So who really makes money
24 July 1998
So who really makes money
in meat chain
If theres one thing that riles livestock farmers at the
moment, its the suspicion that supermarkets have profited
from the drop in beef and lamb ex-farm prices by boosting
their margins. But is it that simple? Liz Mason delves into
a far-from-clear situation to find where the money goes
PRODUCERS are only too aware that livestock prices have plunged over the past two years. But meat prices on supermarket shelves have not dropped to the same extent and many farmers question whether supermarkets, which account for about 65% of retail meat sales in Britain, have been raking in profits at their expense.
Meat and Livestock Commission figures reveal that from Dec 1995- Dec 1997 beef and lamb producer prices fell 23%, with a further 5% drop in beef prices between Jan and April this year. And while beef retail prices dropped 7% between Dec 1995- Dec 1997, lamb retail prices rose 6.6% .
The MLC uses price spreads to give a broad measure of the difference between producer and retail price. These are simply average retail price minus average producer price. The gap can be quoted as a percentage of retail price.
MLC price spreads for beef show an increase from 44.5% in Dec 1995 to 54.1% in December 1997. For lamb, the figures jumped from 37.8% in Dec 1995 to 55% in Dec 97. Recent figures indicate no let up in the overall trend.
Bob Bansback, MLC corporate strategy director, told a recent Commons inquiry into the crisis in the Welsh livestock industry: "As far as we can see retailers have retained their margins to an extent.
Retained their share
"If anything we feel the margin on beef has declined a bit over this period for the retailers and the margin on lamb has increased. But in overall terms they have retained their share at a time when the producer has born the brunt of the reduction in returns."
But retailers dispute the MLCs figures. Chris Gilbert-Wood, Marks & Spencers livestock technical manager, accepts that the difference between producer and retail prices has increased "but not to the extent the MLC figures would suggest".
Although MLCs retail cost figures "were pretty damn good", producer prices paid by M&S were above average market price.
At the beginning of March beef producers supplying M&S were paid more than £1/kg liveweight for Charolais and cross breed cattle compared to a market price of 85p/kg, and for Angus cattle producers received £1.20kg/]liveweight.
Producers supplying lamb to M&S abattoirs are also paid above the figure normally quoted as market price. At the beginning of March they were paid 87p/kg liveweight when the average market price was 75p/kg.
But M&S bosses do not like to hear the price paid to M&S suppliers described as a premium. "We do not like the premium word. We like to say that we will pay the market price for the quality we want, so we are not into fixed premiums," says Mr Gilbert-Wood.
Steve Murrells, Tescos head of meat, also insists that the average market price for beef bears no relation to the price paid to Tesco suppliers. "I cannot stress that enough, the price Tesco pays is not the average market price," says Mr Murrells.
And he claims that figures prepared for the committee show that over the past three years, Tescos beef retail price has come down greater than the cost price Tesco pays to its suppliers.
More light was shed on the way prices are agreed between supermarket suppliers and the retailers by representatives from St Merryn Meats, the largest producer of retail packed red meat in the UK.
St Merryn has no contracts with Tesco and Tesco owns no shares within the company, but 85% of St Merryns trade, mostly beef and lamb, goes to the retail chain.
Barton Stacey, St Merryn Meats director, says Tesco has no input into the price paid to producers. "We negotiate with Tesco against the price list that we agree on a weekly or monthly basis, but they have no input," he says.
Consistently higher prices
"Over the past 12 months St Merryn can prove it consistently paid higher prices than any average that you can find, either on a liveweight basis or a deadweight basis," he says.
On top of that producers were paid a quality bonus at the end of the 12 months.
According to other St Merryn bosses, the livestock auction price was irrelevant because producer prices were determined by competition between the major multiples.
Ian Woods, St Merryn company secretary, says the price paid to its producers was "the market price that we have to pay to compete for that article against competing supermarkets producer clubs. They are the ones setting the price for that type of product."
Brendan Hughes, St Merryns managing director, also believes that the auction market price is irrelevant.
"We deal with the major multiples and that is who we trade against. That is where our market price as a separate market is actually determined," he says.
Evidence from John Kelly, managing director of Dawn Pac, the retail packing arm of Irish-based Dawn Meats Ltd, reinforced the power of the supermarket suppliers in determining prices.
"Without bad-mouthing any of my customers, supermarkets control 65%-70% of the market in retail and retail is just under half total consumption. So they have a huge influence on what we can pay for cattle, because, at the end of the day they are the ones we are selling the beef to.
"It is huge, but I could not specify it any more than that," says Mr Kelly. "If we got more for the beef we could pay more for the beef, but we are not going to push too hard to get more for the beef because there are 450 abattoirs out there as well as us who could equally do it cheaper. It is a very competitive business because of the over-capacity."
Over-capacity in the abattoir industry played a huge part in pushing down producer prices, he suggests. Dawn Pac worked out its beef and lamb producer prices based on what it thought it would get for the end product. But competition between suppliers had a big influence.
"If someone has a particularly good job for beef locally – a competitor of ours locally – he may be paying a lot more than, say someone 200 miles away who has not got an equally good customer.
Cattle price-driven
"So it is what you think you are going to get for the meat on the sales end and what you are going to have to pay for cattle on the other end. It is largely cattle price-driven rather than sales price because the price of cattle is dictated by the 450-odd abattoirs in Britain. We are by no means able to control the cost of the raw material."
One way of increasing that control was through immediate rationalisation of the slaughtering sector to slash the number of abattoirs from 450 to 40. Such a move would mean "there would not be 439 people, or whatever it is, able to come in and quote prices in the same week I was quoting prices," says Mr Kelly.
Rather than an ad-hoc balancing act, St Merryn bosses have a formula agreed with Tesco for converting livestock price to primal transfer prices, and a second formula to reflect yields to retail pack.
Mr Woods told the committee that, as a processor in the middle of the chain, St Merryn was trying to recover its processing costs from Tesco. "We need to be paid those processing costs. That is what we are trying to do with that equation. There are fixed factors in that equation between the starting price and the finishing price that are variables.
"They represent our costs and it is those costs that we have the greatest difficulty in recovering in this process. That is the biggest challenge we face as a processor."
Retailers maintain that the burden of extra costs in the abattoir, processing and packing sectors was responsible for the increased gap between producer and retail prices. Some claim moves to improve traceability through livestock assurance schemes had also added to retail costs.
MLC officials agree that the increasing gap between producer and retail prices was due to extra costs and losses caused by BSE including:
• A big change, particularly for beef, in the balance of cuts sold at retail level with more higher priced cuts being sold.
• A big increase in processing costs, due to a lower return on meat and bonemeal and tallow, and the withdrawal of the rendering subsidy estimated to cost the beef sector £43m (£20/head) and the sheep sector £32m (£1.37/head).
• Reduced value of offal by-products and cattle hides to abattoirs.
• A change in structure of the beef industry with the introduction of the OTMS and the beef export ban.
• A big drop in price for certain forequarter cuts which has affected average producer returns.
Tony Sullivan, Sainsburys senior fresh buying manager, reckons its suppliers costs had risen by £100 per animal between 1995 and 1997. The price at which they sold beef to Sainsburys had risen by 12%, while retail price had dropped 5%.
Less revenue
"Our gross margins are lower year-on-year, our cost prices are higher. I believe our supplier costs are higher, everybody is having to pay more money and receiving less revenue for the cost of production of beef," says Mr Sullivan.
But lamb prices had come down both from suppliers and into the store for the customer by about 10-15% depending on the cut. Mr Sullivan claimed retail prices had fallen in line with the cost price reduction. But again there had also been increased costs born by Sainsburys suppliers.
Evidence from a group of Scottish farmers, who had been investigating margins throughout these beef and lamb sector, pointed out that wholesale or abattoir prices to retailers could vary considerably depending on whether meat was sold as primals (sides) or as CAPs (fully butchered and ready for sale to the public) and figures showed average drops of about 18% to December 1997.
"If multiples are saying they are paying more to the abattoir in 1997 compared to 1995, it is solely because they are taking a much reduced percentage of primals and a higher proportion of CAPs which can be directly sold to the public with all procurement and butchery costs being absorbed by the suppliers."
That, say farmers, is an important factor which retailers never mentioned when it came to defending their stance on negative profits.
Not increasing
Safeway insists that it was not increasing, but maintaining profit margins year on year in the red meat sector. And any "missing profit" in the beef sector could be accounted for by the decline in value of the fifth quarter, including hides and edible offals, and extra abattoir costs.
Over the two-year period which saw livestock prices drop 30p/kg liveweight and retail top side prices by 20p/kg, Safeway reckons the fifth quarter residual reduction amounted to the equivalent of an extra 38p/kg on the price of edible beef cuts. More recently that reduction has increased to a level of 44p/kg.
But Mr Bansback, of the MLC, says he does not believe these added costs were to blame for the fall in producer prices. Although some costs were being passed down the chain, the drop in producer prices has been due to competition from cheaper imports, and the effect of the strong pound, which had particularly hit British lamb exports.
That is the key factor affecting the producer price at the moment rather than the effect of the SRM charges," he says.
Unimpressed by the evidence, MPs called for an inquiry by the Office of Fair Trading. They said the OFT should establish what percentage of retail and wholesale costs were being passed back to producers by supermarkets. And as the retailers control of the supply chain strengthened, the MPs argued that their dominance should not be used as a weapon with which to push producers prices lower.
Estimated price/cost
changes in the beef chain
£/head
1995 1997
Live steer price £745.20 £564.60
Wholesale selling
price (324kg cass) £784.10 £639.90
Hide + other
by-product sales £48.10 £40
SRM disposal costs £1.60 £4.20
Rendering charges £0.00 £11
Slaughter and boning
costs £79 £83.70
Retail selling price £1040 £1004.10
Loss due to higher
cutting specs £0.00 £43
Drip loss £26 £25.10
Retail costs £220 £281
Estimated price/cost
changes in the lamb chain
£/head
1995 1997
Live lamb price (38kg) £42.20 £37.40
Wholesale selling price £42.10 £39.70
Skin + other
by-product sales £8.90 £9.00
SRM disposal costs £0.00 £0 30p
Rendering charges £0.00 £0 80p
Slaughter & boning
costs £5.50 £5.80
Retail selling price £56.70 £60.80
Loss due to higher
cutting specs £0.00 £2.40
Drip loss £1.40 £1.50
Retail costs £11.00 £12.80
Source: MLC March 1998
Live steer to retail pack
Live steer Producer price £469
(liveweight 507kg)
Slaughter Abattoir costs £56
Hide and offal sale £32
Deadweight Deadweight 284kg
Deboned Wt of boneless beef 213kg
Yield 75%
Boning, packaging &
associated costs £53.57
Cut for retail packs Total retail packing
costs £216
Transport to distribution n/a
Cost to retailer £766
Store delivery costs n/a
Live lamb to retail pack
Live lamb Producer price £34.58
(liveweight 43kg)
Slaughter Deadweight 19kg total
Revenue to abattoir from sale of carcass and skin £43.53
Abattoir costs £8.53
Carcass to primals 96% yield
Cut for retail packs 75% yield
Transport to distribution n/a
Cost to retailer £61.12
Store delivery costs n/a
Source: CRS Feb 1998