Friday, 29 January 2021
By Duncan Wyatt
No one needs reminding that the UK’s relationship with the EU changed on 1 January 2021. Where do we stand in terms of our red meat markets, and what changes might we now expect?
While there are still plenty of logistical challenges to overcome, a lot of the uncertainty of the UK’s departure from the EU is behind us. However, there is more change ahead as direct payments go, replaced by a scheme that is still in development. Now could be a great time to examine on-farm costs. Whatever happens, there are a number of AHDB tools available to help navigate the uncertain waters ahead:
- Our Business Impact Calculator helps farm businesses can get an idea of where they stand to inform decision-making
- Take a look at Preparing for Change: The Characteristics of top Performing Farms
- Keep an eye on our website for the latest market prices and information
- We have a range of tools to help including budgets and forecasting, managing cash flow, cost of production and our KPI calculator
- Find seasonal labour, access a ‘new employee checklist’ and get pointers for training your team for business success
There are short term impacts of the UK’s exit from the EU - On 1 January the UK‘s position on transporting goods to and from the EU switched from ‘deliverer’ to ‘importer or exporter’. Although nothing like the changes we could have expected in the event of no deal, in the short term we face delays at ports as additional border checks take place. Trade friction, or the costs associated with additional paperwork, customs checks, will affect trade both ways in the long term. These costs may be passed along the supply chain and could well have an impact on farm gate prices. Labour complications need to be considered by each farm business too, as it is likely there will be a smaller pool of people with the required skill set available and competition will increase. This could mean higher wages, which was a central assumption of much of AHDB’s analysis in the run up to EU-exit.
The UK is a net importer of beef and pork, and increasingly is becoming a net exporter of sheep meat. These balances have implications for prices.
The spectre of no-deal has gone, so prices for sheep will be influenced by the global market, which is tight at the moment. Supplies available for export are expected to be lower in both Australia and New Zealand, and Chinese demand for imported protein remains strong for now. However, China’s pig herd is recovering from African Swine Fever and growing quickly.
Drivers of UK beef prices are perhaps more domestic in nature. Coronavirus is disrupting normal eating patterns so retail sales are playing a more important role, more retailers are sourcing British cattle which is supporting prices. However, when life eventually begins to return to normal, demand will move away from retail and back towards foodservice. Imports will recover and so that market support for British cattle is likely to weaken, and so could the support for prices.
The European pork market is awash with product right now, as Germany’s exports to China have halted due to its own battle with ASF in its wild boar herd. Pig prices will be challenged for at least the next six months if not longer, and feed prices are going up.
Looking a little further ahead, livestock farms could be facing some headwinds in the next year. There will be a seven-year phased reduction in direct payments, but payments for environmental services are still in development.
China’s pig herd is growing quickly again after being decimated by African Swine Fever. China’s import demand has heavily influenced world markets in the last couple of years, and that demand could change from animal protein towards plant-based protein. Soyabean prices have already rallied hard, and other world markets for feed ingredients are on a bull run too.
Other inputs such as fuel, fertilizer and steel may also continue to become more expensive. There is a lot of speculation in the investment press as to whether we are at the beginning of an upward phase in a multi-year commodity super-cycle. Coronavirus may have “synchronised” many economies, and there are various goals across the globe to invest in green energy infrastructure, manage domestic food prices and narrow income inequality. Add to this a generally weaker US dollar, which makes commodities priced in dollars more affordable to lower income countries, and advocates of a long term bullish commodity picture have plenty of evidence on their side.
Looking even further ahead, leaving the EU allows the UK to strike its own trade agreements. We know that FTAs with USA, Australia and New Zealand are in the pipeline. All are big agricultural exporters and conclusion of trade deals will have implications for UK agriculture. 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.
Price, convenience and quality are the key three drivers for consumers and set 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. Now the UK has left 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.
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 have never 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? Investment interest in forestry for example, is already growing. 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.