The Situation and Outlook for Cattle 2002/03

Gross margins

The gross margin results from the NFS for the year 2001 together with the comparable data for the two preceding years are presented in Table 2.1. The overall outcome for 2001 is a slight reduction in nominal value of the gross margin which is in line with expectations. However, this masks substantial changes for individual segments within the overall cattle enterprise. The margins for the breeding systems of "single suckling" and "rearing on dairy farms" experienced a small reduction (less than €20/ha) in both absolute margin and percentage terms (about 3%).

In contrast, the changes in the margins for the fattening stages were more extreme and diverse. The gross margin for the "stores to finish" system declined by €93/ha, equal to 20%. But the comparable margin for the "weanlings to stores/finish" increased by almost an equivalent amount. However, the margin for the "weanlings to stores/finish" system in 2000 declined slightly while the other margins recovered significantly from the exceptionally low figures for 1999. Apart from 1999, direct costs excluding the purchase of animals have been relatively stable. Consequently, almost all of these changes in gross margins are the combined impact of:

• the movements that occurred in the prices for cattle for the different cohorts
• the seasonality of these price movements
• the increasing value of the DPs due to the phased implementation of the Agenda 2000 agreement, and
• the annual adjustments in the rates of pay-out for the DPs.

Source: Teagasc, National Farm Survey
Note: headage excluded for all years

Market based margins

A rather different picture emerges when the direct payments are excluded and the market based margins are calculated (Table 2.2). The market based margin for "all cattle systems" decreased by €31/ha, equivalent to a 15% reduction. With the exception of 1999, this is the lowest market based margin in recent years.

But, the decline in the market based margin for "all cattle systems" masks a much more fundamental and longer term trend in the market based margins accruing to farmers involved in specific components of the Irish cattle production system. The scale of the decline in the market based margin in 2001 for the two breeding systems ("single suckling" and "rearing on dairy farms") was similar to that for "all cattle". In contrast, the proportionate reduction for the "weanlings to stores/finish" and the "stores to finish" systems were 30% and 80% respectively. Furthermore, these large reductions in the market based margins follow the declines that occurred in the previous year. In contrast, the breeding systems experienced substantial increases in 2000. Part of the explanation for the poor margins for farmers involved in winter finishing could be the sharp decline in cattle prices in the late autumn of 2000, after the animals were purchased. However, as will be demonstrated later, a much more fundamental structural issue is also involved.

Source: Teagasc, National Farm Survey

Market focus

When this situation is examined from a beef market perspective further concerns arise. The proportion of the gross margin that is derived from the market is influenced by periodic annual adjustments made by the Minister to the pay-out rate for the DPs. Nevertheless, as the data in Table 2.3 demonstrate, the proportion of the gross margin that Irish cattle farmers derive from the market continues to decline.

In 2001, the market based portion for all cattle systems had declined to less than 40% for the first time. Even for the most intensive system, "rearing on dairy farms", the market gross margin had declined to 50% of the total gross margin. For the fattening systems of "weanlings to stores/finish" and the "stores to finish" the proportion of the total gross margin derived from the market had declined in 2001 to the very low levels of 17% and 9% respectively. The consequenceof this is that farmers in pursuit of their economic interests will realistically and increasingly focus their management efforts towards the compliance criteria for the DPs rather than the requirements of the consumer market for beef. This end result arises because of the actual structure of the DP system itself.

The differential trends in the market based margins between the breeding and finishing systems outlined above are largely a reflection of the long recognised phenomenon of "capitalisation" of a substantial portion of the value of the animal based direct payments into calf and young animal prices, Dunne 1998a,b and Dunne et al 1998. This capitalisation process:

• is beneficial for farmers involved in the early stages of the cattle production chain in that it increases the market based revenue on their animal sales, but
• it results in additional costs to farmers involved in cattle finishing systems as they must purchase these animals whose prices are "inflated" by the capitalisation of a portion of the values of the DPs.

The capitalisation process is further facilitated by the effective existence of a limit on the supply of the calves which are required to "pull down" the SBPs. The supply of calves and young animals is largely controlled by the operation of national limits for dairy cows through quotas for milk deliveries to dairies and for suckler cows via the individual farm quota for suckler cow premiums (SCPs). These largely control the supply of young animals that are eligible for DPs the value of which has greatly increased over the last decade. This greatly accentuates the capitalisation process. The consequence of this capitalisation process has become even more acute as the EU beef policy progressively shifted towards increasing the value of the animal based DPs in order to maintain incomes in lieu of the move to lower beef support prices.

As noted earlier, the most intensive cattle farming system, "rearing on dairy farms", still obtained 50% of its gross margin from the market in 2001. However, even this proportion is excessively flattering as much of it is due to the capitalised value of the DPs that these animals will eventually realise on other farms, rather than the ultimate carcass value of the animals themselves.

As the data in Table 2.2 shows, the market based margin in the finishing systems in 2001, was substantially less than €100/ha. A market based gross margin of only €34/ha for the final finishing stage is in fact a very small return from the finishing of beef animals, especially if it involves winter feeding. Since the average return is so low, some of the farmers involved would undoubtedly have obtained a negative market based gross margin, the value of animal sales being less than the direct costs of production. In normal circumstances, such farmers would quit cattle production since the sale value of the animals did not cover their direct costs, never mind make a contribution to overhead costs. But the problems facing such cattle farmers are not that simple. Further information on this can be obtained elsewhere, Dunne and Shanahan 1999.

As Table 2.1 shows, the comparable gross margin is €365/ha which is sufficient to encourage these farmers to stay in production, even if the market based contribution to overheads are relatively small or even negative. In essence, many of these farmers are keeping cattle primarily to get access to the animal based DPs. For such farmers the DPs have not only become the income but are also the actual gross margin and possibly not even that much in some instances. In the latter situation the cattle are in fact becoming a rather expensive "premium harvester" for the farmers concerned as they are not even able to retain the full value of the DPs as a margin. For a more comprehensive discussion of this, related topics and possible solutions see Dunne 1996, Dunne 1997, Dunne 1998b, Dunne et al 1999, Dunne 2000a,b,c and Dunne and O'Connell 2000.

Market revenue

The number of Irish steers and cows slaughtered at export premises was lower by about 9% in 2002, but the supply of heifers for slaughter increased by a similar percentage. The number of older steers declined as Irish farmers attempted to sell them earlier than previously. This was possibly a response to the price discounts experienced in the previous year but the more stringent stocking density requirements for the extensification and the SBP could also have been an incentive.

Although the exchange rate between sterling and the euro weakened through the year, Irish cattle prices were supported by the strong demand from the UK market. It is estimated that the final overall price will be about 1% higher in 2002 than in 2001. This estimate reflects the combination of a somewhat larger increase for prime cattle but a price reduction for cull cows.

Mid Term Review

The EU Commission published its Mid Term Review (MTR) of the CAP in July. Among the many other issues, this proposed the decoupling of the animal based DPs to an area based payment. It proposed that the historical animal DP claims for individual farmers be converted to area based DP rights for the future.

In anticipation that the EU may include 2002 in its base year calculations, the immediate response by Irish cattle farmers was to try and increase the value of their animal based DP claims for 2002. In response to this possibility, some Irish farmers switched to producing bulls rather than steers in a speculative attempt to build up the possible value of their future DPs rights. This resulted in an increase in the number of bulls available for slaughter, but compared to steers the total number of animals involved is relatively small. Also, most farmers became more conscious of submitting the animal claims once the animals had reached the minimum age limit, while other farmers tried to purchase additional eligible animals for this purpose. Other factors favouring the early application for SBPs included, the tightening of the stocking density requirements for the SBP and for extensification and a more general aim to avoid retaining animals beyond the 30 month deadline.

Direct payments

The combined impact of all the above factors is rather difficult to assess. It is probable that the total number of applications for SBP will be substantially up on the previous year. There is also the possibility of an "overshoot" on the quota for the 9 month SBP. Should this occur, the resulting "clawback" on the over-quota value of the SBPs will be confined to farmers with more than 50 eligible SBP animals. Many of these are likely to be larger dairy farmers who also have a substantial cattle enterprise. Others are likely to be farmers who specialise in finishing cattle, and as shown earlier, most of these rely very heavily on the SBP for their margins and income. The clawback will not affect margins in 2002 as it will impact on the value of the 2003 pay-outs arising from the 2002 SBP applications.

Although the stocking density requirements for the dual premium extensification system in 2002 became more stringent and the value of the premiums increased, the resulting revenue will not arise until 2003. Throughout the 2002 grazing season, many farmers had to adjust their farming systems to accommodate the lower stocking rate compliance criteria. Also, there was a sharp and unexpected realignment in some of the census dates for the stocking density counts for extensification. As the potential revenue involved for many farmers is substantial, these two factors combined to precipitate adjustments to the timing of animal purchases and sales and thereby significantly disrupted the cattle markets. Undoubtedly, some farmers operating close to the stocking density limits will be unable to make the desired adjustments and will either lose out entirely on extensification or will have to be satisfied with the lower rate of payment.

With the implementation of the third and final phase of the Agenda 2000 agreement, the values for all the individual DPs and the "national envelope" were increased in 2002. With the exception of extensification, the normal pay-out rate for DPs is 60% of its value in the year of application and the remainder in the following spring. Since the values of the individual premiums are increasing, the revenue accruing, even from 60% of the value, should also increase. A similar, though smaller, increase should arise from the 40%, or second moiety, of the previous year.

As noted earlier, this potential increase in revenue from DPs was diluted by the earlier decision of the Minister for Agriculture, Food and Rural Development in 2001 to increase the size of the 1^st moiety of the direct payments (DPs) from 60% to 80%. This effectively converted potential revenue and income from 2002 into actual income in 2001, with a consequential reduction in the expected margins for cattle in 2002. This combined with uncertain cattle price developments, very difficult conditions for grazing and fodder due to inclement weather meant the outlook was likely to result in a substantial decline in cattle margins in 2002.

In the early autumn, in response to the evolving situation for margins and incomes, the Minister for Agriculture, Food and Rural Development again sought and obtained EU permission to increase the value of the 1^st moiety of the direct payments (DPs) from 60% to 80% for cattle farmers. This decision then transferred potential revenue and income from 2003 into 2002, thereby more than compensating for the loss of revenue from a similar activity in 2001.

Costs

Early in 2002, a degree of confidence was gradually returning to Irish cattle enterprises as the problems associated with BSE and FMD became more distant and the demand for beef for the UK market increased. This return of confidence together with the scheduled increase in the value of the animal based DPs were quickly reflected in a very strong demand for calves in the spring of 2002. Since cattle farmers are highly dependent on the DPs for their margins, the end result was that calf prices were about 25% higher than in the previous year. As a consequence this substantially added to the costs for the cattle producers purchasing these calves.

Management logistics, pasture and fodder costs and forage quality were severely disrupted in the first half of the year by inclement weather. However, a significant recovery occurred as the year progressed with the result that forage supplies at the end of the season were considered to be at least adequate even if the quality of the early cut silage is lower than normal. It is probable that the annual consumption of concentrates by cattle will decline in 2002 thus resulting in small cost savings. Similar savings may arise in fertiliser costs but these will be largely offset by increases in other costs. The estimated net impact is a small reduction in cattle production costs per hectare, excluding the much more significant cost impact of changes in calf prices.

Estimated margin

When all of the above estimates of changes in cattle prices, value of the DPs, calf prices, direct costs and animal numbers were taken into account, it is estimated that the overall margin in the cattle sector in 2002 will decline. The scale of the decline could be about €34/ha, or 7%, compared to the actual out-turn for 2001. The figures in Table 2.4 show that this is due to the additive impact of a small decline in costs but a larger decline in revenue when the added cost of calves is taken into account.

Source: Teagasc, National Farm Survey and author's estimates
¹Estimate ²Forecast
Note: headage excluded for all years

Export markets

Meanwhile, the main demand for Irish beef is likely to come from the UK. This market will in 2003 still require substantial volume of imports to fill the void in domestic supplies created by the FMD outbreak in 2001. The scale of the imports beyond 2003 is more uncertain as it depends on the prolongation of the exclusion on the over thirty months animals (OTMS) from the food chain. This exclusion may be relaxed in 2004. Even then, there is an expectation that OTMS animals may be permitted in the food chain by phasing them in on a date of birth basis.

Other factors that could increase the export demand for Irish beef in 2003 include, the impact of the drought on world cattle supplies, stronger than expected international grain and oil prices, and the possible run down of EU intervention stocks.

A severe drought in Australia and Canada has greatly reduced grain and fodder supplies and increased feed costs. This is expected to initially result in a strong supply of beef from these sources as destocking occurs, but in due course competition in export markets will decline substantially. The higher than expected grain and protein prices will increase feed costs and reduce margins for pig, poultry and intensive beef producers. Any resulting reduction in meat supplies from intensive producers should inevitably strengthen beef prices for extensive beef producers.

The grain harvest in Russia and some Eastern European countries has again been above that for recent years. This has resulted in both additional exports and reduced imports each of which will provide extra hard currency which could well increase the financial feasibility of importing extra beef. A similar effect could arise in Russia from the unexpected increase in the price of crude oil.

Compared to the overall size of the EU beef market, current intervention stocks are modest and declining. Since the internal EU beef market has firmed, there have been a number of both restricted and unrestricted sales of intervention beef in recent months. The EU Commission estimate that intervention stocks could be cleared in 2003. As past experience would indicate, such a development could put upward pressure on Irish cattle prices.

If the elimination of intervention stocks coincided with an increased demand for beef from Russia and a reduction in supply of beef and other meat from exporting countries, Irish cattle prices could firm significantly. However, any substantial increase in EU cattle prices is likely to be curtailed by the EU management of the export refunds for beef.

Revenue

The volume of Irish cattle available for slaughter in 2003 is likely to be higher than in 2002. For Irish cattle farmers, any modest increase in slaughterings when combined with a possible increase in cattle prices should result in an increase in the market based revenue.

In contrast, the overall revenue available from DPs is likely to decline. Since the pay-out rate for the 1^st moiety of the 2002 DPs was increased to 80% in the autumn of 2002, only 20% remains for the 2^nd moiety payment in the spring of 2003. Also, as noted earlier, any clawback required for an overshoot of the SBP quota will have to be recouped from the 2^nd moiety. It is probable that the pay-out rate for the 1^st moiety of the 2003 DPs will revert to the normal 60%. And unlike in previous years, there is no further increase in the unit value of the individual DPs to offset this reduction.

Extra revenue could arise from extensification payments as the value of the premium itself was increased in 2002 and the number of animals availing of the SBP in 2002 also increased. However, as discussed earlier, the percentage of these animals collecting the different extensification premiums remains somewhat uncertain.

The stocking density compliance criteria for the DPs is also changed in 2003. The limit for SBPs is reduced to 1.8LU/ha but the same limit, albeit measured differently, exists for the low payment rate for extensification. It is difficult to establish how many farms and cattle will be affected by these limits. And, in any event, individual cattle farmers are likely to attempt to adjust their animal purchases and sales to avoid the worst effects of such constraints.

Assuming that normal weather prevails in 2003, changes in direct costs will probably be rather modest. Reductions in the volume of fertiliser use and purchased feeds could help to offset increases in input prices. As in the past, calf prices are likely to remain strong and could increase further.

Margin forecast

After taking into account the above outlook on cattle prices, values of the DP, direct costs and animal numbers it is forecast that the overall margin in the cattle sector will decline further, by about €22/ha or 5% in 2003. The main components of this margin forecast are shown in Table 2.4. This forecast is based on the assumption that Irish cattle prices show a small increase on those prevailing in 2002 and the pay-out of the DPs reverts to its usual level of 60% in the autumn of 2003.

If the margin forecast for 2003 was to achieve the same level as the estimated outcome for 2002, cattle prices would have to increase by over 5% on average in 2003. The margins for 2003 could, as in the past, be increased by adjusting the rate of pay-out of the DPs. This would increase the margin in 2003 to a level above the estimated margin for 2002 and similar in nominal values to that prevailing in 2001. This, however, could present serious problems for 2004 as there would be no increase in the unit value of the individual DPs to offset such an inter-year transfer of revenue.

Second BSE crisis

Cattle prices recovered sharply early in the year 2000 after a very poor financial year in 1999 due to the combination of a fodder crisis and poor cattle prices in the autumn. The recovery in cattle prices gave rise to a renewed optimism among cattle farmers. However, the renewed optimism was suddenly undermined in the late autumn of 2000 by another BSE crisis, this time in the continental countries of the EU. But, because of its timing, the collapse in prices had only a small impact on the overall value of off-farm sales and cattle margins in 2000.

The abrupt price collapse and lack of markets precipitated a larger than expected end of year carryover of cattle on Irish farms. It also presented a bleak outlook for farmers involved in winter fattening who had already purchased store cattle at high prices relative to the market outlook for early 2001. In response to the market situation in late 2000, the Minister for Agriculture, Food and Rural Development sought and obtained EU permission to increase the value of the 1^st moiety of the direct payments (DPs) from 60% to 80% of the total. The normal 60% had already been paid out in October-November. The additional 20% of the appropriate premiums were dispatched to farmers in late December 2000 and consequently were assumed to be included in the cattle margins for 2000.

This structural flexibility in adjusting the level and timing of the pay-out of the DPs, while generally welcomed by farmers during difficult financial periods, can seriously complicate the analysis and interpretation of year to year comparisons in the economics of cattle farming. These complications are particularly acute when the trends in the margins for individual cattle systems and components of a system are being compared. Adjusting the administration of DPs is a rather crude method of income support and does little to offset the direct impact of cattle price fluctuations. This arises because the individual farmers who are most affected by the fluctuations in cattle prices are those that are least dependent on the value or the rate of pay-out of the DPs.

Market support issues

Irish cattle farmers entered 2001 even more anxious about cattle prices than in previous years. There were a number of market and market support uncertainties. The main ones were:

• a large beef oversupply, estimated to be approximately a million tonnes of carcass equivalent beef in the EU, arising from the BSE crisis.
• a consequential re-nationalisation of the EU market seriously undermined market trade flows, beef prices and cattle margins
• scheduled reductions of just under 7% in the EU intervention price for beef in July 2001 and 2002
• there was also much apprehension about how a number of the operational details of the revised EU market support system would operate. These included
  • the level at which the official price support mechanism would be activated
  • the capacity of the intervention system, or some other beef supply withdrawal mechanism, to cope with the immediate volume of beef oversupply that was likely to result from the collapse in demand
  • the eventual potential outlets available for any of the relatively large volume of product that might be withdrawn from the market
  • the possible availability of monetary compensation to cattle farmers following the sudden collapse in cattle and beef prices towards the end of 2000
  • the form of this compensation once the more traditional method of paying "top-ups" on existing DPs was being excluded due to EU budget cost.

Policy adjustments

After a rather uncertain start, a new range of EU market supports were finally agreed and introduced during 2001. The main ones were:

• the purchase for destruction scheme (PFD) for cattle over 30 months of age which was introduced and operated in Ireland and some other member states in the first half of the year
• the special beef purchase scheme (SPS) for cull cows which was introduced in the second half of the year to replace the PFD scheme
• the volume ceiling on intervention purchases was increased
• the operational procedures and prices at which "safety net" intervention applied were clarified and implemented
• the introduction of a BSE test, and its eventual extension to include all slaughter and "fallen" animals, which helped to steady consumer confidence
• a second stage Special Beef Premium (SBP) payment for "castrate bulls" was introduced on a temporary basis to help stabilise the market for bull beef
• the extension of the "maiden heifers" concept and its compulsory inclusion in the compliance criteria for suckler cow premium payments to help reduce the future supply of calves and beef
• a phased tightening of the stocking density limits on intensive farms for animals eligible for SBPs and Suckler Cow Premium (SCP) was introduced to encourage extensive production methods and reduce future supplies. These limits were reduced from 2.0 Livestock units per hectare (LU/ha) and fixed at 1.9 and 1.8 LU/ha for 2002 and 2003 respectively.

FMD outbreak

The apprehensions of Irish cattle farmers in 2001 were further fuelled by the outbreak of Foot and Mouth disease (FMD) in the UK and its subsequent introduction into Ireland. Fortunately, the outbreak in Ireland was successfully confined to a single farm. But, it seriously disrupted cattle movements and trade within Ireland from late February to the middle of June 2001.

The net result was that many heavily stocked dairy farms had to retain extra calves and young animals and purchase fodder and concentrate feed to maintain them. Equally, there were many cattle farms with adequate supplies of fodder and grass but they could not obtain animals to use them. Most of these extra costs were subsequently offset by a good and extended grazing season with a particularly mild autumn. Also, the potential negative impact of the cattle movement restrictions on the stocking densities for individual farms aiming for extensification were ameliorated by the introduction of an adjustment coefficient in the overall administration of the system.

As a consequence of FMD, a large volume of beef and sheepmeat was removed from the market in the UK. This resulted in strong prices and created extra demand for imports which was readily captured by Ireland. The strong value of Sterling against the IR£ (euro) helped to sustain Irish cattle prices for 2001 and into 2002. The overall impact was to provide a strong and unexpectedly large market for Irish beef in the UK at better than expected prices. However, the direct price benefit arising from the increased access to the UK market was largely confined to younger cattle because of the 30 month age restriction in that market. An Irish cattle price differential arising from this age limit quickly developed and was particularly acute in the autumn of 2001.

Over 800,000 tonnes of carcass beef had been removed from the EU market, most of it was removed entirely from the food chain, by a combination of the PFD, SPS and the FMD and BSE culling schemes.