I was a year out; evidently the folk song category was introduced in 1902. The following piece from The Westmorland Gazette, April 19, 1902, can be seen at the paper's website: http://www.thisisthelakedistrict.co.uk/:

Folk song novelty

THE most striking novelty introduced in the Westmorland Music Festival competitions was unquestionably the folk song. Collections of folk songs have been made in many manners since Walter Scott planned and carried out his Border Minstrelsy. His plan was to carry on the hunt for old songs himself and by means of friends and helpers who could take an interest in the quest. But it was without any public or extrinsic document.

In the folk-song contest a new method and new motive are provided. It is known that an indefinite number of popular local songs exist which would have been repeated from generation to generation, but never published. Some of these are worth preserving and it has now been proved that the Westmorland Music Festival may be the means of discovering and preserving them by the process of competitive selection.

It is not stated that the Festival Committee will undertake to print them; but somebody at all events should take care to collect them.