Ask anyone in the beef sector their main concern for the coming year and virtually all of them reply that the biggest challenge facing the industry is supply, along with its attendant vices of availability and price. The ever-tightening supply, both global and domestic, is clearly preying on everyone’s minds, despite the fact that the beef market has been robust over the last year and exports are booming.
This year has seen record prices, with livestock breaking through the 300p/kg barrier in April, and continuing to climb. Although these have eased slightly over the last month, with the record deadweight prices for R4L steer deadweight reaching a peak of 344.7p/kg in early December, everyone seems to agree that livestock prices are unlikely to come down in the foreseeable future.
Peter Garbutt, chief livestock advisor at the NFU, says that it seems likely the price will continue to be strong. “There’s tight global supply and strong global demand for products in the face of the price rises that we’ve seen,” he says. “We’re not expecting prices in 2012 to be going back to historic levels any time soon.”
Producers have felt a slight squeeze, as prices for fuel, forage and fertiliser have also risen, but the continued firm domestic retail and export market has maintained a good return. Margins even increased slightly during January, despite a slight dip in farm-gate prices, as the retail price increased.
Perhaps unsurprisingly, producers have been keen to take advantage of this situation and, as Garbutt explains, there has been an increase in the number of cull cows from beef herds. He says: “It indicates that people are using the high cow beef prices to restructure their herds to get rid of older or problem cows and rebuild the herd again.”
Eblex analysis has confirmed this shift in finishing patterns, with producers increasing the proportion of stock finished at a younger age, typically under two years old. While helping to improve the financial and environmental efficiency of the herds, giving better feed conversion rates and decreasing the risk of over-fat, over-weight penalties, it has had a knock-on effect. According to the British Cattle Movement Service’s (BCMS’) most recent census in June, the cattle population is down 2% on the same time last year, down to 8.43m. Beef cattle declined by 2% to 5.16m, with fewer beef cows kept for breeding, while dairy cattle numbers fell nearly 3%, to 3.28m.
Although the breeding herd, which declined by around 27% between 1990 and 2007, started to show signs of stabilising, Eblex says this may only be temporary because of the rise in slaughtering of both heifers and cows. Although calf registrations have been marginally higher, beef production is also expected to fall by around 4% as fewer prime cattle are available. However, as Garbutt points out, the UK is part of a wider global market. “We’re not seeing other countries in the rest of the world respond with increased production; we’re seeing in South America and Ireland that production is down,” he says.
While this has been generally good news for producers, as higher farm-gate prices bring better returns, the outcome is a little less clear further along the supply chain. Michael Doran, sales and marketing director at Dunbia, says: “The continued inflation we can expect to see throughout 2012, although not as severe as 2011, will put pressure on processors trying to bridge the gap between farm-gate prices and the competitive retail prices required for the consumer.”
The retail market has seen resilient sales, despite the impact of price inflation across the category and a tough trading environment. Beef accounted for just over half of the total fresh and frozen meat sales in 2011, although it was down 3% on average by volume (52 w/e 25 December), to 296,211t. However, despite this volume decrease, the value increased by 1% to £1.87bn in the period, driven by a 4% increase in the price of beef.
Sales in the last few months of the year were particularly tough, with the figures showing that consumption was down 9% (12-w/e 22 January), according to Kantar Worldpanel data, compared with the same period last year. However, Matt Southam, senior retail and consumer insight analyst for the Agriculture & Horticulture Development Board (AHDB) points out that the end of 2010 was very strong for meat sales in general, with retailers reporting good sales and growth.
He says: “The snowy weather in December 2010 encouraged people to stock up on things like mince, and stewing steak, so items you can put in the freezer did really well. It is deceptive when you see the decline at the end of this year, as you’re comparing them to a very strong period in meat sales.” He notes that a more positive, realistic picture emerges when looking at the five-year average, showing a more positive increase of 0.2%.”
Year-on-year growth was marginally down across all of the big four retailers (Kantar Worldpanel 52 w/e 22 January 2012) while the hard discounters grew, up 47.2%, as well as Marks & Spencer, which showed a strong performance, increasing growth by 9.5%.
Kantar data also shows that consumers continued to lean towards cheaper and slow-roasting cuts, such as stewing and mince, which rose 6.1% and 3.2% respectively year-on-year. Mince remains one of the most popular products, due to its convenience, versatility and position as an everyday affordable option.
Doran says: “Beef mince continues to do well, but the hike in volume sales we experienced in 2009/2010 has started to tail off, as consumers are realising the price inflation. However, it is still cheaper per kilo than other beef cuts, meaning it remains the most frequently purchased product in the beef retail market. Price aside, its convenient nature and versatility, coupled with it quick cook time, allow it to compete with chicken fillets, for example, which is a real benefit.”
The growth of scratch cooking has been a noticeable trend, with consumption of homemade beef dishes increasing by around 2.3% in the 12 months to August 2011 — or around 20 million meal occasions — according to Kantar data.
Mike Whittemore, trade team marketing manager for Eblex, says this research shows that consumers are increasingly watching their purse strings and moving towards cuts that offer good value for money and can be cooked easily at home. “Cheaper cuts are coming to the fore — whether it is brisket for casseroles or mince or the ‘forgotten’ cuts,” he says.
Ready-to-cook ranges of convenience meals have also been popular, being easy to use and removing the complexity from the cooking process. Meanwhile, steak cuts and roasting joints have seen the greatest volume falls, with promotional activity key to sustaining sales, according to Doran.
Tom Harvey, beef, lamb and venison buyer at Marks & Spencer, says promotions have played their part, but consumers are primarily looking for good-value products, which doesn’t just mean the cheapest. “It means finding the right balance of quality and price, which is why the top end of the market and the discount end have both seen good growth,” he explains. “Steaks and slow cooking areas have both been in particularly strong growth — if you are treating yourself to a special meal, then you want to be sure you are going to get a fantastic product.”
Jim Viggars, Asda’s senior beef buyer, agrees, noting that Asda’s Extra Special range has performed above expectations, with shoppers ranking quality above price and promotion. “Our TV campaign back in 2010 increased our base sales and we’ve built upon the success,” he says. “We have delivered a restaurant-style quality product, which is matured for 28 days and our customers trust it.”
As Southam points out, the days of the big promos seem to be waning fast. “I don’t think there will be the same pressure on retailers to shift the volume,” he says, explaining that the tightening supply and increase in exports will result in less available beef. “Mince will stay on promotion though — the three-for-£10 and two-for-£5 offers have been there for two-and-a-half years and are set to stay.”
Dunbia’s Doran says this is not only due to less pressure on the retailers, but indicative of a shift within consumer trends. “Typically in the past, consumers would have bought maybe two or three products on promotion to freeze for future use,” he says, “whereas we are now finding they are enjoying the promoted price and just buying what they need to help them stick to household budgets.”
Harvey says tactics are changing: “There have been big changes in price and promotional activity in the last couple of years with three-for-£10 becoming a stock offer on every retailer’s shelves, and round-pound pricing replacing the old world classic of nines and fives. “Provenance is increasingly important and we shout about our 100% British and regional sourcing work in beef and the fact that we know and trust every farm and farmer supplying us with fresh meat.”
Doran agrees on the issue of provenance: “Although consumers are extremely conscious of the price of beef and seek value for money, they still want locally-produced products, and they are more aware than ever of animal welfare standards — so as an industry, we need to be communicating how we meet and exceed their expectations in these areas.
However, he points out that cash is still king for beef shoppers: “One of the key things consumers want to do in 2012 is stick to their budgets and we have seen trading-down trends to suggest this is happening already; not only trading down from steaks to mince in the beef category, but trading out of beef into chicken and pork.”
Harvey agrees that this is potentially a problem. He says: “Further volatility in cost is the greatest risk. One only needs to look at the fact that lamb consumption in the UK is down 20% to see that customers have limits. The greatest opportunity is for the entire supply chain to work more closely in a true partnership approach.”
Andy McGowan, head of industry development at QMS, notes that value is proving elusive: “It’s a tough retail environment out there just now, so it’s always a challenge to get the value back into the supply chain when consumers don’t have so much money in their pockets. But it’s about all parts of the supply chain trying to do the most. “The processors have been making big efforts in recent years, especially in the fifth-quarter side to try to make sure all the bits we don’t use in the domestic markets are finding a value on the export markets.”
Eblex’s Whittemore says one way of putting value back in is through the opportunities provided by new seam butchery, which he says will help improve margins. “We need to be looking at different cuts that are adding value to both ends,” he says, noting that the uptake has been increasing by about 40% every year. “It is beginning to pay dividends, because it does perform and it is a cheap alternative to the more premium fry cuts, such as rump, sirloin or fillet,” he says.
He adds that, as well as the foodservice sector, where seam butchery is proving popular, two of the major multiples — Morrisons and Waitrose — have lifted it, while Tesco is also looking at it again this coming year, having already trialled it. So while there are some serious challenges facing the beef sector, beef remains a popular choice for the consumer’s dinner table. With beef prices unlikely to come down in the near future, it is important for all aspects of the supply chain to increase efficiency, and keep innovating. Keeping the widest possible margin has never been more important. As Whittemore says: “As a meat industry, we need to be smarter and sharper about how we market and merchandise beef to the customer.” Increasing efficiency, adding value at both ends of the process and celebrating the provenance of British beef will be vital, so that all parts of the supply chain can reap the rewards of higher prices.
Exports and imports
The biggest success story for beef over the past year has been the export market, with sales leaping from 83,400t in 2009 to 109,300t in 2010. In the six months from January to June 2011, these rose by around 40% or 67,438t on the same 2010 period.
Although this figure may be unsustainable, due to the tightness of supply, growth is expected to continued, albeit at around 15% in 2012, according to Eblex export manager Jean-Pierre Garnier. He says demand for UK beef, not only in core Western European markets, but also worldwide, has injected a big boost into the entire market. “Processors rely more and more on exports,” he explains, “as they find the supermarket trade in the UK is quite tough. And an exporter can get a better bargain on the foreign market than he can do in the home market.”
The Eurozone still forms the largest destination for UK beef sales and accounts for around 95% of beef exports, with the Netherlands, Ireland, France and Italy as the top importers. However, with the government spearheading an initiative to increase food and drink exports, there is considerable political support to concentrate on opening up strategic new markets, by removing bans on British red meat and using ministers and ambassadors to promote UK produce. The lucrative markets in Russia and South Africa have been firmly on the agenda within the last month, with Canada, the US, central Europe, Angola, China, Singapore, the United Arab Emirates also on the horizon, as well as a clutch of European counties closer to home.
As well as prime British beef, the opportunities created by export restrictions being lifted worldwide also open up the lucrative fifth-quarter market, with the potential for processors to add value to the carcase and thereby increase profitability.
However, Peter Hardwick, Eblex’s trade development manager, says that although exports are expected to remain strong in 2012, there are some potential challenges. “There is a widely held belief that the exchange rates are the main driver,” he says, “but it is quite clear that exports of beef not only rose in 2012, but accelerated towards the end of the year against the backdrop of a weakening euro. While the effect of a significant fall in the value of the euro cannot be ignored, the biggest threat is economic conditions within the EU and the effect this may have on demand as household budgets are squeezed. On the positive side, non-EU exports are rising. Global trade remained generally US dollar-based and we are increasingly competitive in these markets where supply is tight and demand is rising.”
However, while exports have increased, imports have decreased by around 3%, partly due to tightening global supply. Liz Murphy, director of the International Meat Trade Association (IMTA), would like to see this change, in order to increase the raw material for manufacturers. “It’s great that we’re exporting – but let’s do something for the import side as well. It’s more about security and securing supplies than seeing a substantial drop in prices,” she explains, suggesting that many importers are put off by the high import tariffs.
“Although global prices are high, our import duties are very high – they haven’t come down in reaction to the rise in global prices taking place in the past three to four years. Given the global market, if you reduce the duties, that product will come in at a cheaper price,” she adds. “That means you may be able to offer the exporter a higher price and, that way, secure the product.”
Murphy feels the industry needs flexibility in supply and that while a Mercosur agreement may go some way towards helping this, a World Trade Organisation agreement would be more welcome. “That would mean that you are able to source from whatever country is relevant for you to choose, to suit your customer,” she says. Many British producers, however, fear this would have negative ramifications for the UK industry.