Last week, Damian McDonald was appointed director general of the IFA. While policy issues will be a core part of his role, just as big a challenge for McDonald to ensure the success of IFA will be to safeguard the future financial viability of the association.

Given all that has happened over the past 12 months, it comes as no surprise that the IFA’s financial position has been damaged. Figures released by the IFA for the six-month period to the end of September 2016 show that the association made an operating loss of €830,000, mainly as a result of a 17% fall in income.

The IFA derives 60% of its income from membership fees, which amount to about €6m. However, in the six months to the end of September 2016, income from membership fees has fallen 8%, according to the IFA.

Levy drop-off

The association’s other main income stream comes from farmer levies (European Involvement Fund). These amounted to about 40% of total income in 2015, or €4.7m. The levy system has always been a controversial income stream, even before the events of the past 12 months, and it comes as no surprise to see a major fall-off in levy collections.

In March, the IFA said that income from levies was back 12%, or about €500,000 on 2015 figures. However, a lot has happened since these figures were announced.

ABP’s decision to stop the automatic deduction of the levy from farmer cheques hit the association’s income stream at a time when it was already haemorrhaging money. As a result, it is likely that levy collections may now be back as much as 30%, or almost €1.5m, from previous years.

Combining the fall-off in levy and membership income, the IFA’s direct income could be hit to the tune of at least €2m over the last two years.

But while the IFA’s income has come under pressure, its expenditure levels have remained with little adjustment. It cost almost €12m to run the association in 2015.

By far the largest expense is staff costs (including pension contributions), which amounted to €5.7m for its 69 staff in 2015 and accounts for almost 50% of spending. Since the pay issues, there have been no senior staff changes at IFA.

Loss-making core

This means that the IFA has been loss-making from its main operations to the tune of about €1m over the past two years and it looks set to lose more than €2m in its core business in 2016.

However, it does have other strong income streams that shore up these losses. Its IFA Telecom business, which has a turnover of €7m and is capital-light, boosts profits by about €0.8m per year.

It has also enjoyed a strong dividend income of €300,000 coming from its investments in shares, including FBD Plc. However, this has been all but eliminated given that FBD, which is the association’s largest investment, has shelved any dividends in the near term.

In the past, it has also received a €1m annual dividend from FBD Trust. This also looks set to be cut due to the lack of FBD plc dividend.

All in all, the IFA made a profit of €0.8m to the end of March 2016. But, as a direct result in the fall-off in income, it looks set to lose more than €1m for the year ending 31 March 2017.

Inheriting a now loss-making business will be one of the biggest challenges faced by McDonald as he takes up this new role. In the longer term, its funding model is under threat and expenditure is out of sync with its revenue streams.

But what he does inherit is a business with assets of about €16m, made up of its investment in IFA Telecom, shares mainly in FBD and other quoted stocks and a 50% share in the Irish Farm Centre on the Naas Road.

This will give him time and this may be his best friend. He does not need to turn the ship around fast like investors might demand of a plc. Fundamentally, he needs to rebuild the trust of his customers (member farmers) and this cannot be done alone or overnight.

One question farmers may ask is why it costs €12m to run an association like the IFA. There has been a lot of talk around the level of salaries over the past year, not only in the IFA but across the co-operative sector.

While the director general salary has been cut significantly, other senior management salaries have not. Excluding the general secretary, the president and the deputy president, along with 18 senior staff members, were paid more than €2.5m in 2015. This accounts for almost half of the total staff cost.

The easiest thing for any new boss to do is to come in and cut costs. And with salaries accounting for 50% of expenditure, the Lucey report made clear recommendations to the IFA around pay and it is clear these pay levels for senior staff cannot continue. But this may not be in the best interest of the IFA.

The IFA is a people organisation, where the assets walk up and down the corridors. By cutting costs, the risk is that years of industry knowledge and lobbying experience walk out the door and those that remain become demotivated. So while this may help costs in the short term, it does not address the longer-term funding issue.

The IFA has years of success but sometimes it is difficult for companies to recognise when they are losing their edge. It is the role of the boss to identify the fundamental principles to create competitive advantage and staying power. For the IFA to rebuild customer confidence will probably take a few years.

The best outcome will be for the IFA boss to reflect deeply on what has happened and recreate an even stronger association in this era of transparency and accountability. McDonald needs to distinguish short-term thinking from lasting principles that can help create and recreate value for members. With Brexit, protectionism, low commodity prices and the threat of disadvantaging trade deals all on the horizon, there has never been a more important time for an effective farmers’ lobby group.

Even to attempt to redefine business fundamentals in a world where all systems act to protect and cling to the status quo calls for extraordinary leadership.

Most bosses have quarterly profits to deliver, cashflows to protect, employees who demand fair treatment, management team members with different points of view and doubts of their own around the complexity of execution.

For McDonald to be successful in the role, he will need to take on the challenges of long-term change in the face of enormous short-term pressures to cling to the status quo for yet one more quarter.

The bottom line here actually lies in the top line, where the association needs to look at where it can secure its future income. Ultimately farmers are funding the IFA, whether directly or indirectly. So it needs to deliver value for farmers. It could be argued that one of the biggest failings of the current levy model is that many farmers do not see directly how paying levies benefits them.

This doesn’t imply it is not delivering. In fact there is no doubt the work of the IFA does deliver, and if ever there was a time it needs to deliver for farmers it is now. We wish him and IFA the best of luck in shaping the future of the association.