Mr. Paul Kelly:

I will deal with questions or points that were directed at me as best I can and Mr. Michael Barry might then respond.

I will start with Deputy Ó Cuív whose first point related to the cost base. The best work in this area has been done by the National Competitiveness Council. It produces competitiveness indicators and an annual cost of doing business report every year. It produces very good data and this allows comparisons between different sectors and between sectors in Ireland and overseas. Its methodology generally examines costs excluding the costs of raw materials and it does that largely on the basis that most raw materials are priced on a continental or global basis. If one considers specifically domestically originating input costs, it is as well to leave out the costs of raw materials, but from a food perspective they would be a very significant part of the cost base. If one leaves those out and considers the National Competitiveness Council's numbers for most food categories, one will generally find that labour is the single biggest input, and that reflects the fact that many of the industry sectors are quite labour intensive.

Leaving aside the labour input, the next big components are utilities and the largest of those is energy, which is around 20%. Transport is next and it is around 16% to 18%. Deputy Ó Cuív was correct to point out that relative to other manufacturing sectors, those components would be much greater. Those are two of the difficult pinch points. Given that we are export focused if our energy costs are out of line, that is an imbedded cost when we are trying to compete in markets overseas. Similarly in regard to transport, there is a distance-to-market issue. If we are trying to sell beef or butter into the Italian or German market, it has to be hauled a much longer distance than the produce of the local market producers against whom we are competing. They tend to be the input cost components and that is the reason they tend to be a very strong focus for the industry.

The Government has a significant part to play in the construction of those costs in terms of the way in which the energy market is regulated. We were able to benefit from a large energy users rebate for the past number of years and while that is coming to an end now it would have been very helpful to companies in the very difficult circumstances in which they found themselves in recent years. In rough terms, the food and drink sector would account for about 25% of industrial electricity usage and other companies would use gas and heavy fuel oil as well. Similarly in regard to transport, we have one of the highest diesel and general fuel oil costs in Europe. The energy intensity of the sector means that this causes great difficulties.

Deputy Ó Cuív's next question was on the final cost of production. It is a very detailed chain and it depends on the final product. The more processing that takes place, the more complex it becomes. What is noticeable, and this is something to which we both referred, is that it is a low margin business. That can be seen from public companies in Ireland. When they make their statements to the Stock Exchange, and those figures are publicly available, the margins of the consumer food companies would tend to run in low single digits in percentage terms. Meat historically would tend to run at even lower levels than that. Generally speaking, it is a very tight margin business. Some companies have managed to get past that but generally they would have very significant investments in brands and innovation, although they would be the exception rather than the rule. The profile of the Irish food sector is that it is a very low margin business.

That last point is a natural lead into Deputy Ó Cuív's third point which related to the purchasing power of the multinational retailers, to which a number of Deputies have also referred. We have seen a flow of margin from the producer and the processor in the direction of the retailer. That in large part is down to the consolidation and buyer power they have built up. It is not a uniquely Irish issue - it applies across the world. We talked about the importance of getting our statutory code of practice for the grocery sector over the line. There are legislative measures or codes in place or being actively considered in many other European countries and that is the correct political and public policy response to this very significant issue. It has manifested itself in a number of different ways, two of which are particularly relevant in the context of our discussions. The first is the issue of unfair practices where we see changes to contractual terms and so on. That causes huge difficulties for companies in regard to cashflow and general business planning, and I am referring here to the food manufacturing companies.

In the low margin environment I talked about and in our general credit environment, the problem is particularly acute. It is important, therefore, that we put some degree of legal framework in place to address that in Ireland and in other European countries.

It is also worth noting that there are moves afoot at European level to look at these things. Initially, this will be on a voluntary basis but the intention in the longer term is to legislate for this at a European level. This is something we would strongly welcome and, as an industry association, we would be feeding into that through our European associates.

The issue of cost recovery is relevant, not only at processing level but also at production level. We saw a classic example of this in recent months with the volatility caused by some of the input costs of feed and of the many aspects of energy involved in the processing and production levels, coupled with the inability to recover those costs in the marketplace. The European Commission would refer to this as symmetrical transmission of price through the food supply chain. In other words, the hit is taken hard at the early parts of the food supply chain and it takes a long time before it is passed through. This causes a huge squeeze in the immediate term. As a result of the environment I spoke about, with low margins, poor credit availability and so on, there are serious questions over the long-term sustainability of aspects of the sector. In pure economic terms, this sends a market signal back down along the line to people who must decide whether to expand or get out of the business.

Some of the Deputy's points relate to Mr. Michael Barry. He will cover those shortly. I think I answered Deputy Ferris's question about labour. His other points focus on Mr. Barry's area.

We agree with Deputy Heydon's sentiments on the Kerry Group announcement. It is a positive announcement, in many respects. It proves the job creation potential of the sector. It is also noticeable that the expansion is in the innovation space, which will be particularly important for the overall industry in the future.

I mentioned the extent of the supply chain in Ireland. We are unique in the fact that all the corporate headquarters are located in Ireland. They are in Tralee, Ardee, Kilkenny, Limerick, Cork and all around the country. Every county in Ireland has one or more significant industrial enterprises that is dynamic and has export growth ambitions as well as operating in the domestic market. One cannot say that about any other industry sector.

The sugar industry issue was raised by Deputies Deering and Barry. That is a significant issue. Mr. Michael Barry has talked in detail about the ending of dairy quotas. The quota regime, generally, is going and the sugar quota will go in 2015. There are particularly acute issues for sugar users at present because the price has gone through the roof. As Deputy Barry said, the general price was of the order of €950. Companies with medium to long-term contracts are probably working in that space. If there are changes to a company's production or potential new business, the spot price could be significantly in excess of that and there are significant issues around security of supply. There are short-term issues between now and 2015 regarding the quota regime and allowing some additional sugar in from outside the European Union to lessen some of the pressure points within the marketplace. After 2015, the complete removal of quotas will, perhaps, allow the market within the EU and outside it to harmonise. That could be positive for sugar users.

We could look at the issue of developing a sugar production operation in Ireland from both sides of the argument. A totally free market may present great opportunities, as is indicated for some of the other sectors in the agrifood industry. For something like sugar production which is highly capital intensive and carries long-term risks, a new quota environment may be the route to follow. It is one of these, "on the one hand and on the other hand" issues.

Many of Deputy Barry's other points will be answered by Mr. Michael Barry. Things like cost recovery flow back to some of the way in which the entire food supply chain will be controlled. In the medium to longer term, a grocery sector code of practice, for example, would be beneficial in dealing with some of the issues related to that.

I very much agree with Deputy Barry regarding inflation and input costs. In Europe, we operate in the most highly regulated food production environment in the world. That means the consumer benefits from the highest quality food, in terms of its safety. A huge cost is associated with that production and processing level. At the same time, consumers are getting food cheaper than they ever have. In Ireland, for example, approximately 11% or 12% of consumer spending is on food and alcoholic beverages. A quarter of a century ago, a quarter of our spending was on those items. There is a degree of mismatch there. In the interest of the broad sustainability of the food chain, should consumers be paying more? They should, obviously, be getting value in the products they buy. However, when one considers the range of cost inputs at production and processing level, one must ask if the constant downward pressure on food prices is the right way to go.