Only three weeks to go until the end of the EU exit transition period and key concerns remain for Scotland’s sheepmeat sector

According to the latest market commentary by Quality Meat Scotland (QMS), the meeting between the UK Prime Minister and EU Commission President on December 9th leading to a further 72-hour extension to trade talks between the UK and EU, has not reduced the uncertainty for Scotland’s sheep farmers and processors.

With time quickly running out for a deal to be in place in time for January 1st, the potential for market disruption, particularly in the early weeks of 2021, highlights the critical importance of communication between farmers and processors.

The QMS export survey for August 2019 to July 2020 found that EU countries accounted for nearly 98% of Scotch Lamb PGI exports.  Meanwhile, exports accounted for an estimated 23% of Scottish sheep processing revenue compared to 8% of cattle processing revenue, highlighting the greater risk to the sheep sector of a negative outcome from trade talks.

“The primary concern for the sheep sector is that without a trade agreement, Scotch Lamb PGI will face the EU’s considerable tariff shield from the beginning of 2021,” said Iain Macdonald, QMS Senior Economics Analyst.

“Based on import prices at Rungis wholesale market in Paris on December 10th, the price offered to the Scottish exporter after the tariff has been paid by the EU importer would have to fall by 36% to stay competitive at the same market price.

“In such a scenario, exporters of Scotch Lamb PGI would be relying to some extent on EU prices rising in response to an important source of lamb becoming more expensive, and EU import demand being less sensitive to higher prices due to the quality of the product,” he continued.

Other factors which could potentially soften the reduction in competitiveness include a weaker sterling, and a 4% smaller lamb crop in New Zealand leaving it with less headroom to fill a supply gap.

“Of course, this is before factoring in the additional administrative burden as a result of leaving the EU single market.  Currently, shipping meat from Aberdeen to Paris is similar to shipping from Aberdeen to London, except for the additional transport time, but it is set to become much more challenging from January 1st,” said Mr Macdonald.

New administrative procedures, such as export health certification and checks at the border, will add time and cost to the current process.  Fortunately, the EU has proposed a six-month period of grace for UK road haulage companies to continue moving goods from Britain to the EU.

It should be noted that the implications of the requirement to trade as a third country will still disrupt exports even if a trade agreement removes the threat of tariffs.  This could be particularly acute in the early weeks of 2021 as traders and officials have to adjust to new ways of operating.

“Thinking back to late March 2020 when the first wave of the COVID pandemic hit Northern Europe, the export market effectively closed for a period and stocks of lamb quickly built up.  Lamb auction market prices in Scotland fell by around 30% between the third and fourth weeks in March and failed to fully rebound in April.  They also took longer to recover from their low point than prices at marts in England and Wales. 

“Something of particular concern to Scotland’s sheep producers is the extra exposure to market risk due to a later marketing pattern, which means a higher share of the Scottish lamb crop will remain on farms at the end of the calendar year. In the five years up to the 2019 lamb crop year, 55.8% of the lambs sold at Scottish auctions were traded in their year of birth, compared to 64.4% at England & Wales auctions,” commented Mr Mcdonald.

This year’s June census results also point to Scotland having an increased lamb crop to begin with, up 2.1%, whereas the English crop was 1.2% smaller.  Meanwhile, the number of store lambs traded at Scottish auctions since late July has risen by more than 5% on last year. 

“However, marketing of finished lambs has been much quicker in 2020, so we may end the year with a smaller carryover than at the end of 2019.  Given that store lambs have also been sold earlier than last year, a higher share of these lambs may end up reaching the prime market prior to the New Year than in the 2019/20 season.

“As we approach the year-end, the home market has been strong enough to absorb the additional volume of lamb due to early marketing, with increased retail sales more than offsetting the impact of a smaller foodservice sector,” concluded Mr Macdonald.

In the week ending December 9th, farmgate prices continued to trend seasonally higher, averaging 214p/kg.  This was the highest level since the week before Eid al-Adha in July, with lambs averaging 11% dearer than last year and 22% above the five-year average.