Record beef prices don’t mean profits for all

Good news in the beef sector has been hard to come by in recent years.

Like the pig and dairy sectors, profitability has remained marginal for most producers, despite headlines of higher prices.

Once, the prospect of 200p/kg deadweight seemed unlikely. Then 250p/kg became a reality, then 300p/kg, and now R4L steer prices are hovering around 330p/kg – unthinkable just a few years ago.

Confidence

On the back of such a dramatic improvement in finished prices it should come as no surprise to find confidence growing.

A recent NFU survey showed that 53% of beef and sheep farmers were more confident in the industry’s short-term future – compared with just 24% a year ago.

Delve deeper, however, and the picture changes. While more said their profits were increasing, there was a substantial rise in the number of farmers who admitted their businesses were unprofitable and might struggle to survive.

Pressures

Partly, this is because the most malevolent fixed cost for traditional livestock operations – the inclusion of unpaid family labour – is the one that scuppers otherwise-healthy net margins.

But the most acute pressure on beef producers is the relentless rise in costs. New figures from EBLEX show that, on average, it costs nearly 10p/kg more to produce beef than a year ago.

Yet it’s not just feed costs that eat into profits. Bedding costs will be significantly higher this year as straw prices from short cereal crops in the east mean fewer bales heading west.

Skilled labour is short, energy and fertiliser prices continue to rise, and the cost of replacement stock is growing too.

Margins

Each stage of the beef production system needs to make a margin.

The suckler herds need sustainable prices for growing calves, the store men need a reasonable return, and the finishers need a beef price that leaves room for them as well as the others. On top of that the processor and retailer must find a margin too.

Furthermore, that margin must do more than cover costs of production. It must deliver a return that allows for re-investment in stock, buildings and equipment.

Rising prices have at least meant a future for dairy bull calves, and have put a few more much-needed pounds in the dairymen’s pockets,

One thing is underpinning better finished prices – shorter supplies. Economists say that less Irish beef has found its way to mainland Britain this year. And the continent remains hungry for imports of manufacturing beef, helping support domestic prices here.

Margins are likely to remain under pressure though, as inflation in replacement stock and input costs shows no signs of abating.

Much will depend on the depth of consumers’ pockets. The real impacts of the government’s austerity measures have yet to bite, and changes in consumer behaviour take a little time to feed through the supply chain.

Economists reckon that most beef producers will turn a profit this year. But that still includes single payment and environmental stewardship income helping to keep budgets in the black.

So despite the higher prices, the reality is this: Profitable beef production for some, but not for all.

Editorial by FW business editor, Ian Ashbridge

*Ian Ashbridge was FW’s business editor to September 2011