Category: Dairy & Livestock

Beef

Have cattle prices finally stabilised?  The deadweight All Steer Price has been below year-earlier levels since October last year (see Key Farm Facts) and has been on a downward trend since, with prices seeing a significant fall during March.  However, through April prices have rallied and are nearly at the five-year average (although still some 20p per kg less than at the same time last year).  During February and March there was anecdotal evidence of plentiful supplies, with processors stockpiling Irish beef ahead of the initial, 29th March, Brexit date.  But demand from processors is now said to be ‘good’ and trade firm.

Lamb

The prime liveweight lamb trade has been hovering around the five-year average since mid-February.  This is about 20p per kg liveweight more than in 2017 but in the region of 20p per kg less than in the record year of 2018.  After a slight drop in value during the Easter bank holiday week, when there appeared to be an oversupply, prices have risen again and are now above the five-year average.  With better weather conditions compared with last year, new season lamb (NSL) throughputs are significantly up year-on-year.  In contrast old season lamb (OSL) liveweight numbers are around 5% lower in the year-to-date following last year’s difficult lambing season and the resulting smaller carry-over.

Pigs

The EU-spec SPP remains 6.6p per kg below year-earlier levels for the week ending 20th April, but signs of a price rise look encouraging.  The SPP has risen by 1.24p per kg since the start of March and an increase in demand is expected to see prices continue to rise.  The EU pig price has seen a sharp uplift recently making imports less competitive on the UK market.  Part of the reason for this is demand from China, as the affect of African Swine Fever (ASF) in the country becomes clearer.  The Chinese Ministry of Agriculture announced an 18% decline in pig numbers in February compared with the previous year.  Both the US and EU have seen an increase in demand for pigmeat from China supporting prices.

In January mid-range forecasts were for a 5% decline in Chinese pork production due to ASF.  However these have now been revised and range from 10% (USDA) to 35% (Rabobank).  To put this into perspective, a 20% fall in Chinese production would be around 10 million tonnes, about the same as the entire annual US production.  Imports are unlikely to make up the shortfall in production and with prices rising the Chinese are likely to switch to alternatives such as fish and chicken.  But the long term worry is that some may switch away from pork indefinitely.

Production

Milk production continues to rattle along at a strong pace.  Latest figures from the AHDB for the first two weeks of April show that GB output is running about 5% higher than the same time last year.  Obviously, the spring of 2018 was cold and wet, but current output is also ahead of the 3-year average.  The AHDB is now forecasting that total output for the 2018/19 year will be the highest for 29 years.  This is quite remarkable given the weather conditions experienced during the season. 

Commodity Markets

The latest GDT auction results (for the event on the 16th April) saw the index rise by 0.5% to $3,447.  This is after a 0.8% rise for the auction at the start of April.  The GDT has now posted 10 successive increases dating back to last November and has risen 26% in this time.  Overall, however, the Index is currently very close to the same level seen 12 months ago.

There has been a divergence between southern hemisphere prices (as indicated by the GDT) and those in Europe.  The GDT has been boosted by dry conditions in New Zealand reducing grass growth and milk output (although it is the tail-end of the NZ production year now).  In Europe, prices have been lacklustre.  The reasons for this are slightly mysterious – although milk production in the UK and Ireland is strong, other major EU producers such as the Netherlands, France and Germany are showing falls in output compared to last year.  It may be partly connected to Brexit uncertainty.  In any event, there are currently signs that EU prices are now starting to move upwards to GDT levels.

UK Farmgate Prices

There have been relatively few movements of UK milk prices over the past month.  As we predicted, processors seem to be largely adopting a wait-and-see attitude as we move through the spring flush.  The two factors outlined above (strong UK output v rising commodity prices) seem to be cancelling each other out at present.  Some of the more notable changes (or non-changes in many cases) include;

• Arla is holding it conventional prices for the fourth month, into May, with a liquid price of 29.06ppl and a manufacturing price of 30.23ppl
• Muller is retaining its liquid price for May at 26.75ppl
• Dairy Crest is also keeping its prices unchanged for May at 29.9ppl for cheese and 28.8 for liquid
• First Milk is following the same pattern – its milk prices remain unchanged for May at 28.7ppl for manufacturing and 27.8ppl for liquid
• Tesco aligned producers will see a 0.34ppl reduction as from the 1st May

Processing Sector

The purchase of Dairy Crest by the Canadian company Saputo was completed on the 15th April.  The cost of acquisition was £975m.

As part of its cost-cutting strategy known as ‘project Darwin’ (see February Bulletin) Muller has announced that it will be cutting the number of products it sells in the UK by up to 40%.  It currently manufacturers 835 separate products at its six processing sites.  The company states that, at a typical factory, 90% of the milk goes into 40% of the most popular products.  The remaining 60% of products take only 10% of milk – indicating relatively small (and inefficient) production runs.

It is reported that Sainsbury’s are to re-tender for its liquid milk contract.  This was due to occur in 2020, but looks set to be brought forward to this summer.  Muller (who supply around half of the supermarket’s own-label milk) have been putting pressure on for a review as rising costs have resulted in losses being made by many liquid milk processors, including Muller.

 

A recent survey by the AHDB suggests there are currently around 8,850 dairy producers in GB; much less than Defra’s data.  Latest figures from Defra (2017) showed that GB had 16,605 dairy holdings.  But Defra data includes all farms with a dairy cow over 2 years old with offspring.  Around 40% of farms included in Defra’s figures had less than 10 dairy cows, suggesting they are more likely to be suckler herds.

More recently, the Foods Standards Agency (FSA) has been the most-used source to track producer numbers, but their figures have been called into question following numbers falling dramatically over recent months.  The FSA figures, for England and Wales only, indicate that there were 8,991 dairy producers in March 2019.  However, the FSA is currently updating its database as it seems that there may be a significant number of producers who have stopped milk production, but have not been recorded by the FSA.

The AHDB surveyed the major milk buyers and the estimate represents the number of producers actively contributing to GB milk production.  Levy data has been used to account for direct supplies.  However, when we look at milk production, which looks like being the highest for 29 years, the ongoing decline in producer numbers is having little affect on milk supplies with cow numbers and yield playing a bigger role.

All the main categories of farm livestock showed a decline in numbers in December versus a year earlier.  The figures from Defra’s Livestock Population are shown in the table below;

 

UK December Survey (Livestock) – source DEFRA
Numbers – ‘000 Head	2015	2016	2017	2018	Change 17 to 18
TOTAL CATTLE & CALVES	9,816	9,806	9,787	9,610	-1.8%
TOTAL BREEDING HERD	3,469	3,451	3,443	3,382	-1.8%
Dairy Breeding Herd	1,918	1,898	1,904	1,879	-1.3%
Beef Breeding Herd	1,551	1,554	1,539	1,503	-2.4%
TOTAL SHEEP & LAMBS	23,106	23,671	23,239	22,506	-3.2%
BREEDING FLOCK	14,622	14,680	14,659	14,084	-3.9%
TOTAL PIGS	4,422	4,538	4,713	4,648	-1.4%
BREEDING HERD	401	409	407	406	-0.4%

Cattle numbers are reduced, with the lack of forage in the late summer seeing higher-than-usual levels of cullings.  In terms of the breeding herd, it can be seen that this has had a larger effect on the beef sector than in dairy.  Relatively subdued prices and the uncertainty of Brexit are also likely to have played a part.

Sheep breeding ewe numbers are also back, despite lamb prices in 2018 generally being quite good.  The lack of grass at the time of the autumn sheep sales saw fewer breeding animals being retained, and the reduced 2018 lamb crop also reduced availability of replacements.  As the sector that would be most affected by a No-Deal Brexit, sheep farmers may also have retrenched until the situation came clearer.

Pig numbers show less change, although with profitability in the sector once again under pressure, there may be a further decline through the next few months.  More details can be found at – https://www.gov.uk/government/statistics/farming-statistics-livestock-populations-at-1-december-2018-uk

Production and Prices

Strong domestic production and a fall in European commodity prices are pointing towards possible farmgate price reductions.  After fearing there would be a UK milk shortage in the 2018/19 milk year due to weather conditions in 2018, it now looks like we are looking at record supplies for the year.  Latest figures from Defra show UK production in January was 1,255m litres.  At 1.7% more than year earlier levels it is the highest January production on record.  Output does not look like slowing down too much either as favourable spring weather conditions enable those who were running short of winter forage to get cows turned out in a timely fashion.

The latest average GDT index recorded another rise, up 3.3% since the last event and the seventh consecutive rise since December.  Even though production in New Zealand is strong, there are increasing concerns of a drought (Australia is already in drought) and strong demand from China is supporting the GDT.  Usually the GDT is the bellwether for Europe, but this is not the current situation.  Commodity prices across Europe are falling, with strong production in the UK and Germany increasing week-on-week.  In the UK, cream prices have fallen significantly, as manufacturers with nowhere to store butter, switch to cream.  The cream price is at its lowest level since July 2016.  Butter is faring slightly better, at about £3500 per tonne.  However, uncertainty over Brexit is affecting markets with little product currently being traded.  This is another factor putting pressure on UK prices.

Farmgate Prices

Muller, after announcing a huge 1.25ppl price drop for last month has said prices will stand-on for April.  Dairy Crest and First Milk have both said they will also be maintaining their prices for April.

Other notable announcements for April include:

• Suppliers to Glanbia Cheese will see a 1ppl price cut
• Meadow Foods is reducing its price it gives to suppliers by 0.75ppl
• Belton Cheese has announced it will be holding its price
• Suppliers to Marks and Spencer will receive a 0.54ppl increase from 1st April

Andersons have updated their Meadow Farm Model.  The results are outlined in the table below.  To recap, Meadow Farm is a notional 154 hectare (380 acre) lowland mixed beef and sheep business typical of many family-run livestock operations across Great Britain.  The farm runs a 60 cow suckler herd and a 500 ewe mule sheep flock; in both cases finishing all progeny.  There is also a small dairy-cross bull-beef enterprise and 32 hectares (80 acres) of feed wheat and feed barley is grown.  The model is managed on a real-time basis and provides an accurate representation of business structures and changes in annual performance.  The table below shows the results for the last two years and an estimate for the current year, to the end of March 2019, plus a forecast for 2019/20.

Meadow Farm Model – source The Andersons Centre
£/Ha                       Year –	2016/17 (final)	2017/18 (final)	2018/19 (est.)	2019/20 (f’cast)
Livestock Gross Margin	646	717	655	676
Arable Gross Margin	649	647	768	729
Total Gross Margin	648	700	677	686
Overheads	480	496	505	513
Rent & Finance	84	84	82	82
Drawings	234	233	236	240
Margin from Production	(149)	(112)	(146)	(149)
BPS & CSS	213	250	250	241
Business Surplus	64	137	105	92

The results for 2017/18 showed a better performance compared with the previous year, mainly due to higher beef and sheep prices.  The current 2018/19 financial year has seen a decline in profits.  The wet spring, followed by the drought in 2018 affected yields and grass growth, contributing to lower income and higher costs.  Beef and sheep prices have also been declining.  In contrast, overheads have increased, a trend that is forecast to continue.  The business is dependant on the Basic Payment and the additional income resulting from a successful application to the Countryside Stewardship Scheme (CSS) in 17/18 for profitability.  Looking to 2019/20 the gross margin improves slightly because of forecast better beef values later in the year and a reduction in drought-related costs, but higher overheads leave the business in a very similar position to 2018/19 overall.

Meadow Farm is typical of many mixed livestock farms; although there is a business surplus, which after drawings is £37,000, it is reliant on the support from the BPS and Countryside Stewardship.  In the next decade it is clear this level of support will not continue and the change to ‘public money for public goods’ will mean land managers will have to do something to be able to access future funding.  At the moment the BPS has been almost all profit, this will not be the case under the new Environmental Land Management Scheme (ELMS).

Muller announced at the end of January it would be reducing its milk price by 1.25ppl from 1st March.  The move, especially such a big one, was completely unexpected by the industry, but Muller has said the main reason for the drop is the strong milk production in the UK, which was not forecast (see earlier article).  Since the announcement, eyes have been on Arla to see what it would do.  Citing ‘stable European commodity markets’, and the fact that, in general, European milk volumes remain under pressure, it has announced it will be holding its price for March.  This means those producers supplying Muller are now receiving about 2.8ppl less than Arla suppliers.

According to Defra’s statistics, UK milk production fell in January by 2.4% compared to December’s deliveries to 1,209m litres.  But the drop was unexpected and the AHDB are querying the figures.  The Levy Board conducts a weekly survey of the largest milk buyers, which covers about 75% of the milk deliveries in GB, it is then scaled up to produce an overall figure.  According to the AHDB, GB production for the week ending 16th February was 0.4% ahead of the previous week, with deliveries now 2.2% above the same week last year.  Despite many in the industry (including us) expecting milk production to be challenged over the winter months this has not materialised so far.  The current good weather should even see some grass growth, which will make up for any shortfall in forage stocks.  The 2018/19 milk year may well see slightly higher milk output than 2017/18, despite all the weather difficulties experienced.   

The organic dairy co-operative OMSCo has announced a 1ppl milk price reduction as from 1st March.  It also looks set to introduce an A & B milk pricing mechanism, depending on how much of its organic milk may have to be sold into the non-organic market as a result of Brexit.  Over the last few years OMSCo has secured valuable export contracts for both cheese and butter with the US, but it is facing an export ban unless it can agree equivalence standards by 29th March.  Orders are already being cancelled and 200 tonnes of organic butter destined for the US market will not now be delivered.

 

Dairy Crest has agreed to a purchase by Canadian dairy processor Saputo.  The price is 620p per share which values Dairy Crest, whose brands include Cathedral City cheddar and Country Life butter at about £975m.  Saputo are now one of the biggest dairy processors in the world having expanded rapidly over recent years, mainly through acquisitions.  In 2017, the company bought Murray Goulburn Co-operative, becoming Australia’s biggest milk producer.  The deal with Dairy Crest is expected to be completed in the second quarter of 2019.  This will mean that out of all the businesses created by the break up of the Milk Marketing Board (MMB) only First Milk remains in UK ownership.