Further Rise in Beef Prices - Light at the End of the Tunnel

UK - There is a well known saying that "A week is a short time in politics" that could be adapted to say "A week is a short time for beef prices". According to a Livestock and Meat Commission (LMC) bulletin, The range of quotes in the week just gone rose to £2.24 to £2.28 (per kg carcase weight) for U grades.
calendar icon 25 January 2008
clock icon 3 minute read

The LIC reports that a midpoint of £2.26 made R grades average £2.20. Precise plant quotes are difficult to obtain for next week, with plants only saying they are likely to increase further as supplies are tight, and prices have gone up in both GB and ROI.

In the South, R grade quotes are generally holding at 319c/kg which at this week's exchange rate and taking off the VAT converts to approximately £2.27, but farmers there are frequently being offered £2.31 for R grades. There are also many reports of £2.40 for choice heifers, and indeed here at home the competition with ROI for the limited supply has produced reports of £2.40 for good sized loads of quality heifers next week.

These increases have lit the light at the end of the tunnel and put the Red Meat Task Force work into a new context.

Feed cost

Last week we said that £2.20/kg was just about covering the increase in feed cost, and this meant that beef producers were no better off than they were a year ago. Clearly any price increase above £2.20 is likely to cover the higher feed costs, but we still have to be mindful of future increases in fertiliser and fuel costs. However bearing these cost increases in mind, the possibility of feeding less meal and using less fertiliser coupled with a price of £2.40 or more will cause farmers to reconsider their options.

The 'Task Force' price

The Task Force (TF) evidence showed that a price of £3.20/kg was needed to cover all the costs of suckler production and finishing when significant cost efficiencies were made. The TF calculations show that 61% of the production costs in the models for suckler to weanling and weanling to finish combined are variable and fixed costs. This equates to approximately £1.95/kg, so last year's average price fell just short of covering these costs and left no return for the farmer's own labour or any return on his investment in land and capital. The own labour costs in the TF models are about 15% of the total production costs, equating to £0.50/kg when labour is costed in at £11 per hour as per the LMC Labour Survey. Thus covering own labour at this value and the variable and fixed costs requires a beef price of £2.45/kg.

Options for producers

The current price of £2.40/kg therefore just about meets variable, fixed and own labour costs. Farmers can therefore begin to consider if in what we hope is an interim period of prices moving up further, whether in the meantime they are happy to accept less than the full market rate for their own labour; if they are prepared to forego for the time being a return on their investment in land (can this be traded off against an appreciation in land value at the moment, but which might not last due to the drop in property values caused by the current economic recession); and whether they are prepared to continue with their investment in livestock and other working capital as an alternative to counting such as a lost 'opportunity cost' of putting it into a well known building society and getting a 6% return on it.

Light at the end of the tunnel

Taking these factors into account would suggest that the light at the end of the tunnel has begun to shine, and that this could encourage producers to stick at suckler production while the light continues to get bigger and brighter until the full economic costs of production are covered. The current week's prices do give some hope, but that hope needs to be built-on. Perhaps the difficulties of getting enough domestic supplies experienced by one of the GB multiples this week, coupled with the impending restrictions on importing from Brazil, will keep prices moving up.

Further Reading

       - You can view the full bulletin, including tables, by clicking here (pdf).

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