UK raw material outlook

While the emphasis is on the UK situation, the market for hides and skins is very much an international one and the wider international position will always have an impact on what happens in the UK. But when considering the supply position for hides and skins, the main factors are livestock populations, meat consumption trends and national/international agricultural policies, and after the major dislocations over the past year or so, it is going to take some time for the trends to unravel. After a period of relative stability up to the first quarter of 2000, a combination of growing demand and tight supplies saw UK raw material prices increase by over 30% from March to November 2000. This was compounded by the BSE crisis in Europe where meat consumption (and hence hide supplies) slumped dramatically in all European countries. In the worst case, German demand was reported to be 70% down in January. Although the UK position was not significantly affected directly, the shortage quickly influenced demand and prices for UK hides as tanners both inside and outside Europe sought to buy available supplies. From February onwards, the foot and mouth outbreaks in Great Britain led to severe dislocation of UK hide and skin supplies. The supply situation was compounded by the temporary suspension, because of FMD arrangements, of the Over Thirty Month Slaughter Scheme. However, the short term hide and skin supply has now eased considerably, in UK, Europe and also in the US, where reduced marketing of cattle over the winter and early spring added to the tight supply situation. The disruption of normal UK slaughter in the first half of 2001 can be indicated from the latest DEFRA slaughter figures: Impact of foot and mouth disease It can only be hoped that the current recrudescence of the disease is part of a long tail in the eventual eradication of the outbreak but, as background, the current slaughter numbers arising from the disease are summarised below: Slaughter and disposal numbers as of September 1 - [Source: DEFRA DCS database] The database shows: * 3,811,000 animals identified for slaughter. * 3,799,000 animals recorded as slaughtered (589,000 cattle, 3,055,000 sheep, 139,000 pigs, 2,000 goats, 1,000 deer, 13,000 other animals slaughtered) * 12,000 animals awaiting slaughter. * Of those animals slaughtered 5,000 remain to be disposed of. Now that the immediate impact of the FMD situation is, hopefully, substantially finished, the longer term impact needs to be assessed of the loss of stock, the loss (albeit temporary) of export markets for lamb and pork and any loss of domestic market share. To put the above figures into context, the June 2000 livestock population was: 11.1 million cattle; 42.3 million sheep and lambs and 6.5 million pigs. The factors to be taken into account are: * the short term impact of animals slaughtered and taken out of the system * the need for some herd/flock rebuilding (likely to reduce slaughter in the medium term) * the holding back of slaughter with the possibility of an eventual market surplus - especially in the sheep sector where a significant amount of production - around 30% was originally destined for export markets which are not at present an option * the long term impact on the market of the various 'food safety crises' and the political background that the UK government and the European Commission are likely to be increasingly unwilling to support the farming sector. The aims of DEFRA, formerly MAFF, are heavily focused towards a sustainable and dynamic farming sector that is both competitive and responsive to the needs of consumers. In the sheep sector, a major concern is the impact of the export ban leading to a surplus of lamb on the domestic market, and this has led to arrangements for Private Storage Aid, and the special slaughter for destruction scheme explained in the sheep section later. The market in the cattle sector is believed to be more stable but difficulties are anticipated in the autumn store sale period. An exit strategy is being considered by DEFRA and the industry stakeholders, although an agreement is yet to be reached. The priorities of the industry are to strive to: * eradicate FMD * restructure * achieve sustainable production * diversify Cattle outlook In a recent analysis of the outlook for the UK cattle market by the Meat & Livestock Commission, the main points are as follows: Key Assumptions * FMD cases could continue into early 2002 * Restocking during 2001 would be limited to areas with a low incidence of outbreaks * 2002 before widespread restocking permitted * Exports of both meat and livestock unlikely to resume before 2002 Prime cattle slaughter numbers have reduced by 11% (Figure 1) and in relative terms young bull slaughter numbers had increased by 20%, while steer and heifer slaughter has decreased by 17 and 15% respectively (Figure 2). It is suggested that reductions in the breeding herd would lead to a 13% decline in UK prime slaughter for 2001 (mainly in the first half of the year) and a decline in prime cattle supplies (Figure 3). The conclusion is that the UK beef sector would face market share threats from imported beef during 2001, that market re-structuring needs accelerating and that male calves from the dairy sector may fill a niche in the beef sector during this difficult time. MLC's slaughter forecasts for the rest of 2001 are given in Table 3. Key Assumptions * that eventual losses associated with FMD in order of 3.3 million * breeding stock would make up 2.4 million of the above total * losses into the Welfare Disposal Scheme would total 1 million * breeding stock would make up 0.4 million of the above total * total breeding stock losses would therefore total 2.8 million, 15% of the December census total It is likely that downward pressure will be exerted upon the UK sheep flock as a result of a lower lambing rate in 2001 due to poor weather conditions and reduced autumn ewe condition and figures were given for UK slaughter from 2000-2002 (Table 4). Given the export ban and the demand for sheep meat consumption in the UK, MLC were predicting a surplus of 1.5 million sheep carcases or 29,000 tons of sheep meat in 2001, particularly during the autumn period (Figure 4). This surplus comprises largely light lambs with a carcase weight of 8-10kg that are unable to be exported due to restrictions and have no market in the UK. This situation has led to a special slaughter scheme being implemented by DEFRA to remove these lambs from the system without having an impact on the domestic market. The outlook for the UK sheep sector is likely to be one of short term difficulties followed by modest year-on-year recovery. Some time after the MLC's outlook review, DEFRA advised that a special slaughter for destruction scheme for sheep will start on September 3 at dedicated abattoirs. The scheme is for light lambs (guide is under 30kg live weight - broadly under 14kg dead weight) which are effectively surplus because most were formerly destined for export markets. Estimated maximum numbers are: England 0.4 million; Wales 1.3 million; Scotland 1.1 million. DEFRA aim to be finished by the end of November; otherwise there would be a major welfare problem because of insufficient feed. The general target is to kill 200,000 per week. Carcase disposal routes envisaged are: England landfill; Wales landfill; Scotland mostly (70k per week) rendering. Except in exceptional cases, all animals would be killed in abattoirs. In Scotland where the carcases are to be rendered, the skins will definitely be taken off at the abattoir, because the renderers are unable to process the whole carcase. In England and Wales, there is no specific requirement regarding the skins. It is understood that abattoirs will have the option to remove the skins - effectively leaving it to market forces. The broad conclusion is that the picture is slowly unravelling. There has been a short term improvement in hide and skin supplies as the immediate effects of foot and mouth disease and BSE recede. Supplies are expected to return to more normal levels for the second half of 2001 and for 2002, but the longer term position will depend on restocking and what happens in meat markets and with regard to market support mechanisms.