Supply discipline key to EU meat industry’s success

By Melodie Michel

- Last updated on GMT

Related tags Meat industry Meat Pork Beef Livestock Poultry

Supply discipline key to EU meat industry’s success
EU meat companies need to control supply growth in order to improve margins in a fragile economic environment, a Rabobank report has revealed.

The research firm expects feed prices to stabilise or slightly decline in 2012, but warns that any worsening of economic conditions in the euro zone could affect meat consumption and volatility. “To keep markets in balance with demand growth, it is essential for the meat industry to be very restrictive in supply planning for 2012. More disciplined supply growth will make the industry more flexible in times of unfavourable cost-price developments,”​ the report says.

Fragile beef and pork sectors

Rabobank predicts that the beef sector will benefit from low supply, especially at the primary level. Export levels are expected to go back to normal after the massive increase generated by the opening of the Turkish market in late 2010 and the Russian ban on Brazilian beef. This is likely to negatively impact beef prices, while production will decline further due to falling cattle numbers.

Uncertainty remains in the pork sector, which largely depends on the development of demand inside and outside the EU. However, Rabobank expects a downward adjustment of the sow herd, following the negative profitability experienced by producers in the last few years. This should support 2012 pig prices, but the sector will largely depend on the export market as EU pork consumption is on a declining trend. Exports are likely to slow down after a 23% surge between January and August 2011, but the increase in disease outbreaks in China, and the spread of African swine fever in Russia will ensure continuing demand.

The report also mentions the vulnerability of beef and pork companies that lack market power compared to clients in retail and foodservice. “The result​ [of the lack of market power] has been a fast increase in the use of tenders and stringent sales contracts, with hardly any opportunities for the meat industry to forward higher-than-expected prices. However, when prices drop more than agreed in the contracts, retail and foodservice companies immediately start renegotiations, basically obliging the meat industry to follow suit due to their sales dependency,”​ Rabobank added, suggesting limiting the number of fixed contracts and spreading their expiration dates throughout the year to lessen the pressure.

Promising outlook for poultry

Limited supply growth has helped the poultry sector balance the costs of high feed prices, and Rabobank expects demand to stay strong. The likely decline in feed prices should support improving margins in 2012, and vertical integration in many poultry companies makes them less vulnerable to pressure from retailers, as they can link market contracts with supply contracts to farmers.

EU poultry exports are expected to grow by 5% to 7%, due to local demand in the Asian and African markets and subsidies for exports to the Middle East. The report says: “The main growth markets will be Hong Kong, markets such as Benin, Ghana and Congo in Africa, as well as countries in the Middle East such as Saudi Arabia, Yemen and the United Arab Emirates.”

Related topics Meat

Related news

Show more

Follow us

Products

View more

Webinars