Muller UK is looking to make £100m of savings in its business over the next 12 months to address profitability issues. The company is looking to simplify its business to turn-around the loss of £132m made in its last set of accounts to 31st December 2017.
An auction mechanism for European dairy products has taken a step closer. Joint venture partners European Energy Exchange (EEX) and Global Dairy Trade (GDT) have completed an initial consultation period with more than 50 key participants across Europe, the UK and also Asia. The next phase of development is now being entered into by EEX and GDT with a final decision on the venture expected sometime in the middle of 2019. If all goes to plan, the first auction could take place in 2020. This is intended to be a European equivalent to the New Zealand-based GDT auction which, since it started in 2008, has become the de facto world market price for milk products.
With farmgate prices for both beef and sheep remaining rather lacklustre, we take a look at the AHDB’s latest production forecasts for the sectors.
For beef there has been little change to the forecast reported on back in November (see https://abcbooks.co.uk/red-meat-outlook/). For 2019, domestic production is expected to decline, due mainly to a drop in cow slaughterings. In 2018, cow slaughterings were particularly high, finishing the year at 677,000 head, the highest since the over thirty month scheme was abolished and cows were able to enter the food chain again. In 2019 the number of cows culled is expected to fall, although a prolonged winter could change this. Prime cattle slaughterings are expected to remain similar to 2018, but there is expected to be a tightening of supply towards the end of the year as lower calvings in 2018 start to take effect with this carrying on through into 2020. The results from the December survey will be available in March, but early indications from BCMS suggest the cattle breeding herd may have contracted by 2%.
Looking at trade for the year ahead, the forecast is for a slight reduction in both imports and exports. A reduction in domestic production will mean less supply available to export. Similarly, in Ireland, production is expected to reduce, meaning less imports into the UK, but there is a possibility this supply gap could be filled by shipments from Poland. In the midst of this, affecting trade, will be Brexit which could still go a number of ways.
Those with store lambs still left to sell will be interested to read the carry-over from 2018 is expected to be slightly lower than first forecast in October, this is mainly due to higher than usual on farm mortality and a slight rise in slaughterings in quarter four of 2018. The AHDB is forecasting a 6% reduction in the number of old season lambs coming to slaughter between January and May 2019 compared to 2018. Clean sheep slaughterings in quarter one are expected to be down by 10% on the year to approximately 2.8 million lambs. There are also likely to be few new season lambs coming forward in Q1 as there is anecdotal evidence that fewer flocks have opted for early-lambing this year. In contrast, quarter two is forecast to see a 7% rise in the number of slaughterings, although there are doubts over the accuracy of Defra’s 2018 data.
The lamb crop for 2019 is forecast to be lower than 2018. Although the rearing rate is expected to improve (as long as weather conditions are normal), the breeding flock is forecast to have contracted by 3% year-on-year and industry reports suggest scanning rates are very low this year. Thus, the second half of the year is expected to see lower year-on-year slaughterings, with overall total sheep meat production for 2019 expected to be about 1% less compared to 2018 at 286,000 tonnes.
However, the big uncertainty again remains Brexit, how we exit the EU will have a big impact on the domestic sheep sector, approximately a third of production is currently exported, a no deal could see prices badly affected.
The number of dairy businesses in England and Wales exiting the industry has seen an increase over the last few months. According to the latest figures released by the Foods Standards Agency (FSA), 33 producers have quit the industry in January, resulting in 1.9% fewer left in the sector across England and Wales compared to January 2018. In total, 116 producers have left the industry over the last 3 months. The rate of exit had been steadily declining since the middle of 2016 following the long spell of poor prices, but this has seen a reversal since October 2018 and the rate of decline is again accelerating. Current tight margins due to the weather during 2018 and uncertainty over Brexit have been highlighted as possible reasons for the recent acceleration.
Globally, the AHDB Dairy is forecasting milk production to increase by 1% (2.8 billion litres) in 2019, slightly less than the 1.2% seen in 2018. The US and EU are only expected to increase production by 1% and 0.9% respectively. The drought in the EU in 2018 is forecast to continue to have a knock effect into 2019 with pressure on margins in the US set to continue. Furthermore in Australia, production is expected to continue to decline, as high feed costs and low farmgate prices have led producers to cull cattle.
The big uncertainty surrounds New Zealand and Argentina, as the forecast for these are the most weather-dependent. Argentina experienced strong growth in 2018 even under challenging economic conditions, but positive forecasts for 2019 rely on the weather conditions being favourable this year and the availability of forage remaining good. The AHDB’s forecast for production in New Zealand is pretty modest at 0.5%, but 2018 saw exceptional weather conditions for milk production in the province, with peak production in October reaching a new record. These ‘perfect’ weather conditions are unlikely to be repeated in 2019 and therefore production is unlikely to be as good.
With global dairy demand expected to continue to increase by 1.7% – 2.1% per year, and, as reported above, production forecasts only for a modest 1% increase, it could be expected that global commodity prices would see an increase. But there continues to be a number of factors at play in the dairy market blurring the direction. Domestically, production is expected to decline during the beginning of 2019 as costs continue to rise due to the summer drought increasing forage and feed costs. As uncertainty over Brexit continues and it is likely there will be some exchange rate volatility and companies trying to mitigate risks could start stockpiling and look to source more home-produced product.
As outlined above, global milk production from the key exporting regions is only expected to see a modest rise in 2019, but there is uncertainty over production in NZ and Argentina. SMP prices are forecast to recover as all EU intervention stocks are likely to be sold soon. Butter prices have fallen back from their highs in late 2017 early 2018, but the recovery in SMP prices is likely to help the butter price. Although it is not expected to return to its recent heights, it is likely to remain at historically high levels. Import demand is expected to continue to rise in China. Historically, the growth in imports of dairy products has been closely aligned to its GDP growth, but domestic production is expected to be curtailed and low stocks could see imports increase even though its GDP growth has slowed.
At the latest Global Dairy Trade (GDT) auction the average index increased by a further 4.2% to stand at $3,057. This is now the fourth consecutive rise (previous three; 2.8%, 1.7% and 2.2%). All products saw an increase; SMP rose by 10.3%, butter and anhydrous fat were up by 4.6% and 3.2% respectively, with WMP seeing a 3% lift since the previous event. It is expected that the recent increases should help steady any further milk price reductions from March. Even though both Muller and Arla (for conventional and organic members) have announced prices will stand-on for February, there have still been a few price reductions announced for the month. Some of the notable ones are:
Prime cattle prices continue their lacklustre start to the year. Prices generally see a downward trend in the New Year, unfortunately this year though, they did not experience much of a Christmas boost beforehand. Therefore they start at lower levels than in recent years. For the week ending 19th January, the GB deadweight, all-prime price fell by 0.6 to 349.4 p per kg. This is now 8.6p below last year and nearly 6p per kg less than the five-year average. This masks higher declines for both the all-prime steer and heifer price, which fell by 1.1p and 1.6p per kg. The all-prime price is being supported by a fairly significant increase in the young bull price, which saw a 3.1p increase for all bulls; those meeting the R3 specification increased by 4.3p per kg. The cow price also recorded an increase, with the all-cow price rising by 4.3p to 211.8p per kg. Similar trends have been seen in liveweight markets. Reports suggest the demand is not there to support the number of prime cattle coming forward. In contrast, slaughterings of cull cows are up year-on-year by 17%, suggesting there is strong demand underpinning the trade.
The liveweight lamb trade has started the year well; up on both the five-year average and last year. But prices fell mid-month and although rose again the following week, the market seems to be lacking direction at the moment. That said, for the week ending 23rd January the GB OSL SQQ stood at 197.21p per kg, nearly 11.5p per kg more than last year and about 17p per kg more than the five-year average. It seems prices are being helped by tight supplies; numbers were down by 10% compared to the week before at GB auctions and 5% less than year-earlier levels.
The EU-spec SPP continues to slip back, but exports remain strong. For the week ending 19th January, the EU spec SPP fell by 0.71p to stand at 138.78p per kg. This is now nearly 9.5p below last year’s equivalent price. Reports are that demand is slow following the festive period. Slaughterings are similar to the previous week, but 7,000 head up on year-earlier levels. UK pig meat production for 2018 has seen a 3% increase compared to 2017, to total 926,700 tonnes. This is a result of higher slaughterings for clean pigs, sows and boars. In addition the average carcase weight rose to a new record high in December for the SPP sample, measuring 86.14kg per head, almost 1.7kg heavier than at the same time in 2018. It appears producers have been delaying marketing, resulting in heavier average carcase weights.
On a positive note, exports continue to record year-on-year growth. During November, UK exports of fresh and frozen pork increased by 5% compared to 2017, to 19,500 tonnes. Exports to China saw a year-on-year increase of 81% to 4,900 tonnes. Average export prices were also up, which means the overall value of fresh and frozen pork shipments was higher by 7% at £26.4m in November. China produces over 50 million tonnes of pig meat a year and imports approximately 2 million tonnes, it therefore has a huge affect on markets. African Swine Fever (ASF) has been detected in the country and, although it hasn’t had a large effect on the size of the Chinese pig herd yet, the expectations are that this will reduce numbers through 2019. According to AHDB Pork, International food and drink consultancy Gira forecasts a 4.6% decline, with Rabobank proposing low and mid-range scenarios of between 2-4% and 6-8% respectively. A 5% decline on its 50 million tonne production would result in a 2.5 million tonne reduction in supplies.
Ahead of the Dairy-Tech Show on the 6th February, Andersons have updated their Friesian Farm model.
The figures show surprisingly little change since the last update published in September. The milk price for the 2018/19 year is a fraction lower as a result of the cuts in the autumn/winter. Beef prices (calves and culls) are also a little down. But costs (particularly concentrate feed) has not risen as much as feared. The result is a small improvement in the final outcome for the current year. Even so, profitability is much reduced compared with the forecast prior to the summer drought, which is shown in the table below.
| Friesian Farm Model – source The Andersons Centre | ||||
| ppl Milk Year –
|
2017/18
|
2018/19
(pre-drought) |
2018/19
(current) |
2019/20
|
Average Yield |
7,850 |
7,770 |
7,650 |
7,700 |
| Milk Price |
29.0 |
28.5 | 29.0 |
28.5 |
| Total Output |
31.0 |
30.7 | 31.1 |
30.9 |
| Variable Costs |
12.8 |
12.1 | 14.7 |
12.3 |
| Overhead Costs |
9.3 |
9.3 | 9.6 |
9.9 |
| Rent, Fin. & Drawings |
6.4 |
6.3 | 6.4 |
6.3 |
| Cost of Production |
28.5 |
27.7 | 30.8 |
28.6 |
| Farming Margin |
2.4 |
3.0 | 0.3 |
2.2 |
| Basic Payment |
1.9 |
1.8 | 1.8 |
1.8 |
| Business Surplus |
4.3 |
4.8 | 2.1 |
4.0 |
Assuming an orderly Brexit, the prospects for the 2019/20 milk year look solid. Costs should (hopefully) return to a more normal basis, but the average milk prices over the year is forecast to be slightly lower than this year.
It is worth continuing to highlight the significant portion of profit coming from the Basic Payment on this farm. Although not disappearing for some years, its days are clearly numbered. Producers will need to think about how they will replace this lost margin in their accounts.
The prime beef market is seeing a disappointing end to 2018. With prices over the last few years seeing a decline during the first quarter of the year, the outlook going into 2019 is not looking rosy. Usually prices see a pre-Christmas lift as demand increases, but this year deadweight prices have been trending downwards since October and are now below both last year’s value and also the five-year average. With the peak Christmas procurement period just about over there does not seem much, if any, sign of improvement. Anecdotal evidence suggests demand is just not there, and this appears to be borne out as prices are declining as throughputs are also down. Cull cow prices are also lower, although this is not unusual for the time of year as the attention normally turns to prime beef, but the price is considerably below last year and also the five-year average. Cow slaughterings are up year-on-year, probably because fodder is tight. Historically, cow beef prices pick up in the New Year when processors re-open after Christmas.
In contrast to beef prices, finished lamb prices are seeing a seasonal boost. The deadweight and liveweight NSL SQQ price is currently above both last year’s and also the five-year average price. Supply remains tight, with both auction throughtputs and deadweight slaughterings down compared to last year. Auction market throughputs in the first week of December were 24% less than compared to 2017, with deadweight slaughterings about 6% below. Supply is expected to remain tight going into 2019.
Similar to beef, there does not appear to be signs of a seasonal uplift in the run up to Christmas for pigmeat prices. In the week ending 8th December, the EU-spec SPP fell by 0.73p per kg compared to week earlier levels, to 142.56p per kg. This is the largest decline in five weeks and is almost 9p per kg less than the same week in 2017. Estimated slaughterings have been ahead of year-earlier levels for two consecutive weeks now. However, average carcase weights are about 1kg heavier than last year, this suggests that fewer numbers have been marketed earlier than last year, which could mean an increase in supplies in the New Year.
A little relief may come from the news that EU pig prices appear to have stabilised. The sustained low price throughout most on Europe has seen an increase in cheap imports in to the UK, putting downward pressure on domestic prices.
It doesn’t look like being a promising start to 2019 for the dairy industry. Normally, a boost in demand pre-Christmas lifts wholesale prices but this has not been evident this year; butter, cream and cheddar values are all struggling. Farmgate prices remain under pressure and there have been many price cut announcements for the New Year (see below).
In contrast though, after declining in every event held since May, the Global Dairy Trade has finally recorded a price rise. At the auction held at the beginning of December, the average index increased by 2.2% compared to the previous event. All categories, except cheddar recorded a rise. We will have to wait and see whether this is just a blip, or whether it can continue into the next event held on 18th December.
Farmgate price announcements for January include;
The latest Global Dairy Trade (GDT) auction recorded further reductions. At the event held on 20th November, the overall average price index fell by 3.5%, compared to the auction held at the beginning of the month, falling to $2,727 per tonne. WMP, which made up about half of all the products sold, declined by 1.8% to $2,599, whilst SMP (quarter of the products sold) was down by 1.6% to $1,965. Butter and Anhydrous Milk Fat recorded to the biggest movements, declining by 9.6% and 9.4% respectively. The GDT average index has recorded a decline at every fortnightly auction since May.
In the UK, as expected, there have been a number of announcements of milk price reductions. Muller had already confirmed it would be cutting its price by 1ppl as from 1st December (see earlier article). Other notable movers include;