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Subsidy squeeze could force beef off the menu

By Alistair Driver (Filed: 08/08/2005)

The French might still call us "Les Rosbifs" but the reality is that home-grown beef - that most British of dishes - is on the wane.

British farmers produce 68pc of the beef consumed in the UK, compared with 78pc in 1995, representing 10.5m head of cattle against 12m ten years ago.

This January, far-reaching reforms of the Common Agricultural Policy (CAP) took effect and they appear to be putting further pressure on an industry already contracting after the trauma of BSE.

Beef farmers are asking whether CAP reform will accelerate this trend or simply act as the catalyst to force inefficient farmers out.

The reforms expose farmers to the vagaries of the market in a way they have not experienced before. Until this year, subsidies were paid on every animal in the herd, typically accounting for 40pc-45pc of its value - say 350 out of 800. More often than not this made the difference between a profit and a loss.

Now subsidies have been "decoupled" from production. Farmers receive a lump sum, the Single Farm Payment (SFP), based on individual historic subsidy levels and farm size, and conditional on good environmental management.

Crucially, the payment does not vary with the number of animals farmers keep or the acreage of crops they plant.

While "coupled" subsidies justified churning out loss-making beef, milk, lamb or cereals, decoupled subsidies mean that you are better off producing nothing if you cannot sell in the market for a profit. For beef farmers, whose businesses were driven by subsidies, this requires a sea change in their thinking.

The early signs are worrying. Beef farmers' break-even price varies hugely. For some it will be 220p per kilo, while others will need rather more than 300p, depending on the type of production and efficiency of the farm.

Last month, average prices fell unexpectedly from about 200p to 190p a kilo at a time of year when they should be peaking and when retail prices are stable. The problem was that too many cattle were available, mainly because farmers were selling them earlier. Because of the CAP changes they no longer need to keep them until a certain age to get a full price.

On top of that, supply has increased because the supermarkets had imported more beef from South America. Retailers and processors claim the level of imports were relatively small and had little impact on the price drop. This has not stopped the National Farmers Union from accusing them of a "major miscalculation".

The blip in prices is expected to be temporary but it has knocked already fragile confidence.

North Yorkshire farmer John Seymour fattens about 3,000 animals a year, which he sells to Tesco via the processor St Merryn Meats. He says he was losing 40-50 on each animal he sold after his prices plummeted to 175p per kilo in July.

"We have stopped buying and we have stopped selling. We are just waiting to see what price they are going to pay before deciding if we can carry on," Mr Seymour said.

"Supermarkets and processors have to realise that if they do not pay reasonable prices farmers will stop and there will be no UK beef industry."

The future is particularly uncertain in the English hills where a quirk in the CAP system means many upland cattle farmers face progressive and significant cuts in their SFPs over the next eight years.

A recent National Trust report predicted that hill farming faced a "rapid and unmanaged collapse" as a result of the reforms unless farmers received urgent help from the Government. Most farmers will be loath to quit what is a way of life as much as a business, whatever the market signals say.

Duncan Sinclair, the Meat and Livestock Commission's beef economics manager, believes there is no evidence yet of the "meltdown" some in the industry are predicting, although he notes that 100,000 fewer calves have been registered in the first six months of this year - a 4pc fall.

While some farmers will struggle, he says, those able to remove costs from their operations will thrive. He also predicts the cost of land will fall as a result of the CAP reforms, an assertion backed by recent figures published by the Royal Institution of Chartered Surveyors.

Robert Forster, chief executive of the National Beef Association, believes the impact of the CAP reforms will take years to hit home.

"We reached our first post-reform crisis in July. What happens over the next few months could determine whether the UK continues to have a viable beef industry from 2007," he said.

"If prices remain where they are for long, there can be only one outcome - a lot less British beef and many more imports."