Category: Dairy & Livestock

Dairy Roundup

Prices

After recording a 2.7% increase in July, the GDT average price index fell back by 2.6% at the next event held at the beginning of August.  At the latest auction, held on 20th August, the index appears to have stabilised, falling only marginally by 0.2% to $3,255.  WMP actually recorded an increase by 2.1% to $3,100 per tonne, whilst butter dropped by a sizeable -3.4%.  SMP was marginally down by -0.3%.  We are now entering New Zealand’s spring peak and therefore volumes on offer are increasing considerably, contributing to the decline in prices.

Closer to home, cheese makers are fairing much better than liquid milk suppliers which is reflecting in the farmgate price changes (or not) for September, with many cheese processors standing-on on the back of stable market values;

  • Arla has held its price for the 7th consecutive month.  Its standard manufacturing and liquid price remain at 30.22ppl and 29.05ppl respectively for September.
  • Also maintaining their prices for the 7th consecutive month are Saputo Dairy (formerly Dairy Crest, Davidstow) and Muller.  Saputo’s standard manufacturing price remains at 29.9ppl and its liquid at 28.82ppl.  Muller’s standard liquid price is held at 26.75ppl.
  • First Milk has also announced its price will also stand-on for September which sees the standard manufacturing price remaining at 28.37ppl and the liquid at 27.45ppl.
  • Barbers, Belton Cheese and South Caernarfon Dairies have also all held their prices for September.
  • In contrast Glanbia Cheese suppliers will receive a 1ppl reduction to their standard manufacturing litre bringing it down to 27ppl
  • Freshways has reduced its base price to 24.4ppl which sees the liquid standard litre fall by a whopping 2.06ppl to 25ppl.
  • Meadow Foods and Pensworth Dairies have made price reductions of 1.75ppl and 1.35ppl respectively, cutting their standard liquid price to 25ppl and 24ppl.

Indonesian Tariffs

Earlier in the month the Indonesian government announced proposals to increase import tariffs on EU dairy products.  This would see the tariff rate rise from the current 5% to 25% and would make nearly all EU products uncompetitive.  Currently the EU accounts for almost 40% of all Indonesian imports.  The reason for the increased tariffs is in retaliation to EU plans to introduce anti-subsidy duties on palm biodiesel from Indonesia from early in September.  In 2018 the EU exported 164,000 tonnes of milk product, mainly whey and milk powders, valuing £221 million to Indonesia.  The country is the fourth largest export market for EU dairy products.

Sheep Market

The finished lamb price appears to be stabilising following its seasonal decline.  It never reached the highs of last year, but has been trading near or above the five-year average for most of the year.  Due to good pasture growth, lambs have been finishing much faster this year and together with a smaller lamb crop, numbers available in the 4th Quarter are expected to be less this year than last.  Normally this would bode well for farmgate prices but this year Brexit uncertainty is overshadowing price prospects.

Reports suggest early sheep breeding and store lamb sales have actually seen a good start.  This is probably due to good grass growth keeping feeding costs down.  Furthermore, the fall in the value of the Pound against the Euro, means  that in the short term exports will be competitive. This could even lead to EU countries stock piling UK lamb meat ahead of 31st October; however, this could be met with producers off-loading stock ahead of the Brexit date.

For those with store lambs to sell and those thinking about buying lambs to finish, it is a very difficult decision to make.  If we leave the EU with a ‘deal’ on 31st October, this could see us enter into a ‘transition’ period and our current trading arrangements would continue whilst a long term trading position was drawn-up and it would therefore be business as usual. This could mean strong prices because of the reasons cited in the first paragraph above.  But leaving the EU without a deal, would see us trading as a third country with the EU under WTO rules, meaning sheep meat exported to the EU market would be subject to significant tariffs and would not be competitive.

Currently, we export about a third of our lamb production and nearly 100% goes to the EU. Losing this market would hit domestic farmgate prices hard.  There has been some talk of the EU not imposing such tariffs on us, but this is not possible under WTO rules.  Without a Comprehensive Free Trade Agreement, under the ‘most favoured nation’ rule, any changes to the EU tariff would have to be made available to all other countries.  In a further twist, New Zealand lamb will still be available tariff free to both the UK and EU due to their tariff rate quotas (TRQs) which are expected to split (50:50) between the EU and UK on our departure.

Of course, there is the possibility of trading with non-EU countries, the global market for sheepmeat is currently pretty strong, due to African Swine Fever in China and less lamb production in both New Zealand and Australia. However, this will take time to develop and is not always that straightforward due to varying regulatory standards, tariffs and the like.  The expanding Asian market is the most obvious market opportunity, but the Chinese market is complex. New Zealand already has a FTA with China and have relatively well-established processing partnerships in this market, all of which take time to build.

On balance, for the lamb sector, it is clear that having a Brexit Deal agreed with the EU would be much more favourable than a No Deal which would have major negative repercussions for the sheepmeat industry. 

 

Dairy Prices and Production

After four consecutive declines, the Global Dairy Trade (GDT) average price index recorded an increase at the latest event.  At the auction held on 16th July the average price index increased by 2.7% to $3,412.  Over half the product sold was WMP, which recorded an increase of 3.6% to $3,074.  SMP saw the highest rise by 3.8% to $2,505.  Cheddar and butter also recorded increases of 3.3% and 1.7% respectively.

Closer to home, farmgate prices remain pretty flat, with many processors ‘standing-on’ with their prices for August.  However the Tesco quarterly cost tracker review has resulted in a 0.07ppl price reduction from 1st August, this brings the Muller Tesco standard litre down to 31.07ppl and the Arla Tesco price to 30.95ppl.  Muller has also announced a price cut for its Co-op suppliers by 0.19ppl from 1st August.  This will see its standard litre drop to 29.37ppl.

Meanwhile, domestic production remains strong.  Latest information from Defra shows June deliveries stood at 1,285 million litres, although 7.9% less than the peak in May, this is still 1.3% higher than for June last year.  In contrast to last year though, grass growth remains good, this should help maintain production through the rest of the summer.

Beef Market

Beef prices have been struggling for most of the year.  The GB R4L steer price has fallen 44p per kg since September 2018; the biggest drop since 2014.  Cattle prices, over the recent past, have tended to weaken during the first few months of the year, but this year it has been for longer and more pronounced.  There was a slight lift during April to mid-May but prices have fallen back significantly since the end of May at a time when they are usually seeing an increase.  At the beginning of July the deadweight all steer price was 42p per kg less than for the same week in 2018.

Poor domestic demand is not helping the price, but downward pressure is also being applied from a number of areas.  Heavier domestic carcase weights means increased production.  The Irish cattle kill is up, also their exports and at a reduced price.  Therefore, although the UK is importing less from Ireland, our exports (which have increased) are at a lower average price.  In addition, European manufacturing demand has subsided, probably due to high stock in cold stores.

Looking ahead, prices have stabilised of the last week.  It remains to be seen if this can be sustained, although recent reports suggest abattoir waiting times have reduced, which means producers should be able to sell more ‘in-spec’ cattle.  Moving into the second half of the year, supplies are forecast to tighten which should support farmgate prices.

Impact of Trade Barriers on UK Beef and Sheepmeat

Beef and sheepmeat trade with the EU could plummet by over 90% under a ‘No Deal’ Brexit.  This is one of the headline findings of a study recently published by the AHDB in collaboration with QMS and HCC.  The report, complied by The Andersons Centre, looks at the impact of trade barriers on the UK beef and sheepmeat sector post-Brexit.  It examined two scenarios; a Brexit Deal and a No Deal Brexit.  Some of the main points include;

  • Trade impact under a Brexit Deal scenario is relatively small:  total exports would decline by about 1% in volume terms (imports 0.8% lower), driven by EU27 declines.  Sheepmeat exports to EU27 are forecast to decline by 1.5% whilst corresponding imports would be 3% lower. These declines are chiefly due to Non-Tariffs Measures (NTMs) – i.e. the increased trade ‘friction once the UK was not part of the Single Market.  There would be minimal changes to non-EU trade.
  • Significant upheaval under No Deal: trade with the EU27 would plummet (by 92.5%) due to the imposition of tariffs, TRQs and higher impact of NTMs.  Sheepmeat trade with the EU would be almost completely wiped out.  Substantial declines in trade with the EU27 would also ensue for beef – exports down by 87%, imports declining by 92%.  Somewhat better market access for beef compared to sheep, due to TRQs, would permit some UK-EU trade to continue.  The introduction of a new 230Kt TRQ for UK beef imports would cause non-EU imports to soar by over 1,300%.  This would lower prices and drive-up UK consumption by approximately 7%.  Sheepmeat imports from non-EU countries are not anticipated to change whilst consumption is projected to rise by 14% due to declining prices.
  • Price impacts: there would be small declines under a Brexit Deal scenario (-1 to -3% respectively).  Under No Deal severe price declines would be seen.  Sheepmeat is particularly exposed (projected 24% price fall under No Deal).  Downward price pressure for beef (-4%) under No Deal arises due to competition from lower priced world-market imports.  This would be exacerbated if significant volumes of Irish beef enter the UK barrier-free via NI.
  • Value of carcase meat output: under a Brexit Deal, output would decline by an estimated 1.7% whilst under a No Deal the decline would increase by nearly ten-fold (-11.7%) with sheepmeat output nearly 31% lower which would be devastating for incomes in the sector.  Growth in exports to non-EU markets under No Deal would be insufficient to compensate for the loss of access to the EU27.

Projected Impact of Trade Barriers on Domestically-Produced Beef and Sheepmeat (Farm-Gate Level)

Sources: Defra (2019) and The Andersons Centre (2019) *Baseline Figures derived from Defra data.

  • Similar Impacts at Farm Level:  Andersons’ Meadow Farm model projects a 27% decline in profitability (£68 per Ha versus the current £93 per Ha) under a Brexit Deal, but the farm would still be profitable provided it can maintain its current support levels.  Even with support unchanged, Meadow Farm starts to generate unsustainable losses under No Deal with a projected deficit of £45 per Ha, equating to a £7,000 loss.
  • Domestic Market Opportunities: could arise for domestic producers if trade barriers reduce the competitiveness of imports.  However, the proposed access granted under additional TRQs in the beef sector would diminish this.  There are also fears that future changes to standards might make imports more competitive, thus limiting domestic market opportunities even further.
  • Frictionless trade with the EU27 as a third country is not currently possible: and looks set to remain so for at least a decade as the required technology has not yet been developed, let alone tested.  Long-term, technology can contribute to reducing this via e-certification systems, but friction cannot be reduced completely.  Post-Brexit increases in trade friction are inevitable.
  • Most significant non-tariff measures relate to value deterioration: value deterioration (especially fresh meat) arising from border-related delays associated with physical checks and sampling (associated with sanitary and phytosanitary (SPS) regulations) is of most concern to industry and is the biggest contributor to non-tariff costs generally.  Its impact on frozen products is much lower but still a factor in terms of potential penalties imposed on delayed consignments.
  • Uncertainty about future border arrangements:  under No Deal centres particularly on trade on the island of Ireland which the UK Government has claimed would remain frictionless.  If there are also no checks on NI-GB trade, whilst any exports routed from Dublin to Holyhead would be subject to tariffs and regulatory checks, the potential for re-routing meat from the Republic of Ireland via NI and onwards to GB without any checks, could result in substantial volumes of Irish beef being placed on the UK market (beyond the 230Kt TRQ) by the ‘backdoor’.  If significant volumes enter the UK in this fashion, substantial price declines for UK beef farmers would ensue.
  • Disproportionate impact on Small and Medium-Sized Enterprises (SMEs): arising from higher operating costs, fewer loads dispatched and a lower propensity to avail of special authorisations such as AEO status (which confers a lower risk on operators from a regulatory authority perspective).
  • Inflationary pressures: particularly for farm-level imported inputs from the EU27 (e.g. fertiliser, medicines etc.) but also elsewhere.  These costs are unlikely to be absorbed by the supply trade and would be passed on to consumers and/or to primary producers (i.e. farmers).  Any meat price rises are likely to cause consumers to increase their propensity to substitute with cheaper sources of protein, thereby making it more likely that beef and sheep farmers would beat the brunt of price pressures.

The study concluded that a Brexit Deal based on a comprehensive FTA and close customs and regulatory arrangements with the EU would be far preferable to a No Deal Brexit, which could have a devastating impact, especially for sheepmeat.  Whilst developing overseas markets will be crucial to the long-term success of British beef and sheepmeat, close attention must be paid to protecting existing markets, specifically the domestic UK market and the EU27 export market.  The study also found that even if the UK had never entered the EU (or EEC) in the first place, it is highly likely that markets such as France would still be vital to the British sheepmeat industry due to proximity.  To minimise any upheaval post-Brexit, the report states that having a comprehensive mutual recognition agreement between the UK and the EU is crucial.

The report’s findings were similar to several previous studies; however, this study goes into significantly more detail on how non-tariff measures could affect the sector.  It also provides useful insights on the implications of a No Deal Brexit for carcase balance in the sheepmeat sector where it estimates that up to 22% of the annual UK lamb kill (3.1 million head) could be affected.  This would be a major challenge to a sector where approximately one-third of the lamb crop is exported each year.  If it wasn’t already clear, this report underscores the importance of a good Brexit Deal for the grazing livestock sector.  The report is available via: https://ahdb.org.uk/knowledge-library/red-meat-route-to-market-project-report 

Dairy Company News

Muller

Muller has confirmed its Foston dairy in Derbyshire is to close, possibly by the end of the year.  Most farmer suppliers to the dairy will have their milk moved to other Muller processing sites, but it appears there will be a ‘small number’ who are not close enough to other Muller dairies and will have to find an alternative processor for their milk.

Dairy Crest

Having been bought by Saputo, Dairy Crest has been fully integrated into the Canadian company with a re-brand to Saputo Dairy UK.  The historic Dairy Crest name will therefore disappear.  However, there will be no change to Dairy Crest’s well known brands including Cathedral City, Clover, Country Life and Frylight.

Arla Calf Policy

From the beginning of 2021, no healthy calf born on a UK farm supplying Arla will be slaughtered or euthanised under 8 weeks old.  The new policy was put forward by the calf working group and voted through by Arla’s UK board of representatives.  The slaughtering of young calves is one of the issues used by welfare groups to generate negative publicity about the sector and is seen to be affecting consumer perceptions and customer demand.  Arla appreciates it will not be easy for some farmers, particularly those with TB restrictions but will use the next 18 months to work with the beef sector, retailers, breeding companies and Defra to fulfil the policy.

Animal Welfare

The Government has introduced legislation into Parliament to increase the penalties for those found guilty of animal cruelty.  The Animal Welfare (Sentencing) Bill means that the maximum sentence will rise to  five years in prison from the current limit of six months.

Milk Production

The latest GB milk production forecast from the AHDB puts deliveries for 2019/20 at 12.56 billion litres.  This is a slight reduction from their last forecast in March (12.59bn litres), but is still a 29-year high.  As previously reported, production in the first quarter of 2019 has been at record levels, with an early production ‘peak’ as good fertility and a switch to spring calving, increased the number of cows in production together with a ‘boost’ on the back of feeding more concentrates due to the lack of forage.

Looking ahead, assuming normal weather conditions, the AHDB is expecting yields to decline from their recent highs, as forage-based diets replace concentrates.  In addition, the herd size is expected to reduce in the fourth quarter of 2019, cutting production by 25m litres.

However, although GB has been breaking production records, this is not the case in many of the other EU countries.  Milk production across the EU as a whole has only risen by 103m litres (0.3%) in the first quarter of 2019.  Increases in Ireland, Denmark and Poland, compared to the previous year, have been offset by large reductions in France, Austria and the Netherlands.  In particular, France has seen a 2%  reduction (-135m litres).  This has been due to the knock-on effect from the droughts of last summer, which also resulted in higher than usual cullings.  In the Netherlands, new phosphate quotas have required producers to reduce their herd sizes to comply.  Overall the EU milking herd has declined by 1.6%; the Netherlands accounting for nearly a third of this.

 

Dairy Markets

Global Markets

Having risen at every event since the beginning of the year, the GDT average price index has fallen at the last three auctions.  At the latest event, held on 18th June, the index dropped by 3.8% to average $3,208.  All of the products on offer recorded a decline compared to the previous auction;

  •  -5.7% for butter to $4,553
  •  -4.3% for cheddar to $3,781
  •  -4.3% for WMP to $3,006
  • -3.5% for SMP to $2,358

UK Farmgate Prices

Closer to home, farmgate prices are starting to feel the squeeze.  The impact on having to sell excess milk on the spot market has exerted downward pressure on prices.  Notable announcements for July include;

  • 0.6ppl reduction for direct suppliers to Arla, taking their standard liquid litre down to 26.4ppl and the manufacturing litre to 27.53ppl
  • The Sainsbury’s quarterly cost tracker contract sees a 0.5ppl decrease, resulting in Muller producers receiving 30.15ppl and 30.3ppl for Arla
  • There will be no change to the price Dairy Crest suppliers receive in July.  The standard liquid price will remain at 28.82ppl and the manufacturing price at 29.9ppl
  • First Milk has also announced a stand-on to its July price, holding producers’ manufacturing price at 28.37ppl and the standard liquid price at 27.45ppl.