Case for concern

World markets fluctuate. You only have to look at the cost of filling up a family car to witness this at its most basic level. In the casings sector, where once it was hog that was causing all the woe, now read sheep, which has increased by around a third in the space of a year.

As a shortage of stock leads to a reduction in by-products, then comes the inevitable increase in sheep gut casings costs. Some quarters say that the sheep kill is down by some 46% in China, New Zealand and Australia thanks to a combination of natural disasters and the cyclical nature of the industry.

However, the gut sector is working hard to mitigate this by opening up new markets, getting full usage and cutting other costs. But the collagen players in the market also sense an opportunity.

Of course it is an age-old debate what makes a better sausage? Collagen or gut casings? And it is one that will probably never be concluded with supporters on both sides arguing the different cases for and against.

It was to this end that Devro decided to do some research into the matter. The London-listed company is a world leader in edible collagen and sells products in some 100 countries, and has the major share of the collagen market here in the UK. But it was continually being faced with some producers insisting on hog or sheep gut for their premium bangers. So in October 2009, it commissioned Kantar Worldpanel to do some research into what premium sausage buyers actually thought about their sausages and the whole gut/collagen debate. The online study of 1,250 households of key supermarket heavy/medium premium fresh sausage buyers and consumers threw up some interesting results.

When asked what makes a fresh sausage premium, the Devro-commissioned study found that 75% of consumers said that it was meat quality and that only 3% referred to the casing at all. It also found that when asked about buying premium fresh sausages only two respondents mentioned casing type and a staggering 80% referred to meat content, flavour/recipe and fat content as the major deciding factors.

Despite these results, Devro was then asked by Kantar Worldpanel to further drill down its line of questioning and ask: when buying a premium fresh sausage, do you have a preference for what sausage skin it is in? In total, 83.8% of respondents had not even considered the factor or did not mind what type of casing was on the sausage.

The results of the study have prompted something of a sea change in the companys approach to the marketplace and its trade customers. As Lee Hamilton, director of sales for the UK and Ireland, explains: We have proved that the consumer doesnt notice the difference between natural gut and collagen cases. Its not just us saying it we have the data now to back that up.

Of course there is the opposing side of view, as outlined by Charlie Heggarty, the joint managing director of Dunbia Casings. He says: Obviously the market has been affected by the increase in sheep gut casings. But I dont feel conducting an online survey regarding sausage casings represents real-life opinions.

I agree that a large proportion of the public are unaware what actually holds their sausage together. What the public are aware of is, taste, texture and appearance. I would be keen to see the results of a general public taste, texture and appearance test, where I believe natural casings would come out on top.

And, as Brian Johnstone, chairman of the UK-based National Sausage Casings Association (NSCA), says: I think consumers are concerned about the quality of their food and it is well-known that quality sausages or traditional or butchers-style sausages whatever you want to call them are produced in natural casings. Probably, if you asked the man in the street to tell the difference, he would be hard-pressed. But when you look at the quality end of the market, then they usually demand the natural skin.

For Dr Joris Wijnker, from the Faculty of Veterinary Medicine of Utrecht University and secretary general of the European Natural Sausage Casings Association (ENSCA), increasing costs are also leading to a scramble for the better-quality casings. He explains: The number of sheep being slaughtered has dropped dramatically. Sheep are not slaughtered for their casings, they are slaughtered for meat and then natural casings are one of the by-products. In that respect it is very simple: the availability of the raw material has decreased and, subsequently, there is an increase in market demand for specific qualities and calibres.

Then there is the old situation where you have very little availability with a huge demand. As most companies will try to benefit from this, the price of natural casings will go up. Because it is at this point a very strong market, so they try to sell at a higher price. Whether this is good or not good in the long term, I am not able to say.

This is supported by Johnstone at ENSCAs UK sister organisation. He says: Trade has been fairly steady, the most notable feature has been the sharp increase in the cost of sheep casings, which is due to a classic supply and demand situation. Some of the bigger sheep-producing countries, such as Australia and New Zealand, have seen kill levels lower than they have been.

But while the demand for natural casings and sheep casings has been steady, or rising, the supply situation has caused the prices to rise. Unfortunately the animals arent bred for their casings; they are bred for the more valuable parts and we have to take what is available.

Martin Blythe of Martin Blythe Casings says that a reduced sheep kill in Australia and New Zealand is leading people to the UK a move that is prompting the inflation in sheep gut prices. Unfortunately for those in the natural sector, he does not predict a softening in costs. I dont think prices will change this year. Worldwide buyers have come to the UK because of the shortages coming out of New Zealand and Australia this is having an impact on the prices, he says.

For Vince Minchella, sales manager of Naturin/Viscofan, which specialises in collagen casings, the sheep gut price crisis presents an opportunity for his company. He describes a perfect storm of the increased demand from emerging markets as the key factor behind the sheep gut inflation. Sales for us in 2010 were buoyant, he exclaims. Globally there has been an increase in demand for artificial casings, due to the increased consumption of meat products and a continued shortage of sheep intestine. This is also reflected in the local market.

Our objective is to provide continuity of supply. We see the ongoing shortage of sheep casings as being a key driver of growth in demand for our products. The shortage will result in increased demand for alternative products, which also means that higher prices naturally follow.

Johnstone adds: As far as the UK is concerned, we are now at the lowest point for kills, because it is seasonal. The pattern is that the kill will increase through June and through to around February; they peak around October/November and then they fall away, so obviously the more availability there is, then that will affect the price.

Hog casings have been fairly steady, although we had a similar situation a couple of years ago where they rose very sharply in price, but then they fell back to what you would consider to be more reasonable levels. Thats what I am expecting to happen with sheep casings. I think the supply situation in other parts of the world will ease the situation.

The casing is very much in that global market. Asian diets are becoming more Westernised. They are eating more sausages basically and sausages with natural skins.

We are where we were with hog casings some 18 to 20 months ago, with sheep casings at the moment, says Heggarty. At its high point, hog casings were E22 (19.49) and now sheep casings range from between E12 (10.63) and E20 (17.70). Its at one of the highest prices it has ever been but that is for the producer and not for the consumer.

They have seen the cost of the casings, as part of the cost of a pack of sausages, increase from 20p per pack to 30p per pack. That increase is not something that is stopping people from buying. So yes, it is big for the producer but not for the consumer so consequently sausage sales are holding up.

We have been here before with high prices and they dropped off. It will be the same this time around. Here at Dunbia we can meet the demand.

But Ian Hamilton, director at DeWied UK, is predicting an improvement in the sheep gut casings market. He says: In New Zealand over recent years, weve seen sheep farming displaced by dairy as farmers restructure their businesses in search of profit. However, the current increase in sheep values has renewed confidence in the sheep sector and already we see New Zealand mutton sales down 16% as farmers hold back all viable breeding stock together with a large proportion of their ewe lambs to replenish their flocks.

Australia, which has just seen its lowest wool and lamb production figures for a decade, has announced that the current 2% increase in sheep numbers will be followed by a 7% increase next year with the expectation that sheep numbers will double by 2020, so already we see a reversal of the current market conditions.

Cost pressures

Unfortunately, it is not just the cost of sheep guts that has been impacting the industry in these straitened times. Meat Trades Journal has heard of some operators cutting down on the number of deliveries they make to customers in a bid to cut down on their fuel bills. TruNet has seen the cost of netting rubber increase by a staggering 250% a situation it describes as very tough.

Minchella, at Naturin/Viscofan, adds: We have been experiencing increased raw material and energy costs. We experience the effects of inflation the same as any other business. This we have to balance by passing on to the market what we cannot absorb internally.

Despite these cost pressures, the market is as buoyant as it has ever been, with demand from emerging markets outstripping supply. Demand is something that Devro is also having to work with. Lee Hamilton says the group has been working at maximum capacity for a number of years and its recent results confirm that the group is reaping the rewards. Earlier this year, the corporate giant revealed that it had seen group revenue rise in 2010 to 237m, up from 220.4m the year before. As a result, its margin improved to 16.1% on an operating profit of 38.2m, up from 27.4m in 2009.

There is a huge potential out there for us to tap into, adds Devros Hamilton. There are a lot of emerging markets and countries that dont even realise that collagen exists, let alone the advantages that it can offer. But as the price of natural casings increases it is opening a lot more potential for us.
We are moving away from the collagen vs natural debate. Its about value engineering and about helping our customers to become a leaner and smarter operator in these difficult times, without sacrificing quality.

Dunbia is in the closing stages of bringing its new plant online. The site in Ballymena, Northern Ireland should be open by June. In some part, Dunbia has developed its new state-of-art plant in a bid to show the casings industry in a better light. Heggarty explains: We have nothing to hide and this new plant will improve our transparency to the marketplace. We are trying to go the full length to show people what we do here and what we are all about.

We are close to the completion of our new purpose-built casings factory. This has been an ongoing project for the last 18 months, requiring a lot of time and investment. Upon completion, we aim to run casing workshops for our customers. Within these workshops, customers will have the opportunity to learn about all aspects of natural casings. We hope that, in turn, a better understanding will lead to increased sales.

The knack of NPD

Despite the major players working flat out to meet the demand, this does not mean the casings industry is sitting on its hands during this peak period. Both artificial and natural producers are working hard on new product development and innovation in a bid to improve their products for the industry.
In recent years Devro has been working on its new Select range of casings that it hopes will help it achieve inroads into the lucrative wiener market where the vast majority of casings are natural. Devro says its Select range was developed from a consumer perspective and that it provides an exceptional knack a snapping sound loved by sausage consumers on the Continent. The company is also seeing
a great response to its porcine range of skins.

Hamilton says: Select is something that we are really happy with and think that it will become a big hit on the Continent where people dont consider collagen as an alternative at the moment. It could be used in wiener or frankfurter-style sausages and it has the appearance and knack or that snap that people are looking for over there.

TruNet, which deals in both natural and artificial casings, has also seen success with a new line from Russia. Trade has been good again this year. We have started to introduce a range of plastic casings from Russia; they are of exceptional quality and are very price-competitive, claims Stuart Revill, managing director of TruNet. We have also commissioned our new chilled warehouse and we have seen great results throughout Europe with our patented Total Control Net (TCN) netting from our elastic netting company. TCN is a fixed-diameter netting that is perfect for use when slicing is involved. It works great with large hams. It is a net that acts like a skin, its an unbelievable product, he adds.

Another firm that has hit the innovation trail in 2010 is W Weschenfelder & Sons. The family-run company which concentrates on the premium end of the market for natural cases has branched out and seen success by supplying equipment. It has added the Stagionello STG100 MTF salami cabinet to its range. The STG100, from Italy, is aimed at the professional artisan producer of traditional salami and Weschenfelder says the units enable producers to have complete control of the salami process, from fermentation right through the maturation cycle.

Another innovation has been the development of a new flush bag at Dunbia. This is where the casing is presented in a brine solution, meaning the casing requires less hydration before stuffing, says Heggarty. With less salt present and a totally sealed bag, it is a clean and professional-looking product.

Despite the constant barrage of increasing costs, the sector is hoping for a good summer. Ian Hamilton says: As the UK market prepares itself for the summer season, DeWied UK expects to see considerable casings activity due to their suitability for the barbecue, and the customers preference for sausages in natural casings.

Minchella of Naturin/Viscofan is also positive about the year ahead. His company just opened its first plant in China. The E7m (6.2m) plant, just outside Shanghai, means the group now has a presence on each continent.

This sector is very buoyant at the moment and the emerging markets can only be a good thing, he says.



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