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Chapter 11 : Agri-Food Sector (Alan Matthews)
Public perception is one of farmers ‘complaining’ about everything?
Introduction
Facts/Importance • 8% of employment (16% if food
processing included) • 70% of land area; visual impact
therefore huge
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• Exports: book at NET figures • Also R-based, implies not mobile • 30% of greenhouse gas emissions • food and drink: 18% of C • Huge government intervention;
regulation and subsidies • Central to WTO talks, environment
and health • Cannot exist without food and
water 2 Characteristics of Agricultural Sector
Unique Considerations (not in book) • Supply factors: disease, weather,
storage costs, and safety. Means
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sudden and dramatic shifts in supply possible.
• Inelastic demand: cannot increase D by reducing price because those who can afford food reached limit of demand
• Large number of producers, implies weak bargaining power of farmers without strong farmer organisation
• Immobile factors of production: land has ‘cosmic’ attachment. Huge change for farmers to move to other job.
• Small shopkeeper analogy: market forces allowed to apply there.
• Anthony Hopkins, ‘Field’ and other stories.
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Why not Market Forces in Agriculture?
Farmer bogged down with hard work and limits to output: ‘nostalgic’ image
• Sociological/cultural: family farm • Security and safety of supply;
essential like water and cannot just go to lowest-cost producer without guaranteed, safe supply
• Instability: disease, weather, health scares. Hugely affects farming. For
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example, flooding, drought, and so on.
Incomes/Production • 30% farm income from market: rest
subsidies • Emphasis on livestock, Table 11.1
(72% of total); beef and milk • Export orientation; 80% of beef and
dairy output rely on access to export markets
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• Real price falling for 20 years • Volatility of prices a real problem;
huge swings and uncertainty that few other industries could cope with
• Much fewer produce same output; 20% farmers product 80% of output
• Number of farms falling steadily • Income from farming v farm
household income. Former accounts now for just 27% of latter
• Very uneven distribution of incomes in farming: destitute bachelor to very well-off farmers
• Wealth v income; farmers often rich in former and very poor in latter
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3 Agricultural Policy Common Agricultural Policy (CAP)
• French/German ‘deal’ • Objectives:
- increased Q -fair standard of living - stabilize markets: weather, disease, health scare issues again - guarantee supply
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- reasonable prices to consumers • Market price v target price v
intervention price • Tariffs, export subsidies,
intervention purchases to prop up prices (in past now but good example of consequences of ‘rigging’ markets)
Consequences of A Rigged Food Market: Hypothetical Example
Large Farmer Small ---------------------------------------------------- Output (litres) 800K 40K Cost/litre €1 €3 Total cost €800K €120K World price €1 €1 ----------------------------------------------------
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Balance Breakeven - €80K Support Price €3 €3 ----------------------------------------------------
Profit €1.6M Breakeven • Inefficient (for large and small
farmers), inequitable, high budgetary costs, damages world trade and environment
• Rather than prop up price give direct transfers to low-income farmers? €80K in above example
• Direct payments now: also very inequitable but do not distort market and being phased out
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• Does world price take account of safety/health issues and sustainability though?
Reform of CAP • Mansholt 1968: recognised all of
problems of price support • McSharry (Irish Commissioner)
1992: introduced direct payments • EU enlargement : agreed in 1993
and happened in 2004: addition of 10 agricultural states changed dynamic
• Luxembourg Agreement 2003 - payments (de-coupled)
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- ‘cross compliance’ - payments to be ‘modulated’ - rural development emphasis
• WTO and Doha Accord - US v EU (proposed EU/US trade
accord) • Ireland a substantial net gainer • Safety, reliability and sustainability:
new emphases • Energy from agriculture; e.g. wind,
biomass • CAP today and after 2013 • Changed in last 10 years
- Lower payments to some countries still
- Increased role of European Parliament
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- Emphasis on rural development: small industry, forestry, sustaining rural communities
4 Food Processing and Distribution
Food Industry (food needs to be processed, treated, packaged and delivered) • Few products sold directly to
consumer; potatoes and strawberries mainly in summer or local markets
• For example milk: cow to farmer to creamery to wholesalers to retailers to customers
• Food industry value (Table 11.2): huge industry, e.g. Glanbia,
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Greencore, Kerry Group, Danone, etc
Distribution • Wholesale franchisors • Retail sector; e.g Tesco, Supervalu,
Aldi, Lidl • Concentration of market power, in
both wholesale and retail sectors, the policy issue • Changing consumer lifestyles
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- 50% of food in US consumed outside home, 30% here
- Easy to prepare food/take-away food
- Safety, health, ‘fair trade’ issues • Exports to UK: exchange rate issue
5 Food Policy Growing Concern over Food Safety
• Always a concern; e.g. water in 18th century, and indeed today
• Huge variety of issues
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- diseased animals posing threat to human health (BSE and ‘bird flu’)
- to other animals (‘foot and mouth’ and ‘bird flu’)
- sanitary conditions for animals; e.g. battery hens, veal ‘story’
- labelling (e.g. horsemeat issue) - pesticides/hormone residues - food additives, e.g. to make
salmon pink - GM food, etc
• Can lead to drops in demand: e.g. listeria in soft cheeses, salmonella in eggs
• Obesity (the next health crisis after smoking)
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• Not too little food (as 100 years ago, and much of world today) but too much and of wrong type the issues today
• Common eating areas (greater danger of rapid spread of viruses etc)
Economic Considerations • Need state agency for food safety • asymmetry of information
(customer cannot tell quality) • reputational issues, implies self
regulation? • danger of fatalities: irreversible
• Zero risk not possible: not just in eating but also ‘living’
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• Perceived v actual risk: former all that matters for people
• Mass production : efficiency v safety. Farm of 2m cows maybe much more efficient but disease spread very difficult to control
EU Framework • New General Food Law 2002 • New legislation. Key Principles:
- whole food chain approach: ‘farm to fork’
- risk analysis: zero risk not possible - operator liability - enforcement
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• New Food Safety Authority created (but will they ‘miss ball’ like banking regulators did)?
• Food quality the big issue now also
Irish Responses • Food Safety Authority 1999
Market Power in Food Chain
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• Wholesalers • Supermarkets (top 3 account for 50
per cent of sales) • Farmer share of retail price • South v N Ireland comparison: lower
costs in former and economies of scale because part of large UK chains
6 Conclusions • See summary in book: time of major
change - EU budget (2014-2020) - WTO negotiations and proposed
US/EU trade deal - food safety - environmental issues and
sustainability
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• Less price intervention but increased regulation
• Growth sector of future in Ireland?
• • Special access for Irish beef to US
and Russia, and lifting of milk quotes big boost
• Changing composition of food demand in China to more European patterns
• Also remember food industry is R based