11 May 2012

9 minute read

Europe

The general state of the UK economy, how consumers are reacting to it and the resulting prospects for the UK red meat and dairy industries were discussed in the main session of the Outlook Conference held in London last week. The event was jointly hosted by the Agriculture & Horticulture Development Board organisations (AHDB), EBLEX (for the beef and sheep), BPEX (for pigs) and Dairy Co., and attracted 200 participants.

Current Economic Climate and How it Impacts Agriculture

“2011 was the year it all went wrong for the UK economy,” said Head of Agriculture at HSBC, Allan Wilkinson. While GDP grew each quarter last year in the US, and was negative only in the last quarter in the Euro-zone, GDP has contracted in three of the last five quarters in the UK. The last two periods of negative growth put the UK officially into a technical recession.

However, surveys point to a stabilisation in the economy as an indicator points to a greater willingness for businesses in the UK to invest, he said, which is inconsistent with the normal pattern for a recession.

Annual GDP growth is forecast to be positive this year and next in the US, Japan and especially in Asia, where it is expected to reach around seven per cent. An HSBC forecast puts India to become the leading economy by 2050, overtaking both China and the US. A contraction is expected in the Euro-zone this year with a marginal improvement in 2013. The key driver worldwide is the strength of the oil price but Mr Wilkinson stressed: “There is plenty of expensive oil out there.”.

Turning his attention to the UK, he highlighted that inflation is running ahead of earnings, squeezing household budgets, while the housing market is stagnant and unemployment is rising again. On the plus side, he mentioned that the trade deficit is narrowing and profits for private non-financial companies are recovering. Overall, Mr Wilkinson sees signs of a sustainable recovery after the longest economic downturn in a century.

Turning his attention to UK agriculture, he presented data showing the consolidation of the buying power in the agriculture supply chain. Consumers and farmers are squeezed by the supermarket buyers and suppliers to the industry (feed, equipment and agrochemicals), where the real market power lies.

Consolidation in buying power in the agricultural supply chain

Farm incomes have risen since the trough of 2005-2006, despite a reduction in direct support payments, Mr Wilkinson said.

The driving force of rising grain usage in the growth in the global demand for meat, particularly poultry meat and pork, he said.

Sharing the secret of managing market volatility, he demonstrated how producers with low unit costs will return profits in more years of volatile markets than those with higher costs.

Mr Wilkinson concluded with some tips about what the best operators do to achieve their success. They are good at all aspects of their business, using fresh thinking to tackle problems; this includes allocating resources, adopting technology and clever marketing. Variable costs become fixed costs, and vice versa, and they minimise costs per unit while also maximising output. They see change and challenges as opportunities and study their competitors closely, particularly what their costs of production are and how they are working to control them.

Red Meat and Dairy Outlook: The Big Picture

Meat and dairy products represent a huge and stable market in the UK, reaching everyone every day and they for a fundamental part of the grocery trade, according to Giles Quick, Director of Kantar Worldpanel in his presentation on consumer trends in the UK and the drivers of spending. In any four-week period, 99.7 per cent of households buy dairy products and 84.3 per cent purchase some fresh red meat. Total annual spend on these two food groups is more than £15 billion. Growth in the dairy sector has been above four per cent in the last seven years.

Mr Quick showed how the different supermarket retailers show varying performance in terms of fresh proteins (meat), with Waitrose ahead of the field and Tesco and Morrisons under–performing. These trends apply to overall performance, he showed as Tesco has been losing market share to both high-end Waitrose and discounters Aldi, Lidl and Iceland. All the leading retailers are now matching their prices with their competitors for branded products.

In the current economic situation in the country, we are all feeling a bit gloomy, said Mr Quick. Consumer confidence has taken a dive and the gap between consumer prices index (CPI) and average weekly earnings has widened; since June 2007, incomes have risen nine per cent, while prices have gone up by 14 per cent. Generally, consumers are cutting back on spending although purchases of food and drink have been fairly stable since 2007 in actual terms and as a proportion of household spending.

Consumers have responded to the economic uncertainty are to go out to eat less and prepare more meals at home, to trade down to budget brands, to seek out deals, to increase purchases of frozen foods and to “look after number 1”. From the point of view of the UK meat and dairy industries, these trends have led to an increase in the variety and sales of top-end ‘Dine–in’ ranges from the retailers yet also too a rise in sales of budget ranges. Mr Quick said 40 pence in the pound is now spent on promotions of one sort or another, with dairy generally and cheese in particular affected by promotional selling. All red meat sales volumes are lower this year than the corresponding periods of 2011.

The trend to “look after number 1” means consumers are more likely to stick to known and trusted choices for foods as British and Italian dishes are preferred to more exotic Indian, Chinese and Mexican cuisine. Buying local food has also become more popular as consumer make safe choices.

In the home, meat and dairy products are ingredients in many of the nation’s favourite meals but trend is for decreasing involvement in food preparation withe the rise in ready meals and convenience foods at the expense of traditional meals such as roast meats. At just 34 minutes, the average time taken to prepare a meal has halved since 1980 and this trend does not favour red meat dishes, many of which require much longer cooking. Mince and cuts for stewing are more versatile than those for frying, grilling and roasting and sales of the former group are holding up better. Furthermore, traditional meals of meat and two vegetables have lost some of their appeal to the young generation. One effect for the meat industry is that last year, 2,000 tonnes of roasting joints were made into mince.

Over the long-term, surveys have revealed a growing in the importance of health and although there has been a decline in the number of foods chosen for health during the recent recessionary dip, three-quarters of households declare they have general concerns over health. Healthy ranges of meat are benefiting from this trend.

The concept of whole store value was introduced by Mr Quick. The most valuable meal of the week, the Sunday roast, is in decline and there has been evidence of a trading down from pork and beef to poultry meat. However, the total value of the meal, including side-dishes, condiments, desserts and beverages, adds greatly to the overall sales for the meal. For roast beef, for example, the total meal spend is £3.7 billion per year, of which only about half is the beef joint itself. Convenience foods and frozen dishes tend to add much less to the consumer spend for that meal.

Summing up, Mr Quick stressed that red meat and dairy products are a cornerstone of UK food retailing, worth £15 billion a year. The grocery trade is using many more promotional deals on these items and there has been growth in both the budget and high-end parts of the market. Health is here to stay as an important driver of food purchases, and the concept of ‘British is best’ is important in consumers minds in the current uncertain times.

Finally, Mr Quick stressed that if retailers were to take more account of whole store value, rather than category value, would help sales of red meat particularly, which would benefit producers and processors.

Impacts of the Economic Situation on the Agricultural Sector

Longer term prospects for agriculture generally and on prices for red meat and dairy products in the light of the economic and consumers trends were addressed by Ken Boyns, Director of Market Intelligence at the AHDB.

Showing the trends for skim milk powder, cattle and pigs since 2003, it is clear that prices have plateaued at a higher level last year than 2006-2008. By comparison, the wheat price has shown great volatility since 2008.

With the global human population forecast to reach around nine billion by 2050, Mr Boyn showed that demand is likely to remain strong, even without the growth in per–capita protein that would also be expected. Limited possibilities for significant increases in agricultural land mean that supply of land for food production will become a limiting factor.

This trend has been ongoing for decades, he said, adding that global wheat output has shown an upward trend each year since the 1960s – now three times that total yield – while the harvested area has hardly changed. This success has been achieved because of improvements in production technology. For dairy too, milk production has been maintained despite a 30 per cent reduction in the number of cows over the last 15 years.

Mr Boyns said that retailers and policy-makes will drive the future of the industry regarding the allowance of technology. If they do not permit its use, the UK’s competitive situation will be undermined. If the same techniques are permitted in other countries and imports are allowed, the UK industry will shrink; if imports are not allowed, prices will rise, a policy rarely followed by governments owing to its lack of popularity in the general population.

As an example of what can go wrong, Mr Boyns cited the experience of the UK sow herd, which dropped sharply after the ban on sow stalls was introduced in 1999 and has continued on a downward trend since. A similar pattern was observed in Sweden, where group housing of sows was required at around the same time. The Danes continued to permit the housing of sows in stalls and the breeding herd there increased by 20 per cent.

Welfare is an important issue and the sow housing issue is not the only reason for these changes but he said: "It illustrates the point of exporting a whole industry.”

Mr Boyn summarised his presentation, saying that demand for meat and dairy products will remain strong, while supply will be constrained and/or challenged. The rate of technological improvement, its level of adoption and hence, supply potential will drive world prices.

“The UK must focus on technology and global markets to remain competitive,” he told the Outlook Conference audience.

Jackie Linden