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Northern Ireland Red Meat - Strategy Review (Oct 2007)

by 5m Editor
5 October 2007, at 12:00am

The Northern Ireland Red Meat Industry Task Force was established to develop a 5 to 10 year strategy for the beef and sheepmeat industry. The Task Force includes representatives from the UFU, NIMEA, DARD, LMC, Invest NI and NBA.

This Task Force report is the culmination of several months of work by the Northern Ireland Red Meat Task Force. This has included a survey of over 1,000 producers, a detailed financial survey of the economics of processing, over 100 in-depth interviews with stakeholders and experts from across the industry, analysis of a range of case studies, field visits and a series of Task Force review meetings and workshops. The Task Force is very grateful for the cooperation and engagement of the whole industry in the development of this report.

The red meat industry in Northern Ireland is currently generating a loss of over £200m per annum when full production costs are included. This whole industry loss is driven by the very poor economics of production. The losses from production - estimated at ~£260m per annum with fully loaded costs - are significantly higher than the ~£15-20m profits per annum generated by each of the processing sector and the retailing sector of Northern Ireland red meat. The result is that the vast majority of producers are using their Single Farm Payment (SFP) to cover the costs of lossmaking production. This situation is despite reasonable market conditions in which consumer demand for beef and lamb in the UK has been stable or slowly growing. In fact, over the past 10 years against the backdrop of BSE and its effects on trade and consumption, Northern Ireland has been successful in building its market share with grocery multiples and food services in Great Britain, within an increasingly competitive global market.

Producers have been trying hard to find ways to reduce their costs and improve efficiency, but this has proved extremely difficult. There is a very highly fragmented producer base in Northern Ireland. Some 20,000 farms are engaged in red meat production: over 80% of beef suckler farms have fewer than 30 cows and nearly 80% of beef finishing farms have fewer than 30 head of cattle. The ability of small producers to improve efficiency further and to benefit from economies of scale is very constrained. This fragmentation also makes it very difficult to introduce standardisation and adoption of best practice (for example, on age at slaughter) and it hinders the development of commercial partnerships between producers and processors/retailers.

Producers are acutely aware of the difficulty they are in but so far have been very reluctant to cease production. The Task Force survey of 1,000 producers suggests that instead many (over 40%) are planning to reduce their herds to stem the losses. This would improve cashflow in the short-term, but will not reduce fixed costs and would likely lead to further inefficiency. Processing is much more consolidated with the largest 5 processors accounting for approximately 90%¹ of the red meat processed. Their operations are generally efficient on an individual shift basis and processors have been successful in building up business with UK multiple retailers so that Northern Ireland now has a 12% share of this market. The Task Force processor survey suggests that their margins of around 5% are in line with industry benchmarks. However, there is substantial over-capacity in slaughtering and boning – close to 100% - and processors are facing a declining supply base. Processors do not exert the kind of influence over production that is evident in other supply chains – e.g., poultry – and the result is volatility of supply, variable product quality and sub-scale batches of animals.

The Task Force has looked at a range of possible solutions to the problems the industry faces. A central question has been whether farm-gate prices will rise to cover the cost of production. It is the Task Force’s view that while some upward movement in retail price cannot be ruled out (primarily to reflect recent increases in input costs as has been seen in other sectors), the industry should not assume that retail and farm-gate prices will rise sufficiently to cover the full costs of the current production system and supply chains. Global supply and demand are projected to remain broadly in balance, and the option remains for imports from Latin America to offset declines in local production. In addition, although premium lines are growing fast, they are still very small in absolute terms and often the retail premium is not based on production characteristics. Therefore, the potential for NI producers to capture these retail premia is limited. The major retailers that have been interviewed for this review have been consistent in what they have said - while they want to buy from a sustainable local supply, they (and their customers) are not prepared to pay to cover the costs of an inefficient supply chain.

Other options considered by the Task Force include the opportunity to sell to other markets which may offer greater returns (e.g., Italy for beef). However the total costs of production in many cases still outweigh the potential returns from these markets and premium European markets are typically focused towards locally supplied products. Therefore, the Task Force has concluded that the UK should remain the core market for the Northern Ireland industry, at least in the shortmedium term.

If the industry does not change course then a continuation or acceleration of the current decline is almost inevitable. This is likely to be prolonged and painful for producers who would continue to reduce herds and possibly sell off small amounts of land to keep going and supplement their cashflow. It is likely that the largest and most commercially minded producers would be amongst the first to exit. Smaller producers may be more reluctant to stop producing altogether. In practice this would mean they would be using a large proportion of the next 6 years of Single Farm Payment to subsidise losses from production, rather than utilising their SFP to transition to diversification or exit and improving both their cash and economic returns. As supply declines, processors’ margins would be severely impacted and there would almost certainly be a rationalisation of capacity and a shift of attention to Great Britain, Republic of Ireland or other international opportunities.

A prerequisite for the development of the strategy is the identification of economically viable production models for Northern Ireland. The Task Force has invested a lot of effort in studying the viability of alternative models with the test being whether the full costs of production – including the cost of land, farmers’ labour and working capital - could be covered. Research from Greenmount, Hillsborough and other UK-based research bodies has been examined and researchers consulted, interviews and farm visits have been conducted with practitioners (e.g., Blade Farming) and three expert panels – technical, beef producers, and sheep producers - have debated alternative models. Details of the assumptions and economics underpinning these models are in chapter 5. The conclusions are that:

  • It may be possible to create an economically viable model for dairy-origin beef production provided aggressive cost efficiencies can be achieved through a processor-led production system and farm-gate prices move to the levels seen in GB:
    • A dairy/beef-cross production model (e.g., for dairy/Aberdeen Angus crosses) may be viable with substantial cost efficiencies and a farm-gate price of approximately £2.25/kg (similar to that paid in GB in the Blade Farming model and in NI for Aberdeen Angus animals);
    • Full-bred dairy animal production models may be viable, again with substantial cost efficiencies and farm-gate prices in the region of £2.05/kg and £2.25/kg;
  • For suckler-origin beef, without a dramatic increase in average farm-gate price to just under £3.20/kg, there is no prospect of creating an economically viable model of production for even the most efficient producer of suckler-origin beef (producers with at least top 10% performance and scale of 100 cows or 100/200 finishing animals). Even if market conditions allowed a reduction in land prices and concentrate costs, if scale could be increased to 300/600 finished animals and labour efficiency increased further (from ~200 to ~400 finishing animals/man), an average farm-gate price of approximately £2.75/kg would still be needed to break-even;
  • An economically viable model for upland-lowland (grassland) sheep may be attainable through increases in scale and/or reduction in land prices towards levels closer to those seen in GB;
  • It is not possible to create an economically viable production model for an efficient producer of hill sheep unless the farm-gate price increases substantially to approximately £2.80/kg.
Based on these conclusions and the significant upside that the SFP provides over the next 6 years (nearly £1b of SFP will be paid out in NI from 2008 to 2013 in NI), the Task Force has agreed five principles for the industry’s strategy:

  1. The current industry is not viable and players who remain in the industry should prioritise market-focused investment towards creating economically viable scale and efficiency, and better coordinated supply chains.
  2. Dairy-origin beef and upland-lowland (grassland) sheep models show potential for economic viability with processors playing a key role alongside the participation of government in developing and transitioning to these models.
  3. In the absence of a commitment from retailers and manufacturers to a significant movement in farm-gate prices, the Task Force can not see in general the prospect of an economically viable suckler-origin beef or hill sheep model.
  4. There is no economic case for long-term Government financial support to subsidise suckler-origin beef or hill sheep production; any case for Government support would therefore need to be based on wider considerations.
  5. The evidence suggests that current suckler-origin beef and hill sheep producers who wish an economic return would be significantly better off if they used their SFP to transition towards diversification or exit; those that choose to remain in sucklerorigin beef and hill-sheep production should be aware that they are highly unlikely to make an economic return.


The strategy developed by the Task Force is therefore to: Engage with core customers; Build efficient and commercially viable supply chains for dairy-origin beef and upland-lowland (grassland) sheep production; In the event that the necessary, substantial farm-gate price increases are achieved: Build efficient and commercially viable supply chains for suckler-origin beef and/or hill sheep; In the absence of the necessary farm-gate price increases: Facilitate the anticipated decline of the suckler-origin beef herd and the hill sheep flock.

The Task Force’s strategy involves the creation of commercially viable supply chains for dairyorigin beef and upland-lowland (grassland) sheep which will lead to the emergence of a cohort of commercial producers (full or part-time producers who expect a full economic return). The Task Force anticipates (in the absence of any significant market price movement) that there will be a decline in the suckler-based beef herd and hill-sheep flock, and the strategy will seek to facilitate (through diversification and capability building programmes) the transition of producers who choose to leave the industry. However, the Task Force expects that a number of hobby farmers (part-time, typically sub-scale producers who derive sufficient utility to outweigh less than full economic return) may choose to stay in the industry.

The first step in implementing the strategy will be testing whether there is market demand for locally produced suckler-origin beef at a significant premium to both today’s farm-gate prices (~75-120p/kg premium) and to dairy-origin beef production (between 65-80p/kg differential to dairy/beef-cross animals). These price premiums are very significant and the Task Force is aware that they may not be achievable on the basis of the market analysis it has conducted. It should also be noted that any new suckler-origin beef or hill sheep production model assumes significant efficiency and scale increases (for example, with scale increasing by up to 6-10 times current NI scale for suckler-origin beef). Therefore, even if there is the necessary farm-gate price movement, the number of producers who would be willing and able to participate will be limited.

To take the strategy forward, six strategic strands have been identified by the Task Force to build efficient supply chains in dairy-origin beef and upland-lowland (grassland) sheep while monitoring and supporting (through diversification and capability building programmes) the transition of producers who choose to leave the industry:

  • Engaging with core customers
  • Investing in trialling new production models and supply chain systems
  • Aligning and sharpening industry incentives and building strong supply chain relationships
  • Focusing research and capability building to drive competitiveness
  • Facilitating diversification and exit for those producers who wish to transition out of the industry
  • Implementing a communications programme
All the players in the value chain will have distinct roles to play in successfully implementing the strategy:
  • Commercial Producers: Seek to engage in longer-term commercial arrangements with processors to implement alternative models as efficiently as possible and work with other producers to create sufficient scale;
  • Part-time/smaller producers: Use the next 6 years of SFP to transition to retirement, diversification or exit; or accept lower returns if they remain in the industry;
  • Hobby farmers: Recognise that it is a hobby and accept less than full economic returns;
  • Processors: Drive and shape the development of an economically viable value chain, particularly in leading the development of alternative production models, shaping and participating in longer-term commercial arrangements with producers and, engaging with retailers to seek their support for the development of an efficient local supply chain;
  • DARD: Target funding and research towards supporting the development of commercially viable models of production, and review the implications of an increasing number of producers choosing to leave the industry on existing diversification and exit (capability building) programmes along with the broader social and environmental consequences;
  • Invest NI: Continue to work with processors and producers to support them in exploiting new market opportunities;
  • UFU, NBA and other farmer representative bodies: Communicate the Task Force findings and the need for change to their members, support members in moving to either sustainable production or diversifying / exiting, and work with farmers’ unions in other regions to lobby for market support for an efficient local supply base;
  • LMC: Facilitate the implementation of the strategy by supporting the Task Force’s ongoing work, acting as an ‘honest broker’ to help develop value chain relationships, communicating the strategy through the industry and disseminating information to producers on ‘what works’.¹

The Task Force has developed a road-map towards implementation of this strategy. The immediate task is to engage with the industry to discuss the Task Force’s findings, in particular to test processors’ and retailers’ reactions to, for example, a decline in suckler-origin beef production. The focus will then turn to designing and then launching the detailed programmes around the six strands that underpin the strategy. The Task Force will stay in place to oversee implementation.

This is a critical decision point for the industry in Northern Ireland. The transition will be difficult. The challenges in creating a successful dairy-origin beef and upland-lowland (grassland) sheep are formidable. However, this strategy does provide an opportunity to improve the financial situation of many producers across the industry by using the next six years of SFP to enable diversification or exit. In addition, the strategy should generate additional value for the NI economy if the resources and assets (including SFP, land and labour) currently tied up in loss-making suckler-origin beef and hill sheep production are applied to more productive enterprises. In parallel, the industry can focus on creating commercially viable supply chains for dairy-origin beef and upland-lowland (grassland) sheep so that there is the potential to secure the long-term sustainability of the red meat industry in Northern Ireland.

Key Findings, Conclusions and Recommendations

Economics of the Industry

  • The beef and sheepmeat industries of Northern Ireland are making significant losses (over £200m per annum across the industry).
  • Industry losses are being driven by losses in the production sector (~£260m per annum) which significantly outweigh the profits being made by both the processing sector and the retailing sector (estimated at £15-20m each per annum).

The Market for Red Meat

  • Overall global demand and supply of beef and sheepmeat is projected to increase at approximately 1.5% per annum over the next decade with global meat trade flows forecast to increase significantly.
    • Countries outside the EU and North America are expected to continue to grow in importance.
    • Europe’s red meat supply deficit is projected to continue to increase. European producers are already facing fierce competition from leading exporters, especially S. America, and this competition could intensify as a result of any relaxation of current trade restrictions.
  • The UK continues to be the most attractive market for NI’s red meat industry due to its size, geographic proximity, existing relationships with UK retailers and some consumer preference for locally produced meat products.
    • Although premium lines are growing, they are still small in size and often premia are not based on production characteristics (rather are based on subsequent processing, marketing or packaging) reducing the upside available to producers.
  • Analysis of potential European markets shows only limited opportunities for NI based on both the markets’ individual attractiveness and NI’s ability to compete.

Production

  • The producer base in Northern Ireland is very highly fragmented with large numbers of small farms. This fragmentation prevents small producers from improving efficiency and benefiting from economies of scale, hinders the introduction of standardisation and limits the extent to which producers can enter commercial relationships with processors and retailers.
  • The vast majority of producers are using their Single Farm Payment to cover the costs of loss making production. Producers are acutely aware of the difficulties they are in and many are planning to reduce their herds or flocks to stem the losses. Although this will improve cash flow in the short term, it will not reduce fixed costs and will therefore lead to further inefficiency.

Processing

  • The processing sector is concentrated with five processors accounting for approximately 90% of the red meat that is processed.
  • Processors have been successful in building business with the UK multiple retailers (particularly since the export ban), but do not exert the kind of influence over production that is evident in other supply chains (e.g. poultry).
  • Processor margins (at around 5%) are in line with industry benchmarks.
  • Processor operations are generally efficient although there is substantial over-capacity in slaughtering and boning. However, if supply from producers declines (as is already starting), processor margins would be severely impacted and there would be significant rationalisation in capacity with businesses likely to move to GB and/or ROI or other international opportunities.

Retailers

  • Some upward movement in prices is not ruled out (primarily to reflect recent increases in input costs as has been seen in other sectors) but the indications are that the industry should not assume that retail and farm-gate prices will rise sufficiently to cover fully the costs of current production systems and supply chains.
    • Retailers state they want to buy from a sustainable local supply, but they are not prepared to pay to cover the costs of an inefficient fragmented supply chain.
    • Retailers have alternative options in sourcing red meat (e.g., from Latin America) to offset declines in local production.

Future Viability of Production Models

  • It should be possible to create an economically viable model for dairy-origin beef production provided aggressive cost efficiencies can be achieved through a processor-led production system and farm-gate prices are closer to the levels seen in GB.
  • An economically viable model of production for upland-lowland (grassland) sheep may be attainable through increases in scale and/or reduction in land prices towards GB levels.
  • Without a dramatic change in farm-gate prices or alternative support funding there is no prospect of creating economically viable production models for suckler-origin beef and hill sheep.
    • The finished farm-gate average price for suckler-origin beef would need to increase to approximately £3.20/kg to break even against full economic costs of production (based on at least top 10% performance and scale of 100 cows or 100/200 finishing animals). Depending on market conditions for land prices and concentrate costs, and the potential to further increase scale and labour efficiency, £2.70/kg total production costs may be achievable.
    • The farm-gate average price would need to increase to approximately £2.80/kg for hill sheep production to break even against full economic costs of production.

RECOMMENDATIONS

The strategy developed by the Task Force is therefore to: Engage with core customers; Build efficient and commercially viable supply chains for dairy-origin beef and upland-lowland (grassland) sheep production; In the event that the necessary, substantial farm-gate price increases are achieved: Build efficient and commercially viable supply chains for sucklerorigin beef and/or hill sheep; In the absence of the necessary farm-gate price increases: Facilitate the anticipated decline of the suckler-origin beef herd and the hill sheep flock. To take the strategy forward, six strategic strands have been identified: Engaging with core customers Investing in trialling new production models and supply chain systems Aligning and sharpening industry incentives and building strong supply chain relationships Focusing research and capability building to drive competitiveness Facilitating diversification and exit for those producers who wish to transition out of the industry Implementing a communications programme

CONCLUSIONS

  • Implementing the strategy will have major implications for the industry as a whole requiring the main players to take on increasingly important roles in the industry:
    • Commercial producers: Seek to engage in longer-term commercial arrangements with processors to implement alternative models as efficiently as possible;
    • Part-time/smaller producers: Use the next 6 years of the SFP to transition to retirement, diversification or exit; or accept lower returns if they remain in the industry;
    • Hobby farmers: Recognise that it is a hobby and accept less than full economic returns;
    • Processors: Drive and shape the development of an economically viable value chain, lead the development of alternative production models, participate in longer-term commercial arrangements with producers and engage retailers to seek their support;
    • DARD: Target funding and research towards developing commercially viable production models (including developing and adopting new technology that would enhance efficiency), and review implications of an increasing number of producers choosing to leave the industry on existing diversification/exit programmes alongside the broader social and environmental consequences;
    • InvestNI: Continue to work with processors and producers to support them in exploiting new market opportunities;
    • UFU, NBA and other farmer representative bodies: Support members in moving to either sustainable production models or diversifying/exiting, and work with other bodies in other regions to lobby for market support for efficient local supply;
    • LMC: Facilitate the implementation of the Task Force strategy and act as an ‘honest
  • The industry is at a cross-roads and faces a critical decision point. However, the Task Force strategy provides an opportunity to improve the financial situation of many producers by using the next six years of SFP to enable diversification and exit, while building commercially viable supply chains for dairy-origin beef and upland-lowland (grassland) sheep.
¹ 90% of beef and ~80% of sheep meat in 2006

Further Reading

- You can view the full report by clicking here.


October 2007

Members of the Task Force