2020 has been an exceptional year in many ways. Brexit has dominated thinking over international trade for the whole year and at the time of writing it is still unclear how Brexit will be implemented. Additionally the country has been living with the consequences of the Covid-19 pandemic. Again at the time of writing it is not clear how long measures designed to limit the spread of Covid-19 will continue to affect our industry.
The initial steps taken locally and globally to control Covid-19 had an immediate effect on the red meat industry. The loss of out of home eating both in the UK and Europe immediately changed the supply chain dynamics. In the sheepmeat sector export demand halted overnight and farmgate prices collapsed. They slowly recovered lost ground through April and May, but the new season started below prices seen in 2019. However since July farmgate prices have been much stronger than year earlier levels even though prime lamb slaughter volumes have been higher than in 2019; between June and the end of November prime lamb slaughter numbers were 2% higher than in the same period in 2019. Slightly higher domestic production combined with lower exports and higher farmgate prices points towards firm domestic demand. In contrast cull sheep slaughter volumes have been down around 14%.
Farmgate prime lamb prices have also been stronger than in 2019 in both France and Ireland, our main export market, and our main competitor. This strength in the wider European market will inevitably have helped underpin Scottish and UK farmgate prices.
Prime cattle prices which started the year below year earlier levels also fell immediately after Covid-19 control measures were introduced. They too quickly recovered and by mid-June moved ahead of year earlier levels however it was not until August that prices moved ahead of 2018 levels and prices, despite cooling after the Christmas purchases, have remained firm to the year end. The number of prime cattle passing through UK abattoirs has fallen below 2019 levels in the final quarter of 2020.
In contrast the pig meat sector started 2020 on firm footing and prices edged forward to mid-year with no evidence of a Covid related fall. However prices have cooled in the second half of 2020. The growing incidence of African Swine Fever in Europe restricted export opportunities for major European trading nations and Europe became well supplied with pig meat. European pig prices began to fall at the end of the first quarter of 2020, but UK prices took a little longer to catch the trend. UK farmgate prime pig prices continue to remain well above the EU average.
Looking forward into 2021, the two big issues of 2020, Brexit, and Covid-19, will continue to weigh heavily on the red meat supply chain’s operating environment. The disruptions created by Covid-19 impact in several ways on the red meat sector. Measures taken to control covid-19 outbreaks, including the use of self-isolation, mean that the number of staff available to work on processing lines and cutting plants can vary daily. In the extreme they can shut a plant down for several days in less extreme cases it simply reduces the volume of carcases that can be managed. Reduction in processing capacity immediately leads to a backing up of animals on farms which in turn, if it persists for a long period, leads to potential animal welfare issue and animals moving out of ideal market specification. This scenario has occurred in the English pig sector in the last few weeks of 2020 with the number of pigs slaughtered falling steeply and the carcase weights and fat levels of those pigs that have been slaughtered rising. With more animals falling outside ideal market specification and with the market well supplied compared to slaughter capacity available, if not retail demand, producer prices have fallen. Similar messages came from the United States cattle processing sector during spring 2020. US beef farmers found their farmgate price fall because of a limitation on slaughter capacity while at the same time because limited slaughter capacity meat lower volumes of beef on the wholesale market wholesale beef prices rose steeply. When slaughter lines come back on stream farmgate prices can remain subdued until the backlog of animals is cleared while wholesale prices fall back as the volume of meat on the market increases.
Covid-19 measures can also impact on the demand profile for meat. Closures or limitations on out of home eating for example can quickly disrupt the market. While catering butchers for example can see their demand diminish high street butchers and multiple retailers supplying the in-home market can see demand climb at short notice. One consequence of this is a change in the balance of demand for different cuts which can significantly change the carcase balance and revenue from the carcase. Different measures and timings in different countries can also impact on export demand where for example a major export customer is a supplier to food service rather than multiple retailers.
Covid-19 has led consumers around the world to be more aware of where their meat comes from and look to support local rather than national or international supplies changing the dynamics of how to do business. While this is good news for Scotch product in Scottish stores for a nation that trades the majority of its output to the rest of the UK or internationally this raises a different set of challenges for traders.
By the time this edition of the Scottish farmer reaches readers we should be clearer of what sort of Brexit our industry is facing up to and we may be slightly clearer of what the implications are for the red meat supply chain. One thing is certain though and that is by leaving the EU the way we do business will be different. Whether we have a negotiated Brexit or a hard Brexit the UK will be a third country trader with the EU and with that comes a level of bureaucracy that adds cost to both exporting and importing.
From the 1 January any red meat products whether that be live animals, meat or by-products likes skins and hides or non-edible offals, fats and rendered products will face non-tariff barriers. These include providing export heath certificates, delivering product through Border Control Points where varying degrees of checks will take place ranging form checking the “paperwork” to physically examining the products to see that they are what they say they are as well as notifying the Border Control Point to the fact product is arriving on a specific day. There are many other non-tariff barriers to be addressed including for example detailed rules over the use of wooden pallets. These non-tariff barriers come at a cost and in some circumstances may prevent or significantly reduce the export of some products, for example animal by-products, that can lead to unintended consequences for the efficient operation of abattoirs and cutting plants and the wider supply chain.
From January importers of similar products will face more limited demands from the UK Government although they will increase overtime such that imports after April 2021 will broadly face similar requirements to those faced by exporters from January.
The major difference between a negotiated Brexit and a hard Brexit will be the imposition of tariffs on both exports and imports. The cost of export tariffs is significant, and the cost of non-tariff barriers described previously pales into insignificance. The red meat sector likely to be hardest hit by tariffs is sheepmeat because over one-third of UK sheepmeat product is exported. Equally, though exports of beef and pig meat while not reaching the levels seen in the sheep sector are vitally important to achieving carcase balance and add value for cuts less popular in the domestic market for example edible offals and sow meat. For UK product to remain competitive in the European market farmgate prices will have to fall. Predicting how big that fall will be though is clouded by many things including the capacity of other countries to increase their supplies to fill the gap in the Eu market.
In the situation of a hard Brexit the beef and pig sectors are likely to be less affected than the sheep sector. The reason for that is that the UK is not self sufficient in these two products and imports product for European Countries. In principle these imports from Europe would face UK import tariffs from January 1. The UK has lodged with the World Trade Organisation what the upper, or bound, rate of tariff will be. It remains to be seen whether the UK will impose import tariffs at this bound level from January 1st but if they do then this will restrict farmgate price declines for beef and lamb because imported product will have to be priced to include the tariff. In the same way that UK sheepmeat prices are threatened by export tariffs Irish farmgate beef prices would be threatened by import tariffs on beef. Not introducing import tariffs would leave trade with the EU as business as usual but would mean that third country imports from South America for example could potentially increase unless the cost of non-tariff barriers based on sanitary and phytosanitary controls restrict a countries interest in trading with the UK.
A further risk to the Scottish red meat market is the terms of trade with Northern Ireland. While temporary measures have been put in place to allow the movement of shelf ready food to Northern Ireland restrictions still apply to the movement of live animals and carcases. The latter would disrupt supply chains that use Northern Irish facilities to process and pack meat for sale in Great Britain. It seems likely that these movements, in simple terms, will need to be treated as exports to the EU requiring certification and movement notification that will create extra work for Official veterinarians, who must sign red meat export health certificates, and processing staff who administer sales.
As the Ireland of Ireland is considered a single epidemiological region the movement of live animals will be impacted by the need for animal health checks and balances and certification which can include movement restrictions association with animal biosecurity.
This brief discussion of the impacts of Brexit on red meat trade illustrates the many and varied consequences of changing terms and conditions of trade could have on the red meat supply chain and ultimately farmgate prices. It illustrates that different components of the red meat supply chain will be affected to different degrees and it is also the case that different behaviours in each if the cattle, sheep, and pig sector as well as other food sectors create knock on effects other sectors. Movements in the price of lamb for example can result in a change in consumer behaviour that could affect the demand for and price of beef.
What is clear though is that uncertainty exists over terms of trade from January 1 and the consequences of that will be felt for some time as changes are brought in and become better understood by all in the supply chain. Combine these uncertainties with the those created by Covid-19 and we enter 2021 with the most challenging and uncertain business environment that the red meat sector has probably ever faced. Uncertainty leads to a lack of confidence and clarity in the marketplace which in turn leads to volatility in the marketplace.
It is almost of minor consequence that the high level of prime lamb slaughtering between June and November combined with a June census that shows the UK lamb crop 1% smaller than last year and a lower population of under thirty month cattle on Scottish farms this autumn would indicate a tightening of supply for slaughter sheep and cattle in the first half of 2021 and in turn under more normal trading conditions indicate a continuing firmness to producer prices.
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