The prices Scottish producers are receiving for prime sheep in the auction ring remain six percent higher than this time last year, while the GB deadweight average increased by 14.5% year-on-year, according to the latest analysis from Quality Meat Scotland (QMS).
Hogg prices have been running well ahead of early 2013 levels so far this year and, according to Iain Macdonald, QMS Economics Analyst, the increases can be attributed to tight supplies.
“The latest slaughter data from Defra showed that in January 2014, Scottish abattoirs killed 2.5% more hoggs than a year earlier. However, at the UK level, supplies were much tighter with UK abattoir throughput 5.5% lower on the year at 1.04m head,” said Mr Macdonald.
“Moving forward into February, both auction market and abattoir data suggest that supply remained tight. Indeed, the number of hoggs at price reporting abattoirs was down by 12% on the year in February, while auction volumes fell 20% short in Scotland and 19% short south of the border.
“With fewer hoggs, processors have had to bid higher to secure sufficient volumes to cover their orders.”
The main drivers behind the lower supplies were better weather and feed availability over the second half of 2013 compared to 2012, resulting in lamb growth rates being boosted and finishing periods being shortened, meaning fewer hoggs were carried into 2014.
“While the 2013 lamb crop was around five percent smaller than a year earlier in Scotland, it was one percent higher at the UK level, meaning an additional 152,000 lambs on the ground,” said Mr Macdonald.
“However, by the year-end, UK abattoirs had slaughtered an additional 233,000 lambs compared to a year earlier, a three percent increase which accounted for more than the entire increase in the lamb crop.
“This is before considering that the Welsh census figures appeared surprisingly high - up 7.5% - and that higher prices for finished lambs may well have led producers to retain more lambs for future breeding, potentially limiting the pool of slaughter stock even further.”
A tighter market, however, does not necessarily follow on from lower supplies – the demand side is also important. Looking at the current situation, auction supplies were down 24% year-on-year at the beginning of March but prices were up by just 6%, perhaps signalling a softening of demand, he observed.
With regard to consumer consumption, according to Kantar Worldpanel data, in the 12 weeks leading up to January 5th 2014, GB households bought 1.5% less lamb than a year earlier as the average retail price was 4% higher. However, looking at a longer period, sales in the 52 weeks to January 5th were up by 11.5%, helped by an average price that was 3.5% lower.
“These figures indicate that as the higher producer prices have begun to pass through the supply chain in recent months, the gains to consumption that had been driven by the increased price competitiveness of lamb relative to other proteins have now started to be eroded,” commented Mr Macdonald.
Looking at domestic conditions, it would appear that higher producer prices can be linked to reduced supplies more than offsetting a slight easing of demand. However, with around a third of UK production exported and approximately one third of annual market supplies imported from overseas, it is important to consider the likely impact of trade volumes on the market, observed Mr Macdonald.
“The most recent trade data for the fourth quarter of 2013 shows that while UK lamb exports were down seven percent year-on-year, imports fell even more significantly, down 17.5%,” said Mr Macdonald. “As a consequence, net exports widened by 1,600t, removing supply from the market relative to a year earlier and, in all likelihood, placing upwards pressure on producer prices.”
With the main drivers behind lower exports being a stronger sterling exchange rate against the euro plus the general tightness of supply caused by lower imports, a greater proportion of domestic production will have had to cover orders from the domestic market. The main contributor to lower imports was a rebalancing of New Zealand exports towards China.
“Moving into 2014 these trends are likely to have continued given that, notwithstanding the shift in New Zealand trading patterns, its lamb production fell 18% year-on-year in January,” said Mr Macdonald.
“Reduced supplies will have made New Zealand lamb more expensive to import. Meanwhile, on the export side, the euro opened March 2014 worth 82p compared with around 86p at the same point in 2013, making the pound 5% stronger, placing upwards pressure on the price of UK lamb on the continent.
“Nevertheless, as the European economy has been showing some more promising signs, some optimism could filter through into consumer demand for lamb and, if New Zealand continues to prove less interested in supplying Europe, then importers on the continent will look to the UK,” added Mr Macdonald.