The livestock sector is facing stiff challenges to profitability this season, but the long-term fundamentals remain favourable, according to speakers at the AHDB Outlook conference in London last week. Paul Spackman and Robyn Vinter report

Dairy: Price pressure

Price cuts announced last week were symptomatic of the challenges facing dairy farmers around the world, DairyCo’s senior analyst Julie MacLeod told the conference.

The sector faced a tough period of short-term over-supply, which, combined with weakened demand, was putting pressure on farmgate prices.

Production was up in many key regions in both the northern and southern hemisphere, she said. For example, in New Zealand, which exports half of its milk output to China, production was running around 10% above last season, while EU-27 output in 2011/12 was 2% up and UK output in 2012/13 was forecast slightly higher than the season just gone, at 13.56bn litres.

However, the longer-term fundamentals – driven largely by population increases – remained positive and a supply correction in the second half of this year should lead to recovery in 2012/13, Ms MacLeod said.

This correction could come from some herds being forced into liquidation, while others may be tempted to cash in on the firm market prices for cull cows. All farmers would have to contend with the high cost of inputs though, which would put added pressure on businesses, she said.

The pressure on the sector was illustrated by the “huge increase” in dairy cullings recently – 5.5% of the herd was culled in 2011/12, up from 4.1% the previous year. This had been driven by TB losses and the high market prices for stock, but did mean that the industry had a younger, more viable herd, she noted.

Beef: Tight supplies underpin market

The outlook for cattle prices appeared to be relatively firm for the remainder of the year, as supplies were set to tighten further, senior analyst Debbie Butcher said.

Overall, UK prime cattle slaughterings were down 9% during the first quarter of 2012 compared with last year, with the most notable decrease in young bull slaughterings, which were down 19.5%.

Cow slaughterings were forecast to drop to 579,000 head this year and 552,000 in 2013. While this was fewer than the 645,000 in 2011, the number was roughly on par with 2010, she said.

Average carcase weights remained consistent with 2011, however the trend for faster finishing continued, she added. “Around 60% of cattle were finished under 24 months-old last year, compared with 50% in 2006.”

Export demand had dipped in the first two months of 2012, but Ms Butcher was cautiously optimistic it would pick up and remain largely unchanged by the year end. “We still feel our product is well received, so the demand is out there and there isn’t really any extra coming from elsewhere at the moment.”

Sheep: Margins under pressure

Sheep producer margins were predicted to come under pressure during this year, despite some moderation of input costs, said Stuart Ashworth, head of economic services at Quality Meat Scotland.

The basic supply and demand balance remained in favour of producers, but the strong prices were coming under scrutiny as supplies increased and the pound continued to strengthen against the euro, he said.

Breeding ewe numbers began to rise in 2011 after falling consistently for the previous six years and a bigger lamb crop was likely in 2012, despite losses caused by the Schmallenberg virus.

“It seems we largely escaped Schmallenberg in the UK in terms of numbers, but some losses have yet to be recorded,” said Mr Ashworth.

Annual sheepmeat production was forecast to rise by 5,000t to 294,000t this year and 296,000t in 2013. Exports were forecast to grow by a similar amount, while imports were predicted to drop slightly (by 4,000t) in 2012 to 99,000t and remain at that level next year.

Analysts were hesitant to predict the effect of CAP reform on UK producers, but the low-cost English production system was the most resilient in Europe, said Mr Ashworth.

Retail: Growth continues

Meat and dairy remained in demand despite tough retail conditions, with either one featuring in 18 of the top 20 meals eaten in the UK, according to Giles Quick of Kantar Worldpanel.

Some 84% of households bought fresh red meat every four weeks, with the sector worth £5.42bn. Dairy was worth almost double that, and consumed by 99.7% of households every four weeks. Local or British products remained popular, despite the recession, although shoppers were opting for cheaper products (mince, own labels, etc), he said.

Annual spending on dairy had grown by 3-4% over the past five years, equivalent to 12.4% of all food and drink, he said. That compared with overall grocery price inflation at 5.5%.

Mr Quick acknowledged that much of the rise in dairy spending could have been driven by increased spending on more expensive added-value products, rather than shoppers buying more or paying more for core products such as milk, cheese and butter – which had been subject to heavy discounting by retailers.

In the fresh meat sector, consumers were switching away from the traditional “meat and two veg”, where the focus of the meal was a particular cut of meat, towards processed dishes where meat was an ingredient, rather than the focus.

Health as a reason for buying had doubled in importance since 1995, but the perception that eating healthily cost more meant that its importance had temporarily dropped during the downturn, he noted.