Plummeting Farmgate Prices for Beef Cattle – Could This Have Been Foreseen?

The farmgate price paid for finished cattle has fallen from £3.85p a kilo in January to £3.55p a kilo at the end of April, and it is causing anxiety among beef producers.

EBLEX has traced the problem to reduced consumer demand, in turn caused by a rise in retail prices, and to a small rise in finished stock brought forward for sale.

It is worth digging a bit deeper. Why would major retailers want to put the price of beef up at a time when consumers are budget conscious and the likes of Aldi and Lidl with their low prices are stealing customers. Why not take advantage of plentiful supply and promote beef to raise sales and become more competitive?

This seemingly odd behaviour from retailers is likely to be part of a long term plan.

For months now, retailers have been watching the rise of the discounters and its effect on their own sales They will have noted in particular the disastrous decline in Morrisons sales, know that Morrisons have to do something radical to stem the decline, and will have been bracing themselves for a price war.

Price wars are expensive, and have a severe impact on profits. No one wins because all the retailers follow each other’s pricing policies, and engage in a futile race to the bottom. So they want to cushion the impact by building a war chest, and one way to do this is to stealthily raise prices where they can, pocketing the increased cash as an insurance against the evil day when the price war starting gun is fired.

The beef market is an ideal candidate for such a strategy. Valued at over £2billion pounds, the money raised from a retail price increase will far outweigh the loss in sales that might result.

Morrisons announced in March that they will be dropping prices, and now the promise has become a reality. One of the biggest price drops announced is on minced beef where a 500g pack will be reduced by 20%.

Mince is a staple, a “known value item”. It accounts for over half of beef sales. Other retailers will follow suit. Consumer demand will pick up. Unless stock available for sale increases dramatically, equilibrium should be restored, and farmgate prices should rise.

And there’s the rub. Beef farmgate pricing is at the mercy of supply and demand. If demand rises, and supply is constrained, prices rise – as they did to over £4.00 a kilo at the time of the horsegate scandal. A couple of years ago, when there was a surge of supply of dairy beef, farmgate prices fell.

We are told that rising world demand for meat means a bright future for farmers. One can only hope so. But there is no sign of accelerating demand yet. Meanwhile, British beef farmers will be at the mercy of short term factors. Some of these are predictable, and bodies such as EBLEX could support producers by being better in tune with market factors.

But there is no silver bullet, and planning beef production where the lead time from putting the bull out to selling the finished article is at least two years is uniquely tricky.

Red Meat Consumption Update - Beef and Pork Steady, Lamb Plummets

Shoppers bought 19% less lamb in the 12 months to mid July 2011 than they did in the previous year. (Source: Kantar Worldpanel)

By contrast, volume sales of beef are up 1%, pork and sausages up 2%, sliced cooked meats up 3%, and bacon up 5%. Overall, purchases of red meat have remained level with last year, indicating perhaps that lamb buyers have migrated to alternative red meat options.

This is perhaps not surprising given that the average price of a kilo of pork is £4.71p, and beef £6.12p, both around what they were last year. The price of a kilo of lamb though has increased by 14%, and now stands at £7.94p, the knock on effect of higher prices being paid to farmers for their live lambs.

Consumers are walking away, put off by having to pay around £5 for a couple of chops, or £13 for a small leg of lamb. Only 22% of people buy lamb every 4 weeks compared with 37% buying pork and 55% buying beef, and when they do buy they buy less – 1kg of lamb compared with 1.5kg for pork, and 1.4kg for beef.

The figures should make those advocating higher retail prices for beef and pork pause for thought. So far, despite the difficult economic climate, sales of these meats have held up well. The question is whether they are sufficiently special to persuade people to buy despite price hikes. Or would demand just fall as it has with lamb? And will a fall in demand lead to oversupply of pigs and cattle, and reduce the price paid to farmers anyway?

Many factors influence prices paid to farmers, and it is difficult to find a clear link between retail prices and those paid at the farm gate. The lamb experience shows that domestic eating of lamb can fall dramatically yet prices paid for live lambs stay buoyant due to external factors like a strong euro, less imports and shrinking breeding flocks. By contrast, when farm gate prices for beef fell sharply last year due mostly to high quantities of dairy beef cattle, retail prices hardly moved at all, and consumption stayed about the same.

What is clear though is that a push too far on price will probably result in big falls in the amount of meat eaten, and  that the fundamentals of supply and demand tend to hold true in the long term. So, if farmgate prices are to remain higher following an increase in retail price in the home market, additional outlets for British cattle and pigs need to be found urgently. Not an easy task.

Food Inflation - Consumer Behaviour, Supermarket Reaction, Farm Gate Price Fights Ahead

There's been a raft of data published in the last few days covering April's inflation numbers, consumer research from the levy boards, and supermarket performance in the first quarter of the year. Four messages come singing out and these are:

1. Annual food inflation at 6.6% (Retail Price Index) is indeed higher than consumers have been used to recently, but despite the increases food remains a small proportion of household spend.
2. There is little sign of consumers spending less, or of any flight from premium quality food.
3. Supermarkets are keeping price inflation well below published figures because of heavy price promotions.
4. There's an almighty battle ahead on farmgate prices as supermarkets fight ferociously to keep prices low and stop consumer defections to a rival store.

Food Inflation
The rate of inflation varies by sector. Bread and cereal suppliers continue to rack up prices, as do egg producers. By contrast, after a run of monthly increases dairy prices are now dropping compared with March. The biggest change is red meat pricing which has shown price rises in April of 7.2% for pork, 4.2% for beef, and 5% for home produced lamb. All connected to the industry need to remember that until the last couple of months beef and lamb prices were dropping, and that these rises are a much needed correction to help farmers recover their input costs.

Consumer purchases
There is no evidence of a downturn in consumer purchasing of basic products. As reported in May 5th's blog, liquid milk sales have dropped very slightly, but Taylor Nelson Sofres data, published by the British Pig Executive (BPEX), shows volume sales of beef for January to March up 3%, lamb up 4%, and pork up 10%. Neither are consumers trading down to cheaper cuts of meat.
Indeed, the trend to buying top quality food is not just continuing but actually accelerating. Morrisons have said that sales of their value range are up 13%, but it's premium ranges have grown by 22%. ASDA have said their total food range grew by 6.4% in the first three months of 2008, but their premium lines are up 30%. Sainsbury's have said they reckon that quality food is resilient in when the economy is sluggish, in their view because people eat out of home less often. Latest figures show that Waitrose, purveyor of top quality and fairly expensive food is holding market share. The only sign of slowing down is organics, according to the Guardian, where growth is 10% year on year compared with about 30% recently. But 10% is still healthy.
The only sign of consumers being price conscious is that discount stores who sell at rock bottom prices, such as Netto, Lidl, and Aldi are gaining market share, which could signal more willingness on consumers part to seek the best price for basics, but on the other hand, the share gain could be due to consumers who used to shop in the now defunct Kwiksave turning to a similar type of shopping outlet.

The big issue
The big issue is not whether food inflation will stop consumers buying. Rather, its the declared intent of the major supermarkets to keep prices low. Tesco last week announced 1000 price related promotions. Justin King of Sainsbury yesterday said he reckoned inflation was nearer 2% because of the steps big grocers have taken to keep prices down. King saw this fight for low prices continuing because of the competition between them. Andy Bond of ASDA is at this square also. His results statement yesterday ended with the words "We have a duty to lock down inflation by working with our suppliers to cut costs to ensure that our customers are always getting the best possible deal on their weekly shopping."

A pricing battle seems inevitable, and its difficult to see how farmer producers can remain unaffected. Three things need to be regularly and widely communicated, particularly as prices to livestock and dairy farmers are on the rise. The first point is that prices might be rising now but they have been unprecedentedly low for years. Secondly, input prices are rocketing and must be recovered, and thirdly, farm incomes still remain too low to be viable at a time when the country should be producing more to ensure food security.