Category: Dairy & Livestock

Andersons’ Friesian Farm model is showing decent returns so far for 2019/2020.  The latest figures are presented in the table below.  The first two columns show the results for 2017/18 and 2018/19.  In 2017/18 profits bounced back after losses in the previous two years following the milk price slump.  In 2018/19, the margin dropped following the late, wet spring and summer drought.

The last two columns are the budget for the current year, 2019/20 and the forecast for 2020/21.  So far the 2019/20 year is showing a reasonable result.  Even though some processors have announced price cuts for September/October, with further reductions likely for the remainder of 2019, the milk price has been relatively consistent until now and the average for the year is not expected to be far below 2018/19.  Looking ahead to 2020/21, prices are forecast to weaken further and with costs creeping up, the margin from production is almost eroded.  This means the majority of the business surplus is coming from direct payments, which obviously is not sustainable as these are reduced over the coming years.

Defra and the Welsh Government have launched a consultation on proposals to introduce a new method to determine the age of sheep at the time of slaughter.  Sheep classed as being over 12 months old must have their carcases split and their spinal cord removed; a measure introduced as part of the response to BSE.  Currently this is assessed by ‘mouthing’; lambs which have their permanent incisors through are classed as being over a year old and need to be split.  Under the proposals abattoirs would have the option to introduce a system based on a date.  Any lambs sent for slaughter up to June 30th in the year after their birth would be treated as being under 12 months old.

In the summer of 2018 the EU agreed that the age could be assessed by mouthing, the acual age of the lamb or ‘as estimated by a method approved by the competent authority’.  Defra had originally said it would use 30th June date as from 2019, but then changed its mind, worried about the effect this would have on our trading relationship with the EU in the even of a No-Deal Brexit.  The full consultation can be found at https://www.gov.uk/government/consultations/ageing-sheep-at-slaughter-introducing-a-new-method?utm_source=88616d9e-1539-4a80-84a0-f4e2f643dbae&utm_medium=email&utm_campaign=govuk-notifications&utm_content=immediate   responses need to be submitted by 31st October 2019.

George Eustice has confirmed the Government plans to support the sheep sector in the event of a No-Deal Brexit.  According to the Farming Minister, two options are being explored; a headage payment on breeding ewes and a slaughter premium via a top-up to payments when lambs are sold.  Although any final decisions will not be possible until the UK has left the EU, the RPA has been instructed to get the administrative processes in place and discussions have taken place with the Treasury regarding funding required.  The sheep sector is expected to be hit the hardest under a No-Deal.  About a third of UK lamb is exported, with 95% of this going to the EU, currently this enters the EU tariff-free but this will not be the case under a No-Deal.

The Tulip pig processing business has been sold by Danish Crown to the US-based Pilgrim’s Pride Corporation.  In turn, Pilgrim’s Pride is owned by the Brazilian multi-national, JBS, one of the biggest meat companies in the world.  The sale price for Tulip is reported to be $354m.  It is the largest integrated pork producer in the UK with farms supplying twelve processing facilities.  It has sales of over £1bn but has recently struggled for profitability.  Pilgrim’s Pride already owns the poultry processor, Moy Park – Northern Ireland’s largest private-sector business.  Pilgrim’s Pride states it intends to invest in the Tulip business and is still looking at further acquisitions in the European meat sector.

Cow’s milk continues to hold its own in the market, despite the growing range of ‘alternative milks’.  This finding comes from an analysis by the AHDB of recent sales data.  Despite all the news (and noise) surrounding plant-based drinks they only represent 4.4% of the total volume share of the market.  Spend on cow’s milk in the 52 weeks to June 16^th, rose by 2.2%; this was mainly driven by price increase, with the volume remaining pretty stable, just declining by 0.4%.  However, plant-based beverages are growing, with spend for the same period up by 18% on the previous year.  But long established plant-based drinks, such as soya, seem to be losing out to new beverages, such as nut and oat drinks.  With cow’s milk stabilising and not losing market share to these alternatives it would appear shoppers are not particularly switching from cow’s milk but trying these in addition, as something new.

The badger cull could be extended to 10 new areas this autumn.  According to Natural England it has received 14 new applications, from which the Government can choose 10; this will increase the total number of cull areas to 40.  A decision is not expected until September.  Currently there are cull areas in Dorset, Cornwall, Devon, Gloucestershire, Herefordshire, Somerset, Cheshire, Wiltshire, Staffordshire and Cumbria.  The culling of badgers is one measure being pursued by Defra in its battle to eradicate Bovine TB by 2038.

The German chemical business, Bayer, has sold its animal health division to Elanco.  The deal is reportedly worth $7.6bn and includes the firm’s farm animal drugs plus its pet products.  The sale is part of a drive by Bayer to divest non-core businesses.  The purchase makes Elanco the second biggest global animal health company after Zoetis (the ex-Pfizer business).  The Bayer-Elanco deal is still subject to regulatory approval, but is expected to conclude sometime in 2020.  The animal-health market is moving in the same direction as agro-chemicals with increased consolidation among manufacturers, such that it is dominated by a few global businesses.

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.

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. 

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.