I spoke recently at the Irish Farmers’ Association’s (IFA’s) Climate Summit about the challenge of getting government and the body politic to understand the real economic importance of the agri-food sector in Ireland.
Just one of the challenges to a clearer understanding of why the agri-food sector is the most important sector in the Irish economy, is getting the government to accept its own figures that show that the agri-food sector spends just over €16 billion in the Irish economy.
Meanwhile, total spend by all of industry is €52 billion, of which the multinational sector accounts for about €26 billion.
The key point here is that it is the economic footprint that business has in the Irish economy (as measured by Irish economy expenditure), that best represents their Irish economy impact.
Food vs. pharma
This Irish economy footprint is therefore a much better measure of Irish economy impact than the more formal gross domestic product (GDP) / gross value added (GVA) figure.
This is because GDP/GVA is hugely distorted by transfer pricing and profit repatriation that can reduce its value from €400 billion to €200 billion.
Another issue that arises from comparisons of GVA across business sectors is the effect that selling power has on this figure.
Looking across Irish economy official figures, the business sectors that show the largest GVA amounts are the pharmaceuticals and ICT (information and communications technology) sectors, while the agri-food sector is among the lowest.
Leaving aside the point about transfer pricing and profit repatriation, I would suggest that our policy-makers need to understand that the reason the pharma and ICT sectors show high GVA (which is mainly high profits), is that they, as producers, can set the price of their product.
In addition to setting prices, pharma and ICT products cannot be sold below cost, and these companies do not produce ‘own label’ versions of their branded products.
This is not the case for the food sector.
Under a regulation preventing resale price maintenance, food manufacturers and farmers cannot set the prices for their products, and indeed cannot prevent their product from being sold below cost or given away.
The inevitable result of this constraint regarding pricing is that the food sector is nearly always among the lowest contributors to Irish national GVA figures.
Restrictions on the food industry
So to be clear, government policy constrains the selling power of the agri sector, which results in the sector producing low profit margins as measured by GVA.
Yet, this GVA figure is then used to rank and assess the ‘contribution’ of the individual business sectors to the Irish economy.
Indeed, the ranking of GVA levels is also used to assess those parts of the economy that government should invest in and support.
Over the last 20 years, I have sat through a plethora of conferences and summits and national assessments of industrial development policy, whereby the low level of GVA in the agri-food sector was bemoaned and unfavourably compared to the stellar performance of the pharma sector and others.
Would somebody please join the dots?
The other criticism of the agri-food sector that these reviews of economic policy have usually generated, is the perceived low level of investment in research and development (R&D) by food companies.
Here again I believe a joining up of the dots is required.
The fact that food products are regularly sold below cost means that profits and margins are low, and therefore the resources required for innovation and R&D are limited.
Compare this to the pharma or ICT businesses which have significant selling power and generate significant profits which support investment.
Moreover and perhaps even more crucially, pharma companies or mobile phone companies do not, and are not compelled to, provide an ‘own label’ version of their product when they launch a new innovative product, whereas food manufacturers are.
Food companies not only have to commit to providing an ‘own label’ version of each new product for the retailer, but must also commit to reimbursing the retailer if the new product does not make as much as the one it replaced.
Lack of support
The reality for food manufacturers and farmers is that government policy, by facilitating below-cost selling, undermines not only the agri-food sector’s margin and profit level, but also its ability to fund research and innovation.
The lack of recognition or awareness of this is compounded by the use of a ranking system based on a hierarchy of profits earned.
I have highlighted previously how the magical thinking of the environmental lobby, that continues to demonise livestock and dairy food output and promote plant-based agriculture in its stead, is undermined by the realities of supermarket / food retailer below cost selling of fruit and veg.
That point is still valid.
But our policy-makers also need to join the dots between the continuing allowance of below cost selling and loss leading and the detrimental impact that has on margins and innovation spending in the agri-food sector.