Livestock sector: Prices and trade predictions for 2018

Analysts are tentatively predicting solid prime beef prices and looking for exchange rates to keep demand high for UK lamb in what could be a bumper year for production.

A less positive picture is painted by dairy analysts who, after steady declines in price on the Global Dairy Trade since September, are suggesting spring price cuts.

Short-term confidence in the sheep sector has swelled Welsh flock numbers to 10 million head – the highest level since before the foot-and-mouth crisis. This means there are nearly 2 million more sheep in Wales than eight years ago.

See also: Mart review: Exchange rates support livestock trade

Dairy

Outlook

Dairy confidence has already been hit by January price cuts, including a drop of 1.5p/litre from Muller and Glanbia and a 1.25p/litre reduction for Meadow Food suppliers.

Experts fear more cuts elsewhere, although it remains tentative, with much resting on the UK spring flush, Chinese demand and production overseas.

“Farmgate prices are going to fall a little,” says Luke Crossman, senior dairy markets analyst at AHDB Dairy. “Wholesale prices are low and butter and cream are starting to drop.”

He says the markets are looking precarious until the spring flush has passed and that January or February cuts are on the cards for some, depending on pricing mechanisms.

“Farmers should watch processors similar to their own. If they are selling milk for cheese and they see a cut from a cheese processor, it is likely their own buyer could follow suit.”

Milker trade opening up

Cautious buyers are seeing a pattern opening up in dairy cattle trade, forcing a gulf in first- and second-quality heifers, explains Mark Davis of Kivells, who has seen a solid year, but doesn’t expect trade to lift next year.

“Fresh heifers are just averaging over £1,600, with the second-quality ones about £1,300-£1,400,” says Mr Davis.

He believes interest in Jersey cattle, while largely regional, will remain strong as farms look to produce quality milk and meet contracts, while smaller cross-breds and larger Holsteins will continue to have their place.

“Cross-bred cattle and grazing-type cattle are becoming increasingly popular,” he explains. “Some people want smaller, more robust animals.

“On the Holstein side, people want heifers giving 30 litres and more and cows giving 40 litres plus. There is less demand for 20-25-litre heifers that are hard to sell.”

Production up

UK milk production is “not steaming ahead” of last year, but is 2.5% higher, explains Mr Crossman. Defra figures show Northern Ireland is cranking out 4.6% more milk than last year.

Further afield, global milk markets expect pressure to come in the form of a modest Australian increase (3%), lifting production from 9.02 to 9.2bn litres.  

Much depends on how New Zealand fares this season after drought conditions, as well as Chinese demand and European production, forecasts Dairy Australia.

Both Dairy Australia and Rabobank expect a strong New Zealand production season, providing grass growing conditions improvefurther.

The North Island still has extremely dry areas around the Bay of Plenty and southern areas from Taranaki down to Wellington are also suffering 50mm+ moisture deficits.

South Island has northern, western and central-southern areas in major moisture deficit, although central areas around Otago, Mt Cook and along the south-western coast are wetter than normal heading into the new year.

Strong fat prices

Butter, cream and cheddar prices have soared this year, although this looks as if it is changing into the new year, warns Mr Crossman.

The highest average butter values were up to £6,150/t during a strong August/September period, which is 90% up on last year.

“Last year at that time prices were at £3,250/t, which is still not bad going,” says Mr Crossman, recalling 2015 prices slumping to £1,950/t.

In Europe, prices for butter (€5,160/t), skimmed milk powder (SMP) (€1,480/t) and cheddar (€3,220/t) were all back about 2-3% on the previous month in the European Commission’s Milk Market Observatory reports.

“Butter, cream and cheddar prices are relatively good, especially butter and cream,” explains Mr Crossman. “But there is pressure on the market and we are getting closer to Brexit, which is an uncertainty.

“We are likely to see wholesale prices fall further in 2018, although it depends on what happens in world markets.

“If we have milk globally available then our price will probably fall with the world price. However, we could be competitive with producers elsewhere should markets stay firm.”

Beef

Unchanged outlook

Analysts expect beef prices to remain similar to 2017 levels going into the new year, with a weak pound continuing to minimise Irish imports and relatively little going on globally in the beef market.

There will be more prime cattle about because of herd growth, but carcasses will be 4-5kg lighter in the coming two years, says the AHDB. 

However, the UK breeding herd has contracted slightly following a period of growth to almost reaching 3.5 million head in 2016.

“There are animals on the ground already that will be slaughtered after Brexit,” explains AHDB Beef & Lamb analyst Rebecca Oborne. “Sheep farmers can turn production on and off far easier than beef farmers according to market confidence.”

Lighter carcasses

One trend set to continue is further falls in national prime cattle weights, which are back in bulls and steers and slightly up in heifers.

“On average, carcasses are 5kg lighter,” explains Ms Oborne. “Retailers are demanding lighter weights and penalties are proving an effective deterrent.

“Steers have been consistently 5.5kg lighter. Bulls are much more variable, though 2kg lighter across January to September. Heifers are slightly heavier [+1.4kg], however.”

Analysts forecast weights, which currently peak at an average of 352kg, to fall below 350kg for the entire year and fluctuate between highs of 348kg and lows of 345kg by 2020.

Dairy herd contraction

A UK beef herd of 1.5 million head is “relatively” stable given the uncertainty surrounding the industry, explains Ms Oborne, but calf registrations show potential for a smaller dairy herd ahead.  

January to the end of August saw 32,700 more beef calves registered and 41,400 fewer dairy calves. “This is 2% more beef calves and 7% fewer dairy calves,” she adds.

British Cattle Movement Service (BCMS) data suggests Dairy Shorthorns and Swedish Red-cross calves are continuing to grow in popularity. Swedish Red numbers are up at 6,446, and increase from 1,198 in 2011.

Annual registrations of pure Friesian and Jersey calves have continued falling, but Jersey and Jersey-cross calves have seen major increases, alongside a healthy increase in Holstein calves.

Trade

While currency is a key talking point, it is thought export levels will be determined by domestic supply. Irish imports will also depend on the Irish supply picture.

“The Irish market plays an important role in our prime cattle prices,” explains Ms Oborne. “We aren’t expecting drastic changes in Ireland, and Polish imports – which mainly flow into the catering market – are trying to grow exports elsewhere in Europe at the moment and diversify away from us.”

Lamb

Positive in the short term

Sheep farming in the UK as it is currently known hinges on the Brexit deal and the trade negotiations on lamb. In the long-term analysts are tentative, but shorter-term trade looks firm.

Strong lamb prices in China have diverted some New Zealand lamb away from UK shores, while the UK was made to look fairly competitive with Europe as the euro traded at 85p or more for much of 2017.

Dramatic production rise

UK production is earmarked to rise in 2018, possibly by as much as 10%. However, Ms Oborne stresses that this rests on two key variables.

The extent to which the spring weather helps shepherds realise a potential bumper 2018 lamb crop and the quantity of 2018 carryover are the main unknowns in the supply picture.  

Latest production estimates for 2017 have been revised down slightly to 296,500t due to a lack of numbers forward recently and a high number of store lambs being brought into 2018.

“We believe there has been a bigger lamb crop this year, but production is down over the past couple of months. This leads us to believe lambs will be carried over into the new year, just as more were carried over from 2016 into 2017.”

Australia and New Zealand

Farmers should watch the strength of the New Zealand and Australian dollars, where lamb prices have been massively higher, says Ms Oborne.  

A drought in New Zealand has contracted lamb numbers by 4.4% this year, although carcass weights have been slightly higher, meaning a 3.1% drop in overall production.

Consequently, New Zealand lambs have been at 681 cents/kg (up 160 cents on the year) and Australian lamb have been about 120 cents/kg dearer.

“That still leaves New Zealand lamb 37.5p/kg cheaper than our prime lamb, but there are still transport costs to take into account,” explains Ms Oborne.

“Australia and New Zealand would rather sell to China at the minute because their price is very high as demand keeps on rising there and it is already the largest lamb importer.”