QMS Market Report – August 2011

BEEF

In previous years beef prices have tended to dip in late July due to the peak of the holiday season, but no such movement has been observed in 2011. Consequently deadweight prices for steers are up by just over 50p/kg year-on-year (19%), while at Scottish auctions average prime cattle prices have risen 15%.

Slaughter data for Scotland has shown a significant tightening in prime cattle throughputs over the past three months. While the prime kill is up 4.5% year-on-year for the first half of the year (H1), slaughterings in Q2 (April to June) were only 1% above year earlier levels and monthly volumes for June were down more than 1% on the year. Much of the increase in supplies during H1 has been due greater young bull numbers, and they remained well ahead of 2010 levels through June. The heifer kill also remains ahead of year earlier levels but the gap narrowed to less than 2% during June. By contrast, June steer throughputs fell 8% in comparison to the same month of last year, and just 1% more steers were killed during H1.

Defra slaughter statistics for H1 show a similar pattern for the UK with throughputs of prime cattle up 5% year-on-year over the period, but slowing markedly in the second quarter. However, the UK slaughter mix has diverged from that of Scotland as young bull numbers have dipped while the steer kill remains higher than last year and heifer slaughterings have not tightened to the same extent.

With high prices still being offered for cull stock and feeding costs remaining historically high, producers have taken the opportunity to remove any unproductive breeding animals from their herds. Consequently, slaughterings of mature cows and bulls continued to run well in excess of 2010 levels with June volumes up by more than one-third year-on-year. In the first half of 2011 they were 23% higher than during H1 2010.

At the end of July prime cattle prices across the EU returned to May levels having eased back over the previous couple of months. This may reflect the easing of drought conditions in a number of countries, which had led farmers to bring forward slaughterings, and has resulted in a return of the supply balance to the tighter conditions that had been experienced earlier in the year. With France and Germany being hit hardest by drought conditions, prices bounced during July. French young bulls became 5% more expensive over the month while steers and heifers rose in price by 2%. In Germany steers and young bulls rose by around 3.5% while heifers showed price gains of 2.5% during July.

In the first five months of 2011 UK beef exports showed gains of 42% on the year according to provisional Revenue & Customs (HMRC) data. Nearly 56,400 tonnes of beef were shipped overseas compared with 39,700t a year earlier. Improved competitiveness has helped stimulate exports as Sterling has weakened against the Euro relative to last year while UK and EU prices have appreciated at a similar pace. Export volumes have also been boosted by an expansion in domestic production. Of the UK's main EU customers Italy and Germany bought less beef than in the same period of 2010, but significantly more was delivered to Ireland, Holland and France.

Imports of beef to the UK were 4% lower in the opening five months of 2011 than in the same period last year. However, more detailed trade data has shown that deliveries of chilled beef have been close to last year's levels, while frozen imports, especially those from Ireland, have declined sharply. An explanation is offered by the increased domestic slaughter of mature stock as this implies that the manufacturing beef import requirement has fallen.

During May third country import volumes shifted towards Oceania from South America and Africa despite Uruguay and Namibia sending their largest monthly shipments of the year. Less beef was sourced from EU suppliers than a year earlier during the month of May.

News Round Up

New Zealand has become the fourth country to receive access to the EU's 20,000 tonne high quality tariff-free quota for grain-fed beef. Previously New Zealand had an EU quota for just 1,300t of pasture-fed beef at a 20% tariff, and shipped a total of 9,700t of beef to the EU last year (5% of the country's total beef exports). The quota which has previously granted access to the US, Australia and Canada, is set to rise to 45,000t in the summer of 2012. Usage of the 20,000 tonne quota increased from just 49% in the year to June 2010 up to 96% in the year ending June 2011.

To increase domestic beef supplies Turkey has now halved its tariff on live imports weighing greater than 300kg to 15%. Initially applications will be invited for 10,500 tonnes of live cattle from South America and Oceania. Shortly afterwards a second round of live export applications will be opened to other countries including France and Germany. Turkey is also going to hold its beef import duty at 75%, having increased it three times since March. This policy combination implies that while a tariff of 75% encourages sufficient volumes of beef imports to ease retail pricing pressures, imports cannot be relied on in the future, and so greater domestic supplies will be needed to maintain market prices at a suitable level in the long run.
Meanwhile, three animal welfare organisations have called for a moratorium on live exports from EU nations to Turkey due to long journey times and excessive heat. Furthermore, they state that 90% of inspected transporters fail to meet EU welfare standards.

During the first half of 2011 Argentinean fresh beef exports fell to 59,700 tonnes, nearly one-fifth below H1 2010 levels as supply problems continue to bite. Most of the decline can be explained by a sharp fall in deliveries to Russia which dropped from 21,000t to 12,000t, while deliveries to Chile, Germany and Israel increased. Whereas Argentina sent fresh beef to 70 countries in H1 2010, this fell to just 51 this year. Nevertheless, tight supplies have driven prices substantially higher and exporters have been able to increase their revenues by 20% this year. While, shipments of offals and Hilton cuts are down by 8% and 4.5% respectively, revenues have grown by 16% and 8% when compared to the first half of 2010. Looking more closely at the high-end Hilton cuts, Argentina filled 92% of its 28,000 tonne EU quota in the 2010/11 year. This was an increase from 65% in the previous 12-month period as shipments of Hilton cuts increased by 7,700 tonnes despite the intensification of supply problems.

Although the US cattle herd is at its lowest level in decades, dry weather across the country has pushed slaughterings ahead of last year. Monthly throughputs during June were up by 2% on the same month last year while year-to-date production volumes have also risen by 2% on the year. With cows and heifers making up an increased proportion of the kill future supplies are likely to suffer, and high production costs are only adding further support to the downside.

Despite the major outbreak of FMD in Korea at the turn of the year the country's beef cattle population reached a record level of 3.05m head in June, an increase of 4.5% year-on-year. Only 5% of the cattle herd were culled as a consequence of FMD. Nevertheless, due to movement restrictions and a suspension of slaughterings Korea had to import 63% more beef in the first half of 2011 than in the same period last year. The combination of imports and the record domestic herd have helped stabilise beef prices in the retail market.

The Canadian government is to part-fund an energy and money saving project by Cargill to turn SRM, landfill waste and compost from one of its beef plants into electricity to fuel its operations. Government funding will account for one quarter of the £25m investment.

SHEEP

Prices and Supplies

In recent weeks the lamb producer price premium over 2010 had halved from approximately 20% to closer to 10%. Then, in the first week of August, auction prices fell sharply to be only slightly higher than year earlier levels. Prices have held above 2010 levels despite higher domestic production and marginally lower carcase quality; 74.3% of lambs have been graded at R3L or better compared with 74.8% during the first quarter of the 2010/11 season.

It is likely that prices have stayed higher than last year due to the tightness of supply at the global level which has underpinned lamb values throughout the world, plus the current weakness of Sterling. Both factors have supported the competitiveness of UK lamb both at home and abroad. However, lamb has become an extremely expensive protein and cautious consumers have been trading down and purchasing more of their meat on promotion. Although retail and processing sector margins tightened significantly between March and May as weak consumer sentiment prevented a full pass-through of the increased cost of sourcing lamb, this pressure has eased somewhat over the past two months.

Lambs have been much quicker to come forward in the 2011/12 season than they were last year and this is reflected in Scottish slaughter data which shows that numbers were up by one-third year-on-year during June following a 9% increase in the previous month. H1 2011 throughputs show a 15% increase in the lamb kill over the first half of 2010. At the UK level throughputs were 4.5% above year earlier levels over the first five months of the year. While volumes in March had trailed year earlier levels, April and May figures show a 3.5% increase year-on-year. Nevertheless, they were 10% and 6% down on the same months in 2009, respectively.

High cull ewe prices thus far in 2011 have drawn out stock. 12.5% more ewes were slaughtered in the UK during the January to May period than in the first five months of 2010. However, monthly volumes in May were just 4% higher year-on-year.

Heavy lambs were on average 9% more expensive across the EU at the end of July than they were one year earlier. Though still significantly higher than 2010 levels, prices had been showing double-digit annual gains in recent months, and therefore suggests that supply problems have eased somewhat. This has been particularly true in Romania and Ireland where year-on-year increases have fallen sharply, although Spanish lambs remain close to 20% more expensive than last year. Price improvement in Belgium and France is now close to the EU average having been significantly lower in recent months.

Though initial figures show that UK lamb export volumes trailed year earlier volumes in May, they are likely to eventually show a slight increase when revisions are made since previous monthly figures for this year have been corrected upwards. Over the January to May period exports were 5% up on last year with 34,400 tonnes being shipped overseas, 1,700 tonnes more than in the first five months of 2010. Deliveries to France and Belgium, traditionally Britain's largest markets for lamb, are down 7.5% and 30% respectively year-on-year for the first five months. However, shipments to most other European customers are showing strong gains. In particular Irish and German demand for UK lamb has grown and both countries have overtaken Belgium as the second and third largest buyers. A weaker Sterling against the Euro supported exports during May.

Lamb imports were 16% behind last year's levels during the first five months of the year. Tight supplies and rising prices in international markets coupled with higher domestic production have reduced the requirement for imports in 2011 so far. However, deliveries have been running somewhat closer to 2010 levels through April and May, indicating a slowdown in domestic production.

News Round up

New Zealand's lamb exports fell by 15% year-on-year during H1 2011 to 164,500 tonnes. Deliveries to EU markets which accounted for approximately half of all exports declined 17% with the UK and France buying 22% and 25% less New Zealand lamb, respectively, than a year earlier. Of the non-EU destinations only China imported significantly more lamb with deliveries rising by 57% over the first half of 2010. Consequently China overtook France to become the second largest buyer of New Zealand lamb. The principle reason for the overall decline in exports was the sharply lower 2010 lamb crop which affected slaughterings over the January to April period. However, May and June slaughter volumes rebounded, running ahead of 2010 levels and led June exports 5% higher than in the same month last year. It is thought that the increase in May and June throughputs was caused by farmers taking lambs to higher carcase weights in order to receive higher cash payments.

For the first time in 2011 Australian monthly lamb throughputs exceeded year earlier levels in July. Slaughterings were up 5% year-on-year as producers were able to hold on to their lambs for longer this year due to much improved weather conditions, and then rushed to get stock to abattoirs before the commencement of the new season. Nevertheless there was some divergence between states; whereas the greatest increase in slaughterings occurred in New South Wales (+23% y/y), throughputs fell by close to 50% in Queensland.

Monthly Australian exports of mutton fell to their lowest level in 22 years during July. Deliveries totalled 4,370 tonnes, 8% lower on the year and one-third below their five-year average. MLA report that supplies have been restricted by flock rebuilding, which has in turn been facilitated by the combination of favourable weather and high prices over the past year. While exports to the Middle East were little changed at 2,500t, deliveries to smaller markets, such as South-East Asia and the USA, were sharply lower.

In Ireland a review into stocking rates is expected to lead to an increase in maximum stocking densities plus the introduction of minimum stocking densities. Where land is deemed to have recovered from past overgrazing maximum stocking densities will be raised. The likely knock-on effect will be to reverse the decline in Ireland's sheep flock which has contracted by nearly two-thirds over the past twenty years. Changes are expected to be in place for the beginning of 2012.

PIGS

Prices and Supplies

It appears that ex-farm pig prices reached their annual peak of 152.9p/kg dwt in the second week of July and have now begun to slide seasonally. However, the gap between this year and last year's price has continued to widen, reaching 4.5% in the opening week of August. Although feed costs remain elevated they are now at similar levels to this time last year. Consequently, producers are likely to be feeling less pressure on their margins than a year ago.

In the first five months of 2011 Scottish abattoirs killed 8% more prime pigs than in the same period of 2010. However, May figures show a slight tightening in supplies with 6.5% more pigs slaughtered than a year earlier. In the UK as a whole pig slaughterings were 3.5% above year earlier levels for a second consecutive month in May. This meant that just over 6% more prime pigs were killed in UK abattoirs in the first five months of 2011 than in the same period of 2010.

Production volumes data suggests that the UK produced 6.5% more pigmeat in the January to May period of this year than last. This implies that at present, price improvement can be attributed to strong consumer demand rather than industry reports of tight supplies caused by the effect of poor winter weather on piglet mortality and growth rates although this may come.

Weaner prices have stabilised over the past couple of months, settling at around £46 a head. Though this is above Q1 levels of between £41 and £42 per head, weaners remain significantly cheaper than at this time last year when producers could achieve more than £53 in the marketplace.

Cull sow prices gradually moved higher as July progressed, beginning the month at 97p/kg dwt before closing it at more than 101p/kg dwt. Industry reports suggest that price movement was influenced by an increase in demand on the continent; a positive development given the release of pigmeat from private storage into the EU marketplace. In the final week of July producer prices were 6.5% higher than a year earlier.

Prices for feed wheat have stabilised over the past month and are now trading at similar levels to the same time last year. Prices in global markets have fallen back this summer after the resumption of cheap exports of wheat from the Black Sea region. More recently, upward revisions to production forecasts in the EU, Australia and North America, as well as heightened fears of a global recession, have placed additional downwards pressure on prices. Nevertheless, the market remains tight as rising demand for feed use ensures that consumption will still exceed production in 2011/12. As August commenced, spot and futures prices for feed wheat remained around the £160/t mark.

EU pig producer prices opened August around 4% higher than this time last year. Of the major pig producing nations, farmers in Spain, Germany and the Netherlands have experienced below EU average year-on-year gains while the Irish have matched it and Danish producers have exceeded it. Despite the release of nearly 106,000 tonnes of pigmeat from private storage over the last three months, average prices continent-wide have shown stability (in Euro terms) with the EU27 average for Grade E pigs closing July at €1.56/kg dwt having stood just 1c/kg higher at the end of April. With production volumes up slightly over 2010 levels it would appear that strong export sales to third countries have prevented a slump in prices by keeping the availability of pigmeat in balance with demand. With the remaining 35,000 tonnes of pigmeat due to be released from storage this month it implies that prices may begin to fluctuate in September once the intervention scheme has come to an end and the market seeks a new equilibrium.

UK pigmeat exports ran 6% ahead of last year during the opening five months of 2011. A weaker Sterling since March and higher EU prices as a consequence of the Private Storage Aid scheme gave particular help to exporters by raising their competitiveness.

Imports of pigmeat have also risen above 2010 levels this year with volumes up nearly 8% at 152,800 tonnes. May shipments of 34,000t exceeded deliveries in the same month of last year by more than 6,000t. With increased exports insufficiently large to offset higher domestic production and imports, by implication domestic demand for pork has improved considerably since the early months of 2010.

News Round up

Danish July census figures showed a 4% year-on-year decline in its sow herd with the sow population declining by 59,000 head to 1.264m head. Numbers have fallen as tightening margins have given producers an incentive to slaughter any unproductive breeding pigs; reflected in the data by a 2% increase in the sow kill. Nevertheless, increased sow productivity led to a marginal rise in the total pig population compared with July 2010 by 21,000 head to 12.549m head, an increase of 0.2%. This was driven by a 179,000 head increase in slaughter pigs over 50kg in weight. However, the sharp reduction in the size of the sow herd has begun to have an effect on the numbers of younger pigs, which fell by 1% to 7.91m head, and this is likely to reduce the availability of pigs for slaughter in the near future.

The Russian government has revealed its 2012 pigmeat quota three-to-four months earlier than usual, but is yet to include country-specific details. Pork imports will be set a maximum level of 320,000 tonnes in 2012 compared with 470,000 tonnes this year and 420,000 tonnes in 2009 and 2010. Tariffs, however, will remain unchanged at 15% (or 75% if outwith the quota).

Meanwhile, as a consequence of Russia's recent ban on imports of pigmeat from three Brazilian states monthly export volumes declined by 35% from the previous month to 30,000t during July. Compared with July 2010, monthly volumes were down by 8,200t, a decrease of 21%. The export ban has affected approximately 100 Brazilian meat processing plants so far.

With supply-side inflationary pressures affecting pork prices in Korea, the country's government has responded by announcing a suspension of the current 22.5% tariff on imported chilled pigmeat during August and September. The culling of a third of Korea's pig herd during the FMD outbreak at the turn of the year has led to the market for pigmeat being severely undersupplied and prices have risen as a knock-on effect. Measures previously adopted in attempt at increasing imports to ease retail prices, including large import quotas, have had little effect as pork prices are approximately one-third higher than last August. Though pigmeat imports were 70% higher than in the first half of 2010, chilled pork accounted for just 11,000t, or 4%, of the 254,000t total.

In the Czech Republic, pigmeat imports spiked during the second quarter of 2011, rising 12% on the year to 51,750 tonnes. This in part reflects a fall in domestic production volumes which decreased by 2% to 67,300t, but also implies a large expansion in consumption of pigmeat by Czech consumers. With a sharp contraction in the country's sow herd by 15% in the year to April, imports will have to increase further to maintain an adequately supplied market in the future.

Stuart Ashworth and Iain Macdonald – August 2011

Attachments:

• MARKETREPORTAugust2011.pdf