25 May 2011

Beef producers developing extended supply contracts, specialist production units and strong export customers are the types of businesses which warrant long term investment said Alick Jones, Agriculture Policy Director at Lloyds TSB on the eve of Beef Expo 2011 at which the bank is major sponsor. The bank says it is very open to dialogue with producers with investment plans which have carefully assessed rates of return and a well defined market focus.

"The outlook for the UK beef sector looks relatively positive, however input and output price volatility continue to affect margins," he said. "In the short term, the current firm prices look likely to continue following spring turn out, reflecting the shortage of fatstock in the system caused by the high winter feed prices and correspondingly low deadweight prices. The near drought conditions throughout much of the UK this spring will further exacerbate the margin squeeze suffered by finisher units, in particular, as the need to supplement feeding continues."

Alick added that export opportunities remain strong for quality UK beef products, with price being boosted by the continued exchange rate benefits for products paid for in sterling versus the euro.

"For the longer term better and sustained returns are a marked possibility for producers developing dedicated supply contracts over extended periods, those providing stock to a particular market specification and for supply to niche markets," he outlined. "In short, future success will be helped by an understanding of, and close collaboration with, the beef supply chain to secure added value. For example, if your business can supply important consumer segments like the 'value' meal options being offered by retailers."

He suggested that any investment undertaken for beef enterprises needs to consider the underlying challenges for the beef sector such as the inevitable fluctuations in world supply and demand combined with the inelasticity of beef supply. "Farmers need to have given the effects of these global factors due consideration when it comes to planning what to invest in and how much to invest."

He argued that "producers tend to have a limited two to three year production horizon which makes it very difficult to turn on or off supply to take advantage of market opportunities or to avoid periods of glut. The other big challenges are the changes to the CAP and the increasing cost of production, most notably cereal prices, fuel and fertiliser. The impacts of all these factors will need to have been considered in investment planning and will take careful ongoing management."

He noted that long term planning will require producers to prepare for import pressure from the South American 'Mercosur group' of nations, increasing regulatory and welfare demands, as well as the management of animal disease risks.