I am pleased to be back here for the second month in succession, which reflects the committee's active agenda. There is a lot going on in this industry and we in Bord Bia believe it has a significant potential to contribute to the sustainable economic renewal of the country and particularly the dairy industry, which we are addressing today. Much of the potential rests with the dairy sector.
I thank the committee for the invitation to discuss the industry and the challenges facing the sector over the coming years. I am joined by my colleagues, Ms Tara McCarthy, director of our consumer foods division, and Mr. Padraig Brennan, senior business analyst in our information services division. With the agreement of the committee, I would like to focus my statement on the position of the Irish dairy industry within the overall food and drink sector, the medium-term prospects for the global dairy market, the issues facing the Irish dairy industry and the role of Bord Bia in assisting the development of the sector.
The dairy sector continues to form a central part of the Irish food industry with export revenues in 2008 estimated to have reached some €2.2 billion out of total food and drink exports of €8.16 billion. This leaves the sector accounting for 27% of total food and drink exports. Following an excellent performance in 2007, dairy prices came under considerable pressure as 2008 progressed, reflecting a considerable slowdown in the global dairy market. The weakness of the US dollar and sterling relative to the euro also impacted on European and Irish export levels, which for the year fell by 5%. This weaker market environment has continued into the early part of 2009, which is why we are before the committee today.
The breakdown of Irish exports in value terms focuses on three key product areas, namely butter, cheese and infant formula, which between them account for almost two thirds of exports. The strongest growth in export values over recent years has been evident in infant formula and cheese. In terms of destinations for Irish dairy products and ingredients, the UK continues to account for more than 35% of exports with trade in 2008 worth in the region of €800 million. Trade to other EU countries was valued at around €550 million while the ongoing growth in the volume of infant formula and milk powder exports helped trade to international markets, which account for 35% of exports in value terms.
The recently agreed CAP health check, which allows for a 1% annual increase in EU milk quotas over the next five years, paves the way for their abolition from 2015. For Ireland, this provides the opportunity to boost our output given the competitive nature of our production base, especially given that a number of key member states are unlikely to fill their milk quota over the medium term. However, it is important that any increase in output is guided by developments in market demand. It also highlights the necessity to ensure the industry is in the best possible position to utilise any extra production by having the ability to capitalise on market opportunities as they emerge both globally and within Europe. The capital investment programme that has been taking place in recent years in the Irish dairy sector will generate capital investment of almost €300 million and is helping to bring more flexibility to Irish dairy processing, although challenges remain in terms of being able to alter the product mix to meet emerging demand.
Notwithstanding the undoubted pressure currently being faced by the Irish dairy industry, given the decline evident in prices over the last year, the medium to long-term term outlook remains broadly positive for the global dairy sector helped by income growth in many parts of the world and favourable demographic and cultural trends that have increased awareness of, and improved access to, dairy products. However, considerable volatility is also anticipated in the marketplace. Little change is anticipated in global dairy demand during the first half of 2009. A recent report by Rabobank anticipates some turnaround in demand levels towards the end of 2009 and into 2010 based on what it expects to be a more stable global economy, improved consumer demand, more competitive product pricing and lower stock levels. However, the timing of an economic recovery will be critical.
Some moderation in recent supply growth is expected as producers rein back on investment in response to lower milk prices although further output growth is expected in the short to medium term from both New Zealand and Brazil. In the case of New Zealand, increased switching of land from sheep to dairy production is boosting output. Brazil became a net exporter of dairy products for the first time in 2007 as production growth continued to outpace the rise in local consumption.
The fact that dairy demand was running ahead of supply for much of 2007 meant that some slowdown was inevitable. However, industry commentators suggest that the level of correction evident in demand levels has been excessive and some scope for stronger consumption growth exists.
Projections from Rabobank suggest that global dairy demand will show annual growth of around 1.7% in the 2008-09 period with this figure rising to 2.5% or 16 million tonnes annually in the following three years to 2012. China and India have been accounting for 50% of global growth over recent years and, together with the Middle East, Africa and South East Asia, are likely to be the key drivers of global dairy demand over the medium term. However, markets such as India are increasingly self sufficient while China has similar aims over the longer term. Bord Bia is assessing developments in South East Asia with a view to identifying which markets offer the best prospects for growth.
The rate of increase in EU dairy consumption is likely to be modest, although demand for specialised dairy ingredients is expected to show strong growth. Despite the current level of volatility, the rate of increase in global dairy commodity prices up to 2017 relative to the past ten years is expected to be as much as 60% for some dairy products, according to the most recent OECD agricultural outlook to 2017.
Global stock levels are set to remain at relatively low levels while food demand will continue to become less sensitive to changes in farm gate prices. However, increasingly variable weather conditions are likely to impact on global supplies. The fact that only 8% of world production is traded means that small supply or demand swings can have big effects on the market. The uncertainty surrounding the global economic environment makes the timing of any recovery in demand levels somewhat uncertain and this is likely to lead to ongoing volatility in the marketplace over the short term. This volatility means that processors have to adapt to changed conditions while dairy ingredient users have to manage price fluctuations in balancing the costs of reformulation and recipe flexibility, all of which impact on milk prices.
The issues facing the Irish dairy industry come from two different perspectives. First is the immediate issue of stabilising prices and establishing a solid base for the dairy sector over the coming months and second are the issues that need to be addressed to secure a strong future for the industry. Given the in-depth knowledge of the other organisations present today, I propose, if the Chairman approves, to focus on the medium-term issues.
Among the principal issues facing the sector is seasonality, though Irish seasonality, while a problem for milk processing because it is a grass-based industry, is now considered a potential advantage. Another is the product mix. Seasonality constraints dictate that Ireland must select the best product portfolio-market asset utilisation mix. The crucial questions will be what to produce from the additional quota in the short to medium term and where to invest in the longer term for the post-quota world of the future.
These issues raise some critical questions for the Irish dairy industry, such as how to adapt our product portfolio to changing market needs in light of ongoing changes in policy and global dairy dynamics. Other questions are how to move from commodity products to value added products and what products to produce for which markets following expected milk increases post quota. The principal opportunities will lie in selecting and developing new products, formats and ways to get the dairy ingredients or products to market, compatible with existing capacity.
Recognising these issues and the need within the sector for in-depth information as it plans the future product and market orientation of the industry, Bord Bia has established a dairy research programme in consultation with the dairy industry, including the Irish Dairy Board. In addition, our overseas office network provides a market presence that can translate market information into intelligence that can be used by exporters to guide their business development strategies.
To date research has been carried out on market opportunities for Irish dairy products and ingredients in Europe, Russia and Asia, as well as ad hoc studies that examined developments in the Indian dairy sector and the calf milk replacer market. These studies have highlighted a number of potential opportunities that merit further examination. In terms of the European research, significant potential opportunities were identified for hard or semi-hard and processed cheeses in addition to specialised dairy ingredients. In the hard and semi-hard cheese area, for example, potential export opportunities were identified to the value of more than €600 million by 2012. This figure does not represent a projected growth in exports but rather identifies a potential opportunity for Irish exporters, although seasonality remains a challenge.
From the perspective of ingredients, the largest volume opportunity identified was for whey products, with the potential to boost the value of these exports by more than €150 million by 2012. Significant opportunities were also identified for cheese, butter and casein as ingredients. The feasibility of achieving this potential export growth will depend to a large extent on Ireland's capacity to compete effectively with what are, in many cases, established suppliers. In this regard, issues such as energy and labour costs and sterling volatility all impact on the ability of Irish exporters to compete.
In terms of markets offering good potential, the UK, Germany, France, Italy and Spain showed the best prospects for growth. The aim of our research examining the Russian market was to assist Irish dairy companies in assessing developments taking place in the dairy sector, to identify the export potential and examine the best routes to market. The research found that the widening demand-supply gap means that the Russian market offers good potential to Irish dairy ingredient suppliers, particularly for whey powders and milk protein concentrates. However, developing routes to supply the market remain challenging. Nonetheless, the anticipated growth in Russia's import requirement, combined with rising income levels, suggests that the market will offer opportunities for Irish exporters over the medium term notwithstanding current market challenges. Following this research, Bord Bia, through our Moscow office, has been working with a number of exporters to identify potential business opportunities.
Our research examining the market for dairy ingredients in Asia aimed to help guide Irish exporters on the developments taking place across 11 countries in the region. The research showed that significant potential for growth remains in the ingredients sector although the growing presence of emerging low-cost producers means that competitive challenges exist. Nonetheless, the size of these markets in population terms alone and the fact that dairy consumption levels are expected to show annual growth rates of around 5% in most markets suggest further opportunities exist. The focus of Bord Bia activity in this region is to assess which of these markets offers the strongest potential for growth.
With emphasis on the post milk quota scenario, and the current and developing environment in which the Irish dairy sector has to operate, Bord Bia's strategy for the sector is centred on the industry's requirement for information and knowledge. Given the variable plant, technologies, capabilities and experience of members of the industry, their choice of strategic options will require the highest quality information. Current research studies, such as those mentioned earlier, have been circulated to the industry and mark the first phase of a programme in support of the Irish dairy sector.
The commissioned research programme will be supported by Bord Bia syndicated research purchases on behalf of specific client groups within the industry and customised services for individual companies. Industry requirements are obvious. While data is of value, information and knowledge for strategy development are vital. To this end, the objective of the programme is to develop Bord Bia into the core market information provider for the industry, thus enabling strategic choices through market knowledge.
It will be Bord Bia's role to work with the industry to identify the information required, to source and disseminate it, and to assist the industry in deciding how best to use it. In addition, Bord Bia will work closely with the industry to articulate and communicate Ireland's capabilities internationally in dairy production. As part of this Bord Bia, in consultation with industry, is developing a promotional DVD highlighting the capability of the Irish dairy sector and promoting the key strengths of the industry which will be disseminated to all key existing and potential customers.
There is no doubt that the current market provides significant challenges for the dairy industry and requires co-ordinated activity and support to help the sector deal with them. However, while issues remain, the medium to long-term prospects for the global and European dairy market continue to be broadly positive, albeit with the potential for significant volatility, and present further opportunities for value growth in Irish dairy exports.
The gradual move towards the abolition of dairy quotas in 2015 and the competitive cost base at producer level, combined with considerable capital investment at processor level, provide the basis for an industry that can successfully build its market position globally over the medium term.
I thank the Chairman, and the members of the committee for affording me the opportunity of addressing it today. My colleagues and I are happy to address any questions the Chairman and the committee may wish to ask.