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QMS (Quality Meat Scotland)

10 July 2012

QMS Market Report - July 2012QMS Market Report - July 2012

QMS - Quality Meat Scotland


Prices and Supplies

During June prime cattle prices edged forwards by 1% and set a new record high of 356.7p/kg dwt at the end of the month. Throughout the month they have traded around 12% ahead of year earlier levels, and have progressed by around 2.5% in the first half of 2012. Scottish auctions have seen broadly similar price movements. The recent strengthening in prices indicates a slight pick-up in demand; possibly due to the Olympic Games which begin at the end of this month. Although it may also indicate a further tightening of supply.

Cull stock values have risen around 2-3% on the month. Beef cows averaged 146p/kg lwt in June compared with 142p/kg lwt in May. Although they remain slightly off their March peak, beef cows are approximately 14% more expensive than in June 2011. Meanwhile, Scottish abattoirs paid nearly 20% more to source cows from producers in the week ended 23 June than in the same week last year.

According to the latest UK slaughter statistics for May, monthly throughputs of prime cattle matched the year-to-date decline of 8% when compared with 2011. However, within the figures there has been a divergence between the volumes of steers and heifers being slaughtered. While just 1% fewer steers were killed during May than a year earlier, the heifer kill fell by 11.5%. The implication is that producers have reacted to the signal of strong steady prices by retaining more female cattle for future breeding.

In Scotland, the supply of prime cattle to abattoirs was also down by 8% in May. However, supplies have been slightly tighter than in the UK as a whole thus far in 2012; the cumulative total since the start of 2012 falling 9% year-on-year. Scottish statistics suggest that a rebuilding phase may also have commenced north of the border, with supplies of heifers down 13% in May while marginally more steers were slaughtered than twelve months before.

UK level data for mature stock supports the implication that farmers are beginning to expand their breeding herds. In May, the cow kill was down by 4.5% year-on-year, and numbers are down by 5.5% over the first five months. However, in Scotland, greater volumes of mature cows and bulls were slaughtered in both April and May than a year earlier with May volumes up 10%. This has pushed throughputs up by 3% year-on-year in the January to May period. Therefore, Scottish producers are still taking advantage of strong prices to cull their least productive breeding stock. However, the reduced heifer kill suggests they are replacing cows, and hence, the breeding herd may begin to show some signs of stability.

Supplies of prime cattle to Irish export abattoirs continued to remain tight through June with weekly slaughterings down one-fifth year-on-year. Slaughterings are down by a similar proportion in the opening five months. However, later in the year the number of cattle reaching Irish processors should recover as the increased numbers of cattle under one year of age at the time of the December census will begin to come on stream. That live exports have fallen 46% this year should provide further support to slaughter volumes.

The latest data available from market research firm, Kantar, indicates that beef consumption declined by 5% year-on-year in the 12 weeks to May 13. However, consumers had to spend 7% more in cash terms to acquire this smaller volume. The weak economy has encouraged a shift towards consumption of cheaper cuts of beef. Whereas consumption of roasting joints and steaks fell by a respective 10% and 15%, mince and stewing beef consumption has been just 0.5% and 1.5% lower.

Cattle prices showed relative stability across the EU in June. While cows rose nearly 1% and steers by closer to 1.5%, young bulls were 0.5% higher and heifers slipped back a similar proportion. Irish prices rose 1% during the month and are up by nearly one-fifth on the year. The continued strength of Sterling compared to last year has resulted in UK cattle prices being 24% higher than last June in Euro terms; double the gains in Sterling prices.

Lower domestic production continued to place downwards pressure on the volume of product available for export into April. Monthly volumes were down 32% on the year, and this brought the year-to-date figures down more than a fifth at 35,900t. Ireland was the only major customer to import more UK beef year-on-year in the January to April period; purchasing 13% more to offset its tight supplies.

Lower UK production also resulted in an increased opportunity for imported beef. Consequently, imports increased 6% on the year to 75,800t in the first four months. The composition of imports has shifted towards frozen beef. Its share increased to 29.5% from 25.7% in the same period last year. The likely explanation is that the reduced cow kill in the UK has forced food manufacturers to look abroad to meet their requirements (though increased requirements for burgers due to the Olympics could also be playing a part). With Ireland being the UK’s principal source of manufacturing beef, its exports to the UK have risen sharply. Significantly more frozen beef has also been sourced from the Netherlands and Germany.

News Round Up

Shipments of beef out of the EU fell sharply in the first quarter (Q1) of 2012 when compared with the same period of last year. Exports of fresh and frozen beef fell nearly one-half to 45,800t as Turkey bought 13,000t compared with nearly 46,000t a year ago, while the second largest market, Russia, imported 9,900t compared with 18,900t last year. In addition to tight cattle supplies and a subsequent 5% fall in EU beef production volumes, rising tariffs in Turkey and import restrictions in Russia related to the Schmallenberg outbreak were the main reasons for the contraction. Two markets where EU exporters made considerable progress were Norway and Ghana, with deliveries to the former increasing by a factor of 13 to 3,900t and by 120% to 2,400t in the latter. Imports into the EU also fell during Q1 as tight supplies in South America limited deliveries and strong demand at the global level led to increased competition for beef. Lower exports meant that the EU was more able to meet its beef requirements from within.

As touched on above, EU beef production contracted by 5% year-on-year in Q1 2012 as volumes totalled 1.86m tonnes. The only major cattle producing nation to increase output in Q1 was Germany as its production increased 4%. Spain, France and Belgium all saw volumes fall by around 4%, while in the Netherlands, Italy, UK and Ireland the declines were approximately 8%. Poland saw the sharpest decrease as its beef production fell 15%.

During May, Brazil exported 83,100t of fresh beef; an increase of 19,200t, or 20%, year-on-year. However, falling farmgate cattle prices have fed through the chain and the average export price per tonne of beef fell 8% to $4800/t. Nevertheless, total monthly revenues from beef sales abroad still rose by 19% to $400m (£250m). Russia remains the principal export destination and has increased its share to 34% from 28% in 2011. This has primarily come about due to a sharp fall in deliveries to Iran, which was the second largest buyer of Brazilian beef last year. Iran has slipped to the 13th largest market as economic sanctions, imposed because of its nuclear programme, have reduced its ability to trade with other nations. In contrast, Libya has already purchased double the volume of Brazilian beef it imported last year. Clearly, geopolitical factors have a significant impact on the distribution of Brazilian beef overseas.

Estimates from Informa Economics FNP, an agricultural consultancy in Brazil, indicate that the country’s beef consumption per head of population will increase by 3% in 2012 to 33kg. To give this some context, this is around double the level of per capita consumption in the UK. Beef demand has risen sharply in recent years as strong economic growth has lifted millions out of poverty and into the middle classes where beef becomes an affordable part of the diet. Since 2006, the proportion of the country’s population in the middle class has risen from one-third to more than half; an increase of around 40m people. Rising wealth has, as well as increasing demand for beef at the lower end of the value scale, also increased the demand for premium cuts which require stronger animal welfare and traceability systems. This has forced significant change in the production process. Changing income levels have also generated change in the way beef is consumed in Brazil, as there has been a shift towards food service and value-added product. Despite rising domestic demand, producer prices have fallen this year as production has picked up. Over the next decade annual production is forecast to rise one-third to 11.8m tonnes and a continued increase in wealth is predicted to drive consumption up 27% to 9.4m tonnes per annum. The expectation that production will increase faster than domestic demand suggests there may also be an increased availability of product for export. To assist beef sector output growth, the country’s Agriculture Ministry has announced the renewal of a lending scheme where farmers can access five-year loans in order to purchase genetics and breeding stock. Up to 750,000 Real (£235,000) can be borrowed at an interest rate of 5.5%; well below market rates. In Uruguay, monthly cattle slaughterings rose 10% during May when compared with the same month of last year. However, throughputs are playing catch-up as in the opening five months they were down 2%. Despite production being lower this year the country’s export trade has continued to strengthen; shipments are up 8% in the first five months of 2012, at 103,750t.

Peru has followed South Korea’s lead and overturned a ban on beef imports from Canada. Both countries had prevented access since 2003 after a BSE scare in Canada. Korea announced an end to its ban in January. The decision by the Peruvian government, which permits deliveries of boneless beef, offals and bone-in beef from cattle aged less than 30 months, is expected to be worth around $2.5m (£1.6m) to the Canadian beef sector per annum.


Prices and Supplies

Prime pig prices edged forward in June. They opened the month at 149.2p/kg dwt and passed the 150p/kg mark in the final week of the month. Prices are trading 1.5% below year earlier levels, as they had approached their seasonal peak at a quicker pace in 2011. It must be noted, however, that the sample of pigs for price reporting increased to around 100,000 pigs per week at the beginning of June from the previous level of 70,000. Therefore, the DAPP is not perfectly comparable with last year. Growth in UK production volumes intensified in May. Slaughterings of prime pigs surpassed May 2011 volumes by 6%. In the January to May period, slaughter numbers rose by nearly 4% year-on-year, and increased production is likely to have limited gains in ex-farm prices.

Monthly throughputs increased 7.5% year-on-year in Scotland during May, as production caught up after some technical problems at a plant had limited slaughterings in March and April. Slaughterings of clean pigs have been 7% higher in the year-to-date. The addition of a processing plant last September has made a significant contribution to this increase.

Kantar data shows that consumption of pork in the UK declined by 3% in the three months to May 13. Similar to beef, consumption volumes have decreased primarily due to higher retail prices as spending on pork in cash terms has risen. However, the volume figures showed some promise, as there was a slight year-on-year improvement in the four weeks to May 13.

Weaner values have fallen sharply since mid-April. In the week ended 30 June they traded at £42 a head compared with £46 a head eleven weeks before. This is likely to have reflected decreased confidence, caused by a sharp increase in feed costs while returns from the market for finished pigs have been relatively steady. Anecdotal evidence from the industry has also suggested that an increase in supply of 30kg weaner pigs has borne down on values.

Feed grains and soybeans have continued to rise in price over the past month. An extremely hot and dry spell of weather in the US has led to downwards revisions of its grain crop, while similar downgrades have been placed on expected grain yields in the Black Sea region. Soybean prices have also been driven higher by drought in the Americas, with reports of strong demand from China adding to the upwards pressure. Any concerns over the prospects for the global economy have clearly been outweighed by supply-side worries. As feeding costs were falling sharply at this time last year, prices have now surpassed year earlier levels, and, when coupled with weaker prices at the farm gate, it is likely that many producers have experienced tightening margins.

A sow price sensitive to the export trade has struggled in recent weeks. In addition to exchange rate movements, which have seen Sterling strengthen 9% compared with a year ago and by 4% since the end of March, prices have faced headwinds from weaker demand in the EU due to unseasonably wet weather. Subsequently, the average price for an export spec sow has traded at between 116-117p/kg dwt in June; 7% down on three months ago. Nevertheless, they are still trading at a 21% premium to this time last year.

After closing May at €1.635/kg dwt, the average producer price for grade E pigs in the EU had risen to €1.68/kg by the end of June. Over the same period UK prices rose just 0.8c/kg to €1.825. Therefore, UK pigmeat gained some competitiveness in the EU marketplace. In the home market, recent price movements have reduced the discount of European pigmeat compared to domestic product from 14p/kg at the beginning of the month to 11p/kg in the week ended June 24.

Monthly export volumes reached a 6-month high of over 12,600t in April. This was the third month this year in which exports exceeded 2011 levels. During March, a slowdown in domestic production growth had left a smaller volume of pigmeat for potential export; but, with production volumes returning to their previous trend in April, exports increased year-on-year. During the opening four months of 2012, 7% more pigmeat was exported than a year ago.

Pork imports have trended considerably lower so far this year. In the first four months of 2012 they were down by 11.5% on the year, and the decline intensified in April as shipments fell by 15%. Imports have fallen due to the combination of increased domestic production and a slowdown in demand.

News Round Up

Ahead of the EU-wide ban on individual sow stalls on farms with more than 9 sows, just four Member States are fully compliant, despite having had since 2001 to prepare. Of the remainder, nine are not expected to meet the January 1 2013 deadline and two more are yet to reveal their anticipated level of compliance. The four compliant nations are the UK, Latvia, Luxembourg and Sweden; while Portugal and France are the Member States yet to notify the Commission. Of those not expected to be fully compliant, Greece, Austria, Finland, Slovenia, and Poland are thought to be around 90% compliant with Cyprus and Italy at more than 70%. However, Ireland and Bulgaria are significantly behind schedule with only around 40% of holdings currently meeting the future rules. The Irish Agriculture Minister has requested a nine-month extension to upgrades carried out with funds from the Targeted Agricultural Modernisation Scheme which grants individual farmers up to €120,000 to improve sow welfare. Applications for support will close in October as CAP funds cannot be used to comply with EU legislation once it has commenced.

Since producers that fail to comply with the sow stall ban will be able to undercut their welfare-compliant counterparts due to lower production costs, this will distort the EU marketplace. To prevent this outcome, governments and retailers will attempt to restrict imports of pigmeat from non-compliant farms. If this lowers the volume of pigmeat on the EU marketplace, prices are likely to rise across the continent. At the beginning of this year, the lack of full compliance with a similar ruling in the poultry sector pushed up EU egg prices.

With feed costs spiking once again this year, the EU Commission has announced it will maintain a zero tariff on the import quota for low and medium quality wheat deliveries, excluding those from the US and Canada. The normal tariff rate of €12/t for the annual quota of 2.4m tonnes (600,000t per quarter of the year) was suspended at the start of 2012 due to already strong prices for feed wheat. The initial suspension covered the first two quarters and so its extension into the second half of the year means that there will have been no tariff charged throughout 2012.

A Free Trade Agreement between the EU and Korea that was signed last July has driven a large expansion of EU pork exports. Compared with the 4-year average, EU pork exports to Korea more than doubled in the first nine-months of the deal and brought in an additional €200m worth of revenues. The agreement will see tariffs on EU pigmeat erode to zero over a 10-year period.

During the opening four months of 2012, Spain produced 7% more pigmeat than a year earlier. Volumes increased to almost 1.24m tonnes as abattoir throughputs increased 5.5% to 14.5m head and carcase weights averaged 85.2kg compared with 84.3kg a year earlier. Pigmeat production accounted for 63.5% of Spain’s total meat production and 84.5% of its red meat production in the January to April period.

In Taiwan, a case of FMD has been confirmed after 15 pigs tested positive for a sub-clinical form of the disease on a farm in P’ing Tung. As the pigs showed no symptoms, they were not slaughtered and the disease does not appear to have spread to neighbouring farms. This is the fourth case so far in 2012 and last year 1,000 pigs were culled after an outbreak. Taiwan conducts regular testing for FMD after a major outbreak decimated the island’s pig herd fifteen years ago.


Prices and Supplies

For most of June, new season lamb prices had recovered the ground that had been lost relative to last year. Both liveweight and deadweight prices paid to producers were fractionally higher than year earlier levels in late June. They had also returned close to their average levels for the first half of the year. However, auction prices then fell back sharply at the start of July. One factor placing downwards pressure on prices has been greater variation in carcase quality. In the opening two months of the 2012/13 season 73% of lambs at GB price reporting abattoirs achieved a grade of R3L or better during May. In the same period last year, 76.5% met this standard and two years ago it was almost 79%.

However, a more important factor has been supplies. Latest slaughter data shows that 5% more lambs were killed during May of this year than last at the UK level. In Scotland, the increase was 16%. Since abattoirs clearly had a lot more stock to work with it is unsurprising that lamb prices were much lower than year earlier levels at the beginning of the season. The recovery in prices during June indicated that the market had become more evenly balanced.

On the demand-side, Kantar data suggests that lamb consumption is beginning to stabilise, following eighteen months of declining sales. In the period from January to mid-May, purchased volumes fell 2% year-on-year, despite running as much as 10% lower in mid-March. If retail prices also begin to stabilise around last year’s levels, there may be some slight upside to consumption. Consumption should now be less responsive to price given that lamb is an expensive protein, and the average consumer now eating lamb is likely to give heavier weights to factors such as provenance when making purchases. In contrast to the market for prime stock, cull ewes have been valued below last year’s levels. They have traded around £76-£79 in recent weeks; down from around £80 in June 2011.

During May, the volume of ewes slaughtered at UK abattoirs was at its lowest since March 2004. Furthermore, in the first five months of 2012, volumes have trailed year earlier levels by more than 10%. While this can be partially attributed to the continued contraction in the ewe flock, the 10% decline is greater than implied by the falling number of ewes, and consequently, it suggests that producers may have begun to rebuild their flocks.

The average price of a heavy lamb declined by around 2% across the EU during June, but producers still maintained an average premium of 5% over 2011 prices. This average figure, however, masked a wide range of price movements. While Sweden has experienced the largest gains of more than 15%, increases were closer to the EU average in the Netherlands and Belgium, and Irish producers received a 1.5% increase. On the other hand, lambs in Spain, Germany and France are cheaper than at this time last year.

With the Euro trading between 80-81p during June, it remained approximately 9% weaker than twelve months ago. Lamb prices in GB have consequently risen by a similar proportion in Euro terms despite being relatively similar when quoted in Sterling. With more than a third of UK production destined for the export trade, it has been another factor preventing producer prices from exceeding last year’s levels.

Although provisional UK trade data for April showed a sharp fall in lamb exports when compared with April 2011, some of this will be due to Easter falling two weeks earlier this year, since it will subsequently have shifted much of the Easter trade into March. However, it is likely that exchange rate movements played at least some part. Whereas the Euro exchange rate had been similar to year levels for much of Q1, this changed significantly in April. While Sterling strengthened in April 2012, it had weakened a year earlier and was subsequently 7% stronger this year. Since this is likely to have pushed up Sterling prices in Euro terms, it may therefore help explain some of April’s 12% fall in exports. Despite the sharp decline in April, exports still ran ahead of 2011 volumes by 5.5% at 30,500t in the first four months of the year.

Of the major EU customers, just Germany purchased more lamb from the UK in April. In contrast, during the January to April period, shipments to France, Belgium and Germany were higher by a respective 2.5%, 7.5% and 4%, while the other EU markets bought less than twelve months previously. Continued strong growth into South East Asia underpinned exports in both the monthly and year-to-date figures. These markets have been offsetting declining shipments to the EU nations that have been worst affected by financial problems.

The continued weakness of lamb imports in April, despite lower domestic production and higher exports, signals weak domestic demand. Monthly deliveries were down 17% year-on-year and year-to-date purchases were 20% lower. Imports from the UK’s largest supplier, New Zealand, have fallen to a lesser extent; down 14.5% year-on-year in April and by 17% in the first four months of 2012. As a consequence, New Zealand has increased its share of the market to 81% this year. This marks a significant increase on the 2011 figure of 71% and the longer-term average of 73% of UK imports.

News Round Up

In Spain, the economic recession has had a knock-on impact on sheep meat consumption. Figures for the year to March showed a 4% decline in household purchases. Lamb’s position as an expensive protein makes its consumption vulnerable in an economic downturn, and the likelihood of a prolonged period of subdued economic activity suggests that consumption will continue to fall. On the production side, data for the January to April period show a contraction of just over 1% to 42,800t, as a 5% decline in slaughterings was partially offset by a jump in carcase weights to average 11.5kg; up from 11.1kg in the same period last year. Production falling less than consumption implies decreased imports and/or higher exports.

New Zealand filled 41% of its sheepmeat quota for the EU in the first half of 2012, as deliveries totalled approximately 93,600t. This is 80% of the volume delivered in the same period last year, and 70% of the volume sent during the first half of 2010. Weak consumer spending across the region has limited demand for lamb, and, with New Zealand slaughtering more lambs this year, its exporters have had to divert some of their focus into the fast-growing economies of Asia.

In the year to June 30 (2011-12 year), Australian exports of lamb reached an all-time high of 173,800t. This surpassed the previous record which had been set at approximately 163,000t in 2007-08. Higher production volumes supported the increase, which came despite a strong Australian Dollar and a weak global economy. The Middle East was the largest market, buying 42,700t. This was a quarter of the total and an annual increase of 14%. The USA remained Australia’s second largest customer. It purchased 34,700t (20% of the total); an increase of 4% year-on-year. Australia also achieved export growth into China, Hong Kong and Taiwan. The region purchased 15% more than a year earlier at 31,900t. By contrast, deliveries to the EU declined 14% to 11,850t as shipments to the UK (70% of EU total) fell by nearly a quarter. Going forward, exports are forecast to rise a further 5% over the next year due to economic growth-led demand in its principal markets and an expansion in domestic production.

Meanwhile, a report by the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), estimates a fall in profitability amongst lamb producers in the 2011-12 year to 86,600 AUD (£55,500) from 119,460 AUD (£76,500) in the 2010-11 year. Profits are expected to have fallen due to a reduction in prices which more than offset increased numbers of lambs sold. Production costs are estimated at a similar level to the previous year, with higher energy and labour costs being set against lower prices for store lambs and loan interest. However, for specialist lamb producers, revenues and profits are predicted to have risen in 2011-12; profits are forecast up 15% at 53,900 AUD (£34,500). The report also finds a strong positive correlation between farm size and profit per hectare.

Strong demand in Brazil for Uruguayan sheep meat has led to the conversion of two former horse processing plants into sheep processing plants. The two premises will export to Sao Paulo. Favourable tax policy and market prices (currently trading around £2.50/kg dwt) have provided an incentive to invest.

Uruguay’s sheep population has steadied around 7.5m head since 2010. Back in 1991 it peaked at approximately 26m head. Uruguayan abattoir throughputs averaged around 12,300 head per week in the opening five months of this year, compared with 16,900 head per week last year. Despite much lower throughputs, exports are down just 0.5% year-on-year at 4,300t.

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