Tag: Beef

UK/New Zealand Trade Deal Signed

On 28th February, the UK and New Zealand signed the UK-New Zealand Free Trade Agreement (FTA), formalising the agreement-in-principle which was announced in October 2021 (see https://abcbooks.co.uk/uk-new-zealand-trade-deal/).  The FTA is similar in nature to the UK-Australia FTA announced in December.  The deal is seen by the UK Government as another important step towards joining the Comprehensive and Progressive agreement for Trans-Pacific Partnership (CPTPP).  The agreement will now be laid before Parliament for scrutiny.

The key points are;

  • Tariffs: upon entry into force, 100% of tariffs on UK goods exports to NZ will be removed whilst tariffs on 99.5% of goods imports into the UK from NZ will immediately be removed.
  • Tariff Rate Quotas (TRQs): will remain for the most sensitive product being imported into the UK including:
    • Beef: access would be limited by tariff rate quota (TRQ) in the first 10 years. This would commence with access to a duty-free transitional quota of 12,000 tonnes in year 1, rising in equal instalments to 38,820 tonnes in year 10.  Any beef imports above the annual TRQ allowance would be subject to the UK Global Tariff (UKGT).  In the subsequent 5 years (year 11-15 after entry into force) a product-specific safeguard will be applied on any beef imports exceeding a further volume threshold rising in equal instalments from just over 40,000 tonnes in year 11 to 60,000 tonnes in year 15. All TRQ allowances are on a product weight basis. All tariffs would be eliminated from year 16 onwards. 
    • Lamb: access would operate in a similar manner to beef, although tariff-free TRQ access would be managed in a series of step-changes as opposed to annual incremental increases and the allowances are calculated on a carcase-weight basis which is somewhat more limited than a product weight basis.  In years 1-5, an additional 35,000 tonnes per year could be imported tariff-free.  This, of course, is in addition to the 114,000 tonnes of the WTO TRQ that New Zealand has historically had available.  During years 5-15, the tariff-free access will increase to 50,000 tonnes per annum followed by unlimited access in year 16.  Importantly, trade via the FTA TRQ can only commence once utilisation of the WTO TRQ has reached 90%.  Any imports exceeding the FTA TRQ will be subject to the UKGT tariff rate. 
    • Dairy: similar structures will also operate for dairy products with unlimited access being phased in over 5 years.
      • Butter: initial duty-free TRQ of 7,000 tonnes rising to 15,000 tonnes in year 5.
      • Cheese: there will be an initial duty-free TRQ of 24,000 tonnes in year 1, increasing incrementally to 48,000 tonnes in year 5.
    • Fresh Apples: given the seasonal nature of production in both countries, tariffs on imports into the UK from 1st January to 31st July would be eliminated as soon as the deal comes into force.  Imports during August to December will be liberalised over 3 years.  During this time, there will be a tariff-free TRQ of 20,000 tonnes per year.  All fresh apple imports from NZ would then be tariff-free and quota-free from year 4 onwards. 

Sources: UK Government and Andersons

  • Customs Procedures: the deal is ambitious with respect to minimising customs procedures and the promotion of e-certification.
  • Rules of Origin (RoO): are set to remain standard for agri-food – i.e. a threshold of 15% of products traded can be non-originating from the country of origin (i.e. UK or NZ) in order to gain tariff-free access.  The RoO for automotive vehicles (25% originating materials as opposed to the standard 55% threshold) will become much more liberalised.  This is seen as a big gain for the UK, given the extent of its integration with EU supply-chains. 
  • Sanitary and Phytosanitary (SPS) Measures: the The FTA seeks to minimise barriers in the area.  Both countries are to recognise equivalence where both countries have similar standards and the deal will function in parallel with the existing UK-NZ Sanitary (Veterinary) agreement.  The UK Government is also keen to emphasise that the deal “does not create any new permissions or authorisations for imports from New Zealand and does not compromise on our high environmental protection, animal welfare, plant health, and food standards.”
  • Animal Welfare: has a dedicated chapter in the agreement which includes non-regression and non-derogation clauses which the Government intends that neither country will lower its animal welfare requirements in a manner which impacts trade. There is also an ambition to work together internationally to encourage greater animal welfare standards and research cooperation on animal welfare issues. 

Overall, the main thrust of the UK-NZ FTA is very similar to the previous agreement-in-principle and is quite similar to the FTA that the UK has agreed with Australia.  As such, it creates another precedent for future trade deals.  It is clear that the UK has offered enhanced market access for NZ agri-food suppliers in return for greater access to the NZ automotive and services sectors.  The cumulative impact of these trade deals is also important.  Whilst there is a 15-year transition period for beef, by year 14, the combined Australian and NZ TRQs (~214Kt) access will have surpassed recent years’ annual imports from Ireland (204Kt).  That said, just because TRQ access is available, it does not mean that it will be fulfilled as Asia-Pacific will remain very important to Antipodean suppliers. 

Finally, in the case of NZ, it must be acknowledged that whilst there are some differences in its standards versus the UK, its standards are very closely aligned.  Something that the EU also acknowledges in its veterinary agreement with NZ.  Therefore, whilst the competitive pressure will increase, the playing field is quite level in this instance.  What UK farming needs needs to do is to focus much more on improving its market orientation (i.e. focus on satisfying consumer needs profitably and sustainably) and to improve its value proposition and marketing generally, both at home and abroad.  That is its best chance to successfully competing with the likes of NZ in the long-term.

More information on the UK-NZ FTA is available via: https://www.gov.uk/government/collections/uk-new-zealand-free-trade-agreement

Australia and NZ Trade Agreements

Trade deals with Australia and New Zealand (NZ) have been announced with much fanfare over recent months.  However, progress has stalled in converting these agreements-in-principle into legal texts.  The target that this would be concluded by the end of the year now looks unlikely.

It is claimed that this is chiefly due to the UK rowing-back on the market access offered on beef and lamb so that the annual tariff-free quotas are based on carcase weight equivalent and not product weight (i.e. products shipped such as boneless beef or legs of lamb).  A carcase weight equivalent basis would essentially mean that there would be less scope for Antipodean suppliers to export high-value beef and lamb cuts to the UK market and capture the shares of British producers.

Whilst the proposed EU-Mercosur trade agreement (which is being stalled by EU Member States) provided tariff-free quotas based on carcase weight equivalents, such arrangements are the exception in international Free-Trade Agreements (FTAs).  As the UK has formally applied to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which Australia and NZ are members of, both countries are threatening to stall the UK’s application if their tariff-free market access for beef and lamb are calculated on this basis.

It remains to be seen how the impasse will be resolved, but one suspects that given the UK Government’s eagerness to join the CPTPP, it will concede on offering both countries access based on product weight.  This would mean some increased competition for UK producers and exporters from the EU but, as previous articles have noted, both Australia and NZ are heavily focused on the Asia-Pacific markets presently, thus limiting their capability to supply the UK market as well.

UK / New Zealand Trade Deal

The UK and New Zealand have announced an agreement in principle on a Free Trade Deal (FTA).  The deal, announced on the 20th October, is similar in nature to the UK-Australia trade deal announced back in June.  Like the Australian FTA, the UK-NZ FTA agreement-in-principle is subject to further negotiations on the legal text.  Whilst there is an eventual aspiration to fully liberalise agri-food trade, there are adjustment periods for several agri-food products which the UK deems to be sensitive.  These include;

  • Beef: access would be limited by tariff rate quota (TRQ) in the first 10 years. This would commence with access to a duty-free transitional quota of 12,000 tonnes in year 1, rising in equal instalments to 38,820 tonnes in year 10.  Any beef imports above the annual TRQ allowance would be subject to the UK Global Tariff (UKGT).  In the subsequent 5 years (year 11-15 after entry into force) a product-specific safeguard will be applied on any beef imports exceeding a further volume threshold rising in equal instalments to 60,000 tonnes.  All tariffs would be eliminated from year 16 onwards. 
  • Lamb: access would operate in a similar manner to beef although tariff-free TRQ access would be managed in a series of step-changes as opposed to annual incremental increases.  In years 1-5, an additional 35,000 tonnes per year could be imported tariff-free.  This, of course, is in addition to the 114,000 tonnes of the WTO TRQ that New Zealand has historically had available.  During years 5-15, the tariff-free access will increase to 50,000 tonnes per annum followed by unlimited access in year 16.  Importantly, trade via the FTA TRQ can only commence once utilisation of the WTO TRQ has reached 90%.  Any imports exceeding the FTA TRQ will be subject to the UKGT tariff rate. 
  • Dairy: similar structures will also operate for dairy products with unlimited access being phased in over 5 years.
    • Butter: initial duty-free TRQ of 7,000 tonnes rising to 15,000 tonnes in year 5.
    • Cheese: there will be an initial duty-free TRQ of 24,000 tonnes in year 1, increasing incrementally to 48,000 tonnes in year 5.
  • Fresh Apples: given the seasonal nature of production in both countries, tariffs on imports into the UK from 1st January to 31st July would be eliminated as soon as the deal comes into force.  Imports during August to December will be liberalised over 3 years.  During this time, there will be a tariff-free TRQ of 20,000 tonnes per year.  All fresh apple imports from NZ would then be tariff-free and quota-free from year 4 onwards. 

Elsewhere, the deal is ambitious with respect to trade facilitation and the minimising of customs procedures in particular.  There are ambitions to promote e-certification where possible.  Whilst Rules of Origin (RoO) for agri-food remain quite standard (i.e. a threshold of 15% of products traded can be non-originating from the country of origin (i.e. UK or NZ) in order to gain tariff-free access, the RoO for automotive vehicles (25% originating materials as opposed to the standard 55% threshold) will become much more liberalised.  This is seen as a big gain for the UK, given the extent of its integration with EU supply-chains.  The agreement also seeks to reduce barriers in the Sanitary and Phytosanitary (SPS) area.  Both countries are to recognise equivalence where both countries have similar standards. 

Overall, it is evident that the market access offered to NZ suppliers is significant and that agri-food has been used by UK negotiators as a means to open up access in other areas (e.g. automotive and services).  It can also be seen that the Australian FTA announced has become an important precedent for future trade deals.  Taking both the NZ and Australian trade deals together, significant competitive pressure will be exerted on domestic British producers and traditional suppliers from the EU, particularly Ireland.  Looking at beef for example, in year 1 both countries could theoretically export 47,000 tonnes of beef to the UK, rising to 148,820 tonnes in year 10.  By year 15, their tariff-free access will have reached 230,000 tonnes, significantly surpassing recent year’s imports from Ireland into GB (just over 200,0000 tonnes).

That said, it must be acknowledged that both Australia and NZ are heavily focused on the Asia-Pacific market in recent years and imports of NZ lamb have been nowhere near their TRQ allowances of late.  Things could of course change in the future, particularly given the geopolitical tensions between Australia and China.  The UK will be seen by Antipodean suppliers as a high value and dependable market.  British agriculture needs to prepare for this increased competitive pressure which is likely to become more pronounced as future trade deals (e.g. an updated FTA with Canada) are agreed.  More information on the UK-NZ FTA is available via: https://www.gov.uk/government/publications/uk-new-zealand-free-trade-agreement-negotiations-agreement-in-principle/uk-new-zealand-fta-negotiations-agreement-in-principle

Covid Crisis and the Meat Sector

The past month has been one of the most tumultuous for generations as the meat sector as it has grappled with the lockdown brought about by the onset of the Covid-19 pandemic (Covid crisis).   Retailers and their partners have struggled under the strain of consumer panic buying whilst continuing operations whilst implementing social distancing.  Vast swathes of the food services and catering trade (aside from limited delivery and click-and-collect operations) have also presented significant challenges throughout supply-chains, particularly in beef and lamb but also in pigmeat.

Market Impacts

The beef sector has experienced price declines recently, primarily due to the loss of the food services trade.  In the UK, about one-third of beef product sales in monetary terms are to the food service sector.  Such sales consist of the highest value products (e.g. fillet steaks).  With the implosion of demand, this has a much more pronounced impact on carcase value, which some have estimated to have declined by around £200 per head (or 15-20%) at the processing level.  Increases in retail sales which have taken place are primarily for mince and burgers, which are of lower value, thus only partially compensating for steak sales losses.  At the farm level, price declines have remained relatively small with GB steer prices on 18th April (324 ppkg) approximately 4% lower than prices on 21st March (336 ppkg).  If the Covid Crisis continues for a sustained period, further farmgate declines are likely. 

The lamb trade has also experienced issues, although the Easter holiday and the recent commencement of Ramadan have helped prices to recover recently.  That said, major concerns remain due to the closure of the food services sector in continental Europe, most notably France.  As more UK lamb comes onto the market later in the year, any oversupply at that point will have a much more pronounced effect on prices.  If restaurants do open, they are unlikely to be operating at capacity, due to social distancing measures.  As most lamb is eaten outside of the home, this will present difficulties.

Similar trends have taken place in the pig meat sector with convenience products (e.g. bacon and sausages) seeing sales increase significantly but demand for roasting cuts has decreased markedly.  There are additional complexities at play more globally in pig meat.  Processing capacity in the US has been hit by coronavirus cases amongst workers in meat plants, meaning that production lines have shut down.  Whilst Europe has not witnessed processing disruption on the scale of the US, food services demand has lowered, meaning price declines have resulted.

Much of what will happen in the pig meat sector will be governed by the recovery in the Chinese market which has been hit by both the Covid crisis and African Swine Fever (ASF).  China has started to re-open again after a lockdown in some regions, and some analysts have predicted that Chinese demand will be back to 90% of normal levels by the end of the year.  On the supply-side, it has had to deal with ASF which has almost halved its breeding sow heard, and is only in the early stages of recovery.  Short-term, the deficit of pork in China should help European prices recover from Covid.  It could also provide some support in other protein categories but will not compensate for the losses in carcase value seen in beef, nor the potential oversupply in lamb as the UK production season progresses.

Support Schemes

In reaction to the Covid crisis, various forms of support have been instigated across Europe.  Some mechanisms have been aimed at the wider economy, whilst more recently, specific measures to support the farming sector have been announced by the EU-27.

Looking at the economy generally, whilst the UK has opted for a furlough system (subsidising 80% of wages up to £2,500 per month), this scheme is of limited use to the food sector as it necessitates workers being off work for that period.  This has created difficulties for processors who have to continue operations whilst also coping with price declines.  The wage subsidy systems in place elsewhere in countries such as the Netherlands, Ireland and New Zealand, arguably offers more support to sectors such as agri-food where turnover declines are projected, but production must continue.  In the Netherlands for example, if a 25% decrease in turnover is projected, the State will subsidise approximately 22.5% of wages for a 12-week period.

The EU-27 has also recently announced a range of measures to support agricultural commodities, including the re-opening of Private Storage Aid (PSA) for several commodities including beef (25,000 tonnes) and lamb (36,000 tonnes).  Pig meat will not be supported by this scheme.  PSA will allow the temporary withdrawal of products from the market for a minimum of 2 to 3 months, and a maximum period of 5 to 6 months.  It has been initiated to reduce supply and rebalance the market.  There are shortcomings though.  In beef, storing product means freezing it, thus value deterioration versus fresh.  Also, when the storage period ends, that product will need to be released onto the market thus increasing supply and lowering prices at that point.  The EU plans to formally agree the scheme by the end of April.  Previously, the EU also announced plans to offer increased flexibility to CAP and Rural Development funding, including larger BPS advances to farmers.

In the UK, however, there has not been any announcement of support specifically directed towards the agri-food sector.  Whilst many of the more generic support measures (e.g. Coronavirus Business Loan Interruption Scheme (CBILS)) will offer some assistance, more support is arguably required. Especially, given the extent of the price declines and impact on turnover.  Otherwise, many businesses will come under severe pressure in the weeks ahead, with many likely to cease trading.  If this happens, it will take the sector much longer to recover.

Impact of Trade Barriers on UK Beef and Sheepmeat

Beef and sheepmeat trade with the EU could plummet by over 90% under a ‘No Deal’ Brexit.  This is one of the headline findings of a study recently published by the AHDB in collaboration with QMS and HCC.  The report, complied by The Andersons Centre, looks at the impact of trade barriers on the UK beef and sheepmeat sector post-Brexit.  It examined two scenarios; a Brexit Deal and a No Deal Brexit.  Some of the main points include;

  • Trade impact under a Brexit Deal scenario is relatively small:  total exports would decline by about 1% in volume terms (imports 0.8% lower), driven by EU27 declines.  Sheepmeat exports to EU27 are forecast to decline by 1.5% whilst corresponding imports would be 3% lower. These declines are chiefly due to Non-Tariffs Measures (NTMs) – i.e. the increased trade ‘friction once the UK was not part of the Single Market.  There would be minimal changes to non-EU trade.
  • Significant upheaval under No Deal: trade with the EU27 would plummet (by 92.5%) due to the imposition of tariffs, TRQs and higher impact of NTMs.  Sheepmeat trade with the EU would be almost completely wiped out.  Substantial declines in trade with the EU27 would also ensue for beef – exports down by 87%, imports declining by 92%.  Somewhat better market access for beef compared to sheep, due to TRQs, would permit some UK-EU trade to continue.  The introduction of a new 230Kt TRQ for UK beef imports would cause non-EU imports to soar by over 1,300%.  This would lower prices and drive-up UK consumption by approximately 7%.  Sheepmeat imports from non-EU countries are not anticipated to change whilst consumption is projected to rise by 14% due to declining prices.
  • Price impacts: there would be small declines under a Brexit Deal scenario (-1 to -3% respectively).  Under No Deal severe price declines would be seen.  Sheepmeat is particularly exposed (projected 24% price fall under No Deal).  Downward price pressure for beef (-4%) under No Deal arises due to competition from lower priced world-market imports.  This would be exacerbated if significant volumes of Irish beef enter the UK barrier-free via NI.
  • Value of carcase meat output: under a Brexit Deal, output would decline by an estimated 1.7% whilst under a No Deal the decline would increase by nearly ten-fold (-11.7%) with sheepmeat output nearly 31% lower which would be devastating for incomes in the sector.  Growth in exports to non-EU markets under No Deal would be insufficient to compensate for the loss of access to the EU27.

Projected Impact of Trade Barriers on Domestically-Produced Beef and Sheepmeat (Farm-Gate Level)

Sources: Defra (2019) and The Andersons Centre (2019) *Baseline Figures derived from Defra data.

  • Similar Impacts at Farm Level:  Andersons’ Meadow Farm model projects a 27% decline in profitability (£68 per Ha versus the current £93 per Ha) under a Brexit Deal, but the farm would still be profitable provided it can maintain its current support levels.  Even with support unchanged, Meadow Farm starts to generate unsustainable losses under No Deal with a projected deficit of £45 per Ha, equating to a £7,000 loss.
  • Domestic Market Opportunities: could arise for domestic producers if trade barriers reduce the competitiveness of imports.  However, the proposed access granted under additional TRQs in the beef sector would diminish this.  There are also fears that future changes to standards might make imports more competitive, thus limiting domestic market opportunities even further.
  • Frictionless trade with the EU27 as a third country is not currently possible: and looks set to remain so for at least a decade as the required technology has not yet been developed, let alone tested.  Long-term, technology can contribute to reducing this via e-certification systems, but friction cannot be reduced completely.  Post-Brexit increases in trade friction are inevitable.
  • Most significant non-tariff measures relate to value deterioration: value deterioration (especially fresh meat) arising from border-related delays associated with physical checks and sampling (associated with sanitary and phytosanitary (SPS) regulations) is of most concern to industry and is the biggest contributor to non-tariff costs generally.  Its impact on frozen products is much lower but still a factor in terms of potential penalties imposed on delayed consignments.
  • Uncertainty about future border arrangements:  under No Deal centres particularly on trade on the island of Ireland which the UK Government has claimed would remain frictionless.  If there are also no checks on NI-GB trade, whilst any exports routed from Dublin to Holyhead would be subject to tariffs and regulatory checks, the potential for re-routing meat from the Republic of Ireland via NI and onwards to GB without any checks, could result in substantial volumes of Irish beef being placed on the UK market (beyond the 230Kt TRQ) by the ‘backdoor’.  If significant volumes enter the UK in this fashion, substantial price declines for UK beef farmers would ensue.
  • Disproportionate impact on Small and Medium-Sized Enterprises (SMEs): arising from higher operating costs, fewer loads dispatched and a lower propensity to avail of special authorisations such as AEO status (which confers a lower risk on operators from a regulatory authority perspective).
  • Inflationary pressures: particularly for farm-level imported inputs from the EU27 (e.g. fertiliser, medicines etc.) but also elsewhere.  These costs are unlikely to be absorbed by the supply trade and would be passed on to consumers and/or to primary producers (i.e. farmers).  Any meat price rises are likely to cause consumers to increase their propensity to substitute with cheaper sources of protein, thereby making it more likely that beef and sheep farmers would beat the brunt of price pressures.

The study concluded that a Brexit Deal based on a comprehensive FTA and close customs and regulatory arrangements with the EU would be far preferable to a No Deal Brexit, which could have a devastating impact, especially for sheepmeat.  Whilst developing overseas markets will be crucial to the long-term success of British beef and sheepmeat, close attention must be paid to protecting existing markets, specifically the domestic UK market and the EU27 export market.  The study also found that even if the UK had never entered the EU (or EEC) in the first place, it is highly likely that markets such as France would still be vital to the British sheepmeat industry due to proximity.  To minimise any upheaval post-Brexit, the report states that having a comprehensive mutual recognition agreement between the UK and the EU is crucial.

The report’s findings were similar to several previous studies; however, this study goes into significantly more detail on how non-tariff measures could affect the sector.  It also provides useful insights on the implications of a No Deal Brexit for carcase balance in the sheepmeat sector where it estimates that up to 22% of the annual UK lamb kill (3.1 million head) could be affected.  This would be a major challenge to a sector where approximately one-third of the lamb crop is exported each year.  If it wasn’t already clear, this report underscores the importance of a good Brexit Deal for the grazing livestock sector.  The report is available via: https://ahdb.org.uk/knowledge-library/red-meat-route-to-market-project-report 

EU Agrees Mercosur and Vietnam Trade Deals

On 28th June, twenty years to the day that negotiations started, the EU and Mercosur reached a political agreement on a substantial free trade deal.  The EU estimates that, when fully implemented, the deal will reduce tariffs its exporters face by approximately €4 billion.  On a busy weekend for Cecilia Malmström, EU Trade Commissioner, the EU also signed the free trade agreement with Vietnam which had been largely negotiated in 2018.  Both deals are meant to send a message that, with the backdrop of the US-China trade dispute and the increased friction likely to result from Brexit, that the EU is open for business and keen to conclude trade deals with other global partners.   These announcements follow similar recent deals with Japan and Canada.  From an agri-food perspective, the Mercosur deal is attracting most attention as it could have significant implications for sectors such as beef, poultry and sugar.

EU-Mercosur Trade Deal

The details of the Mercosur deal are complex.  In summary, the South American trade-bloc, consisting of Brazil, Argentina, Uruguay and Paraguay, would see tariffs removed on 92% of all its imports to the EU over a period of 10 years.  Focusing on the agri-food sector, tariffs will be cut on 82% of imports coming from Mercosur, with remaining agri-food imports subject to more partial liberalisation.  Notably, this includes beef where a quota of 99,000 tonnes will be permitted to be exported to the EU at preferential rates.  This will be implemented over a five-year period.  Additional volumes of imports will also be allowed of poultrymeat (180,000 tonnes) and pigmeat, (25,000 tonnes), with import restrictions on sugar and ethanol also eased.

From an EU export perspective, tariffs will be eliminated on 91% of its total exports and 95% of agri-food exports.  The dairy sector in particular will benefit from improved market access, with a quota of 30,000  tonnes for cheese, 10,000 tonnes for skim-milk powder and 5,000 tonnes for infant milk formula (Mercosur tariffs are currently at around 28% for dairy products).  These volumes will be phased-in over 10 years.   Whilst improved market access for dairy was welcomed in some quarters, market experts opined that demand for dairy products in the Mercosur market is quite lethargic and is hampered by high inflation, sluggish economic growth and a volatile political environment. 

Mercosur has also committed to protecting the Geographical Indications of 357 EU food and drink products.  The EU is also keen to point out that its food standards on Sanitary and Phytosanitary (SPS) matters would not be compromised in any way.  The EU-Mercosur deal also has a Sustainable Development chapter which commits both parties to upholding their Paris Climate Accord commitments

European beef, poultry, sugar and ethanol producers are expected to come under increased pressure from cheaper imports from South America as a result of this proposed deal.  The agreement has already attracted condemnation from the EU’s farming lobby with organisations such as Copa-Copega and the Irish Farmers’ Association (IFA) complaining that agriculture had been sold out to facilitate a wider deal.  Tellingly, the EU Commission also announced a €1 billion fund to help farmers to adjust to the market disturbances that could be potentially caused by the EU-Mercosur trade deal which indicates that there will be a significant impact on European farmers.

The feedback from the EU farming and food industry points to trouble ahead because, as our previous article on 26th June noted, the agreement thus far has only been at the political level and a number of hurdles remain.  Firstly, it will be translated into legal text before being put forward for ratification by EU Member States and the European Parliament.  Like the EU-Canada (CETA) agreement, there can still be several twists and turns in the process and the deal could be scuppered by a Member State or by a regional Parliament such as Wallonia.  Already, there is significant pressure being exerted on the Irish Government not to back the deal and it is anticipated that there will be similar calls elsewhere.

Any on-farm effects from this deal remain some way off, and in any case would be phased in over several years.  By the time this happens, the UK is likely to have left the European Union, so the impact of this particular deal might be negligible.  That said, the EU-Mercosur deal increases the competitive threat of South American products in European markets.  It is also likely to offer a template for any future trade deals between the UK and Mercosur which the UK is likely to prioritise post-Brexit. 

EU-Vietnam Trade Deal

This pact will eventually see duties removed on 99% of the EU’s imports from Vietnam.  Whilst the formal text has been approved by the European Commission, it still requires ratification by the European Council (representing the EU Member States) and by the European Parliament.  This is expected later this year.

From an agri-food export perspective, Vietnam with its population of around 95 million represents a fast-growing South East Asian market.  Its dairy industry is valued at approximately £5 billion and it currently imports 80% of this demand.  Average incomes have also been rising thereby driving demand for beef and pork products in particular, although the US and New Zealand account for the vast majority of these imports.

As with Mercosur, the UK’s pending exit from the EU means that it may not benefit significantly from this deal.  That said, much will depend on the length of the transition (implementation) period arising from the eventual Brexit deal and the UK’s access to third country market that have free-trade deals with the EU as part of this.  However, the South East Asian market is lucrative and the UK needs to prioritise the development of such markets as it resumes its independent trade policy. 

Farm Incomes in Ireland

On 22nd May, Teagasc (Ireland’s Agriculture and Food Development Authority) released preliminary results from its 2017 National Farm Survey.  Average family farm income is estimated at €31,374, a 32% increase on the previous year.  Dairy incomes are up 65% primarily due to increased milk prices which averaged 27.9 cents/litre in 2016 and 36.9 cents/litre in 2017.  Incomes from tillage (arable) farms are 20% higher whilst sheep farming incomes rose by 8%.

Beef farming incomes remained virtually unchanged however and is partly a reflection of lower prices during the latter half of 2016 and the first half of 2017 as a stronger Euro (versus Sterling) eroded prices as can be seen in the chart below. This contrasts with the UK (GB) where prices have remained relatively steady in Euro terms (and increased in Sterling terms) which have had a positive influence on incomes.

Source: Bord Bia

Further information on Ireland’s National Farm Survey is available via: https://www.teagasc.ie/media/website/publications/2018/NFS-slides-for-Web.pdf

EU Free-Trade Deals

Australia and New Zealand Talks

On 22nd May, EU ministers gave the go-ahead to commence talks with Australia and New Zealand (NZ) on a free trade deal. The move is the latest in a series of initiatives to strike bilateral deals with major economies coming on the back of deals with Canada (CETA), Japan and Mexico as well as negotiations with Mercosur (including Brazil and Argentina).

Bilateral trade between the EU and Australia is estimated at €45.5 billion per year, whilst EU-NZ trade is estimated at €8 billion.  Agricultural trade forms an important component of this, particularly in terms of EU imports and both Australia and NZ will be keen to expand this further.  However, the EU’s has already stated that its focus will be on reducing existing barriers to trade whilst taking account of its agricultural sensitivities.  It is therefore clear that the EU does not envisage full liberalisation in agricultural trade but may contemplate increased access via tariff rate quotas (TRQ) for sensitive agricultural products, with long tariff dismantling periods, similar to the CETA deal.

Any increase in market access for Australia and NZ will exert pressure on EU producers particularly in dairy, beef and sheep meat where both countries hold strong competitive advantages.  However, it must be borne in mind that NZ already has a TRQ of around 228,000 tonnes for sheep meat exports to the EU and it has struggled to fill this in recent years, partly due to strong demand in China.

Mercosur Negotiations Progress

Meanwhile, sources in Brussels suggest that a trade agreement with Mercosur is on course to be signed next month and would include provision for a 99,000 tonne increase in beef imports, via TRQs, into the EU.  The move comes as Mercosur has agreed to a phasing-out of its tariffs on European cars and it is also rumoured that France might be getting imminent access to China for its beef, thus lifting some opposition to the deal.   Again, it is likely that any increases in market access will be phased in over a long period, with EU Commissioner Phil Hogan claiming that any agreement would ‘take 10 years to implement’.

Given the flurry of recent progress on trade deals, it appears that Brexit has jolted the EU into action. However, it looks like a case of being too little, too late, and one wonders what the impact might have been had some of this progress taken place years ago.  From a UK perspective, given that it is now in the EU departure lounge, it will be seeking to replicate similar trade deals as soon as possible. The fear amongst farmers is that it adopts a more aggressive ‘meat for motors’ approach and exposes agriculture to cheaper competitors in a much shorter timeframe.

Meat Markets Outlook

Beef

The UK cattle price has been above year-earlier levels so far throughout 2018.  Similar to 2017, the price fell steadily from the turn of the year until the end of February, since when it has risen through March, April and into May.  As of mid-May the AHDB all steer deadweight weight price was 4.2p per kg more than the price at the turn of the year and 13p per kg more than for the same week in 2017.  Demand is expected to stay ahead of supplies helping to support prices through the summer.  The latest AHDB beef and veal forecasts (see table below) were released in April and see a marginal increase in production (0.4%) for 2018 compared to 2017.  This is mainly due to higher slaughterings of prime cattle, although fewer cows are expected to be culled.  Both imports and exports are forecast to increase slightly, together with a modest 1% rise in domestic demand.  Looking further ahead, lower calf registrations and increased calf losses due to the adverse weather conditions earlier in 2018, could impact on production in 2018 and 2019, but the uncertainty surrounding Britain’s trading relationship with the rest of the EU is likely to impact on herd investment decisions.

Actual and forecast supplies of beef and veal in the UK – source AHDB
000 tonnes 2017 2018 (f) 2019 (f) 2020 (f)
Production 893 897 886 876
Imports 441 460 456 451
Exports 141 153 125 101
Total Consumption 1,194 1,204 1,217 1,226

Lamb

The UK sheep meat price for Old Season Lamb (OSL) has reached record levels in 2018.  Despite a high carry-over from the 2017 crop, lower imports from NZ and increased export demand helped by strong French farmgate prices, has seen UK values rise to unprecedented highs in the first quarter of 2018.  Global markets remain strong, which should help to keep domestic prices elevated over the next few months.  Looking further ahead, the table below shows the latest forecasts from AHDB.  This shows supplies available for consumption to decline sharply in 2018, and again in 2019 and 2020, albeit at a slower rate, mainly as a result of increased exports whilst imports are forecast to decline.  Imports from NZ are expected to remain much lower than historic levels as it concentrates on exports to China and the US.  In contrast exports are forecast to grow by 3% in 2018; all of which should continue to support prices.

Actual and forecast supplies of mutton and lamb in the UK – source AHDB
000 tonnes 2017 2018 (f) 2019 (f) 2020 (f)
Production 297 298 305 296
Imports (a) 95 84 81 83
Exports (a) 94 97 101 98
Total Consumption 298 285 284 280

(a) Carcase weight equivalent and including processed products

Pig Meat

The UK pig price has seen a steady decline since its high of last summer, but is starting to stabilise; whether this can last remains to be seen.  The EU average pig reference price has declined over the past month due to weak demand both domestically and for export.  Over-supply in China is putting pig prices under pressure and this seems likely to remain the case for the rest of 2018.  The UK and EU average reference price has widened over the last month, recording the largest difference since February.  However, it still remains below that calculated throughout the last quarter of 2017.   As domestic productivity is forecast to improve, an increase in demand is required to lift prices.  The table below shows the AHDB’s latest forecasts.

Actual and forecast supplies of pork in the UK – source AHDB
000 tonnes 2017 2018 (f) 2019 (f) 2020 (f)
Production 905 931 958 983
Imports 1,075 1,060 1,051 1,053
Exports 264 278 291 304
Total Consumption 1,716 1,712 1,718 1,733

Livestock Populations

DEFRA has released its latest statistics on Livestock Populations as at 1st December 2017 for the UK.  The total number of cattle and calves has remained similar to earlier levels at 9.8 million head; just a 0.2% decline.  The dairy breeding herd has increased marginally, by 0.3%, to just over 1.9 million.  However the number of dairy cattle aged between 1 and 2 years is down by 6.1% which will have an impact on replacements entering the herd.  Dependent on what milk prices do going forward, we could see a contraction in the herd.

Total beef supplies in the UK were forecast to be higher in 2018 through the availability of more clean cattle slaughterings.  The December survey results support this to a degree, with female beef cattle numbers aged between 1 and 2 years up by 3.1%.  However male cattle between 1 and 2 years of age are down by 1.4%, which may see 2018 production forecasts still higher than 2017, but not by as much as originally expected.

For sheep, the UK female breeding flock has increased marginally, by 0.1% to 14.7 million head, the largest flock size since 2007.  This should mean a large lamb crop in 2018.  However, the AHDB is forecasting a decline in the lamb rearing rate compared to 2017, although still high compared with previous years.  Other sheep and lamb numbers are down by 4.2% on the year, but this is still historically high.  Finished lamb prices have been strong ahead of the Easter market, some 40 to 50p per kg liveweight more than last year.  The deadweight Old Season Lamb (OSL) SQQ broke through the £5 per kg barrier in the first week of March and stands at £511.2p per kg for the week ending 17th March, some 117p per kg more than for the same week in 2017.

The total number of pigs has increased by 3.9% to 4.7 million.  This is mainly due to the number of fattening pigs on farm which has increased by 4.4% compared to year earlier levels.  These figures support the continuing rise in production we are seeing, which is putting downward pressure on prices.  Supplies for the week ending 17th March were 16% above 2017 levels, according to the AHDB.  After two weeks of relative stability, prices fell on the week.  The UK-spec SPP stood at 142.73p per kg for the week ending 17th March, around 6 p per kg less that year earlier levels.