RÁÐUNAUTAFUNDUR 2002

A review of the UK sheep sector and outlook for the future

D. Croston

Head of Sheep Strategy, Meat and Livestock Commission, PO Box 44

Winterhill House, Snowdon Drive, Milton Keynes, MK6 1AX

INTRODUCTION

Sheep meat in all its forms in 2000 was worth around £1.7 billion in retail and catering sales. The industry is fragmented with 51 per cent of breeding females located in hill and upland areas but around 66 per cent of the slaughter stock sold coming from the lowland flocks, which mainly consist of large cross bred ewes mated to terminal sires. The industry makes a significant contribution to the British country-side and rural way of life. Exports contribute significantly to farm gate prices and although these have declined from the peak of 140,000 tonnes of sheep meat in 1995 to 97,000 tonnes in 2000, they still represent around 30 percent of total output.


The estimated product flows through the industry are summarised in Fig. 1.

PRESSURES ON UK LIVESTOCK AND MEAT PRODUCTION

The UK agricultural industry particularly the livestock sector, which has been beset by difficulties in recent years was anticipating better times ahead after many years of depression. World agricultural markets were poised for a ‘significant recovery’(OECD, 2001). However, in early 2001, the wettest year since 1776 and with the lowest commodity prices since the 1930’s in many sectors there was the widespread outbreak of ‘foot and mouth’ disease (FMD).

Following the ‘golden period’ in the early 1990’s, things began to go really wrong in the UK livestock sector following the BSE crisis in 1996. These problems were exacerbated by other ‘external economic’ pressures such as the high value of the pound and its effect on trade and market prices, world economic problems (particularly in South East Asia and the former Eastern bloc), and an oversupplied European food market. By the late 1990’s these ‘macro’ pressures were affecting all livestock sectors. This downward pressure on market prices and farm income has brought into focus the need for structural changes throughout the livestock production, meat processing and marketing supply chains in Britain.

Pressures on Farm Incomes

The Ministry of Agriculture and Fisheries (MAFF) figures, show that Total Income from Farming peaked in 1995, and then fell by an estimated 69%. In 2000 it fell by 27% in real terms compared to 1999 and stood at its lowest level for twenty years (MLC, 2001). By way of comparison farm incomes in the UK in 2000 according to Eurostat, fell by 8% compared with an average increase in the EU as a whole of 1.9%. In the livestock sector there was a slight increase in cattle output in 2000, but this was counterbalanced by reductions in finished sheep and lamb production and in the sheep annual premium. Cattle and sheep farms in the Less Favoured Areas (LFA) have seen net farm incomes fall in real terms since 1977/78, and averaged under £8000 in 2000/01 (MAFF, 2001).

Real farm incomes in recent years have fluctuated following a cyclical pattern:- falling between 1977 and 1981, recovered a little before falling again in the mid 1980s, strong growth in the early 1990s (the ‘golden period’), then fallen dramatically in the mid to late 1990s. Although the cyclical nature of farm incomes is clearly subject to a wide variety of economic factors other than commodity prices (eg effects of national economic growth, exchange rates, and interest rates etc), each subsequent "trough" in the recent cycles appear to be lower than earlier troughs implying a sustained structural decline. To reverse these declines and achieve any sustained recovery the sector needs to adapt to the changing conditions of the marketplace.

Structural Change in the Agricultural Sector

Agriculture across Europe, is having to respond to changing domestic and international market conditions and EU governments are coming to recognise that the complex system of subsidies and protection for agriculture has compounded its problems. Enterprises in many other industrial sectors have had to react to changing market conditions and recognise the competitive pressures of the globalisation of production and trade. In seeking to protect agriculture, decades of market pressures have built-up, such that the structural change facing agriculture will be more painful and dramatic than it could have been.

There has been a steady decline in the number of farm workers. As a result of the problems in the livestock sector and the competitive pressures in the arable and horticultural sectors, the National Farmers Union estimates that within the past two years over 40,000 jobs have been lost from the UK agricultural sector. There has also been a decline in the overall number of farms, and a rise in the proportion of larger farms.

Rationalisation in the agricultural sector is taking place in a number of ways. Small less viable holdings are being taken over by larger farms and agri-businesses that benefit from economies of scale. There is also a trend in that in many parts of the country owners of farm holdings (and especially the lifestyle and amenity ‘newcomers’ to rural areas) have rented out land to larger enterprises. There will remain a role for smaller farmers - but this is likely to be in ‘niche’ farming or part time, even ‘hobby’ farming. Such farms tend to become specialised in for example, organic farming, or rare-breed animal husbandry. This trend is already becoming apparent in some of the more affluent rural areas of England. Many farms are also diversifying into non-farm activities. These changes will present new opportunities through a new enterprise mix between large low-cost technically efficient farming businesses, and small innovative high-value farm-based enterprises

Supply Chain Pressures and Increased Costs

In the livestock sector the loss of the export market for beef and live cattle and calves since the BSE crisis and the economic difficulties of the export trade for lamb and live sheep, focused the industry on supplying the home market. At the retail level this is now dominated by very few large supermarket chains. Since the 1990 Food Act they have imposed their visions of supply chains onto the livestock marketing system concentrating their purchases of meat and meat products from a core group of often dedicated plants. These have developed the sourcing of stock direct from farm. In the more traditional cattle and sheep markets, finished livestock have been increasingly bypassing the traditional auction market sector.

This concentration of economic power in the processing and retail sectors in the meat and livestock industry when accompanied by lower prices has created a problem for many independent farmers in Britain (and in other countries). A policy to resove these conflicts has yet to be found.

Additional animal health and food safety problems since 1996, particularly due to the dangers from more virulent pathogens (such as Verocytotoxigenic E-coli), have increased the need to assure consumers about food safety, and driven the growth of statutory inspection and safety requirements and also quality assurance schemes. The need to introduce such schemes, together with the extra control measures associated with BSE and the limitations on the use of by-products have increased the industry cost base and eroded the already low margins throughout the chain.

THE MAJOR STRATEGIC FORCES DRIVING CHANGE

These can be categorised under 4 separate headings:-

  • Consumer requirements
  • Changes to support regimes
  • Changing consumer requirements
  • Global issues - WTO negotiations, EU enlargement
  • Developments in the supply chain - retail, abattoir and auction sectors

1. Consumer Requirements

98% of the UK population are not involved in agriculture or food product. The factors shaping their perceptions of the meat, and other livestock products anywhere in the world are:

  • the price –cost of production
  • animal welfare/production methods
  • food safety
  • environmental impact (including GM issues, sustainable agriculture)
  • cost of support – e.g. the CAP and the use of tax payers money
  • other attributes (such as taste, convenience/ease of preparation, appearance)

Rapid change and development has become the norm in both the domestic and international food markets in recent years. Changes in consumer tastes and preferences, very often interpreted by the large retailers, have sent out mixed messages to the industry. Suppliers have had to cope with demands for more convenience and variety in food offerings in both the value for money and the quality markets. These have to be delivered to higher standards of safety against greater levels of compliance. With increasing consumer spending on food now occurring outside the home in the food service sector, these needs and opportunities are also increasingly affecting the suppliers to the catering sector.

Total meat consumption in the UK in the last twenty years has increased by over 15% to an estimated 4.2 million tonnes in 2000 (this is the consumption of beef, lamb, pig meat and poultry eaten in or outside of the home; in addition the country consumes an additional amount of imported preserved meat products, such as corned beef, that equates to around an additional 150 thousand tonnes a year).

Within this overall total, the volume of consumption between meats has varied with the ‘red meat’ (beef, lamb and some pig products) sector being in a gradual long term decline over the past thirty years (with consumption of beef and veal and mutton and lamb falling by 25 and 30% respectively between 1970 to 2000 in the UK), whilst the ‘white meat’ (poultry and some other pig products) sector has increased its share of the market (poultry increasing by 180% over the same period and pigmeat remaining unchanged with less eaten as bacon but more in processed products). Poultry in 2000, was the most popular meat and accounted for 39% of the total market.

Much of the reduction in beef and lamb and the increase in pig meat and poultry consumption in the UK over this period has been chiefly driven by changes in the socio/economic environment, such as the increase in the number of small family units, changing work patterns and lifestyles. All meats have also been affected by consumers concerns’ over food and these have been reflected in issues such as, diet and health, taste, eating and cooking habits.

The beef and lamb market has, in the last twenty years, gradually shifted away from the sale of traditional cuts of meat (especially lower value cuts that required longer preparation time and slow cooking), towards the sale of more value added meat and meat as a food ingredient in prepared and manufactured products.

There has been significant growth in the market for more convenience-processed foods. Between 1991 and 1999, total household expenditure on fresh/frozen meat and bacon and ham increased by about 8% to £7397 million, while expenditure on ‘other meat and meat products’ rose by 40% to £4193 million. The largest markets and main growth sectors in this increase were the‘frozen convenience meats’ and the ‘ready meals’ markets, with takeaway ready meals becoming an increasingly important subdivision of this latter market. The third largest market is for sausages, and the fourth for meat pies, pasties and puddings).

The total market for beef, lamb, pig meat and poultry in the UK in 2000 remains huge, with retail , processing and catering sales worth an estimated £15.8 billion. Retail sales for fresh meat (excluding ham) are worth an estimated £6.0 billion, the retail sales for processed meat £6.1 billion and the catering market for fresh and processed product £3.7 billion. This is within a total retail food market in the UK in 2000 of over £55 billion).

The Socio/Economic Framework Driving Change

All MLC the market research carried out, indicates that the changing ‘macro’ factors defining the socio/economic framework in the UK have an important long term effect on the trends in meat consumption. Some of the most important ‘macro’ factors that are expected to affect what we eat in the future are:

  • Increasing disposable income;
  • Increasing owner occupation;
  • Decreasing household size;
  • Ageing population;
  • Increase in single households;
  • Lower numbers and later marriage;
  • Growth of women in work;
  • Less free time out of work –leisure time at a premium;
  • Rapid take up of technology – PC/mobile phone/Internet etc;
  • Advances in food technology i.e. packaging and shelf life;
  • Continuing concern over health and what foods/diets are healthy;
  • Continuing concern over animal welfare;
  • Continuing concern over the environment,;
  • New concern about ‘over manufactured’ foods

All of the above will continue to bring ‘lifestyle’ changes that affect consumer behaviour and eating habits through their impact on:

  • Cooking,
  • Shopping,
  • Attitudes to food –taste as an issue,
  • Retailer/caterer focus,
  • Market definition – meat eaten in the home/outside of the home/takeaway,
  • Meats role - e.g. meat purchased as a meal ingredient or within a food product.

The ‘Leisure’ and ‘Convenience’ Markets

Aschanges in lifestyle continue, the future meat market will continue to segment into ‘fresh and processed’ meat and meat products. These two market segments could also be categorised as ‘leisure’ and ‘convenience’markets.

  • The ‘leisure’ market for meat, is that for fresh or lightly processed meat –which requires some time or effort for cooking (at home or catering), and increasingly where purchasers will seek a more advanced state of preparation. Consumers will also expect that all attributes of quality (eating experience - taste, efficacy and consistency) will be included in the offering. With these products price is less of an issue. They will also be judged by the extent to which they meet consumers’ concerns on some of the ‘macro’ issues, such as animal welfare and the environment.
  • The ‘convenience’ market for meat is essentially processed meat products with a high convenience element, were ‘quality’ is largely built in by the processors, who will seek competitively priced raw materials.

This highlights some particular problems for the sheep sector in the context of these markets. The impact on the lamb sector of the developing ‘convenience’ market, will be that sheepmeat will continue to be a minority component of convenience meat products until there is a major breakthrough in deriving from sheep carcasses low cost lean tissue with a low content of fat with modified fatty acid composition to production will be:

  • mainly targeted at the ‘leisure’ market
  • that concerns about production methods and efficacy assurances will be dominant
  • that traditionally produced ‘extensive lamb’ will have difficulty in competing as raw materials for products for the ‘convenience’ market.

However with lamb derived from large commercial producers the processors need to exploit the whole carcass and utilise the ‘residual’ product i. left after the ‘cuttings and trimmings’ from the ‘high quality’ hindquarter and to better exploit the forequarter. This will lead to some ‘convenience market’ opportunities.

2. Changes to Support Regimes

Agenda 2000

The Agenda 2000 reform measures were more favourable to cattle production and provide some disincentives for sheep. The regime is due to run to 2006 but, with events having been overtaken by the continental BSE crisis , a number of changes could be made to the beef support mechanism. Indeed, a ‘mid-term’ review of the efficiency of the reforms was promised for 2002/2003 and measures being discussed with a view to countering the effects of the continental BSE crisis, could result in alterations to support mechanisms in the beef sector in the short-term. Despite the fact that so far the UK has escaped the worst effects of the latest BSE crisis, any changes made to support mechanisms would apply to the whole of the EU. Prior to the FMD crisis the EU had unveiled a series of ‘7’ proposals (the Fischler 7 Point Plan) all aimed at reducing beef production from 2002 (to counter the 10% decline in EU consumption that is expected in 2001). The EU is keen to prevent the build up of beef stocks and these proposals were aimed at rebalancing the market in the medium term, mainly by encouraging less intensive beef production (with boosts for organic farming and a reduction in stocking densities).

Change in Hill Farm Support

A large percentage of farmland in the UK is defined as being in a LFA (mainly hill and upland). In England and Wales for example some 2.3 million hectares or 22% of agricultural land are in the LFA. Livestock producers in these areas will have been receiving Hill Livestock Compensatory Allowance headage payments on ewes and suckler cows for a number of years. Total direct subsidies have represented between three and four times the level of net farm income on cattle and sheep farms in English LFAs, with almost 35% derived from specific hill subsidies, such as HLCA payments (MAFF, 2001) and the situation is similar in other parts of the UK. Other support is available from payments under the Environmentally Sensitive Areas, the Countryside Stewardship and the Organic Conversion schemes, plus a range of training, adaptation and diversification measures.