Highly Competitive Wholesale Meat Market Expected in 2017

Early reports from the retail sector suggest that the overall grocery trade had a better than expected Christmas.

According to the latest analysis by Quality Meat Scotland’s economics services team, figures from Kantar Worldpanel suggest that in the 12 weeks to January 1st, grocery sales in UK supermarkets increased by 1.8% - the fastest growth since June 2014.

These figures, however, relate to turnover not volume.  Kantar reported that after 28 months of deflation, the average retail price was marginally higher in December than a year earlier.  Higher prices mean that volumes grow more slowly than the total value of sales. 

“The concern for 2017 is that rises in consumer prices may well improve supermarket turnover but actual demand for product may not grow,” said Stuart Ashworth, Head of Economics Services at Quality Meat Scotland (QMS).

“This would be particularly possible if consumers become concerned about a squeeze on disposable income because wage movements do not match consumer price increases.”

While some retailers have hinted at a need to lift consumer prices on the grounds of sterling’s relative weakness, the indications from others suggest continued fierce retail price pressure.

“One large supermarket chain, whilst reporting a 2.9% improvement in like-for-like grocery sales, also cut the price of 800 products post-Christmas,” said Mr Ashworth.

“While the former may suggest some support for wholesale and producer prices, the latter does not.  The wholesale meat market then is likely to remain extremely competitive during 2017.”

Ultimately, according to Mr Ashworth, when looking at producer prices, volume is a key driver - either the volume of meat available from producers or the volume of meat demanded by retailers. If these two sides of the market are not in balance, producer prices can quickly rise or fall.

“Looking back to January 2015, the prime cattle price lifted immediately after Christmas suggesting a strong need to refill the supply chain. However, as January closed, producer prices began to fall and did not turn the corner until midway through the year,” said Mr Ashworth.

“A year ago, prime cattle prices fell immediately after Christmas, suggesting there was no need to refill the supply chain, and prices continued to slide until the end of April.

“In general, the Christmas retail grocery trade in 2015 was considered poor and hence there was no need to significantly refill the supply chain in early 2016. 

“The fact that prime cattle prices have held steady in early January 2017 suggests a better, but not outstanding, retail demand over the Christmas period than last year.”

“However, history would suggest that some downward pressure on farmgate prices is likely in the first quarter of the year,” he added.

According to Mr Ashworth, one way to mitigate this is to supply lighter cattle and reduce the volume of beef on the market.

“Slaughter weights were 2% lower in November than a year ago and slaughter age fell slightly.  However, there was growth in slaughter numbers as some cattle were sold younger and also the pool of cattle was slightly bigger as a result of higher calf registrations two years ago.”

Historically, Mr Ashworth noted, carcase weights are at their heaviest in the second quarter of the year so there is some potential to reduce carcase weights by earlier sale. This, in turn, may boost the number of cattle available but not necessarily the volume of beef produced in the first quarter of the year. 

“The market then is likely to continue to depend on demand to support price rather than reduced supply and that remains a significant challenge,” he added.