IT MAY NOT be the most obvious location for high-tech scientific development, but Lakeland Dairies, just outside Bailieborough in Co Cavan, is a shining example of the Government’s much-vaunted innovation strategy in action.

A new €20 million facility there, which opened two months ago, is the largest of its kind in Europe. The facility will process 3.2 million gallons of milk per week, up from 1.2 million, most of which will be converted into powdered, dry milk for infant formula.

Lakeland Dairies epitomises the kind of sophisticated, innovative development currently driving Ireland’s agri-food industry. Having spent much of the Celtic tiger years somewhat in the wilderness in terms of Ireland’s economic priorities, the agri-food sector is now very much back on the agenda.

Agriculture, and the related food and drink industry, account for about 8 per cent of GDP and €8 billion worth of exports each year. While other sectors of the economy have floundered during the economic slowdown, Ireland’s largest indigenous industry has remained robust and is increasingly being perceived as one of the great white hopes for Ireland’s economic recovery.

In terms of global food production, the agri-food industry undoubtedly has huge growth potential – the world’s population is set to increase to more than nine billion by 2050, requiring a 70 per cent increase in food production. But the dairy sector in particular offers Ireland’s biggest opportunity.

Milk quotas are due to be phased out by the European Commission in 2015, a decision that will result in a seismic shift in the economics of the Irish dairy industry, as farmers will no longer be limited in the amount of milk they produce. According to Food Harvest 2020 , a recent strategy document produced by the Department of Agriculture, milk output could increase by 50 per cent by 2020.

Ireland has natural advantages over competitors in the dairy sector, namely its low-cost, grass-based seasonal system of production.

But among industry sources, there is a conviction that Ireland needs to innovate if it is to retain its market position. According to Michael Barry, director of the the Irish Dairy Industries Association (IDIA), uncertainty about the future of the intervention system – a market-support measure that saw the EU buying up milk in order to raise the price to a “safety net” level – means Irish farmers cannot assume the support of the Commission as a buyer.

“The direction of the Common Agriculture Policy (CAP) is changing to the extent that we can’t simply rely on the Commission as being the buyer of last resort,” he says. “We need to differentiate ourselves in terms of products and process innovation in order to compete in new, higher-value markets.”

One of the stakeholders leading this innovation drive is Teagasc, the national body charged with providing research, advisory and training services to the agriculture and food industry. The agency recently opened the Nutraceutical Research Facility at Ashtown in Dublin and earlier this year commenced a major collaboration with UCC, focusing on food research. The aim of these Government-backed investments is to make Ireland a major centre for food-science research.

“There is a huge buzz around the dairy sector at the moment, particularly as we approach the abolition of quotas in 2015,” says Prof Paul Ross, head of food research at Teagasc. “Much of the research is focused on finding new ways to use milk in less commoditised products, in other words trying to develop more value-added products from milk. We are also looking at how we can use the constituent parts of milk as ingredients in other products.”

According to Prof Ross, the most active research areas in terms of the dairy sector are the areas of infant formula, cheese, and “functional foods” – food products that are consumed for their health benefits. Ireland is already a major player in the global infant formula industry, producing 12 per cent of the world’s infant formula.

Three of the biggest multinational companies operating in this sector are based in Ireland – Pfizer-Wyeth, Abbott and Danone Baby Nutrition, which earlier this month announced a €50 million investment at its manufacturing facility in Macroom, Co Cork. In turn, the country’s main co-ops such as Lakeland Dairies supply these companies with dry, powdered milk product. Simultaneously, Teagasc is working on developing further technological advancements in infant formula, in particular exploring the health benefits of probiotics for infants and pre-term babies in conjunction with Cork University Maternity Hospital.

Other areas of research include cheese, traditionally one of the more value-added milk-based products produced in Ireland.

“What we are seeing is more of an emphasis on cheese as an ingredient, not just as a product sold directly to the consumer,” says Ross. “We are looking both at developing new cheese varieties and researching its technological properties.” Among the products developed by Teagasc was the Dubliner brand, a variety of cheese which was developed in partnership with Cork-based food ingredients and cheese company, Carbery.

Functional foods – the use of dairy ingredients to improve human health – is the other main area being targeted by Teagasc, and one that has been identified as a major growth area for Ireland. It is estimated that the global market for functional foods will grow in value from $78 billion in 2007 to $128 billion in 2013 and account for 10 per cent of the overall food and drink market.

Teagasc is engaged in a number of science-based research projects which aim to examine and extract the constituents of milk that bring human health benefits. It is envisaged that there is significant potential for Ireland to expand its presence in the whey-based nutritionals market, especially in the US.

But innovation is not just limited to the national research bodies. Two of Ireland’s most successful and international public companies, Kerry Group and Glanbia, have led the way in terms of innovation in the dairy ingredients and functional food businesses. Both companies invest significantly in research and development, with food ingredients and flavours increasingly becoming the core focus of their business.

Developments are also taking place at farm level, where there is a push to ensure that farmers are prepared for the increase in output possibilities, following the removal of quotas. In terms of farmers’ preparedness for the opening up of markets, dairy farmer Sean Finnegan, who is in the Lakeland Dairies catchment area, believes that the south of the country will see the biggest increase in production as the northern part of the country already has good quota availability because of the fewer number of dairy farmers. The other main issue is investment.

“Increasing production requires major investment, and that means getting loans from the banks,” he says. “Banks are no longer interested in land as collateral, but are looking at turnover and profit.”

Nonetheless, innovation has been taking place at farm level over the past few years, particularly through investment in and upgrading of milking parlours and equipment, funded in part by EU grants.

Science-based innovation is also resulting in a better quality and more efficiently produced milk product. The economic breeding index which focuses on breeding issues and quality of herd, has been place since 2001, and ensures higher protein and fat content in milk, which results in increased profitability.

Similarly dairy farmers have to meet targets for somatic cell count and total bacterial count which focus on management practices, in particular demanding extremely stringent levels of machinery hygiene.

The Irish Dairy Board has also implemented innovative practices such as a new IT system and logistics platform that links the computer systems of the co-operatives with their own system, thereby improving the supply chain management side of the export process.

But despite the high level of innovation and research activity taking place at all levels of the dairy and dairy-based food industry, there are challenges for the sector. Barry points out that current expenditure on food research is small, relative to other industry sectors, and finance for research is dispersed among too many research and innovation centres.

But the big issue is investment. In order for Ireland to fully take advantage of the possibilities offered by the abolition of quotas, huge investment in terms of expansion at farm level and investment in science-based innovation to ensure Ireland can compete in the value-added markets is required. According to Barry, this may have an effect on product prices.

“If we are to increase production by 50 per cent by 2020, as stated in the Food Harvest 2020 report, it’s going to entail a lot of investment. The reality is that the various stakeholders – farmers, the State and the industry – are going to have to dig deep.”