LFA Hill Cattle Study Extension 2005

3. OVERVIEW OF BEEF MARKET IN 2005

The study results relate to the period 1st January 2005 to 31st December 2005.

All participants were located in either the Scottish LFA or the Highlands & Islands Enterprise area of Scotland.

3.1 LIVESTOCK SUBSIDIES

The SFPS began on 1st January 2005, bringing the decoupling of subsidies from production. Therefore, the Suckler Cow Premium, Extensification Premium and Slaughter Premium were no longer paid to beef producers. After considerable discussion and consultation, SEERAD decided to make use of the National Envelope provisions within CAP Reform and effectively deducted 10.13% from all beef related Single Payment entitlements in Scotland to provide a fund to channel support to suckled calf producers in order to incentivise them to remain in suckled calf production.

As a result, a new scheme, the Scottish Beef Calf Scheme ( SBCS) was introduced from 1st January 2005. The scheme provides a payment on calves which are a minimum of 75% beef bred and at least 30 days old. The calves must have been born on a Scottish holding on or after 2 December 2004 and have remained there for a minimum of 30 days. These calves must also be registered on the Cattle Tracing System and have a valid cattle passport.

The payment given to farmers is dependant on the number of animals claimed under the Scottish Beef Calf Scheme up until 31st December 2005.

The payment rates for 2005 were as follows:

Table 1 - Payment Rates Under the SBCS

Number of calves claimed	First 10 calves claimed	Calves claimed thereafter
Payment Rate (£/head)	£79.32	£39.66

As the amount of funding is effectively fixed, the payment per calf will vary dependent on the number of calves claimed in any one year.

3.1.1 Less Favoured Area Support Scheme ( LFASS)

The LFASS remained largely similar to its 2004 format. The payment rates were maintained at the same level as the fragility markers introduced in 2003, the main farm locations and the grazing category attributed to the land were used to calculate payments. The payment rates are detailed in table 2.

Table 2 - 2004 LFASS Payment rates

Land Category	Areas with lower transport costs 'Standard' Rate per adjusted Ha (£)	Mainland areas of disadvantage and higher transport costs 'Fragile' Rate per adjusted Ha (£)	Islands 'Very Fragile' Rate per adjusted Ha (£)
More Disadvantaged Land (categories A & B)	39.00	45.00	47.00
Less Disadvantaged Land (categories C & D)	33.50	39.50	41.50

Note that the grazing category of the land is based upon the stocking rate on the farm in 2001, with A being the lowest and D the highest grazing category. Adjustments are made to the IACS forage area as follows:

Table 3 - LFASS Grazing Categories

Category	Stocking Density	Hectare Value
A	Up to 0.19LU/Ha	0.167
B	0.20 to 0.39 LU/Ha	0.333
C	0.40 to 0.59 LU/Ha	0.667
D	0.60 or more LU/Ha	0.800

Payments were then further adjusted to take account of the Enterprise Mix between breeding cows and breeding ewes on the holding as follows:

Table 4 - Effect of Enterprise Mix on LFASS payment

Enterprise Mix	Hectare Multiplier
If 50% or more livestock units (lus) are cattle	1.70
If 10% or more, but < 50% of lus are cattle	1.35

That is the LFASS payment is effectively increased by 35% or 70% dependent on the relative number of breeding cows on the holding, incentivising retention of suckler cows in the LFA.

Payment relating to the 2005 LFASS is normally made in March/April 2006.

The payment is made as part of the Scottish Rural Development Plan. The LFASS is currently under review as part of the Scottish Rural Development Plan Consultation for the period covering 2007 to 2013. Within this document is a proposal for the development of the LFASS. No major changes will be made to the scheme until 2010, as the government is awaiting the outcome of an EU review which will conclude in 2008.

It is proposed that the new scheme will remain broadly similar to the scheme currently in place. However, the proposed 'interim' scheme will move to an area-based payment that no longer takes account of the enterprise mix on the holding.

3.2 CAP REFORM

The Single Farm Payment ( SFP) Scheme began on 1st January 2005. Scotland elected to base payments on a historic decoupled basis with deductions of 3.0% for EU modulation, 3.5% for UK modulation and 4.2% for National Reserve.

All beef producers had a further deduction of 10.13% from the beef related part of their entitlement under the Beef National Envelope.

3.3 THE BEEF SECTOR IN SCOTLAND

ERSA (2006) indicated that there were 497,744 breeding cows in Scotland, an increase of 1,764 head on the previous year. Including beef heifers in calf, there was a marginal drop to 545,890. This effectively brings to an end the steady increase in cow numbers that has occurred since FMD in 2001.

The Scottish beef sector contributed £463.8m of output in 2005, equivalent to 27% of total Gross Output of Scottish Agriculture. This figure includes £47.719m of subsidy payments through the SBCS & the OTMS but excludes £61m of LFASS ( i.e. a total output net of subsidy of £416.1m).

In 2004, the total output from the beef sector equated to £634.4m, of which £235.38m were direct subsidies ( i.e. a total output net of subsidy of £399.02m).

Net of subsidy, the beef sector provided an increase of 4.2% in gross output year on year.

3.4 REVIEW OF BEEF SECTOR IN 2005

3.4.1 Fattening Cattle

Prices in the beef sector in the UK began well and remained so until late summer when prices dropped substantially before improving again in the last quarter. In the first quarter of 2005, deadweight prices were up 7% on the same period of 2004 as supplies were tight as a result of farmers finishing more calves in the last quarter of 2004 in order to access the last Slaughter Premium claims.

The price then dropped back slightly into the second quarter as the number of beef slaughterings increased. This increase was related, again, to the changes in the subsidy schemes and the ending of the requirement for retention periods.

This increased level of slaughterings continued into the third quarter of 2005 pushing finished prices down. In mid-October, steer prices reached a low point of 176.4p/kgdwt, some 7p/kg down on the same period of 2004. The last quarter saw an improvement in price due to reduced imports from Brazil as a result of a FMD outbreak in one of their main beef producing regions, the Avian Flu scare and increased demand in the run-up to Christmas. This resulted in steer prices improving to 198.6p/kgdwt by mid-December.

Scottish beef still retained its price premium over beef from the rest of Britain which varied from some 10p/kgdwt up to 17p/kgdwt in the third quarter of the year when the UK price dropped. Over the year, MLC estimated that the average premium for Scottish beef was 15p/kgdwt over the average price for England & Wales.

Figure 1

Source: ERSA 2006

3.4.2 Store Cattle

Store cattle prices started 2005 at a similar level to the same period of 2004, as finishers remained hopeful about the prices available for finished stock, going forward. Prices then declined from a peak of £490/head in February to £335/head for steers and from £392/head to £323/head for heifers in June, £69/head and £71/head down on the same period of 2004. This also demonstrated a reduction in the differential between steers and heifers from around £100/head to around £20/head, as would be expected following the ending of the coupled subsidy schemes.

Store prices then improved towards the third quarter, stretching the differential between steers and heifers up to around £80/head. Store prices then dropped again as finishers decided to pay less as a result of reduced finished prices.

In the last quarter, prices for stores sold at 18 months were 16% and 9% lower than 2004 prices for steers and heifers, respectively, in the light of limited confidence for finished prices in 2006.

Figure 2

3.4.3 Processing Capacity

On 7th November 2005, cull cows were reintroduced into the beef market. By the end of the year, 4 plants in Scotland were able to slaughter and test for BSE for human consumption. There are two processing plants which are still dealing with cattle which were born before 1st August 1996. The number of plants available to process cull cows for human consumption has now gone up to 10.

3.4.4 Auction Markets

The number of prime cattle going through Scottish auction markets was 3% up on 2004, at 168,928. The total value of these sales was £83,429,050, again 3% higher than the value of 2004 sales. However, the average price per head was 1% down on 2004 at £493.87.

Store cattle numbers were down slightly (0.1%) on 2004 at 320,402. However, the total value of these sales was 7% down on 2004 at £144,473,442, therefore the average price per head was also 7% down at £450.91.

3.4.5 Cull Cows

During the first half of 2005 the number of cull cows going into the Over Thirty Months Scheme ( OTMS) was down 6% on the same period of 2004. This was mainly as a result of reduced throughput in England and Northern Ireland. However, in Scotland the number of culls was up by 12%.

On 7th November 2005 the OTMS came to an end and cull cows could be marketed for human consumption if they were born after the 1st August 2006. Those born before this date will go through the new OCDS (Older Cattle Disposal Scheme) after 21st January 2006, the payment rate for these cattle being fixed until 31 December 2006 at 360 euros/animal.

Of the cull cows which entered the beef market, prices were around 60p/kg liveweight at the end of the year.