Demise talk is over top, but…

3 March 2000

Demise talk is over top, but…

By Robert Harris

TALK of the imminent demise of the UK pig industry is alarmist and unjustified, but painful restructuring is needed to achieve international competitiveness, says a recently-released report.

"By any yardstick pig farms are suffering from a severe reduction in their incomes," says author Sean Rickard, head of the executive MBA at Cranfield School of Management. "Behind the statistics and the graphs are many social tragedies and mounting hardship."

In the report, A Future for the Pig Industry, the latest in the Lloyds TSB Challenges and Prospects series, Mr Rickard says over-production is partly to blame for the pig sectors crisis.

The weakening £ during 1994-95 and the BSE crisis in March 1996 pushed prices up to a 150p/kg peak in mid-1996 (see graph), encouraging farmers to increase sow numbers.

Although a resulting downturn in prices was inevitable, the strengthening £, which has gained "an incredible" 29% against the k since 1996 greatly exacerbated this by making imports much more competitive. The combined effect proved "disastrous", the most vicious downturn in farm-gate prices in living memory, he notes.

There is some evidence that recovery is under way. He believes the £ has reached its zenith, though it is likely to remain strong for the foreseeable future, perhaps only losing 5% of its value until the government sets a date for economic and monetary union membership.

Pig production is also falling, not only here but also on the Continent, where a weak market has capped UK values. "All the signs indicate that EU prices will continue to firm during 2000."

Short-term aid

Nevertheless, he acknowledges the case for short-term aid, to help offset the cost burden of unilateral welfare and feed regulations. "For a sector that receives very little support, there is a strong case for temporary help for the damage being inflicted by the over-valued £."

Mr Rickard forecasts an average net margin loss in the UK of £6.80 a pig in 1999/2000. Although this is £6 better than the previous year, farmers made about £20 a pig in 1995/96, he recalls.

The single market, EU enlargement and reduced tariff barriers, certain to be agreed when the WTO millennium round concludes in 2003, all point to increasing competition, with the US posing a bigger threat than ever.

Pig production must be concentrated on bigger, well-managed, cost-competitive farms, says Mr Rickard, the best of which are already capable of matching the performance of US units.

He predicts that, in the next two years, a further 4000 holdings will disappear in the UK, the same number that have gone in the past seven years. The sooner the higher cost, less efficient enterprises exit the industry the better, he adds.

"This is a harsh message, but there is no realistic alternative. The longer incomes are depressed, the greater the risk to potentially viable farms who have high levels of debt caused not by lax cost control, but by investment."

However, squeezing production costs and waiting for the £ to depreciate are not enough to secure a more prosperous and stable future, he adds. "Farms do not exist in a vacuum. In a world of global competitors only supply chain partnerships can efficiently and effectively deliver the customisation at competitive prices that will ensure the competitive advantage of the UK pig industry."

Farmers have to stop thinking pigs, and think product, he said. Independent commodity sectors hand market power down the supply chain to processors, caterers and retailers. "Merely producing pigmeat is no longer sufficient. It is necessary to capture additional value."

Greater integration among producers is vital, by forming clusters of pig farms which can benchmark performance, share information and create a critical mass of output, he advises.

This will help farmers to integrate vertically, working more closely with processors. "It will greatly reduce transaction costs – the cost of negotiating price, volume, quality and weights each week is an enormous cost burden on the industry – according to one estimate, about 20% of the retail price. Much better to do it once a year," says Mr Rickard.

Closer integration will also allow the pig industry to respond better to changing consumer demands. "Bound tightly together and committed to common goals, the UK supply chain is potentially world class and capable of exploiting world markets," he adds.



* Production falling, though £ remains strong.

* Signs of recovery?

* Most producers still in red.

* Greater competition coming.

* Cost-competitive farms vital.

* Supply chain integration needed.


&#8226 Production falling, though £ remains strong.

&#8226 Signs of recovery?

&#8226 Most producers still in red.

&#8226 Greater competition coming.

&#8226 Cost-competitive farms vital.

&#8226 Supply chain integration needed.

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