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Industry news – spring 2017

Industry updates

The industry has had a far more positive start to the year compared to early 2016, and this is something we’ve reflected on in our 2017 agriculture outlook video.

In this latest update we take a look at some of the factors contributing to the improved sector performance and look at the exciting opportunities shaping the industry moving forward.

Dairy

A positive outlook for 2017

Early indicators from the Agriculture and Horticulture Development Board (AHDB) put milk production at around 11.88 billion litres, which is about 605 million litres down on last year. That’ll come as no surprise given the market downturn over the last two years – because of that, producers are naturally reducing output and, in some cases, exiting the industry. Likewise, the mid-year price increase on spot price for milk – which is now more fully reflected in contract price – also indicates a shortage. Figures differ a little depending on where you are in the UK; there seems to be a drop of 3.3% in England and 1.3% in Scotland, while there has actually been a 1.4% increase in Welsh production.

So, what does the rest of 2017 hold for the dairy sector? In the short term, much will depend on the spring flush. If it’s a consistent and warm spring, yielding good grass growth, then there will likely be an increase in milk production and potentially a seasonal glut, which could cause a slight dip in the markets.

News that the cream price fell by £200 per tonne in January perhaps raised concerns. This was linked to an increase in milk quality and currency changes. Overall, a cream price of £1,620 per tonne1 in January is down 10% on December 2016, but still a healthy 80% up on January 2016. Butter also saw an easing in price, likewise partly due to currency and exchange rates, but also due to increased trading into Western Europe. Skimmed milk powder and cheddar were relatively static through the early part of the year.

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The Global Dairy Trade (GDT) auctions also give an indication of global milk price. In mid-January there was a marginal 0.6% increase overall. This comes after a couple of drops towards the end of December and into early 2017, so may reassure many.

Overall, the UK sector outlook remains positive. The spring flush may well cause a seasonal dip in the market, but that has yet to materialise and as always, the weather can’t be controlled or predicted.

Beef and sheep

Increase in lamb prices expected

In the early part of the year, lamb price was just lagging behind the same period in 2016, at around £3.75/kg deadweight1, a marginal looking 6%. The usual trend of increasing lamb prices is still expected, but with slaughter numbers behind where they were in autumn 2016, after a marginally better lambing, it could be that there are plenty of lambs available to supply the demand. As spring progresses it will be interesting to see if the slaughter lag catches up and results in the usual scarcity of lamb before the new crop arrive in the auctions and slaughter houses.

With lambing currently in full swing the spectre of Schmallenberg is now at the forefront of producers’ minds. The disease started to emerge in the early lambs at the turn of the year and has generally been affecting fertility and giving rise to stillbirths and abnormalities in young, making them non-viable. The disease is spread by midges rather than from animal to animal and is far more prevalent on mainland Europe as they have a longer warmer autumn. Authorities are keen to monitor exact levels of the disease around the UK and are urging farmers to report any suspected cases.

Overall, there was a low start to the year from a markets’ perspective, with lambs in the region of £5/head less than 2016. However, the usual demand for late-season lamb should enable the market to lift as the slaughter houses await the first of the new crop to be ready.

The beef sector faired a little better for the first month of the year, with an average liveweight price for finished steers sitting around 10p/kg higher than last year. This correlates to around a 5% increase in income, with finished heifers showing at similar increases on 2016 figures at around £2.00/kg liveweight1. There’s always a fine balance in any market, but beef seems particularly susceptible, especially in the first quarter of the year. This is the period when consumer demand is generally at its lowest. However, the cull cow market has been strong as we entered into 2017 with the market marginally up and demand for cull cattle of a reasonable quality and age is expected to remain good.

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A more buoyant start to 2017 means a slightly increased income for beef producers, and, given an even supply to match the demand, we should see the price maintained.

Schmallenberg has also affected the cattle sector, and as spring calving begins in earnest – across the beef and dairy sector – there will be a degree of angst to see how the infection has affected autumn fertility and calf viability.

Arable

Grain prices continue to lift

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Grain prices are continuing to lift, partly because of the weakened pound, allowing UK grain to be more competitive compared to imports. There’s a good degree of confidence as we move into the growing season, owing to a fair planting season and good establishment for most. Wheat prices have seen an increase on early 2016 of some 30%, sitting in the £140+ per tonne bracket. The quality of grain means there’s a low premium between feed wheat and milling wheat, which has been around £5/6 per tonne1 in the first quarter. Barley has seen a welcome increase too, at a 20% increase on 12 months ago and oilseed rape is way up from last year, sitting around the £350 per tonne1 mark.

A glut harvest south of the equator will put more grains into global stockpiles. However, the new trade deals the Trump administration is talking about could spook the market just as much. According to the United States Department of Agriculture (USDA)1, the new administration will rely on exports to prevent carryover of stock. The USDA have soya bean exports pinned at a record high of 56 million tonnes, and maize at 57 million tonnes. Since the start of September, the US has exported around a third of the full season maize and nearly two thirds of the expected soya forecast for the 2016/17 trading year. This is significant, as the US grew record crops for both maize and soya, yet home demand is expected to remain static. It’s likely that export levels could rise. Likewise, South America – in particular Argentina and Brazil – have planted record levels of soya and maize this season but they have restrictions on storage space, so will also rely on the export market to shift product. The two factors could combine to put pressure on global prices.

Overall, the sector is in a positive place. Prices are higher than they have been for the last couple of years, and a reasonable autumn planting season has already been completed. Add that to a good 2017 growing season and the sector should thrive.

Pigs and poultry

Good news for the UK market

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The pig sector is still doing well, with a strong price for clean finished pigs at above 150p/kilo1. This is an increase of some 25% on 12 months ago; for an average weight finished pig this means an income increase of around £25/head for producers. After the pain of the low markets, this is a welcome relief. The cull sow price is also far improved, at nearly double what it was in the same period last year.

Clean pig slaughtering in the UK is forecast to be 10.65 million for 2016. Those numbers are forecast to increase in 2017, but only by around 200,000 pigs – rising to a figure of 10.86 million, which is the highest it’s been in the UK since 2000. Figures for the EU states have reduced. For example, Germany’s figure for clean pig slaughtering (a huge 1,000,000) is down over 5% year-on-year, which makes a large impact on the tight-knit European market. The drop in slaughtering is also reflected in the figures for Ireland, which are also down over 5%, representing almost one third of the total UK figure.

Although there will be more UK pigs on the market, the demand is good, and the weaker pound is making imports slightly less attractive. So the outlook into 2017 is good.

Feed is a huge input cost to the poultry sector – eggs and meat – so the creeping grain price will be on the radar of many producers. While the weak pound will also make any potential imports less attractive, and buoy the market for UK produce, it’s a factor that will begin to impact margins. News of the potential glut of soya into the market will be received as good news in this sector, as this is also a key component of rations.

By far the largest external factor affecting the industry at present is Avian Influenza (Bird Flu). Infected flocks are being slaughtered and restriction zones are being placed around farms. Right now, high levels of biosecurity and sticking close to guidelines is the most producers can do.

Bank borrowing

Debt trend set to continue

The peak in lending for the industry is usually in the late autumn months, as harvest income for many has not yet dropped into place and Basic Payment Scheme (BPS) income is still to be received. 2016 was no different, with total bank debt to the industry hitting a new record high. In October 2016, it reached £18.209 billion, dipping slightly in November by £2 million. Of course, as BPS income arrives in accounts, the debt levels will decrease. The year-end figure in December 2016 was £17.811 billion2. This is only 0.33% up on December 2015, making it one of the smallest year-on-year increases in several years, indicating a possible slowdown in demand for debt but more likely the impact of very late payment of BPS in 2015, distorting the figures compared to this year. The drop in debt from November to December was £396 million2, showing the impact of BPS income on borrowing requirements.

BPS has also had a dramatic impact on credit balances held by the industry, with an increase to an all-time high of £7.427billion2. That’s a rise of £1.192billion, or 16%.

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Demand for debt reduces as prices rise and subsidy is received. With that in mind, it would be no surprise to see demand for debt increase as 2017 progresses, not only in line with the usual cash demands of the growing season, but also as confidence in the industry increases. Farmers may begin to see opportunities to expand and invest in a different light, after the last few tough years, where many have held back on plans in order to ride the storm of global markets.

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