30 May, 2022

Value of Food

From fuel to feed and fertiliser, prices are increasing at rate which is both astonishing and worrying. While commodity prices in some sectors are helping producers to weather this storm, many primary producers are struggling. With pressure on pig, poultry and horticulture family farms – will a food ombudsman help, asks ifac’s David Leydon.

As we go to print, some pig producers are losing over €35/head. This is unsustainable and the unfortunate step of depopulating herds is starting to take place. With over 8,000 people employed, this sector is on the edge.

Equally on the poultry side, both chicken and egg farmers are facing a similar crisis.  Rising costs of inputs such as feed, energy costs and replacement birds are being heavily felt in the sector.  Additionally, Avian Influenza remains a major threat to the industry, particularly in areas of high flock density in counties like Cavan and Monaghan.  Combined, all these factors mean that poultry farmers are facing significant downward pressures on their margins. These need to be recovered direct from the food chain for the industry to have a viable future.

Do you enjoy a tomato, pepper or cucumber?

The food producers who grow these crops in glasshouses are also going through tremendously difficult times. In 2020 the cost to heat a hectare of glasshouse using natural gas was approximately €100,000. This rose to €240,000 in 2021. Today heating that same hectare will incredibly cost between €500,000 and €800,000. 

We know the people running these businesses. Many are clients of ifac are excellent operators. They have invested in automation, grown in scale to justify investment in specialist machinery, hedged their costs where possible, invested in their business to grow and deliver produce that Irish consumers enjoy. 

However, despite this, there are now less than 100 commercial vegetable producers in the country. 

To add to this, we have seen food price deflation in the past decade. Food up until a few months ago cost 10% less than it did in 2012. This is good for Irish consumers, but it is not equitable. For some Irish families, food makes up a very small percentage of their expenditure. Indeed in 1980, 27.7% of household expenditure related to food, this has decreased to 8.6% in 2020 according to Eurostat. Ireland was one of 3 European countries where expenditure on food and non-alcoholic beverages was less than 10%. No one can find fault with a family on limited income looking for optimal pricing to feed their family but there is a cohort of society who can pay more for food than they are currently paying. A couple percentage point increase in the price of Irish produce would make a meaningful difference to Irish food producers. 

So why isn’t this happening? 

The crux of the long-term problem is the price paid by the retailer, the competitive pressure in the retail sector and the use of certain food produce as a loss leader to drive footfall. 

Each month Kantar publishes market share for retail multiples. Here’s a comparison between 2012 and 2022. As can be seen the market share of Lidl and Aldi has doubled (Figure 1). With growth like this, all other multiples will fight for market share, and this has led to intense, downward price pressure continually applied on food producers. 

Figure 1: Kantar Worldpanel: Retail Market share20122022

Will the long-heralded establishment of theOffice for Fairness and Transparency in the Agri-Food Supply Chain make a difference? Minister McConalogue has made this “Food Ombudsman” a policy priority. Its objective to promote fairness and transparency in the food supply chain is very welcome as is the Minister’s commitment. 

The appointment of a CEO who has the legislative framework to have an impact will be keenly observed. Will the new entity have the team, resources and capacity to enforce its rules on unfair trading?  Will it have a tangible impact on our domestic food sector?

Food security should be top of policy makers agenda. Maintaining our pig, poultry and horticulture sector is an important part of Ireland’s food plan. These sectors are in real crisis now and must be supported in the short-term with the longer-term imbalance of power between retailer and producer getting the attention it deserves.

Ifac advice for food producers:
  • Active management of cashflow situation with obsessive cost control. 

  • Increase working capital, continue to engage with your finance providers.

  • Crop and SKU management: it’s crucial to know the margin on each crop or SKU. We often see that this piece of management information is not available. 

  • Continue to negotiate for upward price reviews with retailers.  In the context of food security rising up the agenda and increasing cost bases, we have seen that some price increases can be secured by producers.. 

  • Engage in “what-if” scenario planning – what if we stopped growing a certain crop, what if natural gas does not revert to a norm in 2022 or 2023 – overlay these scenarios with cashflows so you have financial clarity when you are taking important decisions.