By Stuart Ashworth

Director of Economics Services, Quality Meat Scotland (QMS)

Farmgate prices for beef have failed to match the prices of last year’s throughput over the whole year, which has been well documented. Despite some firming of prices over the past month, they remain 6% lower than this time last year.

Prime sheep prices may have started 2019 ahead of last year’s prices but, like the cattle sector, prices failed to match year earlier levels for most of the year.

It was not until November that they moved ahead of last year. However, this recent strengthening in prime lamb prices means that as the year ends, prices are at their highest for this time of year for three years.

Of the three species: cattle, sheep and pigs, it was the pig sector that saw the most favourable market returns.

However, although the pig sector saw market returns strengthen from May, they did not move ahead of year earlier levels until July.

Prices continued to rise and by October, they had moved ahead of the firm prices in 2017.

Rather than follow the normal seasonal pattern of declining through the autumn, pig prices have kept rising through to the end of the year.

What the farmgate price movements of the three species over the past year illustrates is how the market responses to external pressures, most of which are outside the control of the primary producer, play on the market returns of livestock producers.

These challenges range from political uncertainty to the impact of animal disease on global trade. In among these challenges have also been changing consumer behaviour and perceptions of meat eating.

The combination of these pressures all at the same time may be unusual, but they are unlikely to diminish in the next twelve months.

The first of these challenges is the continuing challenge that is Brexit. Although, the result of the December general election has clarified that Brexit will happen, but not until the end of 2020, there are still many questions to be addressed and resolved before the way ahead is clear.

There are significant discussions to be had on the approval of exporting abattoirs, the administrative requirements over the certification and documentation needed to accompany exports and the ports through which they can enter Europe.

These requirements will inevitably add to the administrative costs of doing business outside the UK and act as a brake on exporter margins.

However, for 12 months at least, the risk of tariffs on exports to Europe is removed allowing some clarity for traders; particularly for sheepmeat where exports are such an important part of the market place. Similarly, the terms of trade for meat entering the UK remain unchanged for 12 months.

In practice, for the next 12 months international trade will be business as usual, simply reflecting the ebbs and flows of supply and demand and currency exchange rates although behind the scenes much needs to be done to prepare for the future administration and movement of exports.

A second uncertainty of Brexit that remains unresolved is what will be the future shape of support for the industry.

The general election, and thus a new parliament in Westminster, removes the promise of stability until the end of the current parliament made in 2019.

Both Holyrood and Westminster are addressing this challenge through legislation to be introduced by the respective parliaments to put in place transitional arrangements in respect of agricultural policy.

However, lack of clarity of the details mean that livestock producers are planning their business with a significant lack of knowledge over the level of future support and the conditions attached.

The second half of 2019 saw the global red meat sector coming to terms with the impact of animal disease. More particularly, the consequences of African swine fever (ASF) in Asia, initially in China but more recently in other countries including Vietnam, Cambodia and the Philippines.

Actions taken to control ASF have seen around half of the Chinese pig population slaughtered and commensurate reduction in production. As a consequence, by October, 2019, the Chinese producer price for pork was 84% higher than last year as production collapsed by around 40% and is expected by USDA to decline further in 2020.

Initially, this shortfall led to increased prices in the global pork market as the Chinese sought pork from around the world to meet this shortfall more recently it has started to impact on other red meats.

Despite political uncertainty over the terms of trade between China and the USA, the USA increased pork exports to China, the European Union also significantly increased exports to China and producer prices began to climb from early 2019.

This has led to the unusual situation where producer prices in Europe are higher than in the UK. Although UK producer prices have strengthened considerably over the year, they have not firmed as much as those in Europe. Continuing firm demand from China is likely to continue to support global pig meat prices through 2020.

Chinese demand for protein is also rippling into the global trade in beef and lamb.

New Zealand and Australia have been building trade with China for both sheepmeat and beef for several years, but this has escalated in 2019 both in volume and value terms.

Consequently, New Zealand’s interest in supplying sheepmeat to Europe has diminished, particularly as the terms of trade with Europe and the UK lack clarity because of Brexit uncertainty, and the basic supply of sheepmeat in New Zealand is, at best, static.

Increased Chinese demand and static supplies underpinned New Zealand prime lamb producer prices which are currently similar to prices paid in Scotland.

Within the UK, increased lamb slaughtering in the second half of 2019 has offset the increase in the 2019 lamb crop indicated in the June agricultural census. This would suggest that the carryover of hoggs into 2020 will be no higher than last year and if New Zealand is less active in the European market reduced supply should underpin prime sheep prices.

Indications of declining ewe numbers in the June census, combined with continued high levels of ewe slaughtering in the second half of 2019, similarly suggests the likelihood of a smaller UK lamb crop in 2020.

In its latest assessment of the outlook for the European sheepmeat sector, the European Commission is expecting production to decline by 1% in 2020 and some growth in exports, particularly live lambs to North Africa, Israel and the Middle East from countries like Spain and Romania, combined with lower imports from New Zealand, would suggest support for producer prices.

Growth in demand from China is also beginning to impact on global beef trade. Brazil, for example, has seen growth in exports of beef to China following a number of abattoirs gaining approval in the final quarter of 2019 which has contributed to significant firming of Brazilian producer prices.

Australia is another country that has seen significant growth in beef exports to China in late 2019. Meat and Livestock Australia report a doubling of exports of beef to China in November, 2019, compared to November, 2018. Similarly, although from a low base, the EU has also benefited from growth in sales to China.

The impact of growth in demand for beef from China, in contrast to pork and sheepmeat, has not significantly supported producer prices in Europe although prices have edged higher in the second half of 2019. Across Europe, they still close the year lower than 12 months earlier.

Similarly, rising prices in the final quarter of 2019, with the exception of Brazil, have left many other countries with prices similar to the levels of a year ago.

Brazil though has seen a remarkable situation where, since October, producer prices have risen some 30% to stand some 33% higher than a year ago.

Indications of prime cattle numbers on GB farms in late 2019 point towards lower supplies through 2020 than a year ago.

Similarly, Ireland’s June census reporting a 3% decline in cattle under two years old on Irish farms also points towards tighter supplies in Ireland during 2020.

Indeed, the European Commission forecast for the whole of the EU that beef production in 2020 will be down 0.7%. Lower cattle supplies would normally indicate a firming of price.

The third challenge of 2019 was consumer confidence, behaviour and media coverage of the health and the climate impacts of eating red meat which has led to slowing consumer demand for red meat.

These pressures are unlikely to diminish in 2020 and hold back demand for all red meats domestically. However, with potentially lower UK and European production and firm global demand underpinned by China, domestic demand may not be the biggest influence on producer prices in 2020.