In the first of two articles on the food industry, Laura Slatteryexamines how Irish producers are coping with changing markets and higher costs.

In the fields of north Co Dublin and Meath, the muck is almost as common as the despair that is spreading among the growers who supply Tesco and Marks & Spencer with fresh vegetables.

Persistent rain has had a catastrophic effect on cabbage, cauliflower and broccoli crops, wiping out up to 50 per cent of some growers' yields. The downpours were so heavy that even root crops like parsnips, planted earlier in the summer, have simply rotted in the ground.

So vegetable-phobic kids can rejoice: by Christmas, there is likely to be a shortage of Brussels sprouts. But for the consumers who push the shopping trolleys and pay the bills, the freak wet weather in Ireland this summer is just one more reason why filling their fridges could cost a lot more in a few months

"A perfect storm" is how Irene Rosenfeld, the chief executive of US cheese giant Kraft, describes a coming together of inflationary pressures on world food markets.

While northern Europe has had its umbrellas permanently on standby, Australia's agricultural belt has spent its last summer baking in a severe drought. In the US, up to 30 per cent of the land mass that was being used to produce food is now being diverted into the production of corn and maize for biofuels.

The loss of so much potential food-producing land has in turn pushed up the cost of the animal feed used by dairy farmers. And in a case of extreme bad timing for a profit-hungry global food industry, all of this has coincided with surging demand for meat and dairy produce in India and China, as their economies and their diets become more westernised.

The last 12 months have seen a doubling in dairy prices, while European wheat prices are up 70 per cent since April, hitting record highs a fortnight ago.

Irish food companies are far from immune.

Rising commodity prices may be good news for most farmers (as long as they can get the co-ops to pay up), but they are putting sustained pressure on the firms that buy in dairy ingredients and grain. Their choice is now clear: either try to recover those costs from the supermarkets or risk going out of business.

This week, milling group Odlums became the latest food producer to warn of higher prices for shoppers. "We have had to write to our customers to tell them we are increasing flour prices by 30 per cent," says Jim Henry, its chief executive.

Odlums, which imports 75 per cent of its milling wheat, has seen grain prices soar dramatically, with freight costs going in an irritatingly similar direction. Global wheat stocks have fallen to their lowest levels since the 1960s, and speculators, bored with taking bets on the price of oil, have moved on to commodities, exacerbating the "unprecedented" surge in prices.

"The level of these cost increases is not sustainable for anyone in the chain," says Henry. "It is inevitable that companies will have to pass it on."

Or at least it is inevitable that they will try to pass it on. In a country where 70 per cent of the retail food market is controlled by just three companies - Tesco, the Musgrave group and Dunnes Stores - food firms frequently don't have the muscle to force multiples to accept price increases.

Even if they do eventually win them, they will have to endure a period of hurt.

"Our raw material prices will go up faster than the prices we can charge to the supermarkets," says Jerry Henchy, who is chief executive of Reox Holdings, the company that ultimately owns the Dairygold, Galtee, Shaws, Calvita and Mitchelstown brands through its consumer foods division Breeo Foods.

The cost of a typical basket of dairy ingredients - cheese, milk powders and milk proteins - has jumped from 83 cents to €1.80 per gallon since January 2004, while changes to how the EU subsidises food production has meant aid levels have dropped from 41 per cent of the selling price to no percentage at all.

With the infamous EU milk lakes and butter mountains all dried up and melted away, the era of intervention is gone, says Paul Kelly, director of food at Food and Drink Industry Ireland, an affiliate of business group Ibec.

"Before, if demand went up dramatically, say if it was a bad year because of rainfall or lack of rainfall, the commission was able to release stocks and keep prices within a narrow band. Now it's much more market driven. You take your chances." Breeo is strong enough to cope with compressed profit margins for a period of time, says Henchy, who is also chief executive of the farmer-owned Dairygold co-op, which sells its produce on to Breeo, but eventually, like all manufacturers, it will have to go knocking on the multiples' doors.

"It is just of question of how long the lag will be."

If supermarkets hold out on food firms too long, they risk undermining home producers' business to the extent that they stop producing, thus cutting off a steady local supply.

"The supermarkets have to support the industry, because otherwise food production will migrate to where the cost of production is lowest," Henchy says.

Unsurprisingly, that is not in Ireland.

The retailers now have "a huge responsibility", he believes.

"If one of the multiples doesn't want to accept a price increase, the producer has lost 33 per cent of its business. Basically, it has to close a factory."

Industry consolidation, already on the menu, is now even more likely. A wave of voguish private equity takeovers is another possible outcome.

Fish fingers provide an uncomfortable precedent here: Permira's purchase of Bird's Eye last summer swiftly led to the loss of 500 jobs in the UK.

If the higher input costs can be passed along the food chain - preferably before manufacturers' existing contracts with their suppliers run out - the squeeze on food companies may not reach such a dramatic conclusion.

The scale of what is happening shouldn't be underestimated: this is not just a blip in prices brought on by a little too much or much too little rain.

"I was born in 1965 and we haven't had food inflation like this in my lifetime," says Henchy.

Aggressive US targets on biofuels are akin to a nuclear explosion suddenly removing vast swathes of land for food production, he adds.

Back on the vegetable farms of Dublin, Meath and the southeast, there are growers who probably feel as if a nuclear explosion has hit them.

Pat O'Connor, managing director of the Dublin Meath Growers society, says much of the damage has still to be identified. Shortages of some foods are likely to continue until next spring, while the crops that do hit the shops may cost more.

"If a grower expects a turnover of €100,000 based on supply agreements with us and his yield is down 50 per cent, he has lost €50,000," he says. Growers are "a resilient bunch", he says, but compensation has to come from somewhere.

The society is already in discussions with Tesco and Marks & Spencer to secure higher prices.

"We need to get the message out to the consumer. While the bad weather is annoying for them, for growers, it's affecting their existence. People talk about how their shopping bill has gone up by 20 per cent, but if we're serious about keeping Irish produce, we are going to have to pay more for our food."

Next week:how the end of cheap food could affect consumers and the economy.