Mr. Michael Barry:

I thank the Chairman. I am contributing at this point because it is our intention to outline the position with regard to the primary element of the industry before commenting on the secondary aspects. I would like to provide a very brief overview in respect of the dairy sector and the opportunities for growth within it. I wish to relate what can be a very positive and exciting story and to outline where the challenges exists. There is no doubt that the targets to be achieved and the bounties to be realised are well worth working towards.

I wish to take a moment to reflect on that for which 2012 will be remembered. The year started a bit too well in that Ireland was faced with a super levy bill. Up to June, there was strong milk production across the EU but this began to fall away in July. We reached the point where there was just too much butter fat available in the market. At one point we wondered whether the EU would reopen the intervention scheme in respect of the butter market. However, this did not happen. What did occur was a very large usage of the annualised private storage scheme. The latter is an EU-run scheme which seasonal producers such as Ireland have used and depended on for a long period. In summary, a large volume of butter stocks were placed in storage.

The year 2012 will, of course, be remembered for the poor weather. There was too much water in the north of Europe and too little in the south. In addition, there were droughts in America. This story was repeated across the globe. The impact of all of this has been a shortage of fodder and an increase, to record high levels, in the price of grain, concentrates and feedstuffs. As a result of poor weather in northern Europe leading to the production of poor fodder, feed prices have risen and people's profits are being squeezed. We have moved from having a problem with the super levy at the beginning of the year to a position where we are 1.4% behind where we should be in the context of milk quotas as the end of the year approaches.

The dairy industry exports just short of €3 billion worth of dairy products to countries throughout the world.

That is approximately 30% of the output of the agrifood sector in Ireland. It is, therefore, a very significant industry. Approximately 27,000 people are directly employed in it.

We are producing 5.5 billion litres of milk. This amounts to approximately 3% of the overall production of the EU 27. We are achieving this with approximately 1.1 million dairy cows. Our production per cow is below the European average. I refer not only to northern Europe but to the entire EU 27. Our output is 80% of the EU average.Due to quota factors, we are withdrawing animals from milking and stopping them from realising their genetic potential. Therefore, a significant opportunity presents itself to us. We will return to this.

The structure of the processing sector has been discussed at length. While we have many co-operatives, 36, it is realistic to state only 12 of those are involved in processing. When one examines product specificity, one sees a degree of specialisation involving shared processing arrangements between co-operatives. For instance, lactose is produced in just one creamery. We have specialisation in the sector, and there are many co-operatives, but the processing sector is becoming more specialised bit by bit.

Dairy expansion is now possible because of the abolition of quotas in 2015. This is an exciting time. It is the first time in 30 years in which we can actually allow farmers to chase market opportunities. However, if the price is not right, there will be no expansion. If there is no profit, we cannot expect farmers to chase expansionary targets. An expansion of 50% is predicted in Food Harvest 2020 but it is dictated by the performance of the market. If the market can take it, we can produce milk. If not and prices crash, we will not be able to achieve our target. This is the proviso behind the predictions on expansion in the sector.

At the end of this year, there will be another report from the Commission on what it calls a "soft landing". This is the strategy and policy on the abolition of quotas. However, the Commission does not want a big-bang effect such that when quotas disappear in 2015, a vast quantity of milk will be released onto the market to detrimental effect. This must be considered. We do not know whether people will suggest a higher increase in quotas for the last year of the milk quota system. This past year will have frightened many policy makers, who saw the price decrease as far as it did. When this occurred, we started talking about intervention again. Let us wait to see what occurs.

The expansion target of 50% under Food Harvest 2020 indicates that 2.75 billion litres of extra milk could be produced by Ireland. It is approximately 1.5% of Europe's current milk pool. It is not a very significant extra volume of milk in the context of European production.

Are we being optimistic or reckless with figures? I believe not. The global demand for dairy produce is increasing at approximately 4% per annum. This is driven by two factors, namely, global population growth and rising levels of affluence. There is increasing demand for dairy products, especially in developing economies. It is these markets that we are targeting.

Predictions are dangerous. Many predictions suggest that, at best, the world can chase supply by approximately 2% per annum. Therefore, if the world can produce 2% more milk every year, with global demand of 4%, we can be fairly confident about our expansion strategy in Ireland.

Milk price volatility could challenge dairy expansion. This has become a significant issue, especially under the family farm structure. The ability to operate and survive price fluctuations, from extreme highs to extreme lows, must be borne in mind.

The CAP 2020 proposals will have very little impact on reducing the impact of price volatility. This will be a factor in the dairy sector in the future. Supply management is no longer effective. We have seen price volatility, including high and low prices, and we are currently in the middle of a quota system. The day of the quota is gone and this is important to note for our future.

Input prices show similar volatility and feed prices are now beginning to follow the same kinds of movements that apply to dairy prices. However, this may give Ireland a competitive advantage because it does not have an intensive farming system. We have an extensive grass-based farming system that may yet give us an advantage. However, we must consider the impact of national and EU climate legislation. Climate change policies are targeting natural emissions, from the land and animals. The problem is that these policies do not recognise how sustainable and natural our system is. They cannot deal with it. Therefore, we need to consider this. Irish agriculture is the green economy.

My colleague has already discussed the question of what constitutes the food industry. By and large, it is a manufacturing industry. It is a capital-intensive, low-margin industry and it needs to be globally competitive. If it is not, we will not be able to export products regardless of what attributes we ascribe to the sector. Unless we get the price mixture right, we will not be able to gain access to developing markets.

Some 84% of what we are producing is currently being exported. Every additional litre of milk we will produce will have to find a home, and it will not be in Ireland. We will have to export it. Therefore, we need to remain competitive.

Much has been written about the dairy and processing sectors. Let us bear in mind that we are not starting from scratch. We already have a sophisticated processing sector. If we were starting anew, we would probably operate differently. Right now, however, we have a developed, sophisticated industry, but we just need more of it.

With regard to global market opportunities, we are dependent on the economic performance of the Asian sector. If the Asian economy slows down and its buying ability is constrained, it will have a knock-on impact on our ability to find homes and markets for dairy products. However, there is a cost creep in many other global dairy surplus countries, and this could give us a competitive advantage.

Let me share a few thoughts on the Common Agricultural Policy. Our ability to compete globally is intrinsically linked to it. The slide I have presented to members shows what the policy achieves today. The focus is very much on primary processing at farm level. It achieves this through direct payments, supply management, the quota system, market management, as in export refunds, and intervention.

However, the Common Agricultural Policy tomorrow and that which will obtain until 2020 will be refocused. It will be about the rural aspect and the producers and consumers recognising what the consumers want. This implies a very different game because it involves bearing in mind additional factors, including the delivery of public goods, climate change and rural development. It is because of this refocusing of the CAP that we are hearing discussions on greening being sewn into the direct payments considerations. This is why we are having discussions on the CAP at present.

We must determine how the CAP can support our strategy for growth in terms of Food Harvest 2020. I asked how we could deal with price volatility. One measure that can greatly assist is a mechanism such as the retention of annual private storage. I ask the committee members to consider this. We should be seeking an annual scheme rather than one that would be introduced only when prices are weak, as proposed. The latter would only accentuate price volatility. We should be seeking a model like the existing one which currently takes produce over the seasonal peaks of production.

There are proposals for risk management. I refer to insurance schemes and margin insurance schemes. We have examined these and have concluded the insurance products are very expensive and complex. They are financial instruments. Their cost would outweigh any benefit they would deliver. Therefore, we are not convinced they can be a solution for us.

Consider whether the direct payments system insulates against extreme price volatility. This year, many dairy farmers will be dependent on the single farm payment because of the lower prices and higher costs. The big question is whether the safety-net mechanism is fit for purpose. Many would say the intervention price today is at 20 cent per litre, and that this is not sufficient. They are right in that, with current feed prices, this is probably not enough. The problem is that the moment one has a discussion on changing the price, one must fund it from a reduction in the single farm payment. This is a tricky area. I am not entirely sure whether it is an argument one could win.

The European Parliament is proposing that there be temporary supply management when the markets are weak.

This proposal is ill conceived, is a blunt instrument and would not benefit the Irish or European sector.

We must maintain the Single Market's integrity. Given its membership of 27 states and more than 500 million consumers, it is a growing market that we want and we must ensure that it operates as a single market. We do not want renationalisation or mandatory country of origin labelling for dairy products. We want to make it easy for European countries to use our dairy ingredients. Let us not put barriers in front of them.

We need to ensure that greening can give Ireland a competitive advantage. We must appease consumer demands in this regard, but a level of pragmatism and common sense must be applied to the greening aspects of the single farm payment.

We must be careful of schemes introduced at member state level. What would happen if Germany, for example, introduced a subsidised risk management scheme for its farmers while we could not afford to do so? It would create a competitive imbalance and we would be on the hind foot in an important market for our butter and other dairy products.

This is a positive story for the dairy sector. There is an opportunity to expand. We will need to deal with price volatility, but we are not there yet and CAP will not do it. The issue requires more work. National policy needs to do more to support the growth opportunity. Climate and environment policies are key in this regard. The National Economic and Social Council, NESC, recently made a recommendation to the Minister for the Environment, Community and Local Government, Deputy Hogan, concerning the discussions on climate change. It is a major issue and national, EU and global agriculture policies must be careful. The feeding of the world with sustainable food sources must never be compromised. We produce sustainable foods. Taxing methane emissions from animals and soil in Ireland would not be a well conceived idea. We need to return to the drawing board.

We can do better. We need a greater alignment of policy across all Departments. I thank the committee for its attention.