Damien English (Meath West, Fine Gael)
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I welcome Mr. Paul Kelly, director, and Mr. Shane Dempsey, head of consumer foods, Food and Drink Industry Ireland, Mr. Cormac Healy, director, Meat Industry Ireland, and Mr. Michael Barry, director, the Irish Dairy Industries Association, to the committee's discussion on the issues facing food companies in the grocery sector. I am pleased we have managed to organise this meeting with the representatives of the Irish food and drink industry.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable.

I ask Mr. Kelly to make his opening statements. This will be followed by a question and answer session. Deputy Dara Calleary has been delayed but hopes to join us at some stage.

Mr. Paul Kelly:

I thank the Chairman and members for the opportunity to make this presentation today. We are from Food and Drink Industry Ireland, FDII, a business sector within IBEC, representing approximately 150 food and beverage companies across meat, dairy, consumer foods and beverages.

I am the director of FDII and am joined by my colleagues Mr. Michael Barry, director of the Dairy Industries Association on my right and, on my left, by Mr. Shane Dempsey, head of consumer foods in FDII, and Mr. Cormac Healy, director of Meat Industry Ireland. I will make the initial part of the presentation, my colleagues will each take a couple of slides and I will speak on the concluding slide.

Let me give the background to the Irish agrifood sector. People are familiar with the size and importance of this sector, but it is worth reiterating that one in eight jobs in the economy is linked to food production, indirectly associated jobs or food processing. It is as important to the Irish economy as the car industry is to Germany. There are approximately 690 enterprises, the vast majority of which are small and medium-sized in the SME category, as is the case across most of Europe. However, the number of large companies in this sector at 6% is above the European average for large companies of 1%. This reflects on our relatively small domestic market. If companies are going to grow they need to export. A successful export company leads to scale. We have rich resources in terms of food production and have a significant number of world class large companies and a very large cohort of world class SMEs.

There are two distinct markets. Many companies will serve both markets but the issues will differ between the export and the domestic focus. We supply the majority of Ireland's €14 billion grocery sector. We have also exceeded for the first time in 2012 the €9 billion worth of exports, which accounts for about 30% of net foreign earning. It has a major link to the economy with €11.5 billion of purchases in the domestic economy. We regularly make the point that the headline numbers, either on the size and scale of the domestic grocery market or the export figures, are impressive in their own right.

However, when one examines the linkages to the rest of the economy - and by that I mean everything from farming and logistics, through to research and development, and marketing - they are deeper than in any other sector. Therefore it has a much greater economic impact than those still impressive headline figures would suggest. We have had to export to grow, but have done so extremely successfully. Ireland is now the largest net exporter in Europe of beef, lamb and dairy ingredients.

Mr. Paul Kelly:

As regards the economy-wide impact of the sector, members of the joint committee will be familiar with Food Harvest 2020 which is the national agrifood strategy. It is expansionary in nature and while some might say those targets are ambitious, we would say they are realistic. It may well be the case that those targets can be exceeded. In headline terms, the targets are to increase exports to €12 billion by 2020.

In the context of the deep linkages to the economy, our analysis - which is based on published figures from Forfás and the Central Statistics Office - shows that direct expenditure in the Irish economy is equivalent to 60% of sales. That compares with 19% for the rest of manufacturing so, in essence, every extra €1 we get in exports from the food sector, will result in direct expenditure of 60 cent in the domestic economy. Compare that with any other aspect of manufacturing and one will get 19 cent. Therefore, when we grow exports in the food sector we will get a much greater, positive impact for the wider economy than for any other exporting sector.

Our strong view is that this export growth will have a beneficial effect on the economy, particularly in terms of jobs. Last year, we published a report entitled "Sharing the Harvest". In that analysis we did all the relevant number crunching involving CSO numbers from their input and output tables. We also examined the profile of growth out to 2020. Our estimate is that up to 30,000 jobs will be created across the economy if those export targets are reached. A fraction of those will be in food manufacturing and processing. A significant amount will be at farm level but a lot of it will be in the rest of the economy, providing services to food processors and food producers, thus allowing them to achieve that growth. That is a fairly significant figure in its own right.

Our priorities run across the whole food chain, from farm to fork. That is because of the unique nature of the supply chain in Ireland. Unlike any other large-scale sector, everything is here, including raw materials, manufacturing, sales and marketing, exporting, research and development, and innovation. In addition, the corporate headquarters of many of the companies are located here.

Due to the unique nature of the supply chain we are more affected by policies and regulations than any other sector. From our perspective therefore it is important that we get this right. That applies to what is happening nationally and at a European level, as well as what is happening on the international stage.

That leads us to what we call the policy dichotomy in Ireland. As I said earlier, we believe there are positive winds for the economy that will arise from Food Harvest 2020 with jobs growth of up to 30,000 to 2020. However, there are also a significant number of constraints in situ which need to be addressed in order to ensure that such growth can be achieved. It should be borne in mind that we are not looking at things purely from an export focus, but are also interested in the domestic market. It is an important market for every company even if they are exporting. Smaller companies in particular need to function properly in the domestic market before they are able to achieve scale and move into export markets.

We are experiencing high input costs, including energy costs which are rising significantly. That is a big competitiveness issue for all companies. In addition, proposals for taxing food and packaging are matters of concern, as are marketing restrictions. The issue of retail buying power will be addressed by the incoming statutory code of practice for the grocery sector.

I will now move on to the area of financing difficulties for the sector, while my colleague Mr. Michael Barry will talk about environment constraints in due course. The big issue for us is how to finance expansion and renewal in the food sector. The sector is characterised as one with high capital costs and relatively low margins over time. That is the reality of the sector and Ireland is not much different from other countries in that respect. We need to match up those two things. The medium to long-term financing facilities that are required for the sector's profile - high capital costs and relatively low level margins - are difficult to obtain. The current credit climate in Ireland is even more difficult for the food sector due to those situations. There have been some positive announcements in the sector of late. Generally, we have been looking at large companies that have greater access to capital markets. There is a major roadblock for many SMEs, which have been in situ for a number of years and have a lot of plant and equipment that needs renewal, or they may have expansion plans that require significant capital investment. That roadblock needs to be dealt with and this can be done in a number of ways. State aids, including capital investment supports, are currently up for renewal. The regional aid map is being developed by the European Commission at the moment and will run from 2014 to 2020. It is important that the Irish negotiating position remains strong to ensure that aid levels at least remain at the same level and, if anything, are increased for the industry here.

There is also a need to look at food sector-specific funds. The National Pensions Reserve Fund and Enterprise Ireland have a number of funds in place. The take-up by the food industry is relatively low compared to a number of other sectors, so that area needs to be re-examined either in terms of food-specific funds or some sort of primer that will ensure a higher rate of take-up by food companies.

We also need an innovative approach to matters such as capital gains tax relief. If people are selling up and getting out of other businesses, including food ones, there should be incentives for them to reinvest. The research and development tax credit scheme, which is utilised by many food companies, should be maintained and strengthened with a particular focus on SMEs, so their take-up will be even greater.

Manufacturing cost competitiveness is of huge importance to the industry. If one is exporting, one's cost base in the domestic market will tell a lot about how competitive one is in export markets. Similarly, if one is selling in the domestic market and the cost base is out of line, imports will be relatively more competitive. In order to ensure that one is not displaced off supermarket shelves, one must be cost competitive. That is vitally important, no matter whether one is in the domestic or export market. A big issue for food companies is industrial energy costs, as the sector accounts for about 25% of such energy usage.

It should be borne in mind that we are operating off fairly tight margins and, in addition, many of the raw materials we use are priced on an international basis. Therefore, if industrial energy costs are out of line with our competitors, either in the domestic or export markets, that will move us out of line significantly in terms of cost competitiveness.

When we talk to our companies they tell us that rebates for large energy users, which were in place for the last few years were useful, particularly after the crisis of 2008 and 2009. They were very useful in reducing the companies' cost base. More importantly, we now find that electricity costs are 15% to 20% higher than their UK sister plants. The gas differential is even higher.

This causes two problems. In the short to medium term, it puts our cost base out of line, which impacts on our ability to compete in the marketplace. When decisions are being made on medium to long-term investments, having a cost base that is out of line has a significant bearing on whether those investments will be made in Ireland or elsewhere. Last year and this year have seen price increases of 15% to 20%. Part of this is due to increases in the price of raw materials, namely, fuels. It is becoming a significant issue for the food industry.

There is a direct relationship between cost competitiveness and jobs. It is important that we retain existing jobs and create new ones. Ensuring cost competitiveness is important in this regard. There is little that we can do about the cost of raw materials such as gas, but we can focus on network capacity charges, the public service obligation, PSO, levy and the capacity payment mechanism to ensure they are suitable for ensuring cost competitiveness, which is most important for the economy. If we get our competitiveness right, the companies will do all they can internally in terms of energy efficiency, ably supported in many instances by, for example, Sustainable Energy Authority of Ireland, SEAI, schemes and the like. The external energy cost factors need to be addressed.

Mr. Cormac Healy:

The next slides will take the committee through some of our sectors. I will address the meat sector, Mr. Barry will address the dairy sector and Mr. Dempsey will address consumer foods. We will briefly refer to the growth potential, as we do not meet this committee regularly, and some of the principal issues in the sectors.

I look after IBEC's members in the meat processing industry - beef, lamb and pigmeat. The first slide relates to the Food Harvest 2020 targets that have been set for the meat sector. The target for growing output value in the beef industry is 40% by 2020. The original target was 20%, but subsequent work through an activation committee and a more detailed examination of the figures revised the target to 40%. A significant amount of the growth in value output has already been achieved. The targets for the pigmeat and sheepmeat sectors are 50% and 20%, respectively. When the document was originally being worked on, the latter sector in the agri-economy was at a low point and there were question marks hanging over its ability to recover. Thankfully, it has. The opinion within the sector's farming and processing elements is that a more ambitious target of 40% or 45% growth is possible.

The table shows that significant progress is being made. Consider the sectors' export performances. Beef has grown to €1.9 billion in export value, an increase of approximately 21% on 2010. Food Harvest 2020's baseline period is 2007-09. Pigmeat and sheepmeat export values have grown by 36% and 26%, respectively. A significant amount of this growth has been generated through an increase in commodity prices, but sustainable growth also needs volume. This is anticipated and I will touch on some of the figures in question.

For the beef sector, a recovery in throughput and processing levels is expected to make the 40% target a reality. The pigmeat sector has seen a volume increase in processing throughput as well as an increase in prices and, therefore, value. After hitting a low point, the sheepmeat sector has experienced an increase in volume throughput for the past two years. As Mr. Kelly stated, the targets are ambitious but realistic. A significant amount of progress has been made. The meat sector is confident that, between now and 2020, the growth targets are achievable.

The second slide highlights a number of key issues for the meat sector. Will there be a growth in volume? The beef sector, which is the major industry, has the highest overall value and has the greatest reach into the agri-economy. Close to 100,000 farmers are involved in beef production in some way or another and there are 60,000 specialist beef producers. It is a relevant sector. The anticipation is that slaughtering levels will increase for the next two or three years. They have increased this year relative to last year. The forecast for processing activity this year is 1.5 million head of cattle. In two years' time, it is expected to be 1.7 million. The target is 1.8 million. Volumes are also increasing in the pigmeat and sheepmeat sectors. Great processing activity in the meat sector means more jobs. It remains a labour intensive pursuit. An increase or recovery in volumes increases the potential for jobs. It also increases commodity prices and export opportunities, which in turn feed into job creation. As Mr. Kelly stated, we believe that 30,000 additional jobs could be created in the food sector with the achievement of the Food Harvest 2020 targets.

The maintenance of the suckler beef herd is important to the beef sector. This specialist herd has been the platform for the past decade's significant progress in penetrating European markets and top retailers. Coupled with its maintenance, the increase in the beef sector owing to the expansion in the dairy herd is also important. Mr. Barry will refer to that issue shortly.

We must continue to differentiate ourselves and work on matters of quality assurance, for example, play to our strengths in terms of grass-fed beef production. Our strong sustainability credentials will be important in the marketplace. A critical issue in the list on the slide is market access, by which I mean access outside of Europe. Our focus for beef, pigmeat and lamb is on the European market and will remain so. However, there are increasing opportunities globally and access is critical. We do not have access to particular markets because of veterinary restrictions and legacy bans post the BSE episode. With the Department of Agriculture, Food and the Marine and Bord Bia, we are working to secure access for all of our sectors. Pigmeat is probably the industry that has the greatest volume of exports to international markets, but there are opportunities for the beef industry, particularly in terms of lower value cuts or fifth quarter items. The lamb industry is increasingly considering international exports. The general global increase in demand for protein is driving increased exports. We want to ensure that we have access to it.

I do not plan to discuss major policy issues during my brief presentation, but the outcome of the Common Agricultural Policy, CAP, negotiations is important, as members know.

Equally important is the impact of certain trade negotiations. WTO and an overall conclusion of the Doha Round may seem quite distant but there are more immediate threats to us from some of the free trade agreements being discussed. I do not want to make the point that free trade agreements have to stop. We heard much talk in recent weeks about the launch of the US-EU trade agreement, which clearly has great potential to grow trade and output, but from a beef sector perspective we have concerns that our sector would not be used as the bargaining chip, to put it bluntly, and we would demand that there be fair access. When we slaughter and process an animal from a producer in the morning, we have to take all the different cuts from that animal, and Senator Quinn is familiar with the range of cuts and their various values. We cannot cherry pick and decide we will take only the fillets and striploin from the farmer and let him take the rest home. We have to market the entire bunch, whereas if we grant access to the US or to Canada, which is being discussed, on a selective basis where they can come to our market with their higher-value cuts, that has a disproportionate effect. We seek recognition of such issues in the overall agreement.

In terms of growth prospects, on-farm productivity and gains that can be made behind the farm gate show major potential. We have been involved with Teagasc, the Irish Farmers' Journaland some of our major processors in the BETTER beef farms project. It has shown the possibility of growing gross margin by 118% in the three years it has been operating, with two thirds of that coming from productivity gain, in terms of greater efficiencies, reduced costs and greater output per hectare, and a third of it coming from the price increase that has taken place. It augurs well that there is significant untapped potential behind the farm gate that can drive this sector on.

We have to continue to work on investment in new and existing product development. It is an important area in which the industry is involved and we must keep investing in it. Mr. Kelly mentioned the research and development tax credit as being important and we, too, see that. I thank the Chairman. That was just a quick, whistle-stop tour of the sector.

Mr. Michael Barry:

I have some summary slides on dairy. My name is Michael Barry. I represent both the primary and secondary dairy processors in Ireland. Much has been said in recent months about the sleeping giant that is the Irish dairy industry. Behind that is a genuine opportunity for Ireland. As a legacy of the CAP the industry has operated under production constraints. We were limited in the ability to increase production because of the European milk quota system. In 2015 those shackles will finally be lifted. We have lived with quotas for 30 years and on farms and in processing we are getting cumulative productivity gains. Farmers have been breeding better animals, investing in newer technologies at farm level and there has been a generational change in many farms. Agricultural colleges have been oversubscribed. It is a happening industry with optimism, which is exciting and spells opportunities for Ireland.

The market opportunities are also there. The timing is appropriate. The global population is growing, and so is the consumption of dairy products. Not alone are more people eating dairy products, but we as a population are eating more dairy products, yogurts and convenience foods and drinking more dairy-based beverages. An increasing amount of dairy is coming into our diet. We are seeing this in the least-developed economies in the developing world. The market environment is very exciting. Ireland can play its part in leveraging the opportunities of this changing market dynamic and where that is evolving to. Ireland is already a strong leader globally in the manufacture of infant nutrition. We are one of the major producers of powdered infant formula and we have also developed a very significant base in the development of medical and sports nutrition and differentiated consumer foods. Brand Ireland and dairy brand Ireland is a very well-known and respected product throughout the world.

We are producing just under €3 billion of dairy products per annum. We export to more than 150 countries worldwide, sometimes directly and sometimes in partnership with other industry players. In Ireland we achieved those sales on the basis of 5.5 billion litres of milk. That is approximately 3% of the European milk pool. We are not as intense in Ireland as they are in other parts of Europe, so we have approximately 4% of Europe's dairy cows. There is a tremendous opportunity to expand there. An extra 50% milk means an additional 1.5% milk within the European milk pool, meaning the EU 27. The market can take it. It is not an unbalanced expansion ambition in the context of European dairy, and when one considers the opportunities outside the European market, one can see that the market demand and potential is there. We will not have problems finding new markets for that product.

We will need to be able to produce and process 50% more milk, and there lies the enterprise opportunity for us. If one considers the nearest regional dairy processing facility, such as Lakelands Dairies or Glanbia's Ballyragget plant, we will need another three of those in Ireland within the next four years. We will need three new processing facilities of that size. Glanbia has recently announced the first of them in Waterford. There will be more such expansion because we will need to find a means to process that milk. That is a very exciting prospect. The industry is up for it. The industry will need to work more closely and in a stronger and more collaborative way with State agencies such as Enterprise Ireland, which is doing very good work in supporting the industry and finding means to produce and process milk into high-value market products.

At farm level we anticipate 200,000 extra cows. That is a 20% increase in herd size to produce that 50% extra milk. We are becoming more efficient. We will be able to get more milk from these cows without changing our grass-based dairy production system.

In that context I will refer to some legislative changes that are going through the Houses. The proposed climate Bill is important because the emissions from primary agriculture are relevant to Ireland and its ambition to move towards becoming a low-carbon economy. The proposal on the development of sectoral roadmaps is entirely appropriate. We must deal with emissions from primary agriculture and dairy cows in a different way from how we deal with emissions from cars, machinery and motors - things one can engineer carbon out of. One cannot engineer carbon out of a natural process such as cows. This route that has been proposed for the development of sectoral roadmaps within the national climate Bill is appropriate and one that we would definitely support.

Innovation is very important. Enterprise Ireland is part-financing and strongly supporting Food for Health Ireland, FHI, an industry initiative in conjunction with Enterprise Ireland to develop new functional ingredients that can be mined from dairy products. We are in negotiation with Enterprise Ireland to do something similar towards the development of an innovation centre that will focus on processing efficiency and processing challenges, and trying to help us to become not just a leader in new dairy products but a leader in new dairy technologies. The growth is real, it is happening and we look forward to a strong collaborative development.

John Lyons (Dublin North West, Labour)
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Thank you, Mr. Barry.

Mr. Shane Dempsey:

I thank the committee for the opportunity to present today. I am head of consumer foods. I would like to take a few minutes to describe the prepared consumer foods sector to the committee, its potential for jobs growth and the challenges facing prepared consumer foods companies. These companies produce the products found in the middle aisles of the supermarket. They cover categories such as beverages, confectionery, cereals, ready meals, ambient, chilled and other convenience foods. The two things companies in this sector need to achieve sustainable jobs growth are finance and fairness in the domestic grocery sector. I will touch on these issues as I progress through my presentation.

The important strategy document all my colleagues have mentioned is Food Harvest 2020. It states that the continued developed of value added foods on the home and international markets is key to delivering a sustainable agrifood economy in Ireland. My two colleagues mentioned the increase in output. We need consumer foods companies to translate this into jobs and innovative products to retain as much value as possible from that and to create as many jobs as possible. That is a key challenge for this jobs intensive sector, which is regionally dispersed, and it will benefit the economy greatly.

This slide outlines the types of companies in the sector, which include some of the largest global brands and Ireland's leading food companies aligned with a healthy cohort of food microenterprises located around the country. The commonality between all these companies is the domestic grocery sector. The indigenous companies and exciting microenterprises we see regularly use the sector as a springboard to export growth, to which Mr. Kelly referred. Equally, the Irish offices of global companies such as Nestlé, Coca Cola and Mars require a healthy domestic grocery sector as well to generate the sales required to retain investment and jobs in Ireland and to attract further investment from headquarters in terms of research and development and shared services locating in Ireland. Unfortunately, due to our lack of cost competitiveness over the past number of years and to power imbalances in the domestic grocery sector, the number and scale of international food companies in Ireland has reduced and many food companies have shed jobs since 2008.

That has put us back slightly in the context of the ambitious targets outlined in Food Harvest 2020. The strategy predicts that prepared consumer food companies can achieve a 40% increase in output from the baseline in 2008 but that is dependent on us getting our policies right and getting the domestic grocery sector operating correctly for food companies.

In 2010, the Consumer Foods Council, of which I am head, launched its sectoral report entitled, Feeding the Recovery. The statistics outline the importance of the sector, the number of companies operating within it, the 12,000 persons engaged in it, gross output of €8 billion and exports worth €1.4 billion. We believe the figures are slightly understated because consumer foods companies within the meat and dairy sectors are included in the meat and dairy figures as opposed to these figures, which refer to a miscellaneous grouping of companies. However, they still show the significant importance of the sector.

The key Government action these companies require if they are to achieve the ambitious targets set in the strategy is to provide access to finance for them in order that they can expand their capacity. There is a market failure in regard to finance in the sector and due to the traditionally longer investment returns from food companies that Mr. Kelly mentioned, sources of finance such as venture capital are not available to them. We believe that a sector specific development is required. There are approximately 70 State-run development funds, many of which are sector specific and focus on technology, but none is focused on food. If we are serious about food, we need such funding to address the gap.

The domestic grocery sector is the springboard for growth for prepared consumer foods companies. However, the sector is not providing that springboard at the moment due to the recession and the imbalance of power in the grocery sector. Large retailers, therefore, have been able in the past few years to offset the costs and risks of the recession against suppliers and producers. We await the introduction of a statutory code of practice and an adjudicator. This is essential in order that all stakeholders, including the consumer, can benefit from the grocery sector. It is vital that the Government does everything in its power to reduce costs and boost competitiveness. Future policy such as VAT increases, the mooted packaging tax or any other consumption taxes such as a tax on beverages should be avoided as they will have a further depressing effect on consumer sentiment, which is greatly damaged the sector currently.

One other area of key importance to consumer food companies is their brand and reputation. There have been a number of attacks on them over the past few years. The obesity crisis is a major societal challenge for Ireland and for consumer foods companies. The Government parties must ensure their approach to tackling this key challenge does not damage the reputation of Irish food companies. These companies take their responsibility seriously and they have been, and are, seeking to collaborate with Government and the Department of Health to achieve health objectives. However, currently, the Department is examining a proposal to introduce a tax on food products. Officials previously considered a 10% increase in excise duty on soft drinks but now they are moving on to other categories. The taxation of food is being seriously considered by the Department, despite the fact that there is no evidence that taxation reduces obesity. We have said for a long time that tax is a fiscal measure affecting people's wealth, not their health, and it is also regressive. Recently, Denmark's political parties unanimously agreed to rescind their saturated fat, VAT and sugar taxes. As early as last month, they repealed a tax on soft drinks introduced in the 1930s as part of a suite of measures aimed at stimulating their economy, particularly in the border regions where cross-border shopping has increased over the past few years in response to increased taxation.

The solution to the obesity problem is too complex to be solved by a tax or advertising ban. These measures will not improve obesity rate or generate the health care savings envisaged but they have been shown in other countries to damage industries, economies and cause job losses. Obesity will only be addressed through collaboration between all stakeholders, including industry and government. We are asking the Government to engage with industry on this key issue.

The consumer foods sector has the potential to create sustainable, high quality jobs dispersed throughout the economy. The increase in global demand for food, increased output in the meat and dairy sector and Ireland's reputation as a food industry are positives for this sector. However, the issues of access to finance and buying power must be addressed, otherwise this potential will never be realised.

Mr. Paul Kelly:

In conclusion, we have been able to demonstrate the importance, scale and diversity of the sector. There is a national strategy for the sector - Food Harvest 2020 - which is expansionary in nature. Many things have been done right by the companies and the State in terms of achieving that strategy. That is acknowledged but that positivity needs to be counteracted to a certain extent by the fact that there are a number of barriers in place, which have much to do with the complexity of the supply chain and the environment in which the sector operates in Ireland. We have highlighted a number of them.

We need faster policy implementation in certain areas to be reconsidered as much from an enterprise perspective as from a specific policy area. We believe that if we get this right and if that job potential is realisable up to 30,000 jobs can be created.

John Lyons (Dublin North West, Labour)
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I thank Mr. Paul Kelly. Deputy Seán Kyne had indicated that he wishes to put some questions.

Seán Kyne (Galway West, Fine Gael)
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I welcome the representatives and thank them for their presentations. It is a very exciting industry and always has been but was somewhat overshadowed during the past decade by the Celtic tiger when some people thought there were better things on offer but clearly there was not. It is therefore good to see the sustainable indigenous industry in agriculture. Perhaps Mr. Cormac Healy would comment on the live trade which has started again and, presumably, would be of concern. Farmers and the IFA would welcome this as a means of limiting reductions in beef prices. As he may have a different view on the issue, perhaps he would comment.

The Minister has handled the horsemeat saga well. Does Mr. Healy think there is a lingering impact on our green image, albeit that the Food Safety Authority of Ireland was the first to discover what was going on? In regard to the CAP, the bigger farmers have larger entitlements which they would like to protect. Many of the smaller western farmers, particularly suckler farmers, would have lower entitlements but they are hugely important. Perhaps he would comment on that in terms of the inevitable reduction in entitlements for beef finishers. Does he see that impacting on their expansion?

I wish to ask Mr. Michael Barry about the dairy sector which will have huge potential following the abolition of quota in 2015. I watched on Sky News recently a story from China on the lack of availability of infant formula. A couple of entrepreneur students in the United Kingdom heard it and started to buy formula in the local shops and export it, as a way of doing business. What work has been done by the Irish Dairy Industries Association in terms of tapping into that market? Given that the quota system will be abolished by 2015, will the extra processing facilities, one of which is planned for Waterford, be in place by that time?

Mr. Shane Dempsey mentioned the sector's specific development fund. Will he please expand on that? Who will lead it? Will it be the State, the banks or is European Union funding available?

John Lyons (Dublin North West, Labour)
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The Deputy asked a number of questions which were directed at various people. Perhaps the representatives would respond before moving on to the next questioner.

Mr. Cormac Healy:

I will start with the question on the live trade. I am not the biggest fan of the live trade but it is there as part of trade. If it is part of trade without particular support in one direction or the other we cannot have an issue with it. However, I will make the following points. There is a myth that they are needed to ensure competition in the market. All I would say is that during the past decade supports have been available in varying degrees, sometimes high, sometimes low. The more recent developments in third countries, which in the past would have seen very substantial numbers, have been non-existent in recent years. The price of Irish cattle to the farmer has increased by about 70% in the past decade. That increase has been driven primarily by the marketing of Irish beef, not of live animals.

I answered a question in regard to the live trade. We did not come here today to say we have to stop the live trade; that is not our agenda. If it part of fair trade, so be it. The processing industry is the one with the investment and the roots on the ground. In the past we have witnessed episodes where trade conditions changed, or there were particular disease issues and where global food bans have arisen the live trade can disappear overnight. We are here for the long haul with the investment and the jobs on the ground. Every 60,000 or 70,000 head of cattle that leave Ireland unprocessed, which would be typical of the throughput of one of our processing plants, means a loss of approximately 300 jobs.

The Deputy asked if there is a lingering impact following the horsemeat saga. I would like to think not. While Ireland was at the centre of the storm for the initial period, it soon became evident that this was a pan-European issue. In terms of the Minister's report and all the coverage of the fraud - which is what it was - the inclusion of horsemeat was not found to have initiated in Ireland. It was limited to a segment of the market. It is important to point out that of about €1.9 billion worth of beef exports, which is a significant value amount for exports, between 5% and 10% is in the frozen category, and s subset of that is the frozen economy category which appeared to be affected. The problem did not move to the fresh side of the business and, therefore, it is untouched by the issue. Things will have changed. DNA monitoring is part of the scene for the future but it had been in place in some areas for some time. It is the case that there will be a focus in the frozen manufacturing business on a tightening in the supply chain. It is clear from some of the examples documented that many links in the chain were not required and there will be a tightening in the supply chain.

On the issue of the CAP, in addition to the market value generated from Irish farms, the beef sector is the prime one in this discussion. A further €0.85 billion in direct payments from Brussels is paid to beef enterprises, beef farms, throughout Ireland. From that we are developing exports to the tune of €1.9 billion. It is important to retain as much of that as possible in the sector and we want it to go to active producers. It is clear from my information, and from speaking to the Department of Agriculture, Food and the Marine which has done the analysis, that by and large those who have the higher levels of single farm payment were those who have continued to invest and drive output, therefore, I would like to see a continuation of that payment. The figures I mentioned for on-farm productivity gain are encouraging; the latent capacity to increase gross margin per hectare in beef enterprises will help us in the future. I would not like to see any significant redistribution purely for the sake of redistributing. It should go to active producers who support output which in turn supports jobs, value added and exports.

The final point I would make on the CAP which is significant is the coupling of payments in the suckler herd. It is the bedrock of the major export of beef. Since the last reform of CAP, five or six member states which have suckler herds have, by and large, retained some form of coupling. We see that as significant for the future. We should not be afraid to speak about coupling in the context of WTO or those who say we cannot link support to output. I make no apology for saying that we need to link support to output, drive output and drive job creation.

It is also unfair that there are proposals on the table that lock some member states in to an ability to couple 7% of their overall budget whereas other member states can go to 12%.

John Lyons (Dublin North West, Labour)
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There were others who were asked individual questions. Mr. Dempsey was asked about the source of funding.

Mr. Shane Dempsey:

I was asked how we would see a sector's specific funding working. There is a number currently administered by Enterprise Ireland involving State and EU funding and they are generally run by venture capital, VC, companies. A number of us mentioned that, traditionally, VCs do not find food companies an attractive type of investment because the returns are steadier but they are over a longer period, and they are not as exciting to venture capital companies as other areas such as technology. However, they are still impressive over a longer period of time. There are a number of general funds out that have mentioned that.

However, in their funding and in how they are administered, the food companies do not get a fair share out of those funds. We suggest that, even in the general generic funds, there should be more of an incentive for the venture capital company to select food companies for investment. There may even need to be a quota system created to ensure that enough food companies get finance. Ultimately, a sector-specific fund, run by a VC with experience and expertise in the food sector, is probably the best solution here. It has happened in other sectors and we do not see why it should not happen in food.

Mr. Michael Barry:

In response to Deputy Kyne, who referred to the request from the infant formula sector to the UK retail sector to restrict the sales of formula, the reason behind this is that there is clear evidence of a significant amount of product of infant formula entering the Chinese domestic market and the problem is that nobody knows from where this product comes. For infant formula, I cannot stress enough the importance of a properly supervised supply chain. One's source of supply is integral because this is the most sensitive and vulnerable population. When one is dealing with infants where their full diet is dependent on formula, food safety is critical. It is playing with fire for there to be product coming into China or any other market through a chain of which nobody is sure. There already have been well-documented food scares in China as a consequence of product coming in where people did not know from where it came. That is the reason behind it. On a simple matter, even if the product was shown to be from a correct origin, there are not many Chinese consumers in a position to read Dutch or Danish labels on products that they have picked up on mainland Europe. That aspect can have lethal consequences.

Ireland is doing a great deal in China right now. We have three significant manufacturing facilities in Ireland, Wyatt Nestlé, Abbott and Danone, all of whom are market leaders and the largest exporters of infant formula from this island to China. China is critical in that respect. The other point is that all of our primary dairies, such as Glanbia, Kerry Group, Dairygold and Carbery, are active in supplying ingredients to the market. It is one of the significant contributors to our ambition of 50% in Food Harvest 2020 and our focus is clearly there.

This leads us to the second question as to whether we will be ready by 2015 for the expansion. It will be challenging, but I believe we will be. One of the measures we are taking is to ensure it is not a big bang. We do not believe on 1 April 2015 we will get 50% more milk. This will take a while, as farmers ramp up as they develop. Similarly, we must ensure that we have the right equipment to produce the right foods for the market opportunities and much of our expansion will be incremental. One will see a series of step changes of medium-sized drying facilities being put in place to ensure we are fit for purpose. That is probably the correct way to go.

Members of the committee will be familiar with the fodder shortage as a consequence of this year's weather. I would go so far as to suggest that I believe we are no longer looking at a 50% increase by 2020 but, probably, are more likely to achieve the 50% by 2021, if not 2022, because the legacy of the fodder crisis is such that it has depressed milk output but will also hamper fertility rates on farms. It will take a few cycles to get us through this. The growth will be there but the 2020 piece may not be in terms of the 50:50 ratio. That would be okay, once we can have our farmers in a sustainable and economic state. In answer to the question, we will be ready for that.

John Lyons (Dublin North West, Labour)
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I will take the next three sets of questions together and suggest we then wrap up with the responses. I am conscious there is another presentation and I do not want to keep those involved waiting too long.

Anthony Lawlor (Kildare North, Fine Gael)
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I thank the group for attending. It was enlightening. The last point is key. We are listening to the legacy of the fodder crisis. We think it is here and now. I know it will be long term because supplies have dwindled. Even this year, fertility rates are low as a result, not of the fodder crisis but of the weather.

I have a couple of points. They did not really deal with anything on import substitution. A number of agrifood companies here, particularly of the smaller scale, are doing something in that regard to replace what we are importing into supermarkets and stores.

They spoke of 30,000 jobs being created in the agrifood sector. I visit meat plants regularly because I supply them. Most of the jobs in that sector are being generated by foreign non-nationals. I am aware of small food-producing companies that cannot get staff to work with them because of the associated salary scales and the expectations of the Irish. Naturally, it ends up, particularly in the beef sector and in boning, that most of the staff are non-nationals. As far as the 30,000 are concerned, will we be creating jobs for non-nationals or Irish? As a consequence, what training programmes do we need to provide if we are to take on Irish workers?

As they stated, the dairy sector amounts to 4% of EU output and we are optimist about the future. The 2015 change applies all across the EU, including the big producers such as the Dutch and the Danes. Have we taken on board what they are putting in place? We want to know what the competition is. Obviously, we speak of the Chinese market for baby formula which is exciting, but what are the big producers doing? They see the opportunities in China too. For what are our competitors gearing up post 2015?

I have always had a problem - it is nothing against Senator Quinn personally or anything like that - with the way the main supermarkets operate with the use of loss leaders and the knock-on effect at my level of farming. These are loss leaders, not for the supermarket but for the supplier. IBEC represents all sectors and FDII may be merely a specific sector within that. How does FDII deal in-house on that matter with the representative organisation for supermarkets, such as SuperValu and Tesco, which may be represented by IBEC too? Sometimes IBEC issues mixed messages. As we highlighted earlier, its chief economist has come out with a mixed message in the past month. Are there mixed signals issuing from within FDII's sector in IBEC on who is the stronger?

Feargal Quinn (Independent)
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I welcome the witnesses and thank them for coming before the committee. Most of the questions I was going to ask have been covered. Mr. Dempsey spoke about consumer foods and there is a danger involved in introducing an obesity tax. I raised this matter in the Seanad last week and spoke about what has been done in Denmark. There is little doubt it has shown a dramatic increase. It abolished the taxes it had imposed, some of which had been in place for a long time. It did so because it was losing business across the border into Germany. We will also lose business if we introduce such a measure.

We are part of Europe and I was concerned to hear about a statutory code of practice. How would a statutory code of practice be enforced on a company whose headquarters and purchasing is based in Düsseldorf, Munich or London? We would end up discriminating against Irish-based companies such as SuperValu and Dunnes Stores, which would have to comply with certain measures not applicable to companies based outside of Ireland. I believe in the marketplace and a measure such as this is not possible. Such a measure must be on a voluntary basis.

I gather a number of supermarkets in Ireland have put a limit on the number of packets of baby formula one can buy because they were being exported. Mr. Barry explained very well why this had to be done as it could damage us. What other threats exist with regard to reaching the 2020 targets? The main threat would be another food safety scandal, such as happened with regard to the pigmeat three or four years ago when it turned out pigs were being fed bread which had been returned but left in the package. We must forcibly insist on watching this issue. We were able to identify the horsemeat out of the blue because we were the only country to check it. Are there other measures we can take to maintain food safety?

Áine Collins (Cork North West, Fine Gael)
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I welcome the witnesses. It is nice to be discussing agriculture and food for a change as we spend much time discussing IT. I represent the constituency of Cork North-West which is very rural and dependent on agriculture. I attended an IFA meeting on Thursday and the farmers there did not share the views of the witnesses, particularly with regard to the fodder crisis and its long-term effect, and they are concerned it might happen again because of climate change. They are also concerned about the price of milk which is 92 cent per gallon which is the equivalent price it was in 1983 but costs have gone through the roof. Will increasing production mean losing some smaller farms? Will this have an impact? Will this have a long-term effect?

Deputy Lawlor spoke about skills in the boning sector and I have many concerns in this regard. I have not done much research but I understand it is being filled by non-nationals who are probably non-European. No training is being provided. I understand one person is being outsourced to train. Irish boners are no longer working in the industry because they do not get paid. If we speak about increasing production by 50% by 2020 we must examine this and consider making it more licensed and regulated. I am not an expert in the field and I would like to hear the witnesses' comments.

John Lyons (Dublin North West, Labour)
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I ask the witnesses who are most equipped to answer the various questions to respond rather than everybody feeling they must say something on everything, which would not be appropriate as we are under time restrictions. The issues raised include import substitution, food production, salary scales, training programmes, competition from other member states post-2013, taxes on consumer foods, enforcing a statutory code of practice, threats to achieving the 2020 targets, food safety and the impact of increased production on small farmers.

Mr. Paul Kelly:

I will begin and ask Mr. Barry to answer the questions on the infant formula and food safety issues, after which Mr. Healy will speak about beef processing. With regard to import substitution, in many respects it goes back to my earlier point that one must be cost competitive to get or stay on retail shelves. Import substitution can be positive if one gets one's cost base right, aside from getting the product right and innovation. This would provide an opportunity to make a pitch. Retailers have been working with many companies on private labels and the brands themselves and much development work has been done.

Senator Quinn spoke about Denmark and taxation. Denmark had a huge issue with people travelling from Denmark to Germany. We had a similar issue a few years ago with people heading north of the Border where costs were very much out of line and we also had VAT, duty and cost differentials. Opportunities exist, but they can only be realised if the cost base is right. Part of this will have to do with how companies make themselves more efficient. Companies have support from Enterprise Ireland with regard to lean manufacturing and this, combined with an appropriate tax regime in the country, is the way to go in this regard.

I will make some general points on job development. In the report we produced last year our analysis suggested the creation of up to 30,000 jobs. We also examined issues regarding employment and our findings are all based on CSO numbers. The total payroll for the sector is approximately €1.8 billion, which is the largest of any manufacturing sector. The average reckonable pay declined in 2009 and 2010, and this was symptomatic of most sectors, be they industry, manufacturing or services, as a result of the economic downturn. We were hit by sterling depreciation also and the need to regain lost competitiveness. Having said this, the average pay for the sector remains above the average for the entire economy. It is slightly lower than the average industrial pay but slightly above the average for the entire economy. More importantly, the CSO produced a job turn report which is the rate of turnover in the sector. The job turn for food and drink is 0.25%, which is lower than the average for the entire economy. In other words the rate of employee attrition is lower than average, which suggests something positive is happening in terms of the quality and attractiveness of working in the sector.

With regard to how IBEC deals with the grocery code, the Irish Business and Employers Confederation is an umbrella of many interest groups and on this issue distinct sectoral views are held. One view is represented by Retail Ireland and the other represented by Food and Drink Industry Ireland, which is the approach taken on this issue. A Bill to merge the Competition Authority and the National Consumer Agency is in the current legislative programme. It is intended this will have an enabling provision to allow the Minister for Jobs, Enterprise and Innovation enact a statutory grocery code of practice. The Minister made this announcement quite some time ago. We came before an Oireachtas joint committee to discuss the issue in 2009, and in 2006 when the groceries order was abolished. The view of the food industry is that the code is an appropriate remedy to put in place, and what is important is the speed with which it is enacted and put in place.

I acknowledge the Senator's point on the European context.

Since 2010, the UK has had the statutorily based groceries supply code of practice, GSCOP. The 42% of food exports to the UK worth about €3.5 billion are covered by the code when they are sold into the UK marketplace. If a company is based in Düsseldorf or Dublin but operates here, then they are bound by Irish legislation. Therefore, a German company operating in Ireland must comply with the terms and conditions of Irish competition law. It is expected that when the legislation and its associated statutory code are introduced, they will be operated on the same basis.

The legislation is being examined at European level. When I attended the Oireachtas Joint Committee on Agriculture, Food and the Marine two weeks ago, I outlined the matter in great detail. The European Commission has a framework and it hopes to decide by the end of the year whether to go down the legislative route, and it will do so on three bases. First, there is a voluntary code of practice that is being introduced around Europe. Second, during the earlier part of the year, the Commission completed a consultation on a Green Paper on unfair trading practices, and it will review the inputs to the paper. Third, the Commission will undertake an assessment exercise to determine the implications for a legislative approach or a softer approach over the coming months.

It is recognised that we have a Single Market. For many aspects of what my organisation deals with, either trade or food safety, we have a Single Market and there has been major harmonisation. There is also recognition that various initiatives in the sector are taking place around Europe, some of which veer more towards legislation while others veer towards voluntary initiatives. Therefore, there will be a need to examine whether the appropriate measure is to harmonise at European level. Having said that, contract law varies around Europe so it may be a little more difficult to harmonise legislation at a European level than for, say, food safety. The matter is being explored at European level but not in isolation by the Commission services. All the players along the food chain, including the food and retailer associations, are working together to compile a voluntary initiative. They are in weekly communication with the Commission on the matter.

John Lyons (Dublin North West, Labour)
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Thank you.

Mr. Michael Barry:

With regard to training, the industry is about to finance a masters in dairy technology and innovation to upskill people in order that they can enter the dairy processing sector, albeit at a slightly different level. A need and opportunity for highly skilled people was identified which can be solved by a piece of retraining, reskilling and refocusing. The initiative will serve the sector well into the future.

Deputy Lawlor asked whether we had examined the reaction and ambition of other European countries and their potential post-quota. Yes, is the answer. Ireland is unique in having its business plan, Food Harvest 2020, which brought the Government and industry together. There is not an ambitious growth opportunity in many of the dairy exporting countries in Europe because many of them have natural, environmental and societal constraints. Water is a big issue but water quality is an even bigger issue in many of these intensive countries. Ireland has a tremendous opportunity to benefit from their constraints. It is my association's view that the expansion of these countries will be somewhat muted.

In terms of the good question of whether we see any other threats post-2020 to achieving the goals, we do not know about the unknowns. Nobody saw the dioxin or horsemeat scandals coming and more will arise, but it is impossible to predict them. We can manage things like trade policy. We work in an increasingly global market so we must ensure the opportunities for accessing markets continue, are enhanced and the competitive base is unhindered. Trade policy is a known factor that is worth a lot of focus. A threat to trade policy would hurt the industry both defensively and offensively.

Deputy Collins asked whether we would lose smaller farms. Since quota was introduced, there has been a gradual and even decline in the number of family farms in Ireland, and the same has happened across Europe. Our feeling on it is that the decline has been driven more by age factors, either a lack of a successor or someone is unwilling to operate a small to medium-sized enterprise. Earlier, the committee discussed finance but a discussion on finance is also important at farm level. Somebody working a small to medium-sized enterprise must learn how much it will cost to take on such a challenge. The problem is that we are increasingly dealing with a very volatile price environment. There have been price highs and lows which makes it challenging for somebody to secure high levels of finance for his or her business. That is a long way of saying that I believe that the current decline in farm numbers will continue due to age and demographics.

The Deputy also asked about the sector's potential for growth. Farmer meetings are difficult now. Farmer confidence is at an all-time low and has been dented. I believe that the 50% target is no longer just related to Food Harvest 2020 because it has been supported by very detailed surveys carried out by co-ops throughout the country. I would go back to the point I made earlier. Let us think less about Food Harvest 2020 and more about the 50% target which is still a great victory for us nationally if we hit that 50% target by 2022.

Mr. Cormac Healy:

I wish to refer to the unemployment queries that Deputies Collins and Lawlor raised. In one way it is a good thing that we are talking about jobs and who will get them because at least jobs are being created. That is a positive.

With regard to food and expansion in the sector, there will be both a direct increase in processing jobs and a considerable increase in associated jobs throughout the ancillary industries at farm level and downstream. That is the way that the jobs will evolve. There will be a certain amount of direct jobs created in processing and additional jobs in associated industries.

Over the past decade there has been an increase in the number of foreign nationals working in the meat processing business. A significant number of them work in the sector for one simple reason. Individuals with the required skills are unavailable here. Despite the depths of unemployment to which we have dropped and the significant unemployment rate we have now, not so long ago Ireland was technically known to have zero unemployment. At that point there was a skills shortage and people moved out of these less attractive jobs. People who worked in these harsh environments moved to another sector such as construction. That led to a skills shortage and foreign labour was brought into the country. Clearly, the demand has now stopped. Outside of Europe, the permit system is extremely tight and difficult, but we have seen a change in the applications now being submitted for such work. There is a greater availability of people from the workforce here. People are now willing to consider such work.

In terms of skills, Mr. Kelly did not mention that the FDII has lodged an application for the Skillnets programme to provide a training programme that encompasses the food sector. A process must be gone through but the FDII is addressing the matter. In more recent years, the National Butchery Academy in Ballinasloe, County Galway, has been established. Although the course has small and modest numbers participating, the profession is moving in the right direction. The students have come from Irish meat processors and, on graduation, will take up employment in boning halls and processing facilities. The FDII will continue to focus on education and training.

Senator Quinn mentioned threats to the sector. Obviously, if I had the answer to his question, I would be outside of the committee room and working as a consultant. Dioxin threats, scandals and food scares are a major impediment to progress. Dioxin, BSE and the foot and mouth disease, though related, are not specific to the food processing area. We need to ensure there are controls along the food chain, to maintain them and not have them all bottlenecked into just one part of the food supply chain. We must also concentrate on driving quality in terms of schemes and throughout the food chain, from the farm and through processing. We must push all of these measures.

The tightening of the supply chain will be a significant factor for that segment of the market that was affected by the horsemeat controversy. Other issues are also threats, in particular, I highlighted the threat of a major EU-US trade deal, or an EU-Mercosur trade deal or an EU-Canada deal that unfairly treats a sector. We are not saying that the beef sector should stop all progress in the greater European economy, but are asking for fairness in how the sector is accommodated within that process.

Currency is another threat. We saw what happened from 2008 onwards as a result of the euro differential with sterling and the major impact this had on our food industry. The United Kingdom market is very important for the meat sector. Some 50% of the beef industry product is sold to the UK market. The industry has been diversifying into continental Europe to spread the risk of further threats.

John Lyons (Dublin North West, Labour)
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I would like to thank all four witnesses for coming before the Joint Committee on Jobs, Enterprise and Innovation. We have been given an exceptional overview and insight into the food and drink industry in Ireland. Issues have been raised that the joint committee needs to reconsider, in particular how to make business as cost effective as possible in order to keep it going. Should the delegates wish to raise other issues in the future please communicate with the joint committee.

I thank the delegates for their exceptionally informative presentations.