27 January 2012

3 minute read

Finished prices reached historical highs in 2011 despite significantly increased domestic supply (see Figure 1). Much of this was due to greater exports. Whilst volumes have not yet returned to pre-BSE levels, they increased by over 40% in the first 5 months of 2011 compared to the same period in 2010. EU destinations accounted for 95% of exports, principally the Netherlands and Ireland. This highlights both the boost that the weaker Pound against the Euro has given to the UK market in recent years, and the dangers posed by the current Eurozone crisis. At the same time imports reduced by 4% for the same period, which predominantly originates from the EU, particularly Ireland.

Calf prices have weakened due to the lack of an export market and high cereal prices. However, store cattle prices have strengthened by as much as £150 per head following the improved finished price and the expectation that this will be maintained throughout 2012 when these cattle will be ready.

The beef herd, despite a 2% rise in 2010, is continuing on a longterm downward trend. The 2011 year saw additional heifer and cow slaughterings following higher input costs and the relative increase in the profitability of arable enterprises.

Domestic supply is expected to tighten due to the lower breeding herd, high export demand, and reduced bull beef supply due to the cost of feed. This latter factor is also likely to lead to lower carcass weights as finishers try to minimise the amount of purchased feed. This too will reduce the volume of supply. Domestic prices could hold if continental demand compensates for a potential reduction in domestic demand following Government austerity measures and higher inflation.

A sector concern is mounting production costs with strong feed, straw, fertiliser and fuel prices. Recent EBLEX figures suggest current costs of production for an English lowland suckler herd for the April to September 2011 period are £2.96 per kg liveweight. The equivalent for an extensive English finishing unit is £4.11 per kg deadweight. These are up 4.2% and 3% respectively on the figures for the year to March 2011.

The feared trade deal with the Mercosur trading block, opening the EU market to South American imports, looks unlikely to be agreed in 2012. South America has low production costs, but these are rising (including land and labour costs). When or if agreed, a deal’s impact may be diluted if world prices strengthen towards current European prices. Therefore, the longer a deal is delayed the less the likely impact will be on UK producers.

Another political challenge continues to be TB. Whether the industry-led cull in England gains traction or too many bureaucratic obstacles make progress impractical, remains to be seen. Despite these negatives, the beef industry continues to face the future with optimism with quality replacement stock, both males and females, continuing to command high prices.

Many English producers have seen their Single Payment decline with the dynamic transition to a regional SPS in 2012. CAP reform looks likely to compel countries using a historic payment approach to adopt a regional method, putting pressure on some intensive EU units. In addition, CAP reform is likely to erode future support payments making profitability more dependent upon the market.

Market prospects, despite being volatile, may be cautiously positive. However, with imminent CAP reform and production costs typically exceeding market returns, beef farmers should continue to review their business plans.

January 2012