Only a year ago, the question on everyone’s lips was how to solve the problem of meat inspection, a system viewed by industry as costly, ineffective and unsuitable for Scotland. However, fast forward 12 months, and the elephant in the room is of a rather different hue. The long-anticipated Scudamore report, published in April has been greeted with enthusiasm across the industry.
The recommendations for a devolved or stand-alone Scottish Food Standards Agency is currently being considered by the Scottish government and a decision is due before the end of the Holyrood Parliamentary session, possibly at the Royal Highland Show.
With this issue, if not resolved but at least progressing well, the question has turned to a more rudimentary one. Jim McLaren, chairman of Quality Meat Scotland (QMS) gets to the crux of the problem.
“The biggest single challenge facing the industry is critical mass,” he says. “Maintaining numbers of livestock and keeping breeding animals on farm is the key challenge at the moment.”
Data from the June and December census show that the number of breeding cattle and sheep in Scotland has continued to fall – sheep numbers on Scottish hills fell to the lowest numbers in a century, according to the Response from the Hills report from the Scottish Agricultural College (SAC). Sheep numbers in Scotland fell by 1.7% to 2.797m head, while the beef breeding herd was down 2.5% to 522,000 in the December census.
The reason for this decline, McLaren says, is the double-edged sword of high farm-gate prices, with farmers attracted by the high value price of kill animals and sending more heifers to be slaughtered, diminishing the potential of subsequent suckling yields.
“We sincerely hope that has been the removal of passengers or less productive animals,” McLaren says, pointing out that a younger breeding stock could increase overall efficiency of the herd in the longer term.
“But if it’s simply seeing a reduction in stock that is not being replaced, it’s a great concern for the whole industry,” he says.
While the rise in farm-gate prices has given producers some respite from the increasing burden of feed, fuel and fertiliser, and enabled them to make better returns on their investment, McLaren argues this short-term view is not sustainable. “Any benefit of livestock shortages will be undermined if there isn’t enough product to keep the abattoirs open,” he points out. Retail prices have not risen as fast as farm-gate prices, and therefore those in the middle of the supply chain are seeing margins squeezed hard, threatening the long term sustainability of the industry.
The acuteness of the problem was highlighted earlier this year with the shock closure of Caithness Beef and Lamb, a £4m state-of-the-art abattoir, processing and packing plant in Wick, which went into administration before ever opening for business. Orkney Meat’s decision to stop production at its Hatston abattoir, as well as the substantial losses sustained by ANM Group, which have resulted in redundancies at the Scotch Premier Meat plant at Inverurie have only underlined the problem.
However, there is some positive news from the rise in beef calf registration figures, up 1.2% in December to 477,500 head, around 10,000 more than the previous year. The British Cattle Movement Service’s spring calving data for March, April and May is also expected to show signs of stabilisation, but until the June Agricultural survey is published, it will be difficult to tell how successful this has been. Meanwhile, QMS says evidence that the improved market price is leading to investment by farmers in the breeding stock, is a hard to find.
“We’ve seen an increase in calf registration, so hopefully that’s coming through,” McLaren says. “But I think the real measure of success if yet to be measured - and that’s the number of stock on the ground, how much of an effect has the culling of breeding stock had on calving, that’ll be the key figure.”
McLaren is not alone in fearing the repercussions of tightening supply pushing down processor margins. The sentiment is echoed around the entire industry north of the border. The Scottish Association of Meat Wholesalers’ (SAMW) new president, Alan McNaughton, voiced his concern at the organisation’s recent conference, saying that the industry had reached a crossroads, with inadequate supply of raw materials putting Scotland at a disadvantage to increase its share of UK, European and global markets.
“No one’s got simple solutions to the lack of livestock,” says McNaughton. He remains convinced that CAP reform is the single most important way to alleviate the huge problem of critical mass. “What is crucial to the future of the Scottish meat industry is the CAP review. We strongly believe that there needs to be some production-based support and that this is maximised to whatever level the Scottish government and the EU can deliver.”
“Without it,” he continues, “livestock production - both breeding ewes and suckler cattle on the hills and uplands - will continue to decline.”
“It has to be made worthwhile to produce calves – everything else in the meat trade flows from that and ultimately, will find the right prices and correct values,” he says.
However, it is current prices and values that are causing concern, with high input and livestock costs combined with food selling prices, which have put processors under increasing pressure. McNaughton points out that in between these costs, businesses have to find working capital and operating costs.
This is particularly true given the amount of companies who have had to protect the customer from these increased raw material costs, partly as they have found it increasingly difficulty to pass on these costs into the British high street. As margins are squeezed, processors’ ability to reinvest in efficiency measures in their own plants is restricted.
McNaughton says that one result is there has been a lack of investment in recent years, not just in Scotland but throughout the UK, and this is often the crunch point that forces plants to look at whether the return is going to be suitable and what margins and profits are required to make the business work.
However, he says that in the shorter term, the industry need to tighten its belt, and that increasing efficiency is the key to alleviating some of these challenges.
“At the plant level where things are tight, cost control is becoming every more important,” he says. “At times of margin pressure, cost control becomes vital and we have to make sure that these are absolutely tight.
“The processing industry has to be open to all new development and new technologies that are out there and would be wise to take them on when they can. That could be new technology for handing effluent or reducing utility usage, but these are small things that people can do to look after the costs.”
NFUS president Nigel Miller feels that the export market has opened up Scotland’s industry and is a primary driver for the growth of the industry.
“The export market is a key feature,” Miller explains, “and ensuring access to markets, decent exchange rates and flagging the higher value in fifth quarter and hides is going to be vital if operations are going to be sustainable.”
While the negotiations budget and reforms rumble on, there are short-term measures that will help, according to McNaughton. “Scotland has a quality brand and provenance,” he says, “and we’ve got to make sure we keep pushing that.
There are opportunities out there on the export front, and processors have to be aware of those new markets and try and exploit them where they can.”
The largest market for Scottish beef, sheep and pigmeat is still the UK, accounting for some £385m worth of beef sales beef in 2010 and £81.5m of both lamb and pigs.
However Lauren Vernet, head of marketing at QMS says that there are markets in Europe that are of particular interest to the Scottish industry. There is currently a strategic drive to develop sale of beef in Germany and the Nordic countries, not only capitalising on the strong brand image that already exists, but also as a result of the weak exchange rate. “Germany is still the strongest economy in Europe,” he says, “so it is good for us to invest there.” Similarly, the majority of Nordic countries are outside the Eurozone and there is strong demand for high quality beef and alternative cuts in foodservice in Sweden, Denmark and Norway. Dubai and Hong Kong are also high-end markets for high quality Scotch red meat, with peopleprepared to pay a lot of money for Scotch beef and lamb.
The key opportunity, according to QMS, is to differentiate. “We need to set our product apart from the competition,” says McLaren, pointing out the level of brand recognition for Scottish food and drink both in the UK and abroad. However, it isn’t only the top end of the market that Scotland needs to target, according to McNaughton.
“We need to look at maximising the fifth quarter, which we’ve done quite well over the last 12 to 18 months,” he says. “Quite a lot of work has been done on that in the industry and that must continue to try to maximise the sources of revenue streams that come into the plants.”
The advantages are well known – as well as optimising the use of the carcase more efficiently, with less waste and higher price gains, it also helps the green credentials of the product, which Vernet says is of increasing importance in a competitive market.
CAP reform and Europe
However, despite export and efficiencies helping processor margins, there is no short-term fix to solving the most serious problem of getting more animals on the hills. Many feel that the biggest scope for this lies with CAP reform, as the Scottish agricultural sector is inextricably linked with Europe and vital support payments.
The issues on CAP reform are two-fold, according to McLaren. Any delay in reform brings greater uncertainty to everyone along the supply chain, but he says it is also necessary that reforms suit Scotland.
“We need to see a system that delivers support to breeding animals, maintained in Scotland,” he says, “an enhanced from the system we have now, so we can target money keeping stock on the grazing land. Unfortunately in some parts of Scotland we’re going to require, some level of support for a very long time to encourage the stock to stay there.”
Miller says that the sector faces some potentially frightening changes in the next few years, as direct payments are flattened. Less Favoured Area (LFA) support amounts to around £63m, which is targeted at productive farms. “Maintaining that budget and targeting will be crucial for the livestock sector,” he says.
“There are lots of challenges ahead politically and in efficiency terms, but in spite of that, most producers do have a level of optimism, fed not only by the last few years but also by the attitude of the government north of the border, which really backs food production and sees it as part of Scotland’s future.”
Political opinion is divided over whether Scotland’s bargaining position in Europe would be better served if it were to have its own representation at the table than as part of the UK, but the debate over independence is certainly one that is set to intensify over the coming year. Those in favour point out that the Scottish industry would receive a larger share of the redistribution, while those against argue that major decisions over currency, levels of debt and tax and the implications for export markets, particularly to English and Welsh market, seriously harm businesses north of the border. There is a fear that if the Scotch brand becomes regarded as ‘foreign’ south of the border, it could reduce access to shelf space, effectively shrinking the domestic market from around 60m people to 5m.
However, McNaughton remains unfazed by the political wrangling. “There’s a lot of speculation, a lot of wind and spin,” he says, pointing out that ultimately it all comes down to opinion. “What we’ve got to concentrate on is that we have a world-renowned brand and excellent provenance and people buy Scotch meat because they want it and they do that throughout the world.
“We sell an awful lot of our meat outwith Scotland and it’s important that is recognised and we don’t do anything that could ultimately upset any of those markets. But we’ve got the brand and the provenance and I the believe that we’ve got the article that people want to buy. I believe that the market will look after it.”
Scotland at a glance
• Total Scottish beef production in 2011 rose 0.1%, to 183,800t, while beef from prime cattle fell 1.5% to 161,700t.
• Sales of beef to Scottish markets were worth approximately £153m in 2010, with sales to the rest of UK worth approximately £385m.
• Exports in 2010 were estimated to be worth £58.5m, up 42% on the previous year.
• The average price for producers was around 13% higher in 2011 than in 2010, while UK beef retail prices averaged 4% higher in 2011.
• The December 2011 census showed the beef breeding herd fell 2.5% to 522,000, while the total cattle population was down 2% to 1.73m.
• Beef calf registrations rose 1.2% in 2011, to 477,500, slightly lower than the average calf registration (up 1.6%) to 581,600.
• Total cattle slaughterings in 2011 equalled 524,000 head (up 1%), while prime cattle slaughterings in 2011 fell 0.2% to 460,000 head
• Total Scottish sheep production in 2011 was 31,100t, up 3.6%
• Sales of sheepmeat to Scottish markets were worth approximately £18m in 2010, while sales to the rest of the UK were worth approximately £81.5m.
• Producer prices averaged 11% higher in 2011 than in 2010, while UK lamb retail prices averaged 21% higher in 2011.
• Exports for 2010 were estimated to be worth £40m, up 38% on the previous year.
• The total sheep population in December 2011 was 4.465m head, down 2.6%, while the breeding flock was 2.797m head, down 1.7%.
• Total sheep slaughterings in 2011 equalled 1.52m head (+3.1%)
• Total pig production in 2011 rose 10.7% to 49,900t, with slaughterings in 2011 of 629,000 head, up 9.5%.
• The total pig population in December 2011 was 368,100 head, down 10%, while the breeding herd fell 13.6% to 32,200 head.
• Sales to Scotland in 2010 were worth approximately £18m, while sales to rest of UK were worth approximately £81.5m.
• Exports in 2010 were estimated to be worth £3.5m, up 16%.
• Producer prices averaged 2% higher in 2011 than in 2010, with UK pork retail prices around 5% higher in 2011 and UK bacon retail prices around 2% higher.