So another Beef Round Table has come and on gone. And has it moved the Irish beef industry forwards; has it made it a more cohesive, supply-chain-partnership-driven whole?
From an outsider’s perspective, the export-focused supply-chain remains largely antagonistic; it is about us the farmers and them, the processing-exporting factories. Is it really surprising when on one side there are tens of thousands of mainly small beef farms and on the other very, very few factories? And then we have the real elephants in the room, Asda, Sainsbury, Tesco, McDonalds and Burger King, entities who themselves massively dwarf the farmer and who can cast a shadow over the processors.
To start with one is not going to get into the detail of specifications; they are the regulatory framework that governs the relationships between the aforementioned elephants and the factories and then the factories and the farmers. Certainly, at the important UK retail level one has seen the product on the shelf change over recent years and that will inevitably have led to specification changes. Whether they have been adequately translated through the supply chain is open to debate. If not, and as suggested in earlier blogs, do the current problems for Irish farmers emanate from a marketing failure?
Has the Irish beef farmer been poorly informed in terms of what the market wants? And have those in the supply-chain and those responsible for providing marketing support failed to inform the farmer, failed to help develop the product the premium market wants and failed to develop Irish beef products that the consumer recognizes and is willing to pay a premium for? Judging by the actual market presence of Irish beef in the UK, there are grounds for saying ‘guilt on all counts my Lord’.
One finds evidence of this marketing failure when one looks behind the much grouched about price differential between Irish beef and UK beef. One hears about currency influences but the issue is simply one of market positioning. There are a few stand-out products for the UK consumers in terms of country of origin and ‘British’ beef is up there alongside the ‘English’ strawberry. It should not come as a surprise for farmers in a country where ‘Irish’ beef is all over the retail food counters of Ireland.
And if you do not believe us commentators, please take a walk down the aisles of a UK supermarket next time you are over the other side of the Irish Sea, Irish beef is rather hard to find.
So just where is Irish beef in its by-far, primary export market? On the retail shelves it is only to be found in the three major players, Tesco, Sainsbury and Asda. It is found in their basic ranges only and hardly ever in their premium ranges. Most other supermarket chains of note have a 100% British-only policy, much like they do in Ireland. These include the ‘discounters’ Aldi and Lidl and the premium-player, Waitrose. Macdonalds at least proclaims that its beef is of British or Irish origin.
One has heard suggested that there is insufficient British beef to fulfil the volumes that are sold as British and there may well be some dodgy dealings around. It is highly unlikely given the importance of due diligence and provenance that any major player would knowingly mislabel. As we saw with horse-gate, there will always be the odd unscrupulous player but British beef is most likely British.
The price differential between British and Irish beef can largely be explained by arithmetic.
To quote the Beef Industry News of the 18th December 2015, “retail surveys indicate that around 70 per cent of consumers prefer to buy certified UK- origin beef backed by the Red Tractor Assurance label instead of imported product”. One wonders how this compares to the Irish market. One can also assume that the other 30% is partly price-driven and want good beef at a lower price and in the UK retail market, this is certainly a market segment that Irish beef can and does fill.
Hence, British beef fulfills a consumer demand that wants ‘British’. Apparently it is willing to pay a price premium for it. How far it is consumer or retailer driven is open to debate, but ‘British’ exists as a market differentiator. It is exactly the same in Ireland. To quote the BIN again, “UK retailers would not support a system in which an 18-20 per cent premium was paid on finished British cattle above RoI cattle unless they were convinced that turnover would fall if less certified UK-origin beef was offered on their shelves”. Retailers appear to be supplying what their customers want. To think otherwise is probably clutching at straws. The problem for Irish farmers is that their supply-chain has had little success in offering a differentiated product that can overcome this UK-nationalistic viewpoint.
And is a ‘born in Ireland finished in the UK’ label really going to make much difference? Just how well would a ‘born in England, finished in Ireland’ label go down with Irish farmers if it started appearing on the shelves of Irish retailers? And as Robert Forster pointed out in this week’s Beef Industry News there are EU law, logistical and operational problems associated with processing mixed origin stock. It is unpalatable for the farmer who is aware what prime beef is, but we live in an age post-BSE and post-horsegate, whereby rational and common sense are no longer what they used to be.
To explain the price differential is simple terms, British beef supplies the upper [and of course some lower] echelons of the UK market, Irish beef pretty well just the lower. And just how much Irish beef gets minced for burgers? And what would one expect the the Independent butchery sector in the UK? Simply, it just does not matter how good the cattle are when they leave the farm in Ireland, its price is dictated by the market into which it is sold. It is a travesty that prime cattle end up in far from prime markets but that is where the currently-existing supply-chains place them.
One can ask how much influence the factories have over where Irish beef goes. Can they even handle and produce the differentiated products that can command a consumer-paid market premium? Or is the farmer and factory just too focused on the supply of ‘Irish’ beef as a generic commodity?
True there are the Irish Angus and Hereford schemes that create a product out of what may only be 50% pure-bred stock, but is that really delivering a major price premium. Again in BIN, Robert Forster says that the Angus and Hereford scheme beef premium is only 10-15 pence a deadweight kilo in Ireland, a half to a quarter to what it is in the UK. A difference that is explained by Irish retail scheme beef being largely only for the Irish market as “no Irish beef is sold through retail schemes in the UK”.
At every turn, when one investigates the UK market one sees the relative position of Irish and British beef and it is illogical to expect anything other than a significant price differential between the two.
This differential that has grown up over time fueled by food safety related demands for traceability. There are also specification changes that only partly include origin. The issues-aware, premium paying consumer is also increasingly aware of ‘local’. True, Irish beef is quality assured [Tesco and McDonalds flags their beef as from quality assured farms in Britain and Ireland] but does it command a premium?
Origin Green is mainly about business-to-business relationships. It has a certain resemblance to McDonald’s sustainability program in France and that is not surprising given that McDonalds says it is [by volume] the biggest single user of Irish beef and that one in five of its burgers sold in Europe is of Irish origin. But, again, does having these QA credentials translate to a premium price for the farmer?
The QA schemes are effective in as far as they go but are they first about meeting the demands of mainstream beef buyers who want volumes of good quality beef and volumes that are accredited so as to allow them to tick their own corporate sustainability and product traceability boxes? The Irish beef sector appears to be successful at supplying large volumes of quality assured beef at reasonable-to-the-buyer prices. Whether that translates into a sustainable cattle farming sector is open to debate.
In essence, one can venture to say that the Irish beef farmer is tied into supply-chains that are focused on markets that mean that the supply-chains cannot deliver upon the farmers price expectations.
The ownership of the meat processing/exporting sector is already consolidated in the hands of a few; a situation much disliked by farmers. This limits those involved in strategic decision-making and that can reduce dynamism in a sector. It can also lead to the processors looking after number one. Their strategy can also be out of kilter with the needs of their suppliers; a situation that can only really be sustainable in the short-term. Into the long-term survival will require their suppliers to change their operational structures to gain economies of scale and to improve their technical efficiency to drive down costs. It is already clearly evident that it is what the processors and government wish to see.
As to the processor/government strategy, a major question remains. Is focusing on greater volume at lower cost going to be feasible when land ownership is fragmented and many farmers are very small-scale and part-time? It is a conundrum that when consolidation is required political motivation leads to the provision of funds to the many via various support mechanisms; thus keeping them active in the sector. It leads the author to the conclusion that a myriad of suppliers feeding a handful of processors is inevitably a dysfunctional situation where change has to happen to one or the other.
Many farmers would like to see the situation resolved by the factories just paying them more for their cattle. So often one hears about tightening supplies through say, live exports, as a means of squeezing factory supplies and forcing them to raise prices to secure more animals. They also dislike the idea that factories can run feedlots themselves to maintain supply and exert pressure in the other direction. It is an antagonistic environment. It is also not helped by a lack of knowledge concerning the operational finances of the factories [in stark contrast to what is known about beef production costs].
The lack of transparency in the meat processing sector comes about because private ownership means that little financial data is published. It often appears that all that farmers get to see is the estimated wealth of families involved in the sector when they are published in the ‘richest lists’. There is a vast gap between the farmers and processors but, ultimately, it comes down to volumes; the farmer produces very little and the processor processes a lot. It is the impact of processor consolidation.
A little light can be thrown on the issue by some BIN figures about Dunbia [one of two processors where ownership may be/is changing]. BIN gives a 2014 pre-tax profit of £4.6 million on a kill of 300,000 cattle. That equates to just over £15/head or just over €20/head. True, BIN also described Dunbia’s operating margins as unusually tight and that their pre-tax profit had fallen by £3 million. Even so a profit of £7.5 million would have been £25/head [less than €35/head]. Discussions with Robert Forster suggest that others might make slightly greater margins due to efficiency and tight cost-controls but that the Dunbia figures reflect an industry sector where margins per head of cattle are very low. Low margins per head on a lot of cattle do still, nevertheless, provide a nice total profit.
This again highlights the fault line, small-scale farmers need/want a high price per head to compensate for their lack of scale whilst the factories want large volumes of consistent specification cattle to minimise their processing costs per head. One fears that for many never the twain shall meet.
The bottom line is, nonetheless, whether there is excess profit being made per beast and if so, just what impact would it have on the price received by the farmer if a proportion of the excess profit was transferred from the processor to the farmer? Transparency in this matter could only help.
Producer Organisations are proposed to the Beef Round table as the big idea. They are, however, proposed as negotiating organisations with a focus on trying to alter the trade balance between farmer and factory. Are they proposed because it is known that excess profits are being made by the factories? Or are they proposed as a mere sop to the farmers? If it is the former, just where is the evidence to back up this assertion. Where is the research study into the markets and the costs of processing to show that profiteering is rampant and that there is margin to transfer to the farmer? Or is the reality that the factories themselves are being squeezed in turn by those they sell to?
Can one actually conclude that the problem is that the Irish farmer to [mainly] UK consumer beef supply chain is characterized by massive business-structure differentials and each player has a very different business model that is focused on very different objectives?
Firstly there are the major food retailers and fast-food chains who are by and large focused on sourcing large volumes of [quality assured] beef at as low a price as possible.
Second there are the factories that have to meet the specifications of the first and to sell within their price parameters. By and large, their business model are low margin and high volume focused and for their own operational efficiency they expect raw materials to meet their own specifications.
Third is the diverse beef farming sector with its various farm sizes, its dairy and suckler calves, its use of multiple breeds and hybrids and its various production systems. It is highly diverse and it is a diversity that the factories have to convert into a constant product that conforms to the demands of their buyers [one could say that they have to convert it into a generic ‘Irish beef’].
The crux of the matter is that this is not the ‘Irish beef’ that farmers would like to see sold. It is a still too close to a commodity; albeit one that is quality assured. The small-scale farmer needs to receive a higher prices for a quality-differentiated product that has been sold to a premium-paying consumer.
Irish beef may be differentiated at the margins for some markets by the Angus and Hereford breed but according to BIN they do not generate the same price premium as in the UK [because of the small Irish market and their absence from the UK market]. Ultimately, the problem is that Irish beef farmers [who see themselves as producing a premium product] are not well served by the business models of their supply-chain partners and the situation is likely to change anytime soon. Why should it?
The author does, however, believes that Producer Organisations are a good idea. In one format they can provide some support and added negotiating weight for farmers who choose to go ‘mainstream’ and who wish to continue to build their businesses on supplying the existing processors. For those who can achieve scale and ‘efficiency’, focusing on ‘commodity’ beef could be the right business choice.
That said, the author believes that the main role of Producer Organisations should be to focus on producing quality-differentiated beef and to see that beef sold to premium-paying consumers.
The Producer Organisations also need to be about providing alternative routes to markets. And these routes to market need to include the provision of smaller-scale processing facilities that can offer the flexibility needed to handle small-volumes from specialized, niche-market focused beef producers. They need to be about reaching the consumer that is willing and able to pay a premium price.
It is about creating supply-chains that operate differently from the existing, main-stream ones. Yes the current players could reach these premium market but is their normal raison d’etre to operate in a volume environment? One would assume that their facilities are geared up to such as opposed to handling small-run, niche-market volumes destined for numerous, specialized markets.
It is about horses for courses and the Irish beef industry needs both; volume-orientated processors to shift volume and small processors to handle, differentiated , niche-market, high-value beef.
Without the latter one does wonder how small cattle farmers are going to be able to reach markets that can meet their price expectations. They are also the specialist supply-chains that the farmer needs understand exactly what the premium-paying consumer wants; among which will be cattle from specified production systems and cattle which have been slaughtered local to-the-farm. Their definition of premium may also include the word ‘artisan’ and that is a term excludes large-scale-factories from the supply-chain. It is a particular problem across the Irish agri-food sector and it is one that if left unresolved will exclude Irish food products from many premium foods markets.
Whilst encouraging the development of Producer Organisations, it is therefore important that the Minister supports those that which to develop premium beef products and their own routes to market. Irish beef farmers simply have to be given the choice as without them they will continue to be reliant on tax payer support to enable them to supply lower-value markets; albeit in a situation where some of that support may be considered justifiable in land stewardship or environmental terms.
Just what justification is there for a supply-chain that is rooted in small-scale farming but does not deliver a farm-gate price that can move that farm towards financial sustainability? As said, many will stay to supply the mainstream and strive to evolve to be viable doing so but it is about choice; it is about having competition within the supply chain and farmers having the option to choose another way to reach the consumer. It is about re-linking the farmer to the consumer and that is the 21st Century challenge for the Irish family farm, be it producing beef or anything else.
The words ‘vested interest’ are so often heard when discussing the future of the Irish agri-foods sector. It is unrealistic not to expect the existing players to protect their own position. It is, however, the role of the Minister and all others in governance, albeit in Ireland or Brussels, to ensure that those vested interests do not hinder change that can benefit the wider farming and rural communities.
In this case change is about the building specialist, niche-market-focused supply-chains that link the small-scale, Irish family farmer to premium-paying, multiple-issues-aware consumers. And lest one forgets, raising consumer awareness and perception of Irish beef per se may just benefit everyone within the Irish beef industry, be they a small cog or a significantly larger wheel.