House of Commons - Agriculture

Select Committee on Agriculture Third Report

II. THE CURRENT STATE OF THE BEEF INDUSTRY

6. The UK beef industry is highly complex. In 1996 there were over 11.3 million cattle and calves in the UK, on over 128,000 holdings. Almost 60 per cent of these cattle were in dairy herds and prior to the BSE crisis about 41 per cent of UK beef was derived from calves from these herds. A further 36 per cent of UK beef was derived from calves produced from specialist beef suckler herds, many of which are located in the Less Favoured Areas (LFAs). The remaining 23 per cent of UK beef was derived, prior to the ban on over thirty month cattle, mainly from dairy and some suckler cows culled at the end of their productive lives.[2] The importance of beef farming to the agricultural economy varies in different parts of the UK. In Scotland and Northern Ireland, where there is more specialist beef production (with a strong tradition of exporting), the beef industry accounts for 27 per cent of gross agricultural output, while in Wales, with large numbers of LFA farms grazing cattle and sheep, it can be as much as 30 per cent. In the UK agricultural sector as a whole, the beef industry accounts for about 15 per cent of gross agricultural output, compared to 12 per cent in the EU as a whole, and 37 per cent in the Irish Republic, 13 per cent in Germany and 14 per cent in France; these countries represent some of the EU's other major beef producers.

7. The calves and older 'store cattle' produced by the dairy and the suckler herds are usually purchased for further feeding to slaughter weight. There are various systems of producing such finished cattle, and the inter-relationships mean that cattle may change ownership two or three times during their lifetime. The major feed, however, is grass and in this the UK has an inherent competitive advantage over other parts of the EU. In addition, as pointed out by English Nature, grazing by beef cattle is critical to the management of biodiversity in our countryside[3].

8. Once ready for slaughter, cattle enter a diverse market chain comprising some 250 auction markets (also important for calf and store sales), almost 400 abattoirs and many cutting and boning specialists and meat manufacturers. Beef carcases are broken down to fulfil the requirements of a complex market place. As a result there are large differences in the prices and values of carcases and cuts in different parts of the distributive chain. In 1995 about 45 per cent of beef was purchased at retail in a fresh or frozen cut form, 33 per cent as processed beef products and 22 per cent in the catering market (particularly as beefburgers). Although the retail market is today dominated by the large supermarkets, retail butchers still accounted for 24 per cent of sales in 1997.

9. In 1995, the year before the crisis, total UK domestic beef consumption was over 900,000 tonnes within a total demand for meat of over 4.2 million tonnes. However, total beef consumption had fallen steadily over the previous ten years from about 1.1m tonnes in 1985, while total meat consumption had increased. In 1995, the beef market was worth some £4,000 million, accounting for 0.7% of UK gross domestic product, and employed an estimated 130,000 people. The long-term decline in domestic demand had been balanced in the industry by a steadily growing export market, mainly to the EU, that took over 28 per cent of the 974,000 tonnes of UK beef production and was worth over £600 million[4]. Nonetheless, the EU beef sector as a whole was in structural surplus with production being 110 per cent (in 1995) and 116 per cent (in 1996) of consumption needs[5].

The crisis

10. The UK beef industry is in the midst of a crisis, triggered by the Government announcement on 20 March 1996 on the possible link between BSE and new variant CJD, which is now approaching its third year. In 1996, following the complete loss of the export market and the sharp fall in consumer confidence in the product, beef consumption in the UK fell by 18 per cent to 739,000 tonnes. By 1997 production had fallen back sharply to 692,000 tonnes, primarily because of the exclusion from the food chain of meat from over 30 month old cattle, although the high number of calves entering the Calf Processing Aid Scheme was also further depressing production[6]. An encouraging recovery in domestic beef consumption throughout 1997 has therefore been met by increased imports, made much more competitive by the stronger value of sterling. As a result of this, and the continued absence of the export market, cattle prices have been very weak, especially towards the end of 1997 and the beginning of 1998[7]. During 1997, liveweight prices fell steadily, averaging around 97p/kg in Great Britain, 8 per cent below 1996 levels and 21 per cent below 1995 levels[8]. Prices for rearing calves were also below 1996 levels[9]. In Northern Ireland, where the export ban has had a proportionally greater effect, prices have been even lower, falling by 26 per cent from 1995 levels[10].

11. In short, a recovering consumer market has been accompanied by a worsening of the producers' position and margins have been severely affected. At the same time, the industry is incurring additional costs due to increasing requirements relating to food safety and traceability, while the Government has gradually been reducing or removing some of the support payments (such as the support to the rendering sector) that have so far helped the industry cope with the crisis. As a result, the UK beef industry is becoming less competitive relative to other EU states and this could generate further declines in production, loss of market share and reduced employment. Ironically, while the slaughter and other measures (including SRM controls) introduced to eradicate BSE from the British herd have raised UK beef hygiene standards to exemplary levels, inevitably they have reduced the volume of domestic product and opened up the UK market to some beef imports produced to less exacting hygiene standards. The future impact of the BSE crisis on some sectors of the industry, particularly beef farmers and parts of the red meat processing and distribution chain, could as a result be significantly greater than the effects to date[11].

Beef producers

12. The Government's latest figures on farm incomes show that, in 1996-97, cattle and sheep farms were largely cushioned from the effects of the BSE crisis by Government emergency measures and special support payments. At a time when all sectors of British agriculture are suffering steep drops in income, however, provisional figures for 1997-98 show lowland cattle and sheep farms hardest hit in percentage terms, with the net farm income (NFI)[12] of such farms in England expected to fall by 62 per cent in real terms[13]. This drastic reduction in incomes arose from the strengthening in 1997 of sterling against the ecu and other European currencies, reducing both the value in real terms of EU subsidies received by livestock farmers, and dampening market demand particularly among supermarket retailers for UK beef in the face of cheaper European imports. For cattle and sheep farms in English LFAs the fall in NFI is expected to be 35 per cent in real terms[14]. These falls come against average NFI in 1996-97 of £18,809 in LFA cattle and sheep farms[15] and £7,432 in lowland farms[16]. The provisional figures for 1997-98 do not take account of the £85 million aid package announced by the Government on 22 December 1997, though it is by no means clear yet that this aid will reach livestock farmers in the current financial year. What the figures do demonstrate is that, contrary to popular perception, lowland livestock producers are in more serious financial difficulties than their upland counterparts who have benefited from the one-off extra £60 million support provided on Hill Livestock Compensatory Allowances in 1997.

13. Farmers' representatives all referred to the dramatic effect that falling market prices and reductions in support would have on 1997 farm incomes. Mr Ben Gill, the then Deputy President of the NFU, maintained that there was "enormous pressure on incomes, which in many cases are zero, in some cases they are losing money"[17]; Mr George Lyon, Acting President of the NFUS, said that "we are looking at a substantial drop in farm incomes"[18]; and Mrs Mary James, the FUW's Director of Agricultural Policy, stated that "our own calculations would suggest that over the last two years we have seen a decline in real incomes of somewhere in the region of 50 per cent"[19].

14. The reduction in incomes being seen in the industry varies, depending on the individual farm circumstances and the differing systems of beef production. This was clearly shown by the details of the loss in income of the individual farmers who gave evidence[20]. In general beef finishers are suffering because of the reduction in the prices and value of their prime cattle (compounded for some by the relatively strong calf/store market towards the end of 1996), and because top-ups to the Beef Special Premium were not available in 1997. The British Simmental Cattle Society pointed out that the value of certain animals that naturally grow to a larger carcase size and young bulls (both previously in demand for export), had been depressed disproportionately by the export ban, and in the latter case, by reductions in intervention buying [21].

15. The incomes of suckled calf producers have been directly affected by the reduction in suckled calf prices and by the reduction in the value of the cull suckler cow as a result of the cap on the Over Thirty Month Slaughter Scheme (OTMS). While this has had a significant impact on the dairy sector, it is even more significant for the beef producer given the importance of the value of the cull cow to the economics of suckler cow production. Also, because of the larger size of cull suckler cows compared to dairy cows, the value to some producers has been reduced by as much as 50 per cent[22]. Lowland suckler producers who do not benefit from HLCA payments have also suffered disproportionately[23].

16. The effect of the current market situation on farm viability is not just related to the income flow of the farm business. As with many businesses, farmers operate on overdraft facilities from banks and the farm's capital assets are used as collateral. Included in these assets is the value of livestock, a capital asset which is seen as one that can be easily liquidated. All of the individual farmers giving evidence to the inquiry, and written evidence from the farming unions and related bodies such as the National Cattle Association, commented on the effect of the declining value of livestock[24] and other assets of the farm business. This was having a marked effect on the future viability of farms, resulting from banks tightening up their lending arrangements[25]. The effect of this reduction in asset values has been most marked for specialist pedigree herd producers, where the inability to sell pedigree stock abroad and the weak market has had a serious effect, not least because, "many breeders look upon their herds as a type of pension fund, which on retirement could be dispersed"[26].

17. The Tenant Farmers' Association made the telling point that beef farmers on tenanted holdings are under extra pressure, as the decline in farm incomes is exacerbated since rents are reviewed every three years. Furthermore, it is increasingly difficult to negotiate rent reductions[27]. Hence the rents of many livestock farms today do not reflect accurately the income-generating value of the land.

The rest of the beef industry

18. As with beef farmers, much of the rest of the beef industry was cushioned against the effects of the BSE crisis for 1996, and much of 1997, by Government emergency measures and compensation schemes[28]. The support provided to renderers, for example, prevented that industry collapsing altogether and allowed it to ease into its role as a waste disposal industry. This in turn supported the abattoirs, many of which also benefited from the slaughter activity resulting from the OTMS and intervention sales, that also benefited some boning and cutting plants. Meat manufacturers received no direct support but many were able to adopt substitution strategies, replacing domestic beef with other meats and imported beef and making major changes in product recipes. These adjustments reduced profitability, raised costs, and, as set out in the evidence from the British Meat Manufacturers Association, resulted in instability for many and changes in ownership for some[29]. Certain specialist cutting and boning firms, such as those processing cow beef for export and the producers of minced and diced beef, export traders and head boners, were particularly badly affected, and some of these firms closed or had to drastically change their business[30].

19. Today, with lower throughput in connection with the emergency OTMS cull, the run down in intervention, the removal of support for the rendering sector and the increase in waste disposal and hygiene and food safety regulation and compliance costs, much of the abattoir and cutting and boning industry, faced with large overcapacity, is looking at the prospect of major restructuring in the next few years.[31] Low livestock prices have eased margins for some during 1997, but with great competition from imports and the increasing demands of the large domestic supermarkets, many large abattoir/processors have had a difficult year and the smaller ones are struggling to survive.

20. The effects of the BSE crisis on supermarkets, and, to a lesser extent, butchers has been limited, as they have seen sales of other products increase with a large amount of substitution occurring, according to MAFF[32]. A point forcibly made by the National Cattle Association and echoed by others in the industry was that "the removal of the export market has enabled a small number of major domestic buyers [supermarkets] to dominate the UK market for cattle"[33]. Because of the complex nature of the final retail market, it is difficult to show that there is any substance in the allegation made by some farmers that the supermarkets have been taking unfair advantage of low farm prices. Tesco, claiming they made no money on red meat sales, also announced an investigation into beef margins during the inquiry.

21. Other related sectors of the industry continue to be affected by the BSE crisis[34]. These range from those sectors that have been affected only slightly (eg support service, banking), to those that have been markedly affected (eg auctioneers,[35] and haulage companies, many of which, according to the Road Haulage Association, have lost valuable livestock and export business that has caused closure and loss of employment[36]). These sectoral effects have had ramifications for the wider rural economy, as pointed out by Mr Gill: "over the length and breadth of the country... it is not just farmers [who will be going out of business] it is firms in the rural economy that supply farms... steel fabricators... builders... the local pub"[37]. Further supporting evidence came from local studies carried out by the Hereford and Worcester Chamber of Commerce confirming the detrimental effect of the decline of the beef industry on the local rural economy[38].

The reasons for the current crisis in the beef industry

22. The fundamental reasons for the current crisis in the beef industry are a direct result of the continuing problems caused by the BSE crisis that began in March 1996. Evidence from Sainsbury's noted that "BSE continues to be the biggest problem facing the beef industry in the UK with significant impact on the turnover and profits of everyone involved in supplying it to the British consumer"[39]. These problems have been exacerbated by a marked appreciation of sterling that has significantly increased the price competitiveness of imported beef (and other substitute products), and by the continuing concern about the safety of beef and other products derived from UK cattle. The issue was put succinctly by the NFUS: "the industry is in a worst of all worlds situation. It is shut out of the Single European Market, with a high regulatory cost structure whilst having to endure unequal competition from imports from other EU states"[40]. Dr Cunningham said that overlying the crisis was the fact that: "we are facing a structural surplus throughout Europe, not just in the United Kingdom, for beef in the face of a well established and continuing long-term trend away from red meat consumption. Unless the problems of surplus are addressed there is unlikely, in my judgement, to be a sustained return to profitability in the beef sector"[41]. In many ways the impact of the BSE crisis has been to accelerate the forces for change that have been putting pressure on the traditional UK beef industry for years: the long-term demand trends, the need for structural adjustment, the gradual move to a more integrated supply chain and with it the increasing requirements of higher standards and traceability. The crisis has also changed the beef industry fundamentally, with the removal of over thirty month old beef from the market (almost 25 per cent of previous production), the continuing loss of the export market (almost 30 per cent of previous production), and the change in the rendering industry from one producing commodities to being a waste disposal industry.

Export ban

23. Most witnesses emphasized the debilitating effect of the export ban and the fundamental importance of re-opening the export market. This is a pre-condition for returning the industry to near-normality and most helping it to help itself. For example, the Meat and Livestock Commission noted that "the opening of the export market is, in our view, the main objective which industry must continue to work towards and the Government vigorously pursue"[42]; the NFUS stated that "the industry cannot survive if it has to compete within the Single European Market at a permanent disadvantage to its EU competitors"[43]; while the NFU maintained that "the highest priority must be given to lifting the export ban and restoring a single European market"[44].

The strength of sterling

24. The industry was also unanimous about the serious impact of the strong pound on the beef sector. This had a major bearing on the beef market in 1997 and increased the competitiveness of beef from other EU countries on the UK market. The currently high level of sterling has of course affected other sectors of agriculture and manufacturing in the UK, and the beef industry has at least benefited from the freezing of premia payments during 1997[45]. However, the strong pound has exacerbated the beef industry's already chronic difficulties. According to the MLC, "exchange rate movements reduced the price of beef from Germany, Ireland and France by an average of 13 per cent. This has led to increased imports.....estimated to have increased in 1997 by 18 per cent. These higher imports have undermined any significant recovery in UK prices during 1997"[46]. The strength of feeling amongst farmers on this issue was summarised by the National Cattle Association: "The major factor affecting the future viability of the industry is the strength of the pound which is making imports increasingly competitive in the UK market and reducing the value of the domestic product"[47].

25. In addition to affecting the price of domestic beef, the revaluation of sterling through the workings of the EU agri-monetary system also reduces the value of some of the market support payments. In particular it has reduced the value to farmers of OTMS payments and has contributed towards the low level of intervention activity in the latter part of 1997. In the meantime, as the Meat and Livestock Commission pointed out, home production is expected to fall in 1998 and, if consumption continues to recover, there may well be a greater need to import to satisfy demand. If the pound remains strong the competitiveness of imports (which could grow even more if the EU begins selling intervention stocks) will continue to weaken domestic livestock prices throughout 1998[48]. Sainsbury's argued that if additional short-term support were not provided to the industry by the Government, there would be "a real danger that the number of beef farmers will decline to such a degree as to make major retailers reliant on imports to meet consumer demand"[49].

The effect of the reduction in consumer confidence and demand

26. The fundamental issue for the future of the beef industry is the demand for the product. The announcement by the Secretary of State for Health on 20 March 1996 led to a significant loss of consumer confidence in beef, both in the UK (with initial falls in consumption of as much as 40 per cent) and throughout Europe.[50] Since then, although the export market remains closed, on the domestic market there has been a steady recovery throughout 1996, starting to level out in 1997 at just below 1995 levels. During 1997 beef consumption is estimated by the Meat and Livestock Commission to have risen by 14 per cent to just under 843,000 tonnes[51]. Household consumption has increased, led by improved sales of steaks and roasts, and aided by a strong recovery in the sales of minced beef. This has been achieved by major promotion and marketing activity, such as the MLC's Minced Beef Quality mark and also by strong in-store promotions, including many special-offer price reductions, by supermarkets especially. The British Retail Consortium maintains these have significantly reduced the profit margins being achieved on beef. Non-promotional prices for different beef cuts in one supermarket identified by the BRC in its evidence showed decreases of between 2 per cent and 11 per cent between December 1995 and December 1997[52].

27. The recovery in demand has also been notable but not as strong in the processing sector, with the return to British beef of the two large burger chains McDonalds and Burger King being a major breakthrough for the industry in 1997. Many manufacturers have reformulated their recipes, usually to an alternative (cheaper) meat, such as poultry and pigmeat, or to imported beef, and these will be very difficult customers for the beef industry to win back. Similarly, in the food service sector, especially in schools and institutions, although there has been some encouraging recovery, there is still a great deal of work to do to win back lost custom[53]. The perception in the rest of Europe of the safety of British beef remains unpromising: Mr Gill of the NFU recounted the puzzlement of members of the European Parliament's temporary committee of inquiry into BSE upon seeing, during a visit to a Midlands market, that the over thirty month old cattle there were healthy. Mr Gill took this to show that, in Europe, "The impression amongst many people is that we are a country riddled with disease from top to toe and we do not care a fiddle about it"[54].

28. The industry also faces the fact that over the last decade the long term trend in overall beef consumption has been for a 2 to 2.5 per cent fall per year, as consumers change their eating habits. In the opinion of many the best that the industry can hope for in the medium term is to improve demand, so that it returns to its long-term 'declining' trend[55]. The industry also faces the continual problem that domestic public concern (and usually sales) is affected and the concerns of consumers heightened each time there is new scientific information on BSE and new variant Creutzfeldt-Jakob Disease[56]. The latest advice from the Spongiform Encephalopathy Advisory Committee (SEAC) on dorsal root ganglia, which led to the beef on the bone ban in December 1997, was a case in point. Other concerns about the healthiness of beef consumption also have their effect. The report of the Committee on Medical Aspects of Food and Nutrition Policy (COMA), on the possible link between high levels of red meat consumption and cancer, is an example of this. Although the main conclusions of the draft report were made public in September 1997, the report itself is still to be published, perceived by the industry as having been delayed by disagreement within the Government over the advice to be given to consumers about red meat consumption. This episode, which risks providing two health scares about red meat for the price of one, is exactly the kind of confusion which compounds the beef industry's problems.

2 Ev p 62 para 2 Back

3 Ev p 121 para 4 Back

4 Ev p 2 Back

5 Ev p 63; Q 113 Back

6 Ev p1 Back

7 Ev p132 Back

8 Ev p 66 Back

9 ibid Back

10 Q 59 Back

¹¹Ev pp 5, 25, 32, 132 Back

12 Net farm income represents the return to the farmer and spouse for their manual and managerial labour and on tenant type capital in livestock, crops, machinery, etc. but excluding land and buildings. It is calculated before deduction of interest payment on any farming loans and also excludes interest earned on any financial assets owned. NFI is calculated for all farms by assuming that all farms are tenanted and that all tenant-type assets are owned by the farmer. Back

13 Farm Accounts in England 1995/96 and 1996/97, MAFF, 30 January 1998, Table 1.1 Back