QMS' Iain Macdonald views trade for beef, sheep and pigmeat

Following the Russian invasion of Ukraine, the knock-on impact on many commodity markets caused by an increased risk of supply shortages was for price spikes for raw materials and finished products, adding to the mounting inflationary pressures which had already been squeezing the finances of businesses and households and reducing confidence to spend and invest.

Fortunately, as we approach 2023, many commodity prices have fallen back towards where they had begun 2022 and Government funding has been put in place to limit energy price rises. Nevertheless, businesses and households are having to deal with elevated price levels compared to what they have been used to in the past. Meanwhile, 2022 has also been characterised by many weather extremes, in a sign of what is set to become the norm; though it is hard to remember a year when there haven’t been volatile weather patterns.

Beef

In the beef sector, if you were only to look at the level of farmgate prices for finished cattle, you might think it has been an exceptional year. As of early-December, the average prime cattle price at Scottish abattoirs has spent the entire year running between 3% and 10% above year earlier levels, averaging 7% higher. However, more limited price increases for store cattle highlight that the environment has been difficult for producers, likely reflecting reduced demand from finishers due to the severe input price inflation being faced.

Challenging market conditions have also resulted in a considerable increase in cull cow slaughter, with producers taking advantage of attractive prices to, in some instances, dispose of their least productive breeding stock, while in others, to reduce herd size. For example, comparing R4L grade prices shows that, in early-December, a steer was making only 19% more on a per kilo basis than a cow, compared to a difference of 40% a year earlier.

While cattle population data from BCMS points to some increase in females at the younger end of the over 30-month population acting as an offsetting factor to a reduction in older females, the suckler herd will have declined this year. As of October, the year-on-year decline remained below 2%, but a strong upturn in cow slaughter in the final quarter suggests that the pace of contraction has accelerated in Q4. Herd reduction is set to take until spring 2023 to begin reducing calf registrations. Therefore, it is likely to take until the second half of 2024 to begin pressuring prime cattle slaughter, with a more significant impact likely in early 2025.

In the short-term, there is some prospect for higher beef production at GB level in 2023, reflecting an uplift in calf registrations in 2021 and year-on-year rise in prime cattle on GB farms in October 2022. As 2023 progresses, production growth is expected to slow, with a slightly reduced spring 2022 calf crop in GB due to begin reaching slaughter condition in the final quarter.

An assessment of beef market conditions must also take account of international trade flows. Indeed, while UK beef production rose by 1% in the first ten months of the year, after factoring in a 26% increase in export volumes and a 1.3% reduction in imports, the overall volume of beef added to the market fell by 2% year-on-year, supporting market prices.

This reduction in imports came despite a surge in beef production in the Irish Republic, which supplied 78% of the UK’s beef imports in 2021. According to HMRC data, imports from Ireland dropped by 10% on a year earlier in the January to October period, despite year-on-year increases in prime cattle and cow slaughter of 6% and 16% respectively. This is likely to reflect some diversion of Irish beef into the continental EU market. UK exports have also benefitted from strong EU demand this year, with combined shipments to the Netherlands, France, Germany, Italy and Spain doubling to 51,000t in the January to October period.

Looking ahead to 2023, EU Commission forecasts point to a continuing tightness of the EU beef market, with production set to fall for a fifth consecutive year and import requirements from non-EU sources projected to increase by 4%.

UK beef exports to non-EU countries have been less positive in 2022, mostly down to reduced trade with the two largest markets of Hong Kong and the Philippines. However, shipments to Canada and Japan have doubled in the first ten months of 2022 and the USDA is projecting lower domestic production but higher consumption for both countries in 2023.

Sheep

After a record-breaking 2021 for finished and store lamb prices, it was always going to be difficult for market returns to match year earlier levels in 2022. However, finished lamb prices did run above 2021 levels holding higher in January and then for most of the June to September period. Up to mid-December, while prices for finished lambs averaged 2.7% lower than in 2021, they were still a considerable 22% above the five-year average.

Hogg prices spent much of the time trailing 2021 levels, largely reflecting a later marketing profile of the 2021 lamb crop. Defra slaughter statistics for GB abattoirs indicate an 11% fall in lamb slaughter on a year earlier between June and December 2021, followed by an increase of 11% year-on-year between January and May 2022. With record store lamb prices paid at autumn 2021 sales, producer margins fell back from the highs of spring 2021.

New season lamb prices peaked later than usual in late-May and early June. Prices then spiked ahead of the Eid al-Adha festival in early July before falling seasonally as new season lamb supply built. Up until the end of September, prices generally held slightly above 2021 levels, with Defra slaughter statistics pointing to a further fall in lamb throughput compared to 2021.

However, lamb prices slumped to their lowest of the season in the second half of October, averaging around 220p/kg lwt at Scottish auctions and falling behind 2021. Nevertheless, market prices continued to hold nearly 20% above the five-year average, well above October levels of around 170p/kg in 2017 and 2018, 190p/kg in 2019 and 210p/kg in 2020. Lamb prices then rebounded to around 240p/kg at the start of November, holding relatively steady thereafter.

Looking ahead to 2023, a fall in abattoir and auction throughput at GB level in autumn 2022 despite an increased number of lambs reported in England’s June census points to the prospect of a further increase in the carryover of hoggs. In Scotland, this prospect is backed up by a 6% uplift in the number of store lambs sold at Scottish auctions compared to 2021.

The trade balance is an important consideration for the lamb market outlook. Beef + Lamb New Zealand has projected a drop of around 1% in the country’s lamb crop and lamb exports in the production season which began in October 2022. For Australia, Meat and Livestock Australia has forecast an export increase of less than 1% in 2023. Overall import availability may therefore prove similar in 2023 to 2022; however, the delivery profile could show further volatility.

Uncertainty surrounding the implications of the relaxation of China’s Covid-19 control measures could also lead to volatility in lamb imports to the UK in 2023. In 2022, UK lamb imports have risen from the lows of 2021 due to Australia and NZ exporters diverting product from China to Europe following the reduction in foodservice sector demand and disruption at ports in China. The relaxation of public health restrictions in China should boost import demand, therefore limiting diversion to the UK and EU.

For UK exports, EU import demand in 2023 will be key. EU households are facing similar inflationary pressures to British households and this may lead to softer consumer demand for an expensive protein like lamb. However, the EU Commission is forecasting that a 4% increase in imports is needed to balance the market.

In the pig sector, if you were only observing the level of farmgate prices, 2022 would look like an exceptional year. Indeed, having dropped as low as 137.5p/kg in February 2022, the GB Standard Pig Price (SPP) traded at around the £2/kg dwt mark between September and December 2022, approximately 45% above its low point. Pig prices follow a seasonal pattern and comparing prices in early-December 2022 to those of a year earlier shows an increase of 41%, while moving 34% above the five-year average.

Also looking more positive for pig producers is a fall in carcase weights in the final quarter of 2022, signalling a reduction in out-of-spec carcases. At price reporting GB abattoirs, the proportion of standard carcases weighing over 104.9kg dropped to 4% in the first week of December this year compared to around 10% in December 2021 and as high as 20% at the January 2022 peak.

Nevertheless, production costs are estimated to have remained well above farmgate price levels, signalling a continued squeeze on producer margins, which began as long ago as Q4 2020. As well as higher feed costs, producers that had to increase borrowings to get through the period of market volatility are likely to have seen interest rates rise sharply, leading to increased repayment levels.

Pigs

Moving into 2023, the pig market outlook does point towards a tightening of supply. The English June census results highlighted a sharp contraction in the sow herd in response to the market crisis, which should be feeding into reduced availability for slaughter over the winter. In Scotland, this appears to be showing up in the slaughter data, with the number of pigs moving to slaughter from a Scottish holding falling by 3% year-on-year in October and then by 12% in November.

On the trade side of the equation, UK import prices tend to show a close link to farmgate price movements in the EU and EU prices have been running around 60% above year earlier levels since September. This pace of increase has out-paced the level of movement in GB, resulting in an improvement in the competitiveness of domestic product in the home market and on the continent.

However, while EU pork production has fallen significantly in 2022, its exports to third countries have also fallen, resulting in the EU market being better supplied than would be suggested by purely looking at its production volumes. Nevertheless, the EU Commission has forecast a further dip in EU pork production for 2023 and for its imports from non-EU sources to rise substantially, highlighting opportunities for UK exports.

After a rebound in domestic production in China in 2021 led to sharply reduced import requirements and a fall in market prices back to pre-African Swine Fever crisis levels, this reversed again in 2022. Its pork market tightened severely in mid-2022, and prices doubled between spring and autumn. While this signalled that import requirements should have risen again, EU and UK exports have remained at a much lower level than the highs of 2019-21. The reductions have been large enough to offset increased trade for EU and UK exporters in markets such as Japan, the Philippines and the USA.

Therefore, if the relaxation of Covid-19 control measures does lead to a boost in China’s pork imports in 2023, UK and EU exporters are well-placed to contribute.

Although the UK is expected to experience recessionary economic conditions in 2023, pork is well-placed to benefit from its lower price points compared to beef and lamb. In addition, though higher priced on average than chicken, pork retail prices have been rising more slowly than chicken, making pork increasingly competitive.