28 December 2001

Commodities in 2002

Of all the bad years farming has had to face, 2001 tops the

lot. Foot-and-mouth played havoc with livestock marketing,

and had a knock-on effect on other sectors. A weak k

continued to undermine prices and subsidy payments, while

some input costs rose again. So what is in store for 2002?

Find out what we think in this special commodities preview

put together by the farmers weekly business team

IT has been yet another traumatic year for the beleagured beef industry.

Last year, BSE in Europe wreaked havoc in the market as consumers on the Continent turned their backs on the product.

This year, foot-and-mouth has ravaged the UK industry and left it with 800,000 fewer animals than at the start of 2001. The industry may already have been declining, but not at such speed.

The worrying consequence and the big challenge is domestic market share. In 2000, just under a quarter of all beef consumed in this country was imported. In 2001 this rose to a third. Next year, the experts are predicting a further rise to 40%.

Prime cattle slaughterings have been running about 10% below last years levels for most of 2001. Next year the shortfall is set to continue and pundits predict the UK will be short of 300,000 cattle. Inevitably, imports will shape the market and influence price.

At the end of 2000 and the beginning of this year, a crisis in consumption on the Continent saw German prices plummet to just 131p/kg in January, with much EU surplus beef making its way to the UK.

In the first nine months of this year, German beef imports grew by 475% to over 7000t. A flood of imports will only keep prices in a straitjacket. Ireland has sold record levels of beef to the UK this year, about 160,000t-190,000t. It has benefited from close ties with UK processors and retailers and a competitive price, at one point falling to 140p/kg sterling equivalent. And with trade this competitive, commentators agree that is hard to see UK prices taking off.

Domestically, a huge number of bull calves are disposed of from the dairy sector each year, and analysts lament the lost opportunity to increase British beef on plates by taking advantage of this resource.

In 2001 at least 800,000 calves were taken out of the system. There is some hope this might have peaked as movement restrictions regarding multiple pick-ups ease.

The finished sector is crying out for these animals, which would certainly help offset imports, but unless there is a margin, producers will not get involved. Some observers believe that an increase in slaughter premium, to about £48 a head next year, and the repeal of the limit of beef special premium claims made on one unit makes finishing better quality Holstein bulls a runner.

Other premiums are set to rise as well. Both suckler cow and beef special premium payments for steers are likely to increase by nearly £10, to about £120 and £90 a head, respectively. Young bull BSP claims will gain even more, with payments likely to be about £126 a head.

Broadly speaking, prices have remained similar to last year for most of this one, until the autumn when they took a serious dive after hide prices fell by £25 apiece. Since then the GB average price has recovered to 168p/kg, compared with 157p/kg in the same week last year.

If supplies remain fairly tight in the festive period, there could be further gains, particularly if restocking keeps heifers off the market.

The outlook sees beef consumption improving throughout the EU and there is hope that more markets will reopen for third country EU beef exports. Egypt has lifted its ban on Irish beef, which will help the UK market if trading resumes at the same level at which it left off. In recent years Egypt has imported 150,000t of Irish beef, accounting for 20% of the Republics beef exports.

This could deflect surplus EU beef away from the UK and keep the heat off domestic prices. These could also benefit from improving UK beef consumption, which was down by about 4% this year, but is expected to recover slightly next year.

FOOT-AND-MOUTH has hit the sheep sector harder than all the other meat sectors.

Already in decline, the onset of the disease in February has seen a 15% reduction in the breeding flock through forced culls.

Prime lamb slaughterings are also down – 30% lower than last year at 9.2m. But the market has shown little benefit, with the export ban cancelling out any upward price movement that lower supplies might have brought about.

However, with the export gates reopened, the supply/demand equation should look healthier, with experts hoping for better prices in 2002.

As this year closes, lamb prices have seen a temporary respite, lifting to post-F&M highs. By the beginning of December they had climbed to 210p/kg deadweight, well above last years figure of 174p/kg; a remarkable turn-around after a serious slump in the autumn, when prices fell to 140p/kg. Even so, analysts doubt the trade will continue upward like the first two months of 2001.

Prospects for next year are in the hands of the exporters, who normally take about 30% of production. Although EU legislation has lifted the export ban, any meaningful recovery in volumes leaving the UK is not expected until the New Year.

Frances unilateral action to impose a ban on spinal cord for all carcasses over six months old poses the biggest threat, as it normally takes 70% of UK exports. At present there is no real means of telling whether a carcass is beyond that age, so most carcasses will have to be split. This will add costs and threaten the French trade, which prefers whole carcasses.

How exports perform in light of this will determine sales, although observers cant foresee last years first quarter trade being repeated, when prices were flying at 230p-250p/kg.

Lamb supply will be down though, with first quarter levels predicted to be 6% below last year and an amazing 25% below normal clean sheep slaughterings of about 3.5m. This confounds earlier predictions of a surplus of light lambs, even though the light lamb scheme only accounted for 525,000 head, well below its 1m target.

If exporters get trade going there is every chance that the market will be tight and prices will improve, but already New Zealand lamb is being imported as supplies tighten before the New Year.

There are other markets apart from France. The Meat and Livestock Commission predicts Germany and Belgium will take at least 10,000t of product and light lamb trade to Mediterranean countries will account for a further 10,000t.

Restocking will occur on UK farms, although it might be on a lesser scale, meaning smaller flocks than before F&M. Producers will cut back on rented pasture and away wintering, say pundits.

A PIG industry full of expectation at the start of the year saw its hopes dashed as the months rolled by.

Better omens and the prospect for a year of sustained price improvement were scuppered by movement restrictions and the loss of the export trade through foot-and-mouth.

Pig numbers have also continued to decline as the industry restructures, and there are now 20% fewer holdings with pigs than during 2000. This trend looks set to continue, leaving production in fewer hands.

Slaughterings have fallen to a weekly total of about 215,000, well below the 300,000 that processors were killing a few years ago. One commentator reckons this could fall further next year, to 160,000-170,000 by early summer.

Pressure on productivity is the last thing many producers want, having weathered heavy losses over the past three years. But pig health is not in good shape after three years of low investment. Pig wasting diseases are affecting a large number of herds, and F&M rules have prevented many from rebuilding numbers, so production will remain depressed.

Other knock-on effects of the F&M outbreak were equally unwelcome. Fewer pigs might have been lost through culls than sheep and cattle, but the market was affected just as badly.

The adjusted Euro spec average GB price kicked off 2001 at 103p/kg, well above the 75p/kg being offered the previous year. But the F&M export ban pulled the market back to about 95p/kg, about break-even price. The ban ground to a halt a lucrative trade to the Continent in forequarters and bellies. This hit the market, leaving processors with the difficult job of flogging a product UK consumers do not like.

Prices remained at that level for much of this year. But mid-December values have crept over the £1/kg mark, to 105p/kg, and spot prices are higher than they were a year before. Most improvement comes from exports restarting and good demand for UK pigmeat from domestic retailers.

Most pundits agree that next years pig market will reflect Continental returns.

Should a 10p/kg gap open up between UK pig prices and those on the Continent, then imports will follow, the industry cautions. The story on the Continent as we end this year shows how dangerously close the UK is to that mark now. During November, UK prices topped the EU price table at 97p/kg, up by 4.2% on the previous month.

Meanwhile, prices in Germany were 87.4p/kg, down by 8.2% on the month before. Danish prices also fell to 86.8p/kg, while average trading in Holland had dropped to just 71.4p/kg, a fall of over 10% on the previous month. But most analysts reckon this trade has bottomed, though a stronger £ against the k might change all that.

The pig market has become fully integrated and pan-European, meaning prices are unlikely to have a high upside. Falling domestic market share is not helping, after three years of declining pig numbers. The future looks brighter, but only marginally.

THE past year rekindled a sense of optimism among UK dairy farmers.

After four years of falling prices, from 25p/litre in 1996 to just under 17p/litre last year, the sector was in danger of collapse.

After intense farmer pressure, supermarkets raised their shop prices last autumn and again this spring, and processors decided to share some spoils from buoyant commodity prices. Farm milk values rose by 2.8-3p/litre to levels not seen since 1997.

But this gain has already been eroded, and is in danger of being wiped out completely before long.

It is a marked turnaround. Until recently, the feeling was that prices could rise again. The main catalyst was expected to be a milk shortage due to foot-and-mouth casualties. Many observers predicted a 5%, or bigger, decline in milk output, and processors geared up for this.

But, while output remains well below quota, there has been plenty of milk to go round. With the best margin over quota ever, farmers retained older cows and milked them hard, and an open autumn helped to keep milk flowing, too.

While production has climbed, commodity prices have tumbled. World supply outstripped demand and recession started to bite.

In the past six months, the value of skimmed milk powder has fallen by 20% to about £1300/t. Butter has fallen about 10% to £1800-£1850/t.

To make matters worse, the European Commission cut export subsidies hard, making it difficult for EU exporters to compete on world markets.

At least UK values are unlikely to fall further. Butter is now at intervention levels, putting a floor in the market, and SMP support opens in March.

While declining commodity returns put pressure on farm-gate prices, the question is, to what extent?

The hope is that the price slump may have been overdone. Consultant Michael Bessey believes world demand has fallen only modestly, but enough to persuade would-be buyers to wait for lower prices, pushing the market down further.

If that is true, prices may stage some recovery in the spring when stocks fall. EU prices are already stabilising, and the commission also raised export refunds by a modest k100/t a month ago. The hope is that more will follow.

But mild Cheddar values have also suffered, falling about £300/t since June to about £2000/t. And a big cheese make in Ireland and the UK (up 17% and 11% in the first nine months of 2000) is overhanging the market.

Commodity processors are already talking of farm-gate price cuts of 1-2p/litre next spring. With SMP and butter accounting for 20% of the UKs raw milk, and cheese another 30%, that is bad enough. But such action could trigger cuts in the liquid milk sector, too.

Retail prices are likely to stay at or near present levels – supermarkets are unlikely to raise store prices again, but they are unlikely to cut them either, as shoppers continue to buy more milk, even though it costs more.

But cut-throat competition by processors for market share is squeezing margins in this sector, and they are likely to seize any chance to reduce the damage.

Some companies have already cut prices this autumn. DEFRA figures show that the average ex-farm milk price for Oct 2001 (including seasonality bonuses) was 20.22p/litre.

It seems that milk producers would be wise to budget for further erosion from the spring.

The main hope is that commodity prices do firm. For, if ex-farm prices slump to last years lows, then farmer confidence will evaporate. Many who have clung on could finally quit. Others may push production to cover costs. But some of these, faced with higher quota prices in the autumn, could come unstuck, leaving processors having to hunt for supplies.

THIS seasons wheat markets could hardly have been more different to last years, with production down by a third after the wettest autumn on record.

Wheat plantings fell to a 20-year low, resulting in a 12m tonne crop, well down on last seasons record 16.7m tonnes. This left an exportable surplus of just over 1m tonnes, allowing prices to move up by £15/t from export levels to import parity.

Imports from Denmark and a record eastern European crop have capped UK feed wheat prices at about £75/t. But Baltic Sea imports will soon grind to halt as the ports will be frozen until April.

This will not give UK prices a free rein, as Brussels is concerned about rising inflation, and is trying to curb unwanted price rises. It removed the k10 import duty on eastern European grain in November, and is refusing to grant export subsidies, which means the EU must export at world prices. As a final resort, up to 3m tonnes of intervention rye can be released on to internal EU markets.

Only about 15% of the 1m tonne UK surplus had been exported by the end of November. At current values, it might prove difficult to shift all the rest, so there could be some slackening of prices later on, unless the £ weakens or world markets rise to make the UK export-competitive. Soft wheat export levels are £5-£6/t below UK values.

But this surplus will have to be exported at some point, as a £10/t drop from June to Sept 2002 will dissuade any carrying over of stocks. A large amount of wheat sales are being rolled from this month into January, and with consumers already well covered, any significant farm selling could pressure prices earlier than anticipated.

Looking further ahead, the surplus from harvest 2002 is expected to be up to five times bigger, after good conditions encouraged farmers to drill more winter wheat. Pundits are pencilling in a 17m-19m tonne crop.

This has been largely factored in, and UK wheat is already trading below US and French soft wheat markets, at £67/t for November. But although more of the surplus than usual will need to be exported outside the EU, price rises are a possibility if UK quality is good.

With EU grain now trading at world prices, much more volatility can be expected. The International Grains Council recently predicted a 15m tonne rise in world wheat production in 2002.

The Australian and EU crops are expected to be large, and good conditions are reported in eastern Europe. But US winter wheat has been given the worst ratings since 1991, and bad weather in South America has curbed cereal plantings.

The big unknown is China, which has now been approved for WTO entry. This will open the doors for more trade, but it is uncertain if China will be a net importer or exporter over the next few years.

Feed barley has traded £8/t below feed wheat for most of the year, and this discount is unlikely to widen. Feed compounders are switching from wheat to barley, providing some support to prices, and farmers have also drilled potentially the smallest UK barley crop in 40 years this autumn.

The winter malting crop is already in tight supply and, at £76-£80/t ex-farm, is only slightly cheaper than spring barley, which saw a near-50% jump in production this year. But quality is variable, and exports of the 300,000t surplus are off to a slow start.

Milling wheat is also of variable quality, with only 53% meeting a reduced breadmaking specification, according to the Home-Grown Cereals Authority. But millers can use a wide range of wheat, and premiums are available for most specifications. Supply could get tight later in the season, but a large UK and EU crop is expected next harvest, and if quality is good, premiums will come under some pressure.