The response to the foot-and-mouth disease crisis by Irish people and businesses has highlighted the importance of the food and drink sector to the economy.

While much of the recent growth in the economy has been driven by the IT and pharmaceutical sectors, food and agribusiness still constitute 12 per cent of GDP and 25 per cent of total net foreign earnings.

However as the economy has grown and labour costs in particular have risen, the ability of "traditional" sectors such as the food and drink sector to absorb higher costs and continue to make such a major contribution to the economy is at risk. There are two principal reasons for this. The first relates to the growing uncompetitiveness of the sector, driven principally by a major increase in labour costs. The second relates to the confused state of consumer demand for food as to whether the priority is safety, convenience or low prices.

Growth in numbers employed in the economy and the resulting increase in disposable income is driving the demand for pre-prepared/convenience foods. As we highlighted in our study, Future For Irish Food with Paul Tansey in 2000, the increased demand for pre-prepared/convenience foods means the food manufacturer or retailer is providing an increasing part of the preparation previously carried out in the home.

This factor combined with the demand for greater food safety training and systems means that the demand for labour inputs at the food processing level is increasing at a time when labour costs are rising anyway.

The result of the above is that the cost of producing food and drink in the Irish economy has risen dramatically.

However, these major increases in costs have not been reflected in the prices received by manufacturers. Labour costs in the food and drink sector have risen by 42 per cent since 1995, compared to an 18 per cent rise over the same period in the UK, which remains both our largest export market and our major source of import competition.

The main reason why we continue to supply the UK market under these conditions is that the fall in the value of the pound/euro against sterling has absorbed these costs. However for food and drink companies selling on the Irish market there has been no currency effect to absorb cost increases.

The food and drink sector has seen a 25 per cent increase in a business costs since 1995. However, wholesale food prices, which measure prices received by the manufacturing and supplying sector, have increased by only 7.5 per cent in the same period, indicating both significant under-recovery of costs and major productivity increases.

In contrast, the food and drink sector in the UK has seen an overall increase in business costs of just 14 per cent, with labour costs increasing by only 18 per cent.

While one can understand the Government focus on food prices, given the importance of food consumption in the consumer price index, the key drivers of inflation in food are a combination of increased Irish economy costs and more expensive grocery imports from the UK In addition, the analysis above shows there has been major under-recovery of cost at the manufacturing level.

Furthermore, it seems clear from both the soul-searching in Britain over FMD and BSE and the consistent prioritisation of food safety by Irish consumers that there is a keen awareness that "every day low pricing" is increasingly perceived as having the potential to compromise the integrity of food products.

Economic logic dictates that a combination of increased costs and under-recovery of cost cannot continue. Furthermore, the decline in the value of the euro/ pound against sterling, which has absorbed some of this uncompetitiveness, is likely to be reversed in the near future either by a decision of Britain to join the euro, or a recovery in the euro itself.

Post FMD and BSE the food and drink sector will be required to redouble their investments in traceability, food safety training and systems.

This can only be achieved where there is recognition and recovery of these higher costs.

In this case as in all others there is no such thing as a (safe) free lunch.

Ciaran Fitzgerald is director of sectors, with IBEC, the employers' lobby group.