Red meat – taking a longer view

Tuesday, 30 June 2020

By Duncan Wyatt

Here we focus on five of the main factors that will influence the red meat sector in the coming years, particularly in light of the two major events of 2020, the coronavirus outbreak, and the upcoming deadline for Brexit. These factors are:

What will the new trading relationship mean?

Following lockdown, the manner in which the UK leaves the EU at the end of the year will be the next major milestone for the red meat sectors. The UK is a net importer of beef and pork, and so the UK’s own external tariff regime will play a critical role. We are more reliant on the EU for our lamb exports, and so the cost of access to that market is of vital importance. Other consequences of leaving the EU are the implementation of a new domestic agricultural policy that moves away from direct support, and an independent trading relationship with the rest of the world.

Supply and demand set prices in the short term. So, if new free trade agreements bring greater access to our markets, it will be the marginal cost of production of imports that will set prices here. While there may of course continue to be some cross-subsidy through environmental schemes, only producers that can compete on a short-term marginal cost basis will be best positioned. Long term, businesses need to recover their full cost of production to remain viable. Domestic output overall is likely to fall, but so can inputs.

 

Direct support is going, replaced by payments for environmental services

Recent polls have indicated that people want the economy to be different after lockdown. One YouGov poll in May indicated that 8 out of 10 people want the government to prioritise health and wellbeing over economic growth, which during the outbreak was understandable. However, over 6 in 10 thought that the UK should prioritise improved social and environmental outcomes over GDP when the pandemic is over. It will be interesting to see if consumers themselves follow through with these ambitions. In order to enact change, consumers would need to spend their money differently to send the right signals. For all the intent that shoppers may have, price, convenience and quality are the key three drivers. We shouldn’t forget that how shoppers say they will behave when participating in a survey is different from their actual purchasing priorities when in store.

This is why the debate over farming standards is such an important one, as higher standards almost always come at a higher price. As the UK leaves the EU, and is free to sign its own free trade agreements, the differences between international production systems will come under more scrutiny. World Trade Organisation rules have much less to say about methods of production than they do about the final product itself, and some countries even argue against country of origin labelling. Unless consumers and the retailers that serve them place a monetary value on security of supply or “Britishness”, there will not be higher prices for locally produced products, to compensate for the lower cost of production elsewhere. We know that for red meat price is king, but will this need to change?

But it’s not all about how consumers consume. UK farm support is changing, and will be guided by a philosophy of “public money for public goods”. There will be more emphasis on natural capital. Although in the short term the overall level of support available could be the same, the amount of money distributed will also depend on environmental scheme design and uptake. Understanding on-farm costs of production and returns at the margin will never have been more important. If livestock farms are going to be paid to produce environmental products, how much will this be in addition to, or at the expense of agricultural output? If environmental schemes cannot reconcile food production with environmental outcomes, farmers will need to become adept at maximising profits from their farms, even if this means some tough decisions on output.

 

Climate change brings changing weather patterns

Of course, farming’s relationship with the environment runs both ways. We highlighted the risk of extreme weather events in January, and the start of 2020 has already confirmed those issues. Extreme weather will likely become more frequent and continue to impact production and raises key questions around exposure and risk:

  • Have you carried out a risk assessment for extreme weather, be that drought or flood?
  • Are there measures you can take to mitigate the risk?
  • What have you learnt from previous weather issues – what worked and what didn’t?

 

Global demand for animal protein is growing

All of these challenges above are set against a background of growing global demand for animal protein, but a mature market at home. According to the FAO (2019), global meat consumption per capita is projected to increase by 1.2% to 35.1 kg by 2028. Overall growth will stem from a combination of income and population growth, especially in Asian and Latin American countries with large middle classes. This consumption growth will encompass all meats, including poultry (+16%), but also beef (+13%), sheep meat (+14%) and pig meat (+8%). Demand in the UK will not replicate these levels of growth.

 

 

So, what might all of this mean for our red meat sectors?

For farms producing all types of livestock, the future is likely to involve greater exposure to world markets, and with that increased uncertainty and price volatility. Risk management will become even more important, both in terms of the outright price of inputs and outputs, but also market exposure for those outputs. Coronavirus has shown us that things can change dramatically in unexpected ways. It may be that diversification and economies of scale become best achieved through contractual arrangements and cooperation along supply chains, rather than individual businesses going it alone.

 

A closer look at lamb

Already the world’s third biggest exporter of sheep meat, the UK is increasingly set to become a net exporter, because of falling domestic demand and New Zealand exporting more to China. This means that we could be exporting more than we import far more frequently. This trend would quicken if the UK flock grows, (possibly even as a very short-term response to the removal of direct farming support), and if domestic demand falls further. New, productive trade deals could ease this transition.

New Zealand volumes will continue to play an important role balancing our market in the early part of the year with legs and loins, but the UK could become ever more dependent on demand in the French and German markets. Without tariff-free access to the EU for UK sheep meat, the UK price would likely face severe pressure in the short term and arrest any flock expansion.

As the Chinese market develops, it’s likely that exports from New Zealand will increasingly move in that direction. New Zealand could even end up playing the role of “swing supplier” in the next few years, which would increasingly tie price movements in Europe to those in China for some products.

For lamb it feels like we’re at a crossroads. We can continue focusing on a domestic market that’s in decline, due to a range of factors that aren’t easily remedied with promotional tactics, and shipping commodities in the form of light lambs to our near neighbours. Or, we can use the next decade to identify growth opportunities outside of our traditional outlets, and look how we can add value to the product. Demand for lamb domestically appears to be heading one way, and unless we do something different, we’re going to have a smaller industry.

 

A closer look at beef

The outbreak of coronavirus highlighted the importance of the value of the whole beef carcase when it comes to returning value to the supply chain. A recent survey of selected countries from AHDB Farm Economics’ agri benchmark network revealed that the UK had one of the highest ratios of sirloin steak prices to minced beef prices. This has implications for trade flows, which at the moment are governed by the UK’s membership of the EU and the common external tariff.

But, depending on the details, after the transition period is over, a free trade agreement with the US for example could further open the UK market to top cuts of beef. Add this to the strong global demand and higher prices for ground beef, and the sirloin/mince price difference might narrow. At the moment, around 45% of the carcase is minced, but mince could go from a low margin product to something more valuable, increasing this percentage. Lean meat yield from the carcase would become more important, and is something that can be managed through breeding and feeding.

We will also see the implementation of measures by some milk processors to ban the euthanising of healthy bull calves on farm. This has implications for breeding and inseminations decisions, dairy production costs but also the beef supply chain. It is likely that we will see further contraction in the suckler herd, and more beef of improving quality coming from the dairy herd. With increased attention on milk solids and the need for more valuable beef calves, will we see an increase in popularity of dual-purpose breeds, possibly also as a way of managing risk through diversification?

 

A closer look at pork

In two to four years, the world pork market will come back towards balance. The Chinese market has been good for UK production and fuelled expansion in the sow herd. It will continue to be an important market, although perhaps a less reliable one. When Chinese pork production recovers from African Swine Fever, the global animal protein shortage will likely be filled, and the Chinese domestic supply chain will be more robust than before. Meanwhile many countries will have increased their production and the market will have to adjust.

At the moment, the Chinese diet demands parts of the British carcase on which we place less value. But as with ground beef, an increasingly uniform global diet could mean that demand for the carcase in the future overlaps much more, with relatively more demand for pork itself (as opposed to growth in offal demand). This would put UK retailers more directly in competition with export markets.

Again, depending on the details, a free trade agreement with the US could open the UK market to commodity pork in particular. US product is not competitive in the UK at the moment, because of the EU’s common external tariff. There might however be an opportunity for a “quality swap” whereby although we may see more commodity pork on UK shelves, the UK could export more high value pork in the other direction.

A liberalised UK trade policy with the rest of the world from 2021 onwards could point to an increase in soyabeans and soyameal coming into the UK from South America. Here the issue of farming standards comes up again. But, if consumers continue to be driven by price, then does the UK need to take an opportunity to utilise South America’s absolute advantage in producing cheap protein for animal feed. Would this better place our livestock market against competition from abroad and at the same time help to secure domestic grain demand?

Duncan Wyatt

Lead Analyst - Red Meat
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