by the body or by the Minister in charge of that Department; and

(v)such other matters as may be jointly referred to it from time to time by both Houses of the Oireachtas,

and shall report thereon to both Houses of the Oireachtas.

(b)The quorum of the Joint Committee shall be 5, of whom at least 1 shall be a member of Dáil Éireann and 1 a member of Seanad Éireann.

(c)The Joint Committee shall have the powers defined in Standing Order 78A(1) to (9) inclusive.

(3)The Chairman of the Joint Committee, who shall be a member of Dáil Éireann, shall also be Chairman of the Select Committee.

Seanad Éireann

19th November, 1997, (** 30th April, 1998), Ordered:

(1) (a)That a Select Committee consisting of 5 members of Seanad Éireann shall be appointed to be joined with a Select Committee of Dáil Éireann to form the Joint Committee on Agriculture, Food and the Marine to consider C

(i)such public affairs administered by the Department of Agriculture and Food and the Department of the Marine and Natural Resources as it may select, including bodies under the aegis of those Departments in respect of Government policy,

(ii)such matters of policy for which the Ministers in charge of those Departments are officially responsible as it may select,

(iii)the strategy statement laid before each House of the Oireachtas by the Ministers in charge of those Departments pursuant to section 5(2) of the Public Service Management Act, 1997, and shall be authorised for the purposes of section 10 of that Act,

** (iv)such Annual Reports or Annual Reports and Accounts, required by law and laid before either or both Houses of the Oireachtas, of bodies under the aegis of the Department(s) specified in paragraph 1(a)(i), and the overall operational results, statements of strategy and corporate plans of these bodies, as it may select.

Provided that the Joint Committee shall not, at any time, consider any matter relating to such a body which is, which has been, or which is, at that time, proposed to be considered by the Committee of Public Accounts pursuant to the Orders of Reference of that Committee and/or the Comptroller and Auditor General (Amendment) Act, 1993.

Provided further that the Joint Committee shall refrain from inquiring into in public session, or publishing confidential information regarding, any such matter if so requested either by the body or by the Minister in charge of that Department; and

(v)such other matters as may be jointly referred to it from time to time by both Houses of the Oireachtas,

and shall report thereon to both Houses of the Oireachtas.

(b)The quorum of the Joint Committee shall be 5, of whom at least 1 shall be a member of Dáil Éireann and 1 a member of Seanad Éireann.

(c)The Joint Committee shall have the powers defined in Standing Order 62A(1) to (9) inclusive.

(2)The Chairman of the Joint Committee shall be a member of Dáil Éireann.

APPENDIX 3

SUBMISSIONS RECEIVED

Submissions were received from the following organisations:

XThe Department of Agriculture and Food

XThe Irish Cattle Traders and Stockowners Association (ICSA)

XIrish Co-operative Organisation Society Ltd. (ICOS)

XThe Irish Creamery Milk Suppliers Association (ICMSA)

XTeagasc

XThe Food Safety Authority of Ireland

XAn Bord Bia and

XThe United Farmers Association

XThe Irish Farmers' Association (IFA)

XMacra na Feirme

APPENDIX 4

TITHE AN OIREACHTAIS

An Comhchoiste um Thalmhaíocht, Bia agus an Mhuir

HOUSES OF THE OIREACHTAS

Joint Committee on Agriculture, Food and the Marine

Minutes of Evidence of 2 June, 1999

Meeting with representative organisations in the agricultural sector regarding submissions received.

AN COMHCHOISTE UM THALMHAÍOCHT, BIA AGUS AN MHUIR JOINT COMMITTEE ON AGRICULTURE, FOOD AND THE MARINE

Dé Céadaoin, 2 Meitheamh 1999.

Wednesday, 2 June 1999.

The Joint Committee met at 4.00 p.m.

MEMBERS PRESENT:

DEPUTY J. ELLIS in the chair

Chairman: Are the minutes of the meeting of 14 April agreed? Agreed.

Submissions on the Draft Report on the Future of Irish Farming.

Chairman: It is proposed to take the meeting in the form of questions and answers. We have had submissions from all farming groups on our proposed report which is being compiled by Professor Sheehy and we have invited them before the committee as we want our report to be ready before the summer recess. Many colleagues are currently out canvassing for the forthcoming elections out of self-preservation, so it is for that reason we have a smaller attendance than normal rather than any discourtesy. I welcome Mr. Tom Parlon, President of the IFA and Mr. Michael Berkery, general secretary. I see Mr. Con Lucey in the gallery. I welcome Mr. Frank Allen and Mr. Ciaran Dolan of the ICMSA and Mr Dermot Kelly of Macra na Feirme. I understand that Mr. T.J. Maher of Macra na Feirme will be along later. I also welcome Mr. Charlie Reilly and Mr. Ray Doyle of the Irish Cattle Traders' and Stockowners Association and Mr. Michael O'Callaghan and Mr. Kevin O'Rourke of the United Farmers Association. We will have a question and answer session.

Deputy Connaughton: I welcome all delegations. Based on the submissions and what farmers are talking about, what do the delegations see as the most important plan that can be developed for the beef industry over the next five years? We know the cheques that will be received according to Agenda 2000 and we also know that if we had a collapse in prices we would have to go down to 56p and the intervention net system. How can we ensure that there is some profitability brought back into cattle farming. How do the delegations view headage working out on an area based system? I assume there will be winners and losers and, most importantly, will we have the £115 million that has been guaranteed? It is one thing to divide it but it is another to get it at the beginning.

It might be difficult to pinpoint this matter but I am having great difficulties with eligibility for the retirement pension scheme among certain classes of farmers, particularly spouses. I am seeing this around the country and I am very concerned by the Department's interpretation of the rules. They may have it right for all I know but it is not as I expected it to be worked. A woman farming in her own right who rents long term lease land from other farmers finds she is ineligible for the pension. I admit it is a technical matter but it is coming up far too often.

Many people are expressing concerns to me regarding installation aid grant, despite the fact that is has been reintroduced at the same level as in 1985 or 1986.

Mr. Tom Parlon: The chairman referred to the sense of self-preservation among politicians and that is one we all share.

Clearly, Agenda 2000 sets out the supports for beef and the guarantee of the levels of support has been a positive development for the beef industry. Our dependence on the supports has been greater than other countries and if that continues we will probably get a greater percentage of the beef supports per farmers than most other countries. There is a common support arrangement across Europe, whether one is Finnish, Irish or another nationality, yet the gap between the Irish price and anyone else in Europe is extreme and the biggest of all. We have to narrow the gap between the Irish price and the European price. We are also dependent on third country markets for exports.

The last time we had a reasonably good price there was a substantial live trade and lots of competition in the marketplace. Whether one is dealing with beef or retailing, competition is the life of trade and there are fairly positive moves in the live trade sector. Market access is also vitally important. We must have a market to go to in the first instance and the means of getting to that market. We sent out over 13,000 live cattle in the week ending 15 May so we appear to have developed fairly substantial means, including access, of getting substantial levels into live exports. That will still be a low percentage of the overall output but it is sufficient to cause competition.

All the indications are that the WTO is going to be the next big challenge. When the US Secretary of State for Agriculture, Mr. Dan Glickman, was in Dublin the week before last he made no bones about the fact that export refunds are going to be a major target. Our major dependence on export refunds makes us very vulnerable. Access to the European market will accordingly be very important.

There is a major difficulty with the renationalisation of markets. It is very difficult to put an Irish flag on Irish beef in UK or French supermarkets and supermarkets have balked at doing so. This is regardless of the extra margin that would accrue to them as a result of buying Irish beef, as we are very competitive in price given that our farmers are taking the lowest prices in Europe. That has to be a priority but how are we do it? It involves labelling, putting country of origin on beef as well as compliance with stringent safety regulations. There will be a lot of politicking, especially given the grouping we are in for BSE status and it is important to have the same status as the bulk of the countries which import from us and a higher status than the UK. It suits many countries to wave the European flag in one context while waving their national flag in another and we cannot tolerate that sort of ambiguity. That is a matter for the Minister for Agriculture and Food and for the European Commission. The other weakness we have is quality, which is readily acknowledged. We need a major improvement in the quality of our animals and of course farmers will respond to market signals, which may be why the quality of our animals has deteriorated. The market signals were not there and there was a dependence on third country markets. We as farmers have made a commitment to invest in the cattle breeding federation to improve quality and to get information out to farmers.

Our industry must also develop. Nobody should underestimate the challenge we face. An Bord Bia has put up a target of an extra 100,000 tonnes by 2002. That means we are going to displace 100,000 tonnes of European beef already in the marketplace. That is a tall order as all the indications are that Europe will not eat any more beef, so we must displace the beef already there on quality and marketing. Our industry needs substantial investment to be prepared. If one looks around the meat factories there has been little or no investment over the last ten to 15 years. Why do so, when we were vacuum packing boatloads of beef for third country markets? Those factories need investment. There is also a lack of partnership between factories and producers and that must be developed. Price transparency should be developed. We may be overly critical of the meat factories in returning the market price but the way they behave generally, the fact that there is a common price for every grade of cattle in every outlet buying beef, does not give rise to much confidence in terms of transparency. The partnership between processors and farmers will have to be built on trust. Processors and Bord Bia must give a clear indication to producers of what the market is returning on a weekly basis. This would remove much of the antagonism so that we can all live in the real world. There is no point underestimating the challenges.

Those are the main areas in terms of beef. We need investment. Our submission on the national development plan highlights the fact that we need national funding and we need to take advantage of EU funds in terms of investment in product development for the European market.

The most important concern for farmers as regards headage payments is not how the money will be spent, but whether it will continue. After the Berlin summit the Taoiseach quoted the figure of £400 million over the next seven years which indicates that, to make up the current level of headage funding, we will need 50 per cent co-funding by the Exchequer. The positive consideration is that we have never been in a better position to provide that funding.

Headage payments have been a major factor in maintaining populations. Critics would argue that they are doing little for the long-term position but it is an income support which is keeping people in areas and people are not going to give them up readily. Is it essential that the Government commits itself to co-funding as it provides a good return.

We have set up a committee to look at the area based system which is a sensitive area. Headage payments is a broad issue. No matter what one's income or rates, one receives the same level of headage payment depending on the number of animals.

One has to consider that a million additional acres will be under consideration for new headage payments which did not qualify previously. This will dilute payments to those who depend on these payments. For example, dry stock suckler cow and sheep farmers are heavily dependent on these payments. Our figures show that about 27 per cent of their total income is derived from headage payments. A dilution of these payments will be a major blow to such farmers and put them out of business. We have to be very sensitive and overall income must be a consideration in terms of the new situation.

Regardless of the constraints imposed by the WTO which prevent us directing payments as before in favour of an area based approach, we have to continue to target headage payments to farmers who received them previously. That is the fairest system. Overall income must be taken into account if we have to exclude people. There are many ways of pairing it off. The EU does not pay matching funding on headage to the over 66s. This is a sensitive area. However, this option must be looked at in terms of the overall future structure of farming.

I was not sure of the detail referred to by the Deputy concerning the retirement scheme. Funding for the retirement scheme, REPS and forestry will be under pressure in the new situation. Under Agenda 2000, 90 per cent of the support will be made in direct payments. The other 10 per cent will go to accompanying measures of which the retirement scheme, REPS and forestry are a part. These will come under pressure.

To date there has been no financial restriction on the number of people applying for REPS, the retirement scheme and so on. The retirement scheme has been very effective in improving the overall structure and it is allowing people to retire from farming with some dignity and not being dependent on a situation in which a farmer could not keep two households going. That is the reality and we have to work hard to secure sufficient funding for the retirement scheme and to ensure that it does not alienate any sector. The Deputy spoke about women and I am not too sure of the detail to which he was referring, but funding will be a priority. We will then have to look at the detail to see that no one is unnecessarily penalised by the restrictions.

Mr. Kelly: Beef payments will continue but they will take a slight cut when the money changes. The main problem concerns payment for quality. Killing cattle at a flat rate is doing nothing for quality. Until last year one got as much for a fat R grade as for the best U grade which did not encourage people to produce the proper quality animal.

No one knows what price they will get for beef next October or November. There could be a two week wait to get cattle into a factory as happened last year. Live exports create competition and are a means of getting extra stock, particularly poor quality stock, out of the market.

The price for heifers has suffered recently as a result of the beef premium being geared towards male cattle. This was evident in the spring with the price for heifer calves was very low and one was lucky to get someone to take them. This area will have to be examined.

It is pointless talking about headage payments unless we are sure that the money will be there. The Government will have to guarantee that it will come up with the money. Area based payments will not gear them in the desired direction. The overall ceiling is about 38 or 39 hectares so it is being geared towards small farmers. If one goes to an area payment one would be reducing the amount received by small farmers and there will probably be no ceiling on the overall amount.

I am not sure of the point referred to by the Deputy concerning the retirement scheme. The scheme has worked fairly well over the past few years but there have been a few problems. We need to examine the age at which a person is eligible to take over land so that it is geared towards younger, better qualified farmers up to 35 or 40 years of age. I am not sure if land is going to the right people in all cases. A person who obtains land at 50 years of age will be eligible for the retirement scheme in few years. We do not want land to go to such people. Land prices for rental, leasing or whatever are £110 or £120 per acre per year which makes it more difficult for young farmers starting out. These are the types of farmers we should be encouraging to take such land.

People will know of the battle fought by Macra na Feirme over 15 months to secure the reintroduction of installation aid. We would like to see this payment increased substantially. The payment was the same when introduced in 1985. There is a big difference between what one could buy with £5,600 in 1985 and what one could buy with it today.

Originally it was suggested that a low-cost grant would be available for installation aid. Our proposal suggested that there should be a grant available for the proper type of planned investment. In many cases considerable development in housing, stock improvement or whatever is needed when a young person takes over a farm. There are times when it is not easy to obtain the capital required. We are seeking the introduction of a structured loan where there is a proper plan.

Mr. Allen: Immediate action needs to be taken on four key points relating to beef. First, the reason for tax incentives for factory supplier contracts is to guarantee supply of good quality cattle to the factories so they can plan ahead. The tax incentive has been seen to be very effective in city and seaside developments. The idea of these incentives drives matters forward. Clearly breeding policy will have to change. There is no question about this because quality has declined. ICBF, together with Teagasc, will have a key role to play in advising people how to manage and develop.

On the restructuring of An Bord Bia, it is time to have a unit which is totally dedicated to beef, marketing and promotion. In other words, another CBF. This is an area where we need to take action because beef production in Europe has decreased and we have an opportunity to get market share there. However, this will need investment and a lot of hard work. There needs to be much more product research and general research on the beef side. A lot of valuable work is being done in the food centre but more needs to be done and more investment needs to be put in place. If we move on those four areas, we can make progress in the short term.

On headage payments, there will be many winners and losers if we move to an area-based system. Any move would have to be on a phased basis. In other words, I would be opposed to a “big bang” scenario. Clearly more people will be coming into the system and it is essential that adequate resources be made available. Headage payments will have to go to those in greatest need. This will mean some restrictions. If those who do not need headage payments receive them, those who need them will not receive sufficient funds. A number of people need help by way of income support and this needs to continue on that basis. We need to be careful how we structure area-based payments but it must be done on a phased basis.

There must be no discrimination against anyone in relation to retirements schemes because this goes against natural justice.

On installation aid, this is a key policy in terms of enticing young people into agriculture. We are now witnessing a situation where it has become extremely difficult to get young people into the industry. Therefore, installation aid has become more important than ever. This needs to be increased and more people need to qualify for it in order to entice them into the industry. Young people need special incentives to encourage them to go into farming because of the other opportunities open to them. It is expensive to take over a farm because a lot of work needs to be done on most farms to get them up and running under new management.

Mr. Reilly: ICSA welcomes the opportunity to address the committee. I will be brief and I will not cover the points already made. In relation to the beef industry, we need to upgrade our breeding policy in the next five years. ICBF is a welcome development because we can cut our dependence on export refunds. If we are to have any impact in the European market, we need to improve the quality of our cattle. Perhaps the emphasis of the ICSA would be to promote research and development. In our submission document we see a need for this because no research and development has taken place in the beef industry in the last number of years. The only consumer friendly product is the burger which has a terrible image. We need to do something about this because with two working partners in most households the need for convenience food has never been more evident. I am sure Senator Quinn would verify this. Nothing has been done in this area for a long time and we need to divert money to this.

In relation to headage payments, it has already been pointed out that this is a substantial part of dry stock farming income. It must be ensured that any different system of payment does not impinge on that. The big word in relation to headage is targeting. This must be targeted at the people who need it most and in our opinion that would be dry stock farmers.

In relation to Deputy Connaughton's points regarding the farm retirement scheme and the installation grant, they are more or less linked in so far as we see it. While the introduction of the installation aid grant is welcome, it falls far short of what is happening in mainland Europe. For instance, in France there is an installation grant of £12,000 to help with cash flow and there is a subsidised loan at a rate of 2 per cent up to £84,000. This can go towards land purchase. This is a serious attempt to change the age profile of the farming community in France, yet it is having limited success. I contend that the installation aid proposed in Ireland is only tinkering, it is not a serious way to go about changing the age profile of Irish farming.

Mr. O'Callaghan: I thank the chairman for inviting us to attend this important committee. This allows us to put our views to the decision-makers. Agriculture is a very important part of Irish life. I would like to think that the members of the committee have studied carefully our submission. A number of important issues deserve to be delivered upon. We are a food-producing nation and these are exciting times for this industry. However, if prices are depressed we must work to improve the situation and we must ensure quality of our products. We must realise also that we are dependent on markets. We will not find good markets if there is a monopoly situation. Last autumn was a perfect example of this where the cosy cartel of beef barons resulted in decreasing prices and destroying the livelihoods of thousands of Irish farmers. The United Farmers Association have for the past ten years demanded a decent live export trade. This trade may not be the best in the world but it provides a market and competition. This deserves to exist on an ongoing basis and we welcome the concept of live exports on an ongoing basis with an emphasis on quality. The beef plan for the next five years should take into consideration Professor Joe Mannion’s overall business development plan which the United Farmers Association recently launched at its national conference in Charleville. This business development plan has proven over two years research how rural farming families can be stabilised and how rural communities who spend 75 per cent of their income locally can be boosted by going down a business development plan route. Deputy Connaughton asked for a plan on beef. The recent report of the food industry development group, spearheaded by the Minister of State at the Department of Agriculture and Food, Deputy Ned O’Keeffe, sets out a plan for the future. However, as farmers we rear stock and cannot be involved at the other end of the market. We need people to market for us. Marketing is the most important word to be used by the Irish farming community. We have not been the best at marketing. As national President of the UFA let me reiterate that Irish farmers desperately need good marketing.

All headage claimants should be paid promptly and any area based systems should be on a pilot basis. The UFA maintains it should be on an income basis. All farmers receive dole, for want of a better term. Taxpayers are providing farmers with the money they get. It is important, therefore, that this money be allocated fairly and justly and that it enables all to provide their families with a decent standard of living.

As a farming organisation we claim to represent low income farmers. We have a hard job. Other organisations need to make greater efforts if they wish to look after the low income farmers.

There are problems with the retirement scheme. In our submission we mention the role of women in agriculture. It states:

The role of farm women in society needs to be addressed. There is a serious neglect of their identity on policy making throughout the agri-sector. As mothers and family farming people, who perhaps in many cases make out the household budget, their experience in life skills is a huge untapped resource which deserve recognition now.

The farm retirement scheme is concerned with dignity. For example, a man walking a dog, a greyhound, is not allowed his farm retirement scheme. In former times people would buy greyhounds as they grew older to enable them keep fit. We do not have to buy dignity or sell out. In a normal democracy we all have dignity. Ultimately, it is all we have. Dignity is a basic right, regardless of whether one is in a retirement scheme or not.

Some people in farming can no longer engage in activities such as having a few greyhounds or counting cattle for their sons. When they join the retirement scheme they are told they cannot participate in such activities. It is a crazy situation for people who have been involved in the farming community for all of their lives. Money does not keep one alive. People are kept happy by their environment and a structured way of living.

The schemes need to be kept humane and in context. Let us not be slaves to money. The members of this committee, who have been elected by the people, should ensure that the laws of this Republic are fair and just.

Senator Quinn successfully markets his company. As an outsider, he sees that the farming community needs a good shake-up in terms of marketing.

With regard to the installation grants, young farmers have participated in various schemes which contain clauses which take account of income. One could be a leader in one's field but would not qualify for various schemes because of being a small holder. The Minister has made a commitment that the new installation aid will take account of family farms, including the small family farms. If this does not happen rural Ireland will be left with nothing but bullocks, briars and bachelors.

Members of the committee, who tramp the country seeking votes, are well aware of the present situation. My members have taken a hammering over the years. We have made a submission on behalf of the family farming sector throughout the country. We hope to return to the committee to follow it up.

Chairman: Three members have indicated they wish to ask questions. I call first on Deputy Kelleher.

Deputy Kelleher: I wish some farmers walked the grounds a little faster because I have backed a few greyhounds in my time and they have always been a little slow.

This is an important forum for discussing rural development and the long-term viability of agriculture. We have always been involved in fire brigade action when dealing with agriculture. On any given issue politicians will defend their ability to resolve problems while the various farm bodies submit their views. It is important that we agree a long-term strategy at a forum.

Apart from the problems of market share in Europe, difficulties with the World Trade Organisation and with breaking into Third World markets with live exports, etc., Irish agriculture faces the additional problem of competing with the Celtic tiger of business in urban Ireland. The question now is how to retain young, vibrant people in agriculture. I come from a farm and spent many years in the pit of a parlour on a December morning. It is not a pleasant way to spent one's time.

We can discuss issues such as installation aids, but if we do not have a long-term plan which will create an image for agriculture as something exciting, challenging and rewarding we will go down a dangerous road. In general, young people are not enamoured with the cheque in the post system. While they have been brought up with it all their lives, they want to be seen to be actively pursuing their careers in agriculture and not want to have their futures decided on the whim of a politician in Brussels in Kildare Street. We need to be conscious of this. I am delighted, therefore, that the committee has decided to consider this aspect and to ensure that we produce a long-term strategy.

In the 1980s there was no problem with people staying at home on the farm because the only alternative was the boat to England or the aeroplane to New York. However, given that we are now in a vibrant era, agriculture is losing people. It not only needs numbers but quality people driving forward the agriculture economy.

As long as there is difficulty in having plentiful access to affordable housing in rural Ireland the social fabric of society is insufficient to retain young people. That is why urban living has become so attractive for them. There are not enough young people in rural Ireland to retain others.

We need to look at the planning process. County development plans contain strict guidelines on rural planning. With modern developments, such as biocycle systems, I see no reason why there are not more rural settlement in far flung areas.

For too long we developed an ostrich approach in trying to force farmers to stay viable within their own unit knowing that in the long-term they could not maintain viability. In certain quarters a stigma attaches to farmers who earn off-farm income for a couple hours a day or a couple of days a week. The organisations should encourage young farmers to seek education in computer systems, technology etc., whereby they could get work for two days a week. The stigma of off-farm income must be removed. People must be actively encouraged to farm but also to seek off-farm income.

The quota regime has been safeguarded for the time being. I would be interested in the differing views of the organisations here in that regard. Can we accept the present quota regime where there is almost a system of landlordism in that people with large quotas have leased them at exorbitant prices to other people who are trying to seek a living? This is something about which we must be conscious. There are farmers who have left the milk production business for various reasons, which may be genuine, but the difficulty is that they hold an asset. We talk of restructuring the temporary leasing but that is a Mickey Mouse proposal. We must be brave on this one and take major steps to ensure that a person with 15,000 or 18,000 gallons is codding themselves if he or she does not have the ability to get extra quota along the way.

On political change in Europe, there were anxious nights while the Ministers, the Government and the farming organisations lobbied on behalf of Ireland but it is dangerous to be dependent. If there is a political change in Europe where European farmers fall foul of the political system, we would be in a serious situation. We must be conscious of that. That is why the long-term plan comes into play.

On the farm assist scheme for which we all lobbied, I remind Mr. Kelly that, along with Macra na Feirme, I lobbied for installation aid also. The up-take on the farm assist scheme has not been good. Have the organisations, through their various regional branch meetings, encouraged those who might be eligible to apply for it?

Senator Quinn: Yesterday the Belgian Ministers for Health and Agriculture resigned because one producer of animal feed supplied contaminated food. It seems to me that will wipe out that industry in Belgium. I suggest the same thing could happen in Ireland in another area unless we find a solution to the danger of one person doing something wrong. My question to the organisations is on whom does that responsibility rest? How can we, as a nation, ensure that one rogue farmer or, as I called him or her in the past, an enemy within the farming organisation does not do so? Is it the view of the organisations that this is the job of the State alone or are the organisations taking responsibility on behalf of their members to root out the neighbours who are misbehaving and endangering the industry which everyone wishes to see survive? Rather than address a number of other questions, let me ask that one question. How do the organisations believe that problem will be solved? How will we face that problem? Are we, as a nation, willing to squeal on our neighbour? If not, rural Ireland will be destroyed.

Deputy J. Brady: I welcome the farming organisations. It is good to see them all coming together with the one objective, that is, to promote agriculture in the best interests of the country.

I want to return to the subject of quality. Speaker after speaker emphasised the need for quality beef producing cattle. This is an old chestnut of mine. It is grand to produce top quality product but if you are not compensated for producing it, it is not worth a tuppenny damn. For too long we have seen that one gets the same rate for a quality beast as for an animal of lesser quality. The problem will not be solved until the grading system is improved. The time has come for every one of these organisations, the processors and the Department to sit down and get a commitment from the factories that if the farmers produce top quality beef, they must be compensated for it.

What does the future hold for agriculture after Agenda 2000, which was completed a couple a months ago? Will more farmers depend on off-farm income and farm assist in the future?

Like Deputy Kelleher, the issue of depopulation, particularly in the part of County Meath from which I come, is important to me too? Planning permission in rural Ireland is a serious problem. I acknowledge that where a family owns 70 or 80 acres two of the children may be lucky enough to get planning permission but if a man has 70 or 80 acres and a family of four or five, I believe they all should be entitled to planning permission. Unfortunately it does not work that way. Perhaps it is our fault because we do not provide for that in the development plans. The problem is of course the way it is interpreted by the officials.

In the past 12 months the farmers of County Meath and other counties who were in financial difficulties would have welcomed a gesture from the planners allowing them to sell a site. Some county councils look after farmers in that regard and provide planning permission for one or two sites. In particular, if such sites were given to local people, it would keep them in the area. The farming organisations should get together on a national basis and fight county councils in this regard, particularly in areas such as my part of County Meath where depopulation is a problem - it is a problem in the northern end of the county but not in the other parts of the county. What are the views of the organisations on that?

Deputy M. Moynihan: Much of what I want to say has been said either by the members of the committee or the farming organisations. However, over the past 20 or 25 years strict controls were introduced to the milk industry. They started off with the methylene blue test in the mid-1970s and graduated to TBC/SPC tests. Nearly every pound of cheese manufactured may be traced back to a batch of milk. There is a need to introduce a similar control system for beef which does not involve an endless round of paperwork because farmers have been bogged down in bureaucracy and paperwork to the point of exasperation. Farmers, such as me, as the primary producers of food, must take responsibility for producing quality product. When we, as farmers, go the marketplace we must have a product over which we can stand.

With regard to installation aid and the need to encourage young people to farm, Deputy Kelleher stated that agriculture is now competing with the Celtic tiger. There is no comparison between a 100 acre farm with 25,000 or 30,000 gallons of milk in rural Ireland and a job. The parents may avail of the retire scheme. It benefits all the members of the family and not just one person.

Mr. O'Callaghan, who is a neighbour of mine, referred to the case of a farmer walking a greyhound. That is bureaucracy completely gone mad. I know of a farmer who applied for 25 premia with one wrong tag number. As a result he was nearly debarred for two years. Surely we can put a human face on all these regulations, either in the Department of Agriculture or within the European Commission.

Chairman: Are the farming organisations prepared to consider making some contribution towards direct marketing where they would have an involvement themselves? When we compare the prices here and those of Mainland Europe, there is a discrepancy of between 25 and 35 per cent, for which there are all sorts of excuses. There will have to be transparency about the price that is paid to the producer compared with the price that is actually received. Farmers would need to get involved in group marketing and group production, but this will need funding. Would farmers see that as an option, in conjunction with State and European funding? Bord Bia is doing the best it can with the resources it has. The percentage of actual agricultural production that ends up in marketing is frighteningly small compared with other industries and this matter will need some co-operation.

We will have to accept that the number of part-time farmers is going to increase dramatically in the coming years. As other members have said, a 20,000 gallon quota of milk does not compare favourably with a job at £20,000 as a PAYE worker. But the two combined can bring about a standard of living that would be much higher than could be maintained with one alone. I am delighted that for once, all the farming organisations are sitting at the one table. There is some common ground. I welcome T.J. Maher and congratulate him on his election. It is not going to be an easy life, which you will find with all types of politics.

Mr. T. J. Maher: The outstanding question how we can attract young people into agriculture during the economic boom. We cannot put our heads in the sand and say we cannot compete. There is a need to set out a long-term policy that will attract young people into agriculture. We have a difficult income crisis at the moment but we should not unconsciously or otherwise, give the impression that firstly, one cannot earn a living from agriculture and secondly, it is not a good way of life. It is a fantastic way of life - I believe, as a young farmer, that it is one of the best ways of living. I have been in this job for only a couple of weeks but there is a lot to be said for farming as opposed to being a politician. More useful schemes for young people are needed. The installation aid scheme is very limiting as you have to be a very small scale farmer in order to qualify for it. The two thirds stamp duty exemption really needs to be removed. Any impediment put in front of young farmers is one more obstacle in the way of taking over the farm, though this is no guarantee of an income. It gives one the right to farm and possibly survive. Putting stamp duty on whoever takes over a farm penalises them before they start and times are difficult enough. Macra will have a very clear view on this over the coming months.

There is a contradiction in Irish agriculture that there is a huge labour shortage simply because schemes debar many young people if they are not full-time farmers. We must reclassify what is known as farm income. If I am a farmer with 70 or 80 acres of beef farm, clearly I have time that I can utilise in a better way. I have two choices - I can look for a job in Superquinn or the local butchers or I can try to raise my agricultural income. I can work with the local farmer or go on the farm relief service. If I do those things, I am removing myself from full-time farming and the resulting benefits, such as 100 per cent stock relief, if I am a young farmer. It would be better for a young farmer if he could work on his parents' farm, build it up and also earn extra income to enable him to have the equivalent income of his counterpart in industry. That is a very simple measure but it could have a huge long-term impact.

Deputy Ellis's and Deputy Moynihan's questions were similarly on part-time farming. We cannot support all our farmers as full-time farmers, therefore we must provide enough infrastructure throughout rural Ireland to attract industries, small or large, to set up in those places. If we do not give people the opportunity to earn enough income within rural areas, then they will continue to migrate.

Farming numbers have decreased rapidly since we entered CAP and the EU. If we were not in the EU they could be a lot lower. We must slow down the trend as much as possible. Farm partnership in France involves two or more people operating their farms as one unit, with the advantage that it is a community based activity and there is not the same loneliness one has in Irish agriculture. There is a far better social life where there is cover available and you are not the only person on call. There are also productional advantages where labour and farm machinery can be used more efficiently. Obviously there are political difficulties in the way quota regimes and beef premium rights are operated. If we continue to operate our agricultural schemes as we did five years, we will continue to lose people out of the industry. All options must be looked at.

The problems of planning have often been raised around the country. We must lobby on this matter and if we are serious about keeping people in rural areas, then we should not stop a farmer's son from building a house on his own land.

Mr Allen: How can we make agriculture more attractive to young people? Quite simply by giving them a decent income from it. If we do not act soon farmers will be an endangered species and special plans will be made to encourage people back into farming. Let us keep the people that are there by giving the ones who want to farm the necessary help.

Rural depopulation is a serious issue in many places whereas in other areas the rural population is increasing and that has to be taken on board. We need to ensure that in those areas where there is not sufficient population to have viable communities that we have help to make sure things are developed.

Planning is an issue but it has a number of features. First, the question of the density of rural housing, especially where septic tanks are used. This has implications for underground water supplies, etc.. Perhaps, there is a need for new technology so that there can be a greater density of rural housing because if septic tanks are too close, that can have implications for ground water and that needs to be looked at. The overall principle must be that planning permission should be made available. We do not want the cities to become congested and overcrowded; we want to get more people out of them and with modern communications and information technology there is no reason many more people could not work in rural areas. There is a lot of scope for development in that area.

Two points are relevant to whether we should encourage off-farm income. We need a core of full-time farmers to underpin the industry and we also need a sector of part-time farmers and depending on the state of the non-agricultural economy that will vary because people will only remain part-time farmers - some by way of hobby - if they see that they are getting value and extra income for the work they put in and they will stay at it if that continues to be the case. If it does not, they will not stay in part-time farming and we will be at a loss. Those two aspects need to be looked at. Another is a farmer who has, say, three quarters of a job on farm and needs some additional income such as another enterprise on the farm or a part-time job off-farm and that area needs to be encouraged.

There is a question as to whether the milk quota regime is acceptable. The basic principle must be that only one person can “live off the gallon of milk”; it is not realistic in the long run to talk about two people living off the same gallon of milk. Our view is that the people who produce the milk should have the quota. Obviously, there are in between situations where people who have young children or health problems need to make provision for such cases. The general principle has to be that the people that produce the milk should have the quota.

The Committee asked whether we are very dependent on political change in Europe. Agriculture has always been dependent on politics. In the early part of the last century the UK Government brought in free trade, for example, and ruined the grain farmers in Britain - one should read “The Mayor of Casterbridge” by Thomas Hardy which is a classic novel of that period. It will always be dependent on politics and food has, and will always, be a political time. Food security is more important than military security. If we ignore that in Europe, we do so at our peril. I consider that a primary political driving force is food security.

The uptake on the Farm Assist scheme has been slow but it is beginning to gather momentum as publicity is generated and people realise that it is there. It will be a slow development but it is an important scheme which will be significant. Senator Quinn referred to the Belgian food scare situation. There has been traceability in the dairy industry for a long time at producer, processor and marketing level. The beef sector needs to develop that to a greater extent. It is going down that road because, obviously, with modern computer systems traceability is available. It needs sampling at different levels and full monitoring.

For example, in the dairy sector, Dairy Produce Inspectors are employed by the Department who have an overall function at processing level to make sure that standards are implemented in full. In terms of the Irish context in the contemporary situation our controls are more stringent that in most places. We are building on them all the time. Nobody is complacent and saying that it could not happen here. One must always be on one's guard but we are fully aware of the problem and everybody is working very hard at all levels to make sure that quality guarantees and control are maintained. It should be remembered that product liability is a feature which applies to the primary producer due to recent changes in EU legislation. In the past one could argue that the farmer did not have product liability - it was the processor's obligation - but that is no longer the situation.

Deputy Brady asked what the future held for agriculture. In the longer term it has a good future for a number of reasons: the world economy will recover again - it always does; growing world population and demand for food, particularly protein. The ability of the world to produce more food is not really there to any great extent. To think that the world food market could be supplied by organic producers is a nonsense because, clearly, we would not be able to generate and produce the level of protein necessary. Organic production is excellent for the niche market. “Rice economies” such as China will not survive for long more. They will look for better quality and newer beef and dairy products rather than rice and we will have opportunities in such markets and, indeed, in other markets when those economies develop even further. There is not question that the demand will be there. The long-term future is quite good.

Chairman, to answer your question, a distinction needs to be made between promotion and marketing. Bord Bia is a promotion and not a marketing agency as distinct from the Irish Dairy Board, which is a marketing agency and spends millions of pounds every year in supporting its brands. Certainly, farmers are prepared to put more money in; there is no question about that assuming that everybody else, including processors, will be putting money in as well. It needs to be done and we ought to look at Bord Bia and see who we can sharpen it up even more. I do not see any reason for change on the Irish Dairy Board front. It is a co-op involved in marketing and promotion and doing it very well. Any lessons to be learned ought to be learned from that source. The basic point is that we are prepared to contribute assuming everybody else is.

Mr. Reilly: Deputy Kelleher asked how we can encourage young people into agriculture. I endorse what Frank Allen said; give them an adequate income from their efforts. That will certainly bring them in because they see their brothers, cousins, etc., going into industry and services and surging ahead of them in income terms. On top of that, what is probably putting them off to a greater extent is the idea of the cheque in the post and the amount of form filling involved, as the Deputy said. There are various schemes, such as the suckler cow scheme, the bull premium and the new slaughter premium. There is nothing only application deadlines for everything.

We, in the ICSA, put forward a policy over the last number of years that was targeted at the farmer rather than units of production so that the farmer was assured of an income subject to stocking density and he could farm with good farming practice and derive his living in that way. Then the marketplace would return value for this product rather than production for production's sake. The issue of off-farm income is difficult in so far as there is a need for it. The amount of people that will be involved in agriculture is bound to decrease. However, it raises a difficulty in so far as when you have people engaged in agriculture with an off-farm job, the amount of time that they can devote to it is reduced. The effort of full-time farmers is diluted.

For instance, if you have somebody who is suckler farming and has an off-farm job, he is far less likely to go down the route of breeding top bulls on the basis that he will have greater calving difficulties. If he has a job where he is tied to a desk or a supermarket floor for eight hours per day and his cows are calving at home, he will obviously go for the easy calving option. In terms of the full-time farmer who is trying to upgrade his enterprise his efforts will be diluted. While I do not suggest that we should not put some emphasis on off-farm income, we must recognise the difficulties involved.

In reply to Senator Quinn, I presume he is asking the farm organisations to weed out rogue farmers as regards beef, illegal residues etc. The issue of on-farm inspections is current. Perhaps it would be possible to have on-farm random inspection of stock rather than have the product at the factory and perhaps in the food chain down the line which could create a scare. Any member of the ICSA who is found to be using illegal substances or is found with residues or whatever is immediately expelled from the organisation. That is our position.

As regards what Deputy Brady asked, quality is a problem for beef farmers as regards flat pricing which has not served dry stock farmers over the past few years. However, we must understand why flat pricing got a foothold. It got a foothold because of the continued deterioration of the national stock coupled with the lack of confidence in the grading system. Basically there were two flat prices - for lesser quality cattle and better quality cattle - because the farmer, the individual supplier, did not have confidence in the grading system. If he felt he had U grade cattle or a certain percentage of them and sold them on a graded basis he would end up with a cheque for all of them. This needs to be addressed, which is being done at present.

What is post-Agenda 2000? There is a certain euphoria about how well Ireland has done in Agenda 2000. As dry stock farmers, we warn some caution in so far as there is still great difficulty facing us in this sector. As regards planning permission, as a County Meath man I know where the Deputy is coming from. I would like if my sons had the capacity to build a house on land close to me, if that is what they wish. If it is not, so be it.

In reply to the chairman's question about marketing, as is stated in our submission document, we would seek to reappraise the role of An Bord Bia.

At present, An Bord Bia is a promotion agency. This should be changed to a marketing sales agency that actually locates, sells and promotes our beef and lamb across the world. The Dairy Board's expertise should be drawn upon in this regard. Coupling this with the new research and development body, we are suggesting a meat board should be able to deliver similar results, that is real market share in Europe at a premium price. The new version of An Bord Bia should take real responsibility for marketing our red meats and could be funded out of its own profits. Ideally, ICSA would like to see the meat processors having to sell perhaps 30 per cent of their output through this body and market the rest themselves at prices not below what the new Bord Bia is getting. This, in some way, would ensure a process of selling our red meats, not trading them away, leaving the producer with no profit margin.

Mr. M. O'Callaghan: I hope this report will have a good outcome. Professor Sheehy has taken on a brave task and I hope special attention will be given to the role of the small family farm. Deputy Brady raised planning. We have called for a land authority in our submission to direct scarce resources towards genuine farming families. At the moment there is an outrageous situation of chequebook rule. There was a time when a structure was in place which ensured a sensible arrangement where the vast estates were divided among the farming community, very successfully for generations. All of this has now been thrown away.

We must have a land authority and give a sense of continuity to farming. As regards the milk quota review, the UFA is seeking a seat on the quota review body. When we sought a seat on the quota review group, the then Minister of Agriculture, Deputy Yates, said that if we were on the board other people would leave. We live in a democracy, as I am sure the chairman would agree.

Chairman: With all due respect, we have nothing to do with the quota review group. We would prefer to stick with the questions asked if possible.

Mr. O'Callaghan: I will return to the question. Needless to say, if you are not in you cannot win. One cannot dictate policy from outside. In a democracy, those who represent others around the country should be involved in serious decision making.

As regards the recent successful additional milk quota, 32 million gallons were achieved in the recent negotiations in Brussels by the Minister for Agriculture and Food, Deputy Walsh, and his officials. No decision has yet been taken as to how this will be divided. Who will get it? Will some criteria be laid down? This is not a matter for fun, it is very serious. I am sorry Deputy Kelleher has gone but his landlord is not there at the moment. There are a great number of people on 15,000 to 18,000 gallons. They are not codding themselves, they are working very hard on their farms. They are using the temporary leasing scheme to get an additional milk quota on a temporary basis. They can lease it out on a yearly basis and top up 15,000 gallons to 30,000 gallons under that criterion.

The temporary leasing scheme is an excellent one which is policed by the Department of Agriculture and Food. The United Farmers' Association would like to see the continuation of the temporary leasing scheme. We feel there is an obligation that the least-well off in society should get that additional milk quota, which has been won, not by farming organisations but by the elected representatives of the Irish people. That is an increased wealth for the Irish nation. It is important that in this Republic we recognise people and not groups of people who use their power and influence, not always to the best advantage.

There are successful farmers on low gallonage of milk quotas, for example, 20,000 gallons. I have been on their farms throughout the country. Furthermore, they operate extremely low-cost systems. Politicians will at the end of the day be criticised for making unfair laws. The United Farmers' Association sought an increase in the milk quota for Ireland. The IFA decided at the last minute in Dublin on a Sunday that it would not seek an increase in the milk quota for Ireland. Is that true, Tom?

Chairman: We are not here to have any inter-group disputes.

Mr. O'Callaghan: Let it be put on record. When the Minister decides how to divide that increased allocation for Ireland, he is duty bound to give meaningful supplies to small farmers with milk quotas of less than 35,000 gallons. The ICMSA recently suggested that very small increases in milk quota should be allocated to small farmers. Our organisation does not agree with that. Our argument is that, if farmers with less than 35,000 gallons were provided with increased amounts of milk, it would give them hope for the future. I understand the difficulties of politicians in doing that. Therefore, there should be a quota review group and the Combat Poverty Agency should have a say, as should those who represent the less well off in society. Some 75 per cent of those involved in dairying have a quota of less than 35,000 gallons. They are the cornerstone of the dairy industry and they deserve this increased milk quota. It would stabilise their future.

Chairman: We hope between now and September or October to give each group an opportunity to come before the committee in their own right to put their case.

Mr. Parlon: Deputy Kelleher is correct in the issue he raised. Farming has been involved with fire brigade issues and that unfortunately has been the case for a long time. At least with Agenda 2000 agreed and set up, farmers have some security. Any profession at this stage has little job security. Civil servants once had a job for life but that is no longer the case. Politicians are probably one of the best examples of people with limited job security. Farmers have a signpost as to where supports will go in the next six or seven years. The global trend is towards fewer farmers and that is as a result of increased productivity. Farmers have taken advantage of all the advances and are producing seven times more per individual. If one attends a high faluting conference, one speaker is certain to say world population is running at such a rate that there will always be a need for food. The capacity of agriculture to keep abreast of that is impressive.

Financial security and lifestyle are major issues in encouraging young people into farming. The business has many positive points in terms of lifestyle. However, rural depopulation is an issue. Living in the countryside on your own does not hold many attractions. It is important for rural communities that the friends of the person who chooses farming as a profession stay in his area. Planning is a factor in that regard.

Job creation will also be a factor and we have made that clear in our submission today and in our submission to the national plan. Regionalisation means that where IDA Ireland or Enterprise Ireland locate jobs in future will be a major issue. There is a concentration of jobs in the Dublin area because it has major attractions for large multinationals. The direction for the future would appear to be that incentives will aim to promote those areas with Objective One status as locations for the multinationals. That is positive but a great deal of thought and effort must go into it. A farmer will want to work and live within 25 miles of his job. I know Dublin people spend a great deal more time commuting shorter distances than a farmer who drives 20 miles in the country. However, travelling distance is a major factor and we have made that point strongly.

We must seek to improve the scale of farming enterprises. Some speakers referred to the high percentage of small milk quotas. Many such farmers live in poverty. They are tied to a small milk quota without the opportunity to expand. The policy which will derive from this process we undertake must encourage the improvement of the scale and efficiency of farm enterprise. Such encouragement could take the form of the promotion of the pre-retirement scheme and other positive schemes to encourage older people to retire from farming and encourage younger people to stay on. Over past years, the emphasis been towards people getting out of farming. There was a great deal of competition for leased land which meant it obtained much more than its market value and the same was the case for leased quota. However, that will change with greater reality coming into play, which will be positive.

The farming lobby recently showed its clout and effectiveness in terms of political change in Europe, so I would not write it off. There will be more major reform in six to seven years' time. The thrust of the farming lobby in terms of recent reforms has been to slow them down. The more reforms there are, the fewer farmers there will be. We are moving towards globalisation, but we want to slow it down. We will be campaigning with the same motivation on the next occasion although perhaps with fewer numbers. However, that is a challenge for us to improve our effectiveness in lobbying.

Senator Quinn raised the issue of what happened in Belgium. There was good reason for the politicians in charge to resign because this had been festering for a long time and had not been dealt with. I received a report before I came here that all Belgian food exports had been banned. That would be a doomsday scenario from an Irish perspective. It could close down the country, never mind just the farmers.

Senator Quinn raised the issue of who is responsible in such a situation. Consumer confidence has become a major issue and farmers are concerned about that. Traceability has become widespread in farming. Reference was made to the massive amounts of paperwork involved. There must be greater use of information technology, especially when the herd register set-up comes on stream. At present, it is Dickensian because a farmer must spend an hour every evening writing into the register exactly what he did. Unless there is a massive increase in manpower in the Civil Service, no one is likely to ever check it out.

Farmers are the primary producer but they are just a part, albeit an important one, of the chain which includes processors, retailers, restaurants and fast food outlets. People are eating prepared food more often. We have our responsibilities and traceability means product can be traced back to the farm from which it came. I produce pigs, sheep and beef and our animals are double tagged. All pigs can be traced back to my farm and the same will be the case for sheep. However, responsibility should transfer from us whenever someone takes over from us in the food production cycle. For example, we cannot be held responsible for what happens in processing factories, nor can we be held responsible for what happens in retail outlets.

Furthermore, a number of issues have been raised recently about the level of imported food. Many people are strong on the issue of traceability but not on the issue of sourcing food. Malaysian chicken is a major part of the people's diet but no one seems concerned about its traceability.

As regards quality, Deputy Brady suggested negotiating with the beef industry. I have a pain in my you know what from doing that and we have not been able to reach a consensus so far. Farmers will respond to market signals. The greatest response has probably been to market signals from live exporters who recently bought top quality bulls and improving cows paying £100 over the going rate for them. Such is the demand for the animals now, everyone is focussing on the live export trade. We would like a half or even a quarter of such a signal from the meat industry, but it does not seem prepared to make an advance. Until we get that, farmers will not respond and will end up with many more cattle than normal which will cause a major imbalance. The meat industry must respond. Farmers would respond quickly if it gave a signal.

I wish to put on record the help and support we received from the committee and the two gentlemen at the top table in bringing the farm assist scheme into being. It is an important safety net. Raising a question mark about the take up seven weeks into the new scheme makes little sense as 1,000 people have applied. I was at a meeting in Sligo last night and a question was asked from the floor about the question of people losing their medical cards, as they moved up the line a little.

Deputy Kelleher: We are raising awareness as opposed to--

Mr. Parlon: We put two full time people on this around the country and I think people will take it on board. However, it is unfortunately not the be all and end all. It means that a couple on two children with an income of £80 per week will get an extra £19.60 or so. I believe most farmers will try to farm their way out or try to take advantage of the Celtic tiger in terms of looking for a job. It is important to have it there and we will push it very strongly and continue to do so but it is important that the Department of Social, Community and Family Affairs get actively involved in promoting it. Deputies mentioned stigmatisation of farm income and that is a problem in some areas. However, the figures we have in our submission and the Teagasc report show that out of 145,000 farmers, 44,000 have an off-farm income through either the farmer or the spouse. That leaves approximately 35,000 commercial farmers, as the others are in different categories. For example, there 42,000 farmers that Teagasc regard as under pressure. They are in the right age bracket but they do not have the opportunities for off-farm jobs and they are under pressure. They will either get out or the new Enterprise Ireland policy will give them the opportunity to pick up a job somewhere. There are also 24,000 residual farmers, who are elderly or semi-retired. They just want to farm out the end of their days in the countryside and they take advantage of farm assist or whatever other schemes are available.

Planning is certainly a difficulty. A number of issues have been raised, such as the very strict regime being operated now by many county councils. There seems to be no merit to that. There have been major advances in technology for septic tanks and so on and one need only spend an extra £5,000 to £6,000 over a conventional septic tank, which is superb.

I have discussed cluster developments in small country villages, as opposed to having them dotted around, with the Minister for the Environment and Local Government. Farmers are often taken to task about cutting their silage or starting their milking parlour early in the morning by those who are not used to that lifestyle. If a cluster of houses is formed around a village the local authority can get involved in sewerage and water systems and that would be more cost effective than having them dotted around the country.

Deputy J. Brady: On that one we have to be careful because that is our intention in County Meath. My worry is that the day this is brought in the son or daughter of a farmer down the road will not get planning permission.

Mr. Parlon: We have to get a balance but there is no way we can tolerate such a situation. In my area, five of my next door neighbour's children have built houses nearby and work within a 20 mile radius. That is a tremendous boost to the local school, the local hurling community and the community at large. There does not seem to be a particular problem in my area but as soon as one goes to the Birr-Roscrea road, which is not exactly a massive road, one cannot get planning permission to build there. It is not a safety matter and I do not know what the thinking is behind it. That kind of attitude comes from the top and we must change it.

The issue of penalties and bureaucracy was raised. This is a major concern to people. A large amount of the total agricultural income for 1999 was taken up by direct payments and farmers are very dependent on that for their income. A whole new level of bureaucracy and red tape is being associated with these schemes. I recently met the EU auditor who audits the Department of Agriculture and Food and asked him about proportionality. One can lose one's year's income by making an unintentional mistake, which sounds crazy. It could happen by misreading a female for a male. Proportionality must come into play. Administrative discretion was also discussed with the auditor. Nobody in the Department appears to want to take responsibility for saying that someone has a good reputation. that they have applied properly for premia before and that clearly a mistake was made. Applications are pushed up the line and eventually the auditor decides that we are not in compliance and fines the Department. The big problem in the Department of Agriculture and Food is that everyone makes sure his own back is covered and is less concerned about the farmer losing out than about the penalty that may apply to the Department. We have a lot of work to do here.

There will have to be an increased role for information technology. I would like to show Senator Quinn the degree of traceability we now have. When one applies for tags for newly born calves, one gets a preprinted sheet with the tag number and a bar code back with the tags, so these are double tags. When the calf is born one puts the double tags in its ear and one fills out a form stating what breed it is, what the number of the dam was and the date it was born. One sends that back to Bandon and it all goes on computer, so every animal born in the last two years is recorded on computer: its date of birth, dam, father and age.

Senator Quinn: There seems to be so much dependence now on DNA that we must make sure we are not behind other countries.

Mr. Parlon: Every farmer in the country has been sent out a register which means that for the next seven years he must record every detail by writing it down. It should work like a bank statement, where every transaction is recorded against one's balance. The same should be possible with this information technology. We are investing the time, money and effort from our side but what is the point in double tagging calves when 5 per cent of them fall out and have to be replaced at a cost of £5 for each animal when one covers postage and the tags. We have invested a massive amount of time in this and unfortunately, so far we find it is incriminating us when we have an inspection. The Department has so much information that it can say we are not compliant with a scheme and that we are going to get a severe penalty. We have to use the traceability positively to convince the consumer the consumer and to identify the famous rogue farmer that has been referred to. If that person's animals show up in the food chain as a risk to consumer confidence and food safety, we must be able to go straight back and say that he is the person who caused the problem. The law is sufficient to deal with these people now and generally the book is being thrown at them. Identifying them in the first place is the problem. We have to get a return on this.

Regarding the chairman's question, our task force has made a recommendation, though it is contingent on getting rid of a very unfair levy placed on us unilaterally by the industry, a specific risk material levy which is costing every farmer that kills an animal £3. Nobody discussed it, it was just decided to charge farmers £3 as an SRM levy. I never received a return from a factory that stated that the hides were worth £40 or £50 and that there was an extra 3p a pound for hides. That was never referred to but this SRM became a new charge we are paying. We are saying that this levy should be stopped and made part of the fifth quarter. We have offered to pay an extra £1 per animal for a promotional campaign within An Bord Bia. We need to have a say in that, as not all the Bord Bia campaigns have shown a great return.

The part time issue will continue to be a large factor in farming. A new group has stated that we will soon have 15,000 commercial farmers and the rest will be part time or hobby farmers. The stigmatisation is going out, particularly for younger farmers, who want a lifestyle. The farmer's children down a lane in Clare or Offaly have the same expectations as those in Dublin 4 or Brussels. They have the same expectations and that is positive. Every couple would wish to give their children that sort of lifestyle and most people would vote for it, even if it means getting up earlier and driving 20 miles to work in order to have that sort of money and enjoy the country lifestyle which, hopefully, will continue. They have to have the opportunity of finding employment within a 20 mile radius.

Mr. Berkery: The committee is discussing the future direction of Irish agriculture. We have given much time to the social and other dimensions of rural development, rural living and agriculture. We must export 80 per cent of the raw materials produced by the agricultural industry. There can be no assessment of the future direction of Irish agriculture without the processors and marketing.

The business of farming is to produce raw materials. We do not have the capital investment, the control, the influence or the management beyond that point. We are suppliers of raw materials. In the lowest cost countries in the world, such as Australia, New Zealand or South America - the New World - the scale is different to that resulting from 2000 years of European evolution. The committee should consider this point if it is going to have a real appraisal of the direction of Irish agriculture.

We produce £3.5 billion of raw materials. The price we receive for these materials and the income we derive will reflect the capacity of the processing sector to process competitively and to market, invest, innovate and develop.

Mr. O'Callaghan: I pay tribute to Leader groups, local development groups and ADM boards which have done much work at local level. These groups have highlighted the contribution of small holders and they have a role to play in the future.

We circulated our members with information on farm assist. I spoke to the Minister yesterday and he was impressed by our document on this programme. Farm assist is a safety net and it is a sign of the times in farming that such a programme is needed. The programme is paid for by taxpayers' money so it must be spent carefully.

The weather last year was extremely wet which affected the livelihoods of many farm families. This hammered home to many of us the need for a special wetlands policy. At Kilmaley, Teagasc proved that wetland farms incur 15 per cent additional costs. Our submission highlights the fact that there is a need to identify that cost and to take appropriate action.

Mr. Dolan: Farm incomes in seven or eight years will only be maintained at their present level if there is a continuing erosion of farming numbers. Non-farm incomes however, will increase by about 30 per cent. Therefore, the desire to leave farming, or not to enter it at all will intensify.

T.J. Maher referred to the farm organisation's recent visit to France. We can make a supplementary submission to the committee on the issue of whether we can identify new arrangements at farm level which will allow individuals to be more efficient and to combine that efficiency with a better quality of life.

When Deputy Connaughton was Minister of State, after about 15 years of lobbying to change land law, the Land Act, 1984, brought about a different way of looking at matters. Prior to that Act much statutory provision went against land leasing. We now have the reverse of that situation. Farm partnerships along the French system, may provide an option in some cases. Looking to the long-term commercial outlook, we should accommodate any new device which will give farmers more options. We should not be blinded by tradition or past legislation.

Chairman: I thank all the delegations for attending. Between now and October the committee hopes to give a couple of hours to each organisation. We will circulate the delegations with Professor Sheehy's final document which, from what I have seen, will give rise to much thought.

Mr. Parlon: Will the document circulated be the first draft, Chairman?

Chairman: No. First drafts can be terribly dangerous. We had a query from Dermot Cahill with regard to synchronisation and we will write to the Department requesting that it takes no action on its proposals until it has discussed them with the committee. We also stated that we wished to discuss the drugs and animal remedy situations.

The Joint Committee adjourned at 5.57 p.m.

¹ ESU comparsions are for the EU-12 for 1993 rather than 1995

* Region 1: Louth, Leitrim, Sligo, Cavan, Donegal, Monaghan, Region 3: Kildare, Meath, Wicklow, Region 4: Laois, Longford, Offaly, Westmeath Region 5: Clare, Limerick, Tipperary N.R., Region 6: Carlow, Kilkenny, Wexford, Waterford, Tipperary S.R Region 7: Cork, Kerry, Region 8: Galway, Mayo, Roscommon

¹ The content of this section draws heavily on O'Hara and Commins, 1998

* Appointed 18 June 1998 to fill the vacancy left by Deputy Hugh Coveney R.I.P.

* In substitution for Deputy W Penrose