A look at the market trends of 2017

Beef sector

Prices for both prime and cull cattle have been firm throughout 2017 with both categories seeing farm-gate prices higher than a year earlier for the whole of 2017.  Driving this higher price has been a reduced production of beef from UK abattoirs as a result of a generally lower volume of slaughter animals and lower carcase weights. Scottish abattoirs, for example, had killed 2.5% fewer prime cattle between January and November 2017 than they did in 2016, although they did handle 5000 more cull cattle.

Scottish steers were some of the heaviest carcases in the UK but cattle finishers have responded quickly to the consistent messages from processors, which clearly signalled that around 380kg was the most desirable weight. Steer carcases have averaged 1% lower in 2017 than 2016 and 2.5% lower than in 2015. Carcase weights for heifers have always been lighter than steers and producers have not materially changed the weight of heifer carcases over the past three years. 

Also helping prices in the first half of the year were some modest increase in beef exports, aided by weak sterling, and lower imports. Modest growth in exports continued into the second half of the year but imports did increase over the July to October period, although the growth has tended to be of frozen product that is likely to be used in the manufacturing sector, and cattle supplies did rise seasonally during October.

According to Kantar Worldpanel analysis, retail demand for beef has generally been modestly above year earlier levels for most of the year although mid-summer sales did struggle to match year earlier levels. So, with a reasonably firm domestic demand and slightly lower domestic production, producer prices firmed.

Looking forward the beef market looks to be finely balanced. BCMS data suggests that the volume of 18-24-month cattle currently on Scottish farms is little different from last year but as the year progresses prime cattle numbers are likely to fall. Across GB as a whole, there is the prospect of slightly higher supply than a year ago in the short term but, as is the case in Scotland, as the year progresses GB prime stock availability is likely to tighten again.  

The June 2017 UK census shows a substantial reduction in cattle under one-year-old at the time of the census and also a significant reduction in dairy-sired cattle suggesting a change in behaviour among dairy farmers that will see a greater number of dairy beef cross calves in the supply chain. Additionally, the census reported a decline in the breeding herd, both beef and dairy, across both Scotland and the UK holding out little prospect of longer term recovery in prime stock numbers.

The Republic of Ireland has seen a significant increase in live cattle exports during 2017 which is likely to result in lower prime cattle availability in 2018. Meanwhile across the whole of the EU there is an expectation of lower beef production in 2018 than 2017 but for demand to remain firm.  The market outlook for Scottish cattle farmers in 2018 then remains positive.

Sheep sector

The year has been mixed for Scottish sheep producers. Store lamb finishers saw market prices in the first half of 2017 falling well short of 2016 returns. This was on the back of a plentiful supply of prime hoggs which saw weekly slaughterings across the UK in the first quarter of the year up some 5%. However, as the new season commenced market returns reached their highest level for three years. The time of the Moslem Ramadan festival in early June created demand in the market at a time when prime lamb numbers are at their lowest. 

Poor weather in early summer slowed down lamb growth rates, and volumes reaching the market fell well short of year earlier levels through July and August, supporting farm-gate price. Supplies reaching the market continued to be lower than year earlier levels through September, but the quality of lambs also deteriorated putting pressure on market prices. 

Through October and November, volumes increased but the proportion of R3L or better carcases continued to be lower than in previous years. However, prices recovered some ground to trade at similar levels to a year earlier through November and move slightly ahead during December.  

Lower domestic supplies in France, lower deliveries from New Zealand into Europe and the UK along with weak sterling encouraged increased export activity creating demand and supporting prices. By the third quarter of 2017, exports had once again taken more than 30% of production, an increase over the 26% seen in the third quarter of 2016. Consequently, 2017 lambs have generally traded at better prices than last year with the exception of a short period through September.

Nevertheless, prospects for the remainder of the 2017 lamb crop remain challenging. According to the June census, the UK lamb crop was around 3% larger than in 2016 and with slaughter data suggesting fewer lambs have been slaughtered than last year between June and the end of November it seems likely that there will be a larger carry over of hoggs into 2018.  In contrast, lamb slaughterings in the Republic of Ireland have been running well ahead of last year in late 2017 and consequently their carry over of hoggs may not be as great as last year.

Reports from Beef and Lamb New Zealand (B and L NZ) suggest little change in export production as a small increase in the 2017 lamb crop is offset by a fall in carcase weights.  They anticipate some modest growth in exports to China but they are likely to remain active in the UK market, particularly for the Easter trade. However, having reported a 21% decline in sheepmeat exports to the UK over the first three quarters of 2017, they may not be as significant a player as in recent years. Since this assessment was made by B and L NZ, New Zealand has seen a return to very dry conditions and there may be some earlier marketing of lambs at reduced carcase weights.  

UK slaughter data suggests a lower ewe kill in the second half of 2017 than 2016 which combined with a June UK census that showed an increase of 1% in hoggs intended for breeding and a 2% increase in ewes, including those intended for slaughter, suggests some growth in the breeding ewe flock for the 2018 lamb crop. However, ewe condition may have been compromised by the poor weather conditions ahead of the mating period and the 2018 lamb crop may be little different from 2017. 

With further declines in the breeding sheep population expected in France, Spain and Ireland opportunities are likely to continue to exist for exports to Europe.

Pig sector

Despite some downward movement through the autumn, Scottish pig producers have benefited from a particularly strong marketplace throughout 2017 with farm-gate prices consistently above year earlier levels. Despite some increase in carcase weights, pig meat production has struggled to match last year’s levels for most of the year. UK supplies of prime pigs ran below year earlier levels for most of 2017 only moving ahead in the final quarter. However, sow slaughterings did run higher than a year ago through the first half of 2017.

Sterling weakness created an opportunity for some useful growth in exports over the year while imports declined in the second half of the year. All this left the UK market less well supplied with pig meat as the year progressed, despite some modest increase in production in the final third of the year.

Meanwhile, UK retail interest in pork and pork products has been positive over the past 12 months. Kantar Worldpanel retail market analysis showing modest growth in retail demand over the past year despite some increase in retail prices. European pig prices were also very strong in the first two-thirds of the year but fell steeply in the final third to below year earlier levels in September and falling further since then to currently sit some 7% below last year’s level.  

One challenge for the EU has been a decline in exports to its biggest market, China, which has seen overall EU exports drop below year earlier levels in the second half of the year leading to price falls that the UK has reflected to a lesser extent. Additionally, strong prices encouraged expansion in the EU sow herd in the first half of 2017 and there is some evidence to suggest that there is also some growth in the UK sow herd as well, which has led to increasing production as 2017 draws to a close, both in Europe and the UK – contributing to downward farm-gate price pressure.  

This growth in production is likely to continue into 2018 and estimates for the European Union show growth of around 1% in 2018. Meanwhile, pig meat production in the USA is also expected to increase in 2018 and consequently the global market is likely to become more competitive particularly in the crucial Chinese market. As a consequence, UK and European farm gate prices for pigs may cool through 2018. However, the International Grains Council is forecasting growth in global grain and oilseed production in 2017-2018 which may ease the cost of the biggest input to pigmeat production, namely feed, and offer some protection to producers’ margins.

Retail environment

The retail market continues to very competitive and passing through increased farmgate prices continues to be difficult. Increasingly the UK government is using the consumer price index (CPI) rather than the retail price index as its key measure of inflation. Comparing retail price movements of both food and meat with the CPI shows that food and meat have increased in price more quickly than the overall basket of consumer goods. This may result in consumers being more selective in the meats they buy in 2018.

Looking more specifically at meat, the largest movement in retail prices was in lamb which even before the spike in October (caused by significant movements in the price of imported lamb rather than domestic lamb) was moving faster than the CPI. Beef and pork in contrast have more closely matched the movement in the CPI. Meanwhile poultry is slightly cheaper in the retail market than 12 months ago. It is then perhaps not surprising that consumption of poultry continues to grow.

Compared with November 2016, farm-gate prices for prime stock are typically 2-3% higher than a year ago roughly matching the increase in retail prices. However, over the past 12 months there has been considerable variation in the relative movements of farmgate and retail prices.  Nevertheless, for beef and pork the second half of 2017 saw pressure on the supply chain as retail prices did not reflect farm-gate prices and, may explain some of the pressure and cattle and pig prices as the year closes.

Lamb similarly shows a squeeze on margins in the supply chain over summer and early autumn. Irrespective of supply patterns, what an abattoir can afford to pay a producer in the longer term must reflect what they can realise form the marketplace.  

While retail prices do not necessarily reflect the price paid to a processor they clearly are associated and further increases in farm-gate prices will be determined by domestic or international consumers’ willingness to pay. Given the current uncertain UK economic climate and the balance between consumer price movements and pay and pension movements raising consumer prices may not be an easy task in the UK.