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No one needs reminding that the UK’s relationship with the EU changed on 1 January 2021, but where do we stand in terms of our beef and lamb markets? Duncan Wyatt, lead analyst (livestock) at the Agriculture and Horticulture Development Board (AHDB), looks at what we might expect.
Last updated: 23 Mar 2021 6 min read
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 have seen delays at ports as additional border checks take place. Trade friction – or the costs associated with additional paperwork and 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 farmgate prices.
(Source: AHDB, Agri Benchmark)
The UK is a net importer of beef and could become a regular net exporter of sheep meat. These balances have implications for prices. Of course, 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 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 has disrupted normal eating patterns so retail sales have been playing a more important role, and more retailers are sourcing British cattle, which is supporting prices for now.
Leaving the EU allows the UK to strike its own trade agreements. We know that free trade agreements (FTAs) with the USA, Australia and New Zealand are in the pipeline. All are big agricultural exporters, and the conclusion of trade deals will have implications for UK agriculture. So, if new FTAs 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.
(Source: AHDB, INAC, NZX, Agrifax, MLA)
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 FTAs, the differences between international production systems will come under more scrutiny. World Trade Organization 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.
It’s not all about how consumers consume, and will be guided by a philosophy of “public money for public goods”. There will be more emphasis on natural capital. An agricultural transition period has been in place in England since the start of the year to help farmers plan for the new arrangements that are on the way. The standout element of this is the seven-year phased reduction in direct payments. These payments offer a level of security and certainty to farm business income, amounting to 61% of profitability across the board, although it differs by sector.
However, 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? 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.
Already the world’s third biggest exporter of sheep meat, the UK is increasingly set to become a net exporter more often because of falling domestic demand and New Zealand exporting more to China. 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 for carcases in the French and German markets. See below to find out how UK sheep prices compare with those in other countries. 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. There is some evidence that this is already happening.
(Source: AHDB, European Commission)
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 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.
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. Last year saw the implementation of measures by some milk processors to ban the euthanising of healthy bull calves on farm. This has implications not only for breeding and inseminations decisions and 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.
For more information, visit the AHDB website.