Lamb report: Surviving the squeeze

It seems we can dismiss all talk of a crisis, with deadweight lamb up a surprising 7p in July to 356.4p/kg. As Peter Morris, chief executive of the National Sheep Association (NSA), says: "Any drop is to be expected as new-season lambs come onto the market. But after two weeks of price falls to mid-July, they bounced back again. It's a very unexpected turnaround in a period when you always have price dips, and shows what an unusual situation we're in."

Ignoring for the moment how retail sales are not being impacted by product costs, one group in particular is going to be happy at the current turn of events. "It's nice for farmers to be making a small amount of money from the market now, so that they can pay back the debts built up from the bad times," says Richard Cullen, market insight manager at Eblex. "Lamb farmers don't have a lot of cash to play with. Many of them are hill farmers, and lamb forms a large percentage of their income."

NEGATIVE RETURNS

By the reckoning of Hybu Cig Cymru Meat Promotion Wales (HCC), sheep farmers need a price of £1.43/kg to make a profit. Even between 2008 and 2009, when the average price was much talked about for its stratospheric gains, it was £1.34/kg. This came on top of even worse negative returns following the foot-and-mouth outbreak in 2007, when the price fell as far as 60p/kg. "We're looking at two years in the black after eight or 10 in the red," says the NSA's Morris.

Average farm gate prices increased by 62p/kg over 2009, while retail values only rose by 51p/kg, narrowing the gap between the two, according to the AHDB UK Market Survey. This moved from 52.8% in 2008 to 47.3% in 2009 farmers are finally seeing more than half of the retail price.

Yet complaints from the supermarkets have been surprisingly few and far between, which might give a clue as to who exactly is being hit by the current rises. Contracts between supermarkets and suppliers are agreed on a 'cost-plus' basis a figure set for the next few months/a year ahead of time. With prices going up, this means the processors, not the supermarkets, have to pay for the extra. And this has been borne out by events in the past few months. In July, The Foyle Food Group closed its Londonderry-based plant Foyle Meats with 23 jobs lost, and 62 relocations, while New Zealand-based Silver Fern Farms shut its Brooks of Norwich plant in early August, with 64 redundancies.

"Processors are being squeezed," says Stuart Ashworth, head of economics services at Quality Meat Scotland. "They could refuse to take lamb from their suppliers, but when the price comes back down again, they may well have lost all their customers. There isn't the capacity in the system to be paid more than they are, unless they get the retail price to move, yet they're on meagre returns."

It is possible to argue that a situation where two plants disappear in the midst of a recession is not abnormal. But other sectors are moving in the opposite direction. Cobb Europe is building a new £3m poultry breeding facility in Norfolk and Anglo Beef Processors is upgrading its Ellesmere abattoir. Gwyn Howells, chief executive of HCC, explains: "There are a small number of very high-volume plants affiliated to the major retailers. To supply them, you need to be able to put through high volumes and lots of new technology. But the flip side of that is that you require constant volume to make such plants viable. In times of declining sheep flocks, such as we're seeing right now, that is a major issue."

Doomsday scenario

Thank goodness, then, for New Zealand. While a British farmer might not say that, 227,000t of lamb arriving from New Zealand every year ensures the meat is kept front-of-mind for the consumer and the imports fill processing lines outside the August to November rush. However, says Howells, the problem is that these are not whole lambs for slaughter. "Suppliers are slicing up vacuum-packed primals and only using half of the plant. It's a major challenge on the processing line. Even medium-sized plants cannot afford to shut their plants for three days a week, but in many cases they're having to." He paints a doomsday scenario: "If you start losing the critical mass of livestock and farms, the auctions and livestock markets go and the processing plants fall away too then you're in a downward spiral. At some point you lose the infrastructure and you just keep going."

Arguably, however, not every processor has grounds for complaint. "If you look back a number of years, a few people in the chain were making money," says Morris at the NSA. "Supply and demand was different then, and some had the chance to put some money away." Rizvan Khalid, executive director of Euro Quality Lambs, admits that, pre-2007, processors made good profits. "But this wasn't done in isolation," he says. "It was demand-related. And now we have many regulations to conform to."

LOYAL HALAL CUSTOMERS

Khalid, because he is running a halal operation, should surely be benefiting many times over; it is easier slaughtering for halal consumers, because they tend to buy either lamb or chicken, and there is a loyal customer base. "We're not like non-Muslims who choose between fish, beef and pork as well," says Naved Syed, managing director of Janan Meat, based near Birmingham. "We buy more too. Seventy per cent of our plate is protein compared to around a third for non-Muslims." Plus, more ethnic wholesalers and retailers are supplied, rather than major retailers, which mean less of a squeeze on margin.

It seems like a no-lose situation. But according to Khalid, the nature of his supply chain has been a major downside in the current recession. "Some of these people don't have the ability to get out of debt so we lose out completely when they fold," he says.

The recent economic downturn has also impacted upon consumers. "People who buy halal look for low prices, it's what they expect," says Khalid, "and when it comes to lamb that's getting harder and harder to find."

Yet this situation is not just peculiar to halal high prices cannot be sustained in the lamb market as a whole either. Michael Doran, sales and marketing director of Dunbia, believes August will bring slightly lower prices for deadweight lamb, but says: "It needs to be around £3.20-£3.30 deadweight, so that it's affordable for everyone. The £3.50-£3.70 area it has been at is not workable."

Compared with other meats, lamb does appear expensive. As of 7 August, a loin chop of lamb was £12.53/kg in major retailers, almost double the same cut of pork at £6.29, and more expensive than rump steak [Agriculture & Horticulture Development Board figures]. In fact, the only cuts measured that were more expensive were fillet and sirloin, seen by consumers as highly premium.

"Lamb has always been expensive, it's known for that," insists Cullen at Eblex,"but penetration is holding up." In fact, although the number of consumers buying lamb in the past year has stayed remarkably firm, it seems finally that the higher cost of purchasing lamb is kicking in. A block of consumers who have stopped buying lamb suddenly emerged on Kantar's measurements in April, worth around £4,000 of the overall market.

It is not the first time, as there was a brief loss of penetration at the end of last year, but it was less significant. "There's evidence that some people are leaving lamb altogether," says Stephen Lavery, client executive at Kantar. "We're starting to see the emergence of a pattern."

ON-SHELF PROMOTIONS

Amidst all the deal-making and price negotiations, the sector's biggest fear is that consumers will leave lamb, never to return. As QMS' Ashworth says: "If lamb gets too far out of tune with other meats, then it could disappear off the shelf altogether and then we're all stymied."

A second key finding emerging from the Kantar research is that people are buying more lamb when they visit the supermarket. Exactly a year ago, the opposite was the case. This appears counter-intuitive at first how can volume per trip be up when price has gone up as well? "It points to promotional activity," says Kantar's Lavery. This means that the volume increases at present are being artificially held up by major on-shelf promotions.

But while supermarkets have to sell their lamb, farmers and processors have also played their part in the current tricky situation. A major factor keeping supplies low and ensuring that prices remain high in the UK is the pursuit of exports. Nearly one-third of Welsh lamb headed overseas last year. Sheep meat exports from the UK in the first five months of 2010 fell by 9%, year-on-year, according to the Agriculture & Horticulture Development Board, but as production was 15% lower, a greater proportion of production in the UK was diverted overseas.

"We'd love to see a stronger domestic market," argues Eblex's Cullen, "but producers don't have to do all the extra butchery and packaging they are required to carry out for the home market, making sure retailers' needs are fulfilled and doing lots of activity, with extensive promotions."

In fact, one way of viewing the export market is that it is a competitor to the larger retailers, a situation which the farming community and processors have waited years to appear. "The export market is healthy, it provides competition to the supermarkets," says the NSA's Morris. "It's a really positive thing that they're now not the only game in town."

But there is a question as to whether lamb from the UK is doing so well abroad because it has something special that consumers overseas love or due to the fact that the pound is low by comparison with the euro. In other words, is it just competing on value? "There's certainly a reliance on the exchange rate in terms of the export market," says John Mercer, chief livestock adviser at the National Farmers' Union. "This can change and it inevitably will. We've built robust links with the export market, so we're trying to be positive, hoping it's not fragile."

Exchange rates are certainly important, but Peter Hardwick, head of trade development at Eblex, thinks the main issue lies elsewhere. "Where does it say that the pound is going to rise?" he asks. "In the past 12 months, sterling has gone from 1.06 to 1.23. Until it's 1.30, 1.40, there won't be a significant change in trade and that's a long way off. There's no way you can be sure that the pound will strengthen."

Any further dip in house prices, when added to public sector cuts, make it likely that interest rates will stay low which will continue to make the pound cheap.

"The simple fact is that there's not enough lamb around. If we had it to export, we could sell it," adds Hardwick. Contrary to what many in the farming industry believe, this makes flock size the crucial element. It also ought to encourage farmers to enter the business.

Eblex predicts lamb production in the UK to fall by 7% to 284,000t by the end of the year, but also forecasts a rise in flock sizes from 12.209m to 12.240m in 2011. Grounds for optimism? "We hear that farmers are retaining more of their ewe lambs for breeding, which gives us cause to be more positive," says Howells at HCC." So not a wholesale collapse then? "We don't think the market will disappear," says Khalid at Euro Quality Lambs, "but the next five years are going to be very, very difficult."

The major processor view

"Lamb has always been seen as a luxury, and that's even more the case now. By comparison, chicken and pork are cheap meats that benefit from aggressive promotional activity. Beef is becoming affordable at the forequarter end. Lamb stands out as a high-priced meat offering and more lamb is being traded on promotion. We've invested heavily in lamb, but there has been a major decline in numbers in Ireland around 30% and that's predicted to continue over the next few years. Your guess is as good as mine as to what prices will be over the coming year, but the farmers we deal with are aware that if lamb becomes too expensive, it will kill demand. Our farmers are certainly not greedy. They know that if they overcook the lamb price, there'll be a crash. It all comes down to throughput, and lambs have been a bit slow coming. On the other hand, there has been ewe retention, with farmers looking to increase production, and so keep back some for breeding. Export markets are becoming more difficult. The pound has strengthened a little, which has meant that major export markets have moved back a bit too. However, we're in this for the long haul."

fresh lamb analysis by Kantar worldpanel

The fresh lamb market in Britain is worth £543.4m (52 weeks to 11 Jul 2010). The growth in market value is driven largely via the increase of £0.21 in average price paid, to £7.19 per kg. While seeing slight growth in spend, fresh lamb experiences an annual volume decline, driven via shoppers buying fresh lamb less frequently, and also some shopper losses.

A strong relationship can be seen between average price paid and volume performance. Total fresh lamb is more premium in price versus fresh beef and fresh pork, and while lamb sees an annual average price increase of 2.9%, pork and beef see average price decreases.

Of the three red meat sectors, fresh lamb has the least percentage of sales coming through the volume-based Y for £X mechanic. Lamb did increase Y for £X levels versus last year, but to a lesser extent than beef, or pork both of which see greater increases in amount purchased per trip.

While total fresh lamb volume sales may have been impacted upon by price, it is important to acknowledge that 58% of the British population bought fresh lamb in the last year. This equates to over 14.6 million households, demonstrating the strong shopper base that the market holds.

The substantial growth of, and increase in, shopper numbers to lamb frying/grilling steak in particular, (which on average, is one of the more expensive lamb cuts), supports the fact that not all shopper behaviour is price-driven.

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