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M4: Reconciling prices and costs of production – can we make ends meet?

Chair: Sue Fowler (OCW)

Higher costs of production and low premiums are putting beef and sheep producers in a squeeze and leading to leakage of organic animals to conventional markets, increasingly resulting in shortages of organic stock when they are really needed. This session reviews the trends in prices and costs of production and asks do we need premium prices for beef and sheep and what role the different parts of the supply chain (farmers, distributors, processors and retailers) can play in addressing the problem? (Organized with Graig Producers)

Session summary

Nic Lampkin presented a detailed study of production costs for meat producers (beef and sheep). The analysis was based on the latest Farm Business Survey in England and Wales (2009/10). It compared organic and non-organic (conventional) production costs in £/ha, £/head and £/kg dry weight of beef or sheep. Results showed that although fertiliser and other input costs are considerably lower in organic, the overall costs (variable and fixed costs) are not. This is due to higher labour costs, longer finishing and lower stocking rates. Improvements in organic are possible as the comparison of the best performing quarter with the average sample shows. The data also showed that, at current prices, neither organic nor conventional farms make meat production profitable at a net margin level after imputed costs like farmers’ labour are included. Only after inclusion of support payments (single farm payment, organic and environmental schemes) had average farms a positive net margin. Organic farms were more profitable for beef and sheep production, compared to their non-organic peers.

Using detailed price charts Bob Kennard showed how the premium prices for organic beef and sheep have eroded in the last 10 years. They were reduced from about 30% to nothing during the height of the recession in 2009. Currently, 2012, they are slightly up with about 10% farm gate premium for beef and 5% for sheep, respectively. Bob also showed that prices have not increased during the last years after correcting for inflation. Retail premiums in supermarkets for red meat have remained 30% for organic and other premium lines like ‘finest’ or free-range. This indicated that supermarkets are still using the organic sector to boost their profit margin! This is clearly not fair-trade, where the premium is at least shared or given mainly to the part of the supply chain which actually has higher costs due to labour inputs, low stocking or slower growth of the animals (there is no comfort in the fact that farmer colleagues with premium conventional products are not treated any better). Bob’s plea was to join a producer organisation like Graig Producers (www.graigproducers.co.uk) to get more leverage for farmers and fight for fairer prices.

Discussion points:

  • Farmers questioned why red meat farms are not leaving the sector and land prices increase, if net margins are so negative? Explanations given in the discussion were that if the second product ‘ecosystem services’ is included the picture changes (however, sole dependency on ecosystem services is also dangerous). In addition, farmers have further diversified and have off-farm incomes which may be considered as resilience if demand for quality meat picks up across Europe.
  • Farmers wanted to know if Graig Producers can guarantee higher margins. The answer was “not immediately and there is no guarantee”. Producer organisation are a strategic instrument to gain leverage for farmers helping to market all produce which cannot go through local market channels only.
  • It was reiterated that costs of production are still not very well understood in organic and improvements of up to £50k per farm might be possible.

Action point:

  • A working group for benchmarking was proposed and ORC Elm Farm offered to lead on this. Farmers welcomed this, but concern was expressed that if too much data is made public it might be used against the organic sector. The need to improve cost structures by transparency and shared learning will always have to be balanced with potential information misuse.
  • Conclusion: As premiums remain low and support payments will be reduced with CAP reform a more forward looking strategy of cost improvements combined with more EU wide marketing of British premium organic outdoor meat might be the best growth option for the organic red meat sector (if the £ remains reasonably weak).

    Individual speaker presentations and abstracts

    Nic Lampkin (ORC): Costs of producing organic beef & lamb and opportunities for reducing costs (PDF 265KB)
    As price differentials between organic and non-organic beef and lamb have come under pressure, the issue of costs of production has become more relevant. It remains the case, unfortunately, that there is still very limited actual data on costs of production of beef and lamb – in part a reflection of the very wide range of production systems found in the UK. This presentation reviews the evidence from England, Wales and Scotland that does exist, and highlights that although fertiliser and other costs per hectare may be reduced in organic systems, the costs per kg of meat produced are often higher than non-organic because of lower stocking rates and longer finishing periods. For the same reason, similar fixed costs per hectare also end up as higher costs per kg. However, there are also very wide variations in performance, indicating that for some producers, significant opportunities to reduce costs may exist. In some cases, these may be more im-portant than attempting to increase the price obtained. The presentation considers what ac-tions should be undertaken to improve the quality of the evidence available, and in particular whether the levy companies could play a greater role in helping collect and collate relevant data.

    Bob Kennard (Graig Producers): Price trends and the role of producer marketing groups
    Is it a reality or a perception that organic lamb and beef producers need a premium? Prices appear to be currently high in the conventional sector, due to strong export demand resulting from a weak £. However, once inflation is stripped away, are prices so good, especially with high organic input costs? To what extent has a variable and unpredictable organic premium, together with a lag between live weight market prices and deadweight organic prices, resulted in some farmers voting with their livestock, and selling organic stock without an organic premium through livestock markets? This is especially so of lambs, but with beef there appears to be a major organic leakage into the conventional stores market. Either way, how important is a premium in keeping livestock within the organic system? Are we in danger of frightening the consumer away from organic red meat due to price? If so, what are the levels of organic premium being charged along the supply chain, and are they justified? How do producers negotiate a premium?