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QMS (Quality Meat Scotland)


15 June 2012

QMS (Quality Meat Scotland) June Market Report 2012QMS (Quality Meat Scotland) June Market Report 2012


QMS - Quality Meat Scotland

Pig

Prices and Supplies

Ex-farm pig prices continued on their seasonal upwards trend through May. They began the month at 148.2p/kg dwt and advanced at a slow pace to reach 149.2p/kg dwt in the fourth week of the month. However, prices moved forward at a much quicker pace last year, and this has meant that producers are now receiving less for their pigs than 12 months ago.

Growth in UK production volumes intensified in April. Slaughterings of prime pigs returned to the 5% year-on-year expansion which they had shown in January and February, after running just 0.5% ahead of year earlier levels in March. Increased production is likely to have limited any gains to prices.

It was a different case in Scotland, however, as monthly throughputs fell 4%. Nevertheless, slaughterings were 7% higher in the opening four months of 2012 than in the same period of 2011. However, the addition of a processing plant last September prevents a direct comparison.

Kantar data shows that consumption of pork in the UK declined by 4.5% in the three months to April 15. Similar to beef, consumption volumes have decreased due to higher retail prices as spending on pork in cash terms has risen.

Weaner values have fallen back towards £44 a head from the £45 a head they had traded at in April and £46 in March. The recent downwards move suggests that confidence has decreased. This may have been driven by downwards revisions to medium-term price expectations and resurgent feeding costs.

Feed grains and soybeans have risen steadily in price this year as global arable crop estimates have been revised downwards. This has been driven on the supply side by a February cold snap in Europe and the Black Sea region and drought in South America which reduced yields. The rising use of grains for animal feed has also caused demand side pressures. Though commodity prices have eased a little as May has progressed due to negative global economic sentiment, they are still around 15% higher than they began the year and it is therefore likely that some producers will have seen margins narrow in 2012.

The sow price is heavily dependent on the export trade and is therefore sensitive to exchange rate movements. Since reaching a record high of nearly 125p/kg dwt as April commenced, Sterling has strengthened by 4% against the Euro. The UK sow price has subsequently dipped by 6.5% over a seven-week period.

The EU average price for grade E pigs edged back by 2c/kg in the first three weeks of May from €1.64/kg dwt to €1.63 dwt. With UK prices increasing from €1.75 to €1.81 over the same period, UK pigmeat has lost competitiveness in the EU. In the home market, recent price movements have given European pigmeat an increased discount to UK product, and this has been emphasised by a stronger Sterling. The discount ended April at 10p/kg but had widened to 14p/kg by May 27.

Though UK pork exports grew slightly in both January and February, they trailed year earlier levels in March. The likely cause was the slowdown in domestic production growth during the month of March, which left a smaller surplus to export.

Pork imports have contracted significantly when compared to early 2011; volumes were down 15% in Q1. The decline can be partially attributed to reduced competitiveness of European prices earlier in the year, particularly through February, but the extent of the decline will have also been the result of increased domestic production and a demand slowdown.

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Compared with the same period of last year, the EU achieved export growth of 14% in fresh and frozen pigmeat during Q1 2012. Total shipments rose by 45,000t to 367,250t. Growth was helped by greater deliveries to Russia, the EU’s principal customer, which increased by 12.5% to 83,000t, while the EU more than doubled its exports to China. Strong growth into the Chinese market meant that deliveries took a 9.5% share of total EU exports, compared with less than 3% in Q1 2011. By contrast, shipments to Korea declined by 11.5% to 43,500t as its domestic production continues to recover from the FMD outbreak at the start of 2011. At 28,000t, Hong Kong bought marginally less pork than a year earlier.

French exports of pigmeat fell by 2% year-on-year in Q1 2012 to 115,300t. However, sales revenues increased as the average price rose by 9%. The decline in volumes exported was driven by lower shipments to Russia and Asia as other EU Member States bought the same volume of French pigmeat on aggregate as they had in Q1 2011. In the EU, strong growth in deliveries to Germany and Belgium were offset by a decline in sales to Italy, Greece and Spain. France imported more pigmeat than a year earlier during Q1. Spain is France’s largest supplier and it increased its deliveries by 10% to 68,400t, maintaining a 75% share of the market. The change in French pigmeat trade volumes reflects lower production volumes coupled with increased domestic demand. A 3% lower output of pigmeat in Q1 and a 1% increase in consumption limited the volumes of pigmeat that could be exported, and meant that more product had to be bought from fellow EU Member States.

In Sweden, pig production fell sharply in Q1 2012. Slaughterings were down 10% on the year at 683,000 head, well below the level anticipated by the EU Commission. Production volumes have been restricted this year by significant herd liquidations during 2011 as producers left the industry due to the struggle to compete with cheaper imports from countries such as Denmark and the Netherlands. The Swedish pig sector’s competitiveness has also suffered from the strong performance of the national economy as this has strengthened its currency against the Euro. However, the EU-wide sow stall ban at the beginning of 2013 may provide some support to the competitiveness of the Swedish pig sector, as its welfare regulations are currently more stringent than in many other Member States.

A sign of the rebalancing of the EU pig sector ahead of the sow stall ban has come from the Czech Republic. According to its agriculture ministry, the Czech Republic is now 94% compliant with the future regulations and most farmers not willing to invest in new housing have already left the industry. Census data showed that the Czech pig herd contracted by 10% in the year to April 1 2012 and its sow herd declined by 11%. A smaller pig population meant that pigmeat production fell in Q1 with volumes down 9% to 60,000t, and tighter supplies pushed producer prices up by 20% year-on-year.

Cattle

Prices and Supply

Prime cattle prices edged backwards during May to close the month at 352p/kg dwt, having posted a record high of 355p/kg dwt at the end of April. Though deadweight prices are now trading approximately 12.5% higher year-on-year, they are only slightly higher than six months ago. Prices have shown a similar trend in the auction ring. The recent weakening in prices indicates that abattoirs have been been able to source sufficient volumes of cattle to meet their requirements. Cull stock values have also come off their recent highs with beef cows trading at 143p/kg lwt at the end of May, down from 148p/kg lwt at the end of March. Nevertheless, beef cows are still up 11% on the level at which they opened 2012.

DEFRA data for slaughterings at UK abattoirs shows that throughputs continued to slide in April compared with last year as 5% fewer prime cattle were slaughtered. In the first third of the year slaughterings were down 8% on the year. Throughputs fell during April to a lesser extent than in previous months as the number of steers killed fell by 2%, compared with a 6% shortfall in the January to March period. So far this year 8% fewer heifers have been slaughtered, implying that producers have increased retentions for breeding. Young bull volumes fell 17% year-on-year over the four-month period.

In Scotland, the supply of prime cattle to abattoirs has been even tighter, down 10% year-on-year over the first four months. Similar to the situation in the rest of the UK, the decline in heifer slaughterings has been greater than that for steers, while the young bull kill has fallen sharply; high feed costs have reduced the profitability of young bull systems. However, the culling of mature stock at UK abattoirs picked up during April. After running 9% behind year-earlier levels in the first quarter (Q1), monthly volumes moved 3% ahead of last year in April. North of the border, a 5% increase in the culling of mature stock during April was enough to move volumes 1% above year earlier levels for the first third of 2012. At the UK level, they remain 6% lower. Irish abattoirs continued to kill fewer cattle than last year during May. Weekly data for the first four months of the year indicate that slaughterings have been approximately 20% lower. However, supplies should begin to ease late in the year as the Irish December census revealed a significant increase in the number of cattle under one year old on Irish farms. A major contributing factor has been a collapse in live calf exports. So with prices falling in the UK despite tight supplies, this points to a fall in demand at the retail level. Indeed the latest data available from market research firm, Kantar, indicates that beef consumption declined by 5.5% year-on-year in the period between mid-January and mid-April. However, consumers actually spent more money on beef, meaning that it was the higher prices that reduced purchased volumes. This is unsurprising given the current squeeze on living standards, in which prices across the economy have been rising faster than wages.

Average prices paid for cattle across the EU have been relatively stable during May. While young bulls and heifers have eased slightly, steers and cows have become a fraction more expensive. Irish prices rose 1% during the month and are up by around 12% on the year, slightly above average for the EU. Exchange rate movements have resulted in UK cattle prices being 20% higher than last May when quoted in Euros (well above the 12.5% gain in Sterling terms).

Lower domestic production volumes have had a knock-on impact on beef exports. In the first quarter of 2012 they totalled 28,600t, 17% down on the same period last year. Deliveries to all major UK customers declined, except for Ireland, the second largest export market. Ireland purchased 15% more beef to cover its tightly supplied market.

The reduction in UK production also led to increased beef imports. Shipments rose 6.5% on the year to 57,400t. There was also a shift in the composition of imports with frozen beef taking an increased share. This can be explained by the 10% reduction in slaughterings of mature animals during Q1 leading to an increased requirement for manufacturing beef, of which Ireland is the principal supplier.

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The EU’s autonomous High Quality Beef import quota (not the Hilton quota) has been changed to a first-come-first-served basis, having previously been allocated through import licences. The previous system worked by allocating each country with a proportion of the quota, and then the exporting country would determine which firms could export, usually based on past trade flows. However, this process had the unintended consequence of leading to an oversubscription of licences as firms with no intention of exporting high quality beef could profit by taking a license and then selling it on to an exporting firm. Nevertheless, the new system has generated a new issue of uncertainty. Once the beef reaches Europe it will count towards the quota, but if the quota has already been filled when the shipment arrives in the EU, then either the full tariff will have to be paid, or the beef will have to be returned to its country of origin. The problem lies in the fact that the exporter cannot know if the quota has been filled when the beef is sent, or if the quota will be filled by the time the beef arrives in the EU. This could pose more of a problem for Australia and New Zealand since their shipping times will be considerably longer than those of the American nations. However, the quota requires full cattle traceability and this gives the Australians an advantage over the US as they already have a form of EID whereas the US does not. Therefore, firms in the US wishing to export will have to invest in a new production unit with full traceability that will not deliver a return for eighteen months, and even when it does, there will be some uncertainty due to the first-come-first-served nature of the quota.

The EU has changed the amount of subsidy paid to EU beef exporters for product shipped to third countries. Export refunds have been cut to €163/t (approximately £130/t) from €224/t for beef carcases. The reasons given have been that prices have risen significantly and also that a tightly supplied EU beef market requires more product to remain in the EU.

In Brazil a structural change in beef production towards feedlots is expected to continue this year. The number of cattle on feedlots is forecast at 3.87m head, up 15% year-on-year. The rise in feedlot production has offset a historical fluctuation in production volumes which tend to slow from May to September as dry weather reduces the weight gains of grass-fed cattle. The shift towards feedlots now means that Brazilian abattoirs have a more stable source of supply throughout the year and as a consequence prices now show less seasonal trend. As meat processors benefit from the increased certainty offered by stable supplies, they have encouraged growth in feedlot production by setting up their own operations and agreeing partnerships with producers. However, the combination of lower farmgate prices and rising feed costs are set to tighten feedlot margins in 2012.

Tight cattle supplies and government policy continued to restrict Argentina’s beef exports in the opening third of 2012. Exports of the high-end Hilton cuts fell by 25% year-on-year while total fresh and frozen beef shipments were down 15%. Exporters were shielded to some extent, however, as market conditions pushed up the average value of the Hilton cuts by 8.5% to £9,900/t and fresh and frozen beef by 2.5% to £4,400/t. Germany continued to take more than half of the Hilton cuts while Israel, Russia and Chile maintained their positions as Argentina’s largest customers for fresh and frozen beef. Chile jumped from third to first as its imports from Argentina increased by 45%. Israel bought 20% less, meaning it fell to third place from first, but despite purchasing 7.5% less Russia remained the second largest buyer.

By contrast, Uruguay managed to increase its beef exports over the same period. It shipped 83,100t to other countries between January and April, compared with 75,900t a year earlier. This was an increase of 9.5%. Higher exports have come despite a 5% decline in cattle slaughterings, thereby suggesting significantly lower domestic demand. Meanwhile, Uruguay’s national football team will promote the country’s offering of beef for the next eighteen months, after agreeing a deal with Uruguay’s meat promotion agency. Uruguay will compete at the London Olympics and is currently ranked third in the world.

Another country that has seen its beef exports expand in 2012 has been Australia. Shipments rose by 1% to 368,000t in the first five months of the year. Growth has been aided by strong demand from the US, particularly for manufacturing beef, and deliveries are up nearly 60% at just over 100,000t. A recent weakening of the Australian Dollar against the US Dollar has increased the competitiveness of Australian beef and suggests that this growth could be sustained going forward. Of the smaller markets, Russia, Taiwan and Singapore also bought more than in the same period of 2011. However, this was partially offset by a decline in beef exports to Australia’s largest market, Japan. Exports fell 11% to 120,500t. Another significant buyer, Korea, purchased 41,000t, one-third less in the five month period than a year ago. Lower exports to Korea have been attributed to the recovery in domestic production after the FMD outbreak of eighteen months ago, plus a slowdown in beef consumption.

Sheep

Prices and Supplies

Since the 2012/13 season commenced, lambs have been trading at a near 20% discount to the level at which they opened the 2011/12 season. Deadweight prices peaked at 467p/kg, compared with 561p/kg a year ago, while liveweight prices reached a high of 224p/kg, well below the 272p/kg reached in May 2011.

One factor holding prices down has been greater variation in carcase quality. 74.5% of lambs at price reporting GB abattoirs achieved a grade of R3L or better during May, compared with 78.5% one year ago. A second factor is likely to be wholesale and retail price resistance as producer prices have fallen sharply despite lambs being slower to come forward to market this year. In the four weeks to 30 May less than 4,800 lambs had been sold in Scottish auction rings, 1600 fewer than in the four weeks to 1 June 2011.

Weak consumer spending has caused resistance to higher lamb prices at the retail level and lamb consumption has fallen sharply, particularly since retail prices began to pick up at a double-digit pace throughout 2011 and into 2012. Though the most recent consumption data from Kantar suggested that this trend had reversed, the way that Easter fell distorted the true conditions in the retail market, and consumption in the year to 15 April 2012 was 10% lower than it had been in the year to 17 April 2011. Lamb remains a relatively expensive protein with prices around 70% higher than four years ago. This compares unfavourably with beef, pork and poultry which have risen by a respective 40%, 35% and 20%. Furthermore, the average price of cheese has gone up 18%, eggs are 10% more expensive and the overall cost of living has increased by 15% over this period.

The decline in lamb throughputs at UK abattoirs which had been evident between November and February reversed in March, and numbers were only slightly lower than year earlier levels in April. In Scotland, the decline continued into March, but then 1% more hoggs were killed in April 2012 than in the same month of 2011. Nevertheless, in the first third of the year slaughterings were down 6% in Scotland and 2% at the UK level.

In contrast to the market for prime stock, cull ewes have been valued a fraction more expensive in the latter part of May than a year ago. They are currently trading around the £75 a head mark, up by nearly £1. The volume of ewes being slaughtered at UK abattoirs remained considerably lower than for a number of years into April. While part of this has been caused by the continued contraction in the ewe flock, slaughterings are down by a greater proportion, suggesting that producers have begun to rebuild their flocks.

Heavy lamb prices across the EU have slipped back in May and are trading approximately 10% lower than last year. However, compared to last year there is wide divergence from the average. Prices have risen in Belgium, Germany and the Netherlands, but fallen back slightly in Spain and France, by 9% in Romania and by 18% in Ireland.

With the Euro trading between 80-81p during May, UK export competitiveness has decreased by 4% since the end of March and by around 8% over the past twelve months. Lamb prices in GB have consequently fallen at a slower pace in Euro terms than in Sterling. With 36% of UK production volumes exported this may begin to restrict exports and already appears to have had a downwards effect on producer prices.

Nevertheless, export figures for Q1 showed improvement over 2011 levels, rising by 7%. This was supported by exchange rates being similar to year levels for much of this period. Deliveries to France, the UK’s principal customer, increased by 3.5%, while Belgium bought 22% more than a year earlier. Though other traditional customers, such as Italy and Germany, bought less UK lamb, this was offset by strong growth into South East Asia.

Despite reduced domestic production and higher exports resulting in a smaller volume of UK lamb being available to the domestic market, imports failed to make up the gap, signalling weak demand. The UK purchased 5,800 fewer tons of lamb in the first quarter, a decline of 21%. Imports from New Zealand fell by 18% to 17,350t. Imports from New Zealand increased their market share to 80%, significantly greater than both the 2011 average of 71% and longer-term average of 73% of UK imports.

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Despite lamb prices trading well behind year earlier levels and production volumes increasing by 1%, New Zealand’s exports into the EU have fallen sharply, down 16% year-on-year in the first third of the year. Economic weakness has forced consumers into trading down towards cheaper proteins and demand for lamb has subsequently fallen. With nearly half of New Zealand’s lamb exports being shipped to the EU, its overall exports have been affected by the slowing EU economy.

The combination of falling prices in New Zealand and weak consumption in the country’s largest export market, the EU, is forcing the country’s exporters to concentrate on diversifying towards the growing economies of the Middle East and South East Asia. However, these are currently the largest markets for Australia, and took a combined share of over 55% of its total exports in the first five months of 2012. If Australia faces increased competition then it could struggle to maintain export growth in these regions. However, its exports have yet to be affected, rising 19% to 72,600t in the first five months of the year. The increase has been facilitated by higher domestic production and lower domestic consumption which has left a greater surplus for export. Despite the competition from New Zealand lamb in the Middle East and South East Asia, it was increased deliveries to these regions that drove overall export growth. With less than 6% of Australian sheepmeat exports being sent to the EU, the country has been relatively well shielded from the slowing EU economy.

Across the globe, lamb producer prices have fallen this year because the global market has been more adequately supplied as production has recovered and demand has softened. In New Zealand, Australia, and Uruguay, prices have fallen by more than 20% year-on-year, while Chilean prices are down 12%, and in Argentina they have fallen 14% since 2012 began. If the rebalancing of ex-farm prices is reflected in the retail market, it may begin to encourage consumption in the coming months, though the deteriorating economic situation in the EU will limit any gains.

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