25 August 2011

5 minute read

The mood music in farming circles is sweeter than it has been for many a year, with better cattle, sheep and milk prices. Coupled with good grass-growing weather and solid ground conditions, it is understandable that there is an air of optimism among farmers. This is also mirrored in official circles by the upbeat and expansionary tones coming from the Food Harvest 2020 report.

Against such a backdrop, it seems a touch miserable to be sounding a note of caution. At the start of the year, I predicted that beef prices were set to be the highest in decades and put my head on the block by suggesting that €4/kg was possible for top stock. That prediction was based on a number of key factors that have to be analysed and understood on an ongoing basis.

However, there are concerns that, at times like this, we lose sight of where we are and where we should be going. For example, take the recent announcement by the Beef Activation Group that the original target of a 20pc increase in beef output in the Food Harvest 2020 report was far too low, and consequently it was decided that this should be doubled to 40pc (30pc from volume, 10pc from price).

ICSA expressed alarm at this, suggesting that setting artificial targets for a huge expansion in beef production was extremely misguided in the absence of any concrete evidence that the meat processors could (a) deliver new markets and (b) ensure that those extra markets would translate into better prices on an ongoing basis.

Very quickly, the response from certain elements in the industry was critical. It was vital, they said, to have a bigger industry in order to maintain Government support and national prestige. History, however, has consistently shown that a weekly kill above 30,000hd depresses prices, regardless of market demand.

Basic economics tell us that volume and price rarely increase in tandem. Just as we are seeing volatility in the stock market, we must be conscious of volatility in commodity prices. Cereal prices have already felt the chill wind of market sentiment and low cereal prices usually lead to lower meat prices on global markets.

Some of my optimism at the start of the year related to booming beef prices in the big beef producing countries. However, although prices are still strong in Brazil, Australia and the USA, they seemed to have peaked. Brazilian beef price peaked last November, Australia and the USA in April. The EU experience has been more muted.

While Irish beef price is up 15-16pc on a year-to-date basis, the increase in Italy, Spain and France has been more typically in the range 5-8pc. Given that I had predicted a scarcity of beef this year, I remain convinced that beef prices will hold up well for the next 12 months. Nonetheless, in the more medium term, there are reasons to be nervous.

A drop in live exports of over 40pc (over 105,000hd) in the year to date suggests that beef factories will regain the upper hand in late 2012 from the supply side.

The rush by farmers to buy Holstein calves for finishing here rather than letting them off to continental veal units will prove to be an own goal on several levels. They'll make no money and the extra animals will depress beef price. On the demand side, it is early to speculate what international beef prices will be like, and impossible to predict euro-sterling exchange rates.

Although the long-term trend is for improved food prices, caution is advised on medium-term prospects. The Beef Activation Group suggests that we need a substantial suckler cow premium to help deliver its targets.It is disturbing to note that there are a lot of cheerleaders for this approach, most notably leading figures in the beef processing industry.

What is needed now is for farm organisations to make up their mind on where they stand. Back in 2002, ICSA stood alone in supporting full decoupling. Some predicted wrongly that the suckler herd would disappear. Yes, there has been a slight decrease in sucklers and a bigger decrease in sheep numbers, but prices for both have increased and numbers are starting to increase again.

The flexibility to reduce or increase stock numbers in response to market conditions has been clearly beneficial to farmers. Prices have improved as a result, with €5-6/kg paid for lamb, weanling and store prices well above €2/kg live weight, and beef up to €4/kg. This could not have happened if we still had coupled payments. Music to the ears of meat factories maybe, but low prices to farmers are the inevitable consequence. The harsh reality is that any effort to reintroduce a suckler cow premium would be a classic case of shooting ourselves in the foot.

The first question is where is the money coming from? The answer is that it's coming from the farmer's Single Farm Payment (SFP). The reality is that the post-2013 CAP will, at best, provide the same level of SFP as at present and any new coupled premium can only be funded by first cutting the existing supports.

Farmers should also be aware that the leaks coming from the EU Commission suggest that any coupled payment will be absolutely limited to a maximum of 5-10pc of the total Pillar 1 envelope (ie, €130million) and may be conditional on no increase in production. Even if we were to avail of this option, it would be only justified on the basis of systems of production under threat, so presumably any such money would have to be divided between ewes and sucklers.

The outcome would be a suckler premium of approximately €85 and a ewe premium of €15.A free for all would undoubtedly lead to a stampede of farmers chasing the premium, resulting in an inevitable hit on weanling and beef prices.

Instead of current weanling prices of €2.25-2.50/kg, a more likely scenario would be a return to prices in the range €1.70-1.90/kg. That's a hit of up to €240 on a top 400kg weanling. To avoid this, we could have strict quotas, but farmers would then be prevented from expanding other than via expensive quota purchase from retiring farmers and any increases in numbers of the sort favoured in Food Harvest 2020 would be foregone.

The only conclusion is that beef and lamb expansion is only possible if markets can be developed and only desirable if such markets can return sustainable prices.

We tried tinkering with the subs before and it didn't work; there's no reason to believe that we can repeat the mistakes of the past with different results this time.