Production costs eat into profit

BEEF producers in Scotland are most definitely relishing current returns, with the deadweight trade for the best prime cattle hovering around 270p per kilo, which is at least 40p higher than 12 months ago.

However, that needs to be set in the historical context: in 1995, the year before BSE decimated the beef sector, the average price of steers in the UK was 227.7p per kilo. The Scottish premium was about 10p a kilo.

In 1995, the average retail price for all cuts of beef was 409p a kilo, a gap of 44.3 per cent between what the farmer received and the price at the supermarket check-out. As of February this year – the cut-off point for the latest available statistics – the retail price stood at 474p per kilo, with the gap between farm and shop at marginally over 50 per cent.

That suggests farmers are faring slightly better, but takes no account of the huge cost increases sustained by the industry, especially in the past year with feed and fertiliser having more than doubled. The industry view is that while ex-farm prices for beef have increased by over 40p per kilo, this gain has been nearly wiped out by higher costs.

However, the most telling figure relates to the cost of shopping in real terms. Taking 1977 as the base point, according to the UK government's Office for National Statistics food prices are almost 20 per cent lower.

Food costs are on the rise and the beef sector is an indicator of the general trend. Since the turn of the year, the average price for steers and heifers has increased by 17 per cent, while there has been remarkably little change at retail level – but that situation may soon alter.

In the first quarter of 2008, slaughterings of prime cattle in the UK at 517,000 head were down by 35,000 on the corresponding period of 2007 – a drop of 6 per cent. The accepted prognosis is that this trend will continue for the foreseeable future. Exporting beef is once again an attractive proposition, given the highly-favourable rate of exchange between sterling and the euro. Last year the UK exported 58,700 tonnes of beef – up almost 18,000 tonnes on the 2006 figure. Most of that beef came from cull cows. That product has normally been widely used in the UK catering sector, but is now seen as expensive.

In the past, the gap would have been filled by imports, but with trade from Brazil and Argentina now at a virtual standstill, beef is in short supply.

The common agricultural policy is set for another review with European Union commissioner Mariann Fischer Boel due to make a major announcement next week. Europe has had major problems with over-production in the past, but that is no longer the case.

However, farmers in this new era of higher costs are no longer willing to produce unless they are suitably rewarded. As a result, consumers are likely to be paying more for their food.