Plummeting Cattle Farmgate Prices - What Can Producers Do?

Cattle farmgate prices are going from bad to worse. Supplies are plentiful and demand is low.

The strong pound means that imports are a cheap buy, and imports in March grew by 22%. Imports of frozen beef were up by 46%. More animals are coming forward for slaughter, and carcasses weigh an average of 8kg more than last year so the volume of beef production grew by 6.5% in March. On the demand side, consumers bought 4% less beef in the 12 weeks to April 27^th because the retail price has been hiked up by 8%.

The response from the meat industry could be summarised as kicking the problem into the long grass. Eblex say that everything will be fine in the long term. Hybu Cig Cymru’s answer is to launch a review, NFU Scotland have arranged a meeting with the Scottish Association of Meat Wholesalers. The British Meat Processors Association has called for a long term vision for the supply chain, and meanwhile advises producers to get their costs down to better compete with imports.

The major retailers, who are ultimately responsible for the problem, having put their retail prices up as their costs have gone down, have as ever sheltered behind the British Retail Consortium who came up with the feeble response that retailers are using increased margins to ensure the sustainability of supply chains.

So what can producers do?  One school of thought says that ups and downs in pricing are part and parcel of beef production and the storm will pass. At the other extreme Farmers for Action feel that militancy might help and are planning to protest at a meat processor plant in the next few days.

A close eye must indeed be kept on costs. But to suggest as the BMPA does that costs should be kept down in order to keep prices down and imports at bay will not solve the problem. It is currency values which dictate the ebb and flow of imports – a strong pound means more imports.

Bashing the processors will not help either. Few processors are going to risk alienating the retailers they supply, no matter how much a retailer policy is hurting them.

The only section of the whole supply chain that retailers listen to are their customers, and sadly most customers are not so overwhelmingly convinced about the superiority of British beef that they will vote with their feet and go to another store or seek out the store manager and complain about foreign beef on the shelves. Yes, they say they like to buy British, but how many actively seek it out, or understand what information on the label tells them it is British.

British beef needs to be built into a strong brand, one that consumers feel they must seek out, and if necessary pay a bit more for because it is worth it.

Easy to say of course. Building a brand takes time, money and talented marketing people who can identify what is special about British beef, and communicate it in a compelling way.

It may be that the brand does not attempt to promote all British beef but segments of it. Ladies in Beef are keen to build a suckler beef brand. Many have suggested the idea of branding grass fed beef because of its higher essential fatty acid content. Branding is possible in beef, and has already been done with breeds. Waitrose promote Aberdeen Angus and Hereford beef, and Morrison’s support Shorthorn.

What is clear is that floating vague ideas will not work. Building brands is hard graft, and whether the consumer message is about grass fed, or suckler beef or something else, someone has to sit down, roll up their shirt sleeves, and work out what it is that will appeal to and motivate the general public.

And here is where producers could use their clout and lobby the many bodies who represent them, and are often funded by them, to start thinking about adding value to beef.

EBLEX, HCC, QMS, the NFU, the NBA, the Red Tractor people, the BMPA, breed societies, and the retailers who run producer groups all claim to support beef producers. Surely between all these bodies there is enough money in the system to support a brand building exercise, and somewhere a champion with the will to knock heads together and find a positive way forward.

Being Creative with a Commodity - How Meat Marketers are Adding Value

These beefburgers, with their reference to breed and Britishness  neatly capture some of the ways that marketers are adding value to meat. The British reference is important as consumers continue to seek reassurance about where their food comes from, and buying British becomes more of a consideration.

Breed is increasingly being used as a value adding tool. Aberdeen Angus has for a long time been seen by consumers as a quality breed. McDonalds sells an Angus burger costing more than the standard variant, and Waitrose emphasises meat from Angus as well as Hereford cattle. Now Morrisons are embracing breed differentiation, selling beef from Shorthorns (and paying producers a premium in the process).

At the other end of the breed spectrum Kobe beef from Waygu cattle is gaining a reputation for quality, so much so that at the request of a Japanese chef, an Australian farmer is feeding his Waygus a litre of wine every day.

Making meat meals more convenient to prepare and serve also adds value as many consumers are nervous about cooking meat, and, given its price they want to be reassured that the end product will taste great. Hence the rise of "foolproof" products such as Simply Cook where all ingredients are available in one pack, the size of portion is strictly controlled, and the food just has to be flung into the oven for the specified time.

These cook in the bag products from Maggi are a cheaper solution, but offer the same benefits.

Value can be added through packaging innovation. Some consumers do not like to handle meat, so Tesco's meatballs are packed individually, in a tray like an egg carton so that the product does not have to be touched, and Waitrose sells their roasting chickens in a hard case rather than film for the same reason. Note the saltire and reference to Scotch on the pack to reinforce where the meat came from.

All this innovation notwithstanding, price remains a key part of the value equation. It is no accident that all of the above featured products from Tesco came with a promotional offer - mostly two for a discounted price. It is a sobering reminder that people will not pay if they do not think a product is worth the money.

From the Farmer's Mouth - More Farmer Views on Diversification

DEFRA's startling statistic that 19% of farm profits come from diversification compared with 5% from core farming has prompted a regular look at what farmers who have taken the diversification plunge are saying about the good, bad, and ugly of stepping along this path. Information is collected from farmers featured in the farming press.

Over the last twelve weeks there have been 16 diversification stories, covering adding value to beef, lamb, pigs, poultry, dairy, and vegetables, plus a milk round, 2 farm shops, marquee hire, property development, and, in a sign of the times, eco farm holidays, and an eco friendly visitor centre and restaurant.

Once again there is a high level of agreement about what makes a diversification successful. Most speak about the need for a top quality, great tasting product. Peter Willes, producing cheeses from Higher Alminster Farm near Bideford in Devon, says " Milk must be a particular quality, 4% butterfat and 3.5% protein", adding that he favours cow condition and a moderate yield over pushing too hard, so that quality is maintained. Ian Burdess, who farms with his wife Zoe at Dottril Farm in the Yorkshire Wolds, says " I think its very important for flavour that lamb has been on grass. Our customers tell us that it is superior to lamb that has never been outside." Peter and Henrietta Grieg of Piper's Farm in Devon say that their aim is to sell " pre packed meat of high quality, meat that is wonderful to eat". James Hague of Lyde Green Farm Rotterwick in Hampshire who has a milk round says " The key is providing good service, and above all good quality milk". Malcolm Sutton and his wife Kate of Postern Lodge Farm Belper sell ice cream, and Malcolm talks about the need for a top quality product, "no additives, just milk, cream, eggs and sugar, with natural flavours."

Product consistency is important too. Zoe Burdess sells to restaurants, and says "Chefs want consistency both in terms of quality and weight". Peter Grieg says " What drives this business is absolute consistency so that the customer always gets the same food to the same high standard."

Another common theme is to understand what customers want not just at the start of a project but regularly, by doing market research. Peter Grieg spent hours in Marks and Spencer watching how people shopped and what they bought. Rod Smith of Beal Farm near Lindisfarne, who has opened the eco friendly visitor centre, spotted the eco trend, and noted that 500,000 people pass by the front door annually. He is now "Inviting constructive criticism and suggestions about our menus and facilities in order to improve them". Richard Scoles who farms with sister Rachel on Railton Farm near Driffield Yorkshire has started growing speciality vegetables like chicory, squash, pumkins, flageolet beans and kohlrabi, and their sales manager Mark Southwell says " We have a strong emphasis on attention to detail, listening to our customers requirements, and making sure we supply what they want and deliver when they want it." Hugh and Sascha Grierson from Newmiln near Methven Perthshire started by selling organic meat but were constantly asked by customers for organic chicken.

All the farmers sell their produce under a brand name, sometimes the name of the farm, sometimes something completely different, but all with the objective of setting themselves apart from competition. Scott Milligan from the Ballathie estate near Stanley Perthshire sells beef direct and says " We see branding as very important so that Ballathie is associated with high quality". Malcolm and Kate Sutton have two brand names for their ice cream, the upmarket Cowhouse Dairy brand, and Udder Stuff for younger consumers. George and Pat Booth who farm near Ellon in Aberdeenshire developed "The Store" as the name for their farm shop, but it now goes onto a range of products. Ian and Zoe Burdess registered the name LUST (Lamb U Can taste) so that no one else could steal it.

There is much similarity in where farmers sell their produce.Farmers Markets are usually the start point, followed by local shops, delicatessens, catering outlets, and even cinemas and garden centres. Some sell to supermarkets.

Most regularly publicise their products. Free samples to taste are popular, as is attendance at food fairs and local events, often offering cooked food, getting stories published in local newspapers, compiling a list of customers and sending them newsy updates. Two farmers had entered local food competitions with James Hague the milkman really landing on his feet when Antony Worrall Thompson, one of the judges decided to use the milk in his restaurant.

The farmers also give good advice about the downsides of diversification. Four of the meat sellers warn that selling the whole carcass is vital to making a profit. Some dealt with the forequarter by making beefburgers, some sausages, and one did ready meals. Two warned about the time it takes to become profitable with one being honest enough to say that the first year was bad and the second worse, and then it turned around. As Malcolm Sutton said "Diversification is easy to say, but it is not a cheap or easy option. You have to be interested and live the dream."
Overall though diversification does seem to work. DEFRA's analysis says that only 1.5% of diversification projects fail to make a profit, meaning that 98.5% contribute positively to farm earnings.
(See blogpost of 12/2/08 for further analysis of DEFRA's diversification report, and blogpost of 28/2/08 for the first in this series of reviews about farmers' thoughts on diversification).

Grass Fed Cows - A Market Opportunity?

Today's headlines announce that a recent study has found organic milk to be healthier than conventionally produced. Dig a bit deeper and we find that's not what the study found at all.
The study was carried out by Newcastle University, and published yesterday in the Journal of the Science of Food and Agriculture. It compared nutritional content of milk from three production systems - low input organic, low input non organic, and high input conventional.
And here's the interesting bit. During the outdoor grazing period milk from low input non organic systems were just as rich in good essential fats and antioxidants as organic. Both were much richer than conventional high input milk. When the cows were housed, there was little difference in nutritional composition between high input and organic.
The increased fats and antioxidants cited in the study include Omega 3, Vitamins A and E, and conjugated linoleic acid which has been found to shrink cancerous tumours. Consumers are likely to feel that milk which contains more of them is a better buy.
The study shows that the difference between the two low input systems and the high input is the amount of fresh grass grazed, with an average high input cow having just 37% of her food from fresh grass compared with around 80% for the low input animal.
Of course in our sound bite society few journalists are going to delve into the detail of a heavyweight journal article, and uncover the facts that low input non organic is just as good as organic, and that the extra richness disappears from organic during the winter period. Hence the easy headlines that organic is better.
Nevertheless, the findings are significant for the dairy industry. At last there seems to be an opportunity to divide liquid milk into another market sector rather than just talk about organic and conventional. It is not too difficult to see an added value milk on shop shelves with a selling point about being from grass fed cows and therefore naturally higher in health benefits.

Premium Food - Sainsbury Says Still Growing

One of the trends we're tracking is whether current financial gloom is affecting sales of premium food. No, says Sainsbury who have just announced 12 week sales to March 22nd. Asked specifically about this, Justin King their CEO said that there is no evidence that consumers are trading down to save money, and that their research says consumers will continue to spend more in areas where quality is important to them. According to King, the biggest sales growth was in their premium "Taste the Difference" range, and at the other end of the scale in their basics range.
The other interesting trend he highlighted was that ready meals sales have stopped growing, but what is booming are foods where one stage of preparation has been done, like meat with a sauce on the side, or veg which has been peeled and diced. King put this down to a wish to eat more naturally and healthily, but save a bit of time where possible.

Making Money from Meat

A recent report from the NFU/MLC about the meat market in the top 4 retailers helpfully outlines market sizes, growth rates, volume and value sales by cut, and how much of each cut can be got from the animal. Analysis of the data gives two clues about how to improve profits.


1. Sell all the meat from the animal, not just the premium cuts

Most relevant to direct sellers, carcass balance as it is called makes the difference between profit and loss. It is easy enough to sell fillet or sirloin steaks or legs of lamb, but trickier to find an outlet for slow cook cuts of beef or shoulders of lamb. The problem is magnified by seasonality, with roasting joints or casserole meat struggling for sale in the summer. Direct sellers might want to identify possible customers for the cheaper cuts, be realistic about the price which will be achieved for them, and ensure that any financial analysis includes these lower prices.


2. Target premium/ added value market segments.

This applies to all producers, not just direct sellers. The idea is to identify the market segments which consumers are prepared to pay a bit more for, and sell product into those segments. The NFU/MLC report explains how retailers divide the market up into different segments or tiers, and gives the relative sizes of each segment. Most retailers have a basic segmentation of value (or cheapest), standard, and premium. But there is a trend to "standard plus" and "super premium" products in an effort to encourage consumers to pay a higher price. These new products are backed by marketing claims such as healthy (meaning with less fat), outdoor reared, welfare friendly, a specific breed, free range, increased hanging time, special butchery techniques, and of course organic.

The amount sold in these added value sectors is still small, sausages being the exception:
Beef
Premium 4%
Organic 1.2%
Health 4.6%
Lamb
Premium 1%
Organic 1.4%
Health 1.2%
Pork
Premium 1.5%
Organic 1.0%
Health 2.3%
Sausages
Premium 29.5%
Health 5.1%
Organic no figures
Bacon
Premium 2.1%
Organic 0.2%
Health 1.3%

The size of the added value premium sector may be small currently but it is the holy grail for retailers and it will continue to grow. More to the point, the difference in prices paid by consumers is huge. On average, value beef sells at 57% less than standard, premium sells at 61% more than standard, organic 47% more, and healthy 8% more. In lamb, premium is also sold at 61% more than standard, organic 55% more, and healthy 104% more.
A good look at what consumers are prepared to pay more for could be useful for farmers with the opportunity to better match their system to consumer trends.

Milk Market Trends 2007

Milk market data for 2007 has landed in the in tray, courtesy of the Milk Development Council (MDC Datum).

Many of the trends are as expected. Pasteurised liquid milk sales grew by 2% to 4.1bn litres despite a 9% price rise, confirming industry views that consumers are either not aware of the price of milk, or not concerned about having to pay more. Semi skimmed and skimmed grew again whilst whole milk declined. Plastic containers now account for 80% of milk sold in grocers. Two litre remains the most popular size.

There are some surprises though. The organic market remains small at 169m litres, and growth slowed to +4% compared with +60% in 2005, and +13% in 2006. The reason seems to be price.Once the price difference between organic and standard milk crossed two price points, with standard costing 50 something pence a litre versus organic at 70 something, growth slowed to a halt. It started to pick up at the back end of 2007, when the standard price crossed 60p. Organic prices are now close to 80p, and if they jump over that barrier, without a corresponding increase in standard, sales will probably slow again.

Sales of modified milk have plummeted, down by 35% year on year. "Modified" means with added benefits such as omega 3, and it looks as if consumers don't want manufacturers adding stuff to something valued for being pure and natural, even if the additive is supposed to be good for you. The modified milk market is now just 17m litres.

Also noteworthy is a +22% growth in filtered milk with its selling point of staying fresher for longer. Filtered milk sales have gone from 142 million litres in 2004 to 247 million in 2007, and the category is now 50% bigger than organic in litreage. Whilst growth has levelled off in the last 3 months, the rise of the category, pioneered by Cravendale, shows that it is possible to add value in a so called commodity market when a unique selling point marries a strong brand. Filtered milk sells at a 2p premium to standard which helps pay for promotional support.

The fourth surprise is the up and down nature of Channel Islands milk.The market has always been small, but for some reason it fell from 12m litres in 2004 to 7m in 2006, but turned the corner in 2007, up to 8m litres. The MDC puts this down to a promotional campaign highlighting the benefits of Jersey and Guernsey milk, and giving recipe ideas.

And finally, reading the papers you would think that lactose intolerance is a huge problem, but soya milk remains a very small market at just 81m litres, and showing 3% growth.

Diversification - A Key Part of Farm Income

Heaven knows what planet Jeff Rooker is on when he calls the latest TIFF (Total Income from Farming) figures an encouraging sign for the industry.The farming press and NFU have rightly called for numbers and commentary to be viewed by enterprise so that the precarious position of livestock farming is disentangled from the dazzle of arable and better returns from dairy.

Simultaneously with the TIFF, an analysis of numbers from the Farm Business Survey England were published by DEFRA. These figures highlight the patchy returns from farming, especially if subsidies are excluded, but they also point up the amount of farm income which depends on diversification. Latest actual figures are for the year to April 2007, and these show income for the 60,000 farms who support at least one worker half-time, as follows:

£m
TIFF Total - 2250
Agri income excluding subsidies - 80
Subsidies - 1740
Diversification income - 430


So income from diversification is over 5 times the size of income from regular farming, and about 19% of total income. Not a small amount. Diversification is defined (deep breath here) as "non agricultural work of an entrepreneurial nature, on or off farm, which utilises farm resources".


About half of the total sample of 60,000 farms have diversified, and the biggest activity by far is renting out farm buildings, followed by sport and recreation, processing and retailing farm food produce, tourist related activity, and "other" which is not broken down further but would include activities such as spinning wool, or woodwork from farm trees.


The numbers of farms involved in diversification are:
Diversified total - 30,000
Letting buildings - 21,400
Sport/recreation - 6,700
Processing/retailing - 4,500
Tourist related - 2,600
Other - 4,800
About 30% of farms have more than one diversified enterprise.

The average income per farm from the various enterprises differs alot, with processing and retailing leading the field, followed by tourism.

Income £ per farm
Letting buildings - 12,200
Sport/recreation - 5,100
Processing/retailing - 14,200
Tourist related - 13,800
Other - 10,500
Only 1.5% of farms failed to make a profit from their diversification.

Diversification shows no sign of slowing down. An additional 2,400 farms came into sports/recreation in the year ending April 2007, and 1,100 into processing and retailing.

Against this rosy picture should be set the fact that most diversified enterprises are small. 57% have an output, ie sales, not income, of less than £10,000, and 12% have an output of less than £1000. Also, about 2,800 farms stopped diversifying activities, and what the numbers don't tell us is whether profits fell unacceptably in the core business when the diversification took place because the eye was taken off the core farm ball.


Overall though, the DEFRA numbers are encouraging for existing or would-be diversifiers. Particularly the one about only 1.5% of enterprises failing to make a profit. Many diversifications may be smallish in size, but the majority seem to help make ends meet, and some turn in a substantial profit. All in all, its probably worth taking a regular look at what else the farm's assets could be used for other than core farming, particularly as subsidies shrink. And of course any venture needs thorough market research and detailed costings before going ahead.

Trendspotting 2008

As economic gloom rises, access to cheap credit evaporates, nervousness sets in about spending the money we've got, and rising food costs have registered even on the affluent, it is timely to ask whether a hunt for lowest possible food prices is set to obliterate any other considerations in consumers' minds. Applying some tried and tested lessons about consumer behaviour when the going gets tougher may help answer the question. So, somewhat bravely, here are predictions about food market trends in 2008.

Value not price

At times of economic pressure people search harder for value, which is different from just looking at sticker price. Value is a combination of price, quality, and feeling good about a purchase. Its perhaps best summed up as answering yes to the question "is this worth it?". Top quality, fairly priced products will continue to sell well. Anything seen as pricey for what it is will not, and supermarket top tier product staples such as meat, fruit, veg and dairy may struggle unless they are clearly better than alternatives.

Environmental concern

This is here to stay largely due to the high level of publicity it receives. Products and services seen to be beneficial to the environment will continue to see sales growth.

Provenance/Ethical purchasing/Health

These trends have been combined as they are closely related in consumers' minds. Provenance may be described as "can I trust the source of this food and how it got here". The link with health comes because consumers are worried for health reasons about what goes into their food and how it is processed. They worry for ethical reasons about where it has come from and how far, how the animals have been treated, and have the producers been fairly rewarded. All these concerns have combined to power sales of local food, organics, fair trade, and special animal welfare schemes, even though the sticker price is usually higher than for other options. The forecast for all these sectors is continued growth, albeit at a lower rate than historically. Those who are truly committed will not change buying habits, but occasional purchasers if pushed for cash may buy less often.

Channels of purchase

The places people buy from and the way they buy are also likely to change. People drawing in their purchasing horns may choose to eat out less, or trade down in the amount they are spending on a night out. So sales through catering channels will slow or even decline. One channel which could grow is internet grocery shopping which saves petrol costs, and food miles, and is more convenient.

So in the end....

Though conditions may be tough, and overall growth may slow, there is unlikely to be a major reverse in the encouraging trend towards consumers caring more about their food, and being prepared to pay that bit extra for top quality, fairly priced products that help them live lives that they can feel good about.

What Makes a Food Premium?

There is much talk of consumers buying more premium food.

Producing a premium, added value product can deliver bigger profit simply because the higher amount that consumers pay means more money to be distributed through the food chain. Research published by the Institute of Grocery Distribution (http://www.igd.com/) in spring this year provides useful data for farmers wrestling with the problem of how to add value to their produce. So what makes a food premium? Here are some figures.

% consumers saying what makes a premium product:

High quality ingredients used - 41%

Well known brand - 33%

Free range - 23%

Organic - 21%

Locally produced - 19%

Fair trade - 17%

Added health benefits - 17%

Packaging looks good - 13%

Environmentally friendly - 12%

Retailers best own brand - 10%

Quality assurance standards - 10%

High animal welfare - 8%

The figures highlight that many consumers feel that ethical standards also mean premium, whether high animal welfare, environmentally friendly, free range or fair trade. It is also clear that locally produced and organic also equate to premium, and it is likely that ethical considerations influence this also. Other research indicates that consumers buy local because it is better for the environment (less food miles), and they can check for themselves that the farmer is committed to high welfare standards. Organic research also indicates that people buy for ethical reasons.

However two factors stand out as reasons that consumers see a food as premium. First, the product has to be made from high quality ingredients. This means that however ethical the product is it will not be seen as premium unless it is top quality. And second, the product has to be strongly branded, and stand for something consumers can trust. Which means a consistently good eating experience, wrapped up in good looking packaging, with a crisp name and a persuasive reason for the consumer to buy again and again.