The Red Meat Sector Operating Environment

Half yearly review:December 2014

Iain MacdonaldEconomics AnalystQuality Meat Scotland

0131 472 4118imacdonald@qmscotland.co.uk

Executive Summary

• After seven consecutive quarters of growth, the UK economy appears to have become self-sustaining with increased consumer and business confidence helping drive spending on consumption and investment. Although the pace of job growth slowed in the autumn, more people are finding full-time and permanent roles, leading to increased job security.

• Inflation has fallen well below the Bank of England’s (BoE) 2% target due to lower global commodity prices and heightened retail competition. Though pay growth remained historically weak during the third quarter of 2014, regular earnings rose faster than the cost of living.

• Though overall net lending has remained weak, businesses have been seeking alternative sources

of finance to ensure that investments can go ahead. In an environment of weak wage growth, increased access to credit has supported the rise in consumer spending.

• In contrast to the upwards trend in overall consumer spending, food retail sales have been sluggish.

• The monetary stance has continued to support UK economic activity. Though two members of the

BoEs Monetary Policy Committee are now voting for higher interest rates, weaker economic data and lower inflation expectations have pushed expectations for the first interest rate increase back to the autumn of 2015. On the fiscal side, the tax threshold was raised for the 2014/15 financial year and there was some tax relief for business investment. However, a number of benefits were cut.

• In the Euro Area, the economic recovery has slowed. Though some of the economies worst affected by the 2008 crisis have shown encouraging signs, the largest economies of Germany, France and Italy are struggling. Unemployment has been edging lower, but it remains elevated. Inflation has fallen well below the ECBs target and threatens economic recovery through its impact on expectations and debt burdens. In reaction, the European Central Bank (ECB) has cut interest rates and banks have been offered cheap financing. However, despite weak demand, the fiscal stance has remained neutral continuing to place pressure on the European and global economies.

• The main influence on the exchange rate between sterling and the euro has been divergent

monetary policy prospects. Sterling has firmed on a stronger economic outlook while the euro has weakened due to lower interest rates. Sterling is currently around 5% stronger against the euro than a year ago; but this gap had been as wide as 7-8% for much of the period between July and October. This will have undoubtedly placed pressure on livestock producer prices by making imports cheaper, exports less profitable and adding to market supplies.

• The UK economic outlook continues to look positive and the self-fulfilling nature of the expansion is likely to support a prolonged period of economic activity growth. Inflation is expected to remain low and wage growth is likely to pick up, indicating disposable income growth. A weaker global economy implies that UK export demand will be subdued, leaving the UK economic expansion highly dependent on domestic demand.

• On the red meat side, retail prices have been trading broadly flat this year as increased supplies have placed pressure on producer prices. With pig producer prices sliding significantly, there may be some scope for retail prices to fall back to stimulate consumption. However, with prices for most alternative proteins also flat or falling, it may be difficult for red meat to gain market share.

• Going forwards, while domestic production of sheepmeat and pigmeat is likely to remain ahead of year earlier levels, there is more of a worry over beef production. Imports of beef and lamb may ease back due to lower production in Ireland and New Zealand, respectively. However, a strong sterling and competitive prices on the continent are likely to increase pigmeat imports. Exports for all three species may prove difficult given the exchange rate; though higher value cuts may see less of an impact given that demand will be less sensitive to prices.

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Contents Executive Summary ....................................................................................................................................................... 1 What is happening in the UK economy? ................................................................................................................ 3

Macroeconomic Indicators ............................................................................................................................................ 3 Economic Activity: ..................................................................................................................................................... 3 Inflation: ..................................................................................................................................................................... 5 Labour Market: .......................................................................................................................................................... 7 Money & Credit: ...................................................................................................................................................... 10 Money Holdings ....................................................................................................................................................... 10 Credit Availability .................................................................................................................................................... 10

Consumer Indicators ................................................................................................................................................... 11 What has been happening to economic policy in the UK? ............................................................................ 14

Monetary policy: ...................................................................................................................................................... 14 Fiscal Policy: ............................................................................................................................................................ 14

What has been happening in the European economy? .................................................................................. 15 Economic Activity .................................................................................................................................................... 15 Inflation: ................................................................................................................................................................... 16 Labour market: ........................................................................................................................................................ 17 Consumer Trends: .................................................................................................................................................. 19

What has been happening to economic policy in the EU? ............................................................................. 20 Monetary Policy: ...................................................................................................................................................... 20 Fiscal Policy: ............................................................................................................................................................ 21

A focus on exchange rate movements ................................................................................................................. 22 What factors have been influencing the €:£ exchange rate? ........................................................................... 22 What influence does movement in the €:£ have on the red meat industry? ................................................. 22 What has been happening to the $:£ exchange rate and why does it matter? ............................................ 24 What has been happening to the NZ$:£ exchange rate and why does it matter? ....................................... 24

Economic Outlook ........................................................................................................................................................ 25 UK .................................................................................................................................................................................. 25

General Economic Climate:.................................................................................................................................... 25 Economic Activity: ................................................................................................................................................... 25 Inflation: ................................................................................................................................................................... 25 Labour Market: ........................................................................................................................................................ 25 Monetary Policy: ...................................................................................................................................................... 25

EUROPE ......................................................................................................................................................................... 26 Exchange Rate Movements ........................................................................................................................................ 27

€:£ ............................................................................................................................................................................. 27 $:£ ............................................................................................................................................................................. 27 NZ$:£ ........................................................................................................................................................................ 28

What has been happening in the red meat sector? ......................................................................................... 29 Food Price Inflation: ............................................................................................................................................... 29 Beef: ......................................................................................................................................................................... 29 Lamb: ........................................................................................................................................................................ 30 Pork: ......................................................................................................................................................................... 30 Bacon:....................................................................................................................................................................... 30

Review and Outlook for Meat Supplies ................................................................................................................ 31 Beef: ......................................................................................................................................................................... 31 Sheepmeat:.............................................................................................................................................................. 33 Pigmeat: ................................................................................................................................................................... 35

Red Meat Sector Outlook .......................................................................................................................................... 37 Sources ............................................................................................................................................................................ 38 Statistical Appendix .................................................................................................................................................... 39

UK Economic Indicators ......................................................................................................................................... 40 Retail Price Index: meat & other food items ...................................................................................................... 41 Scottish Monthly Average Retail Prices of Selected Cuts .................................................................................. 42 UK Farm-to-Retail Price Spreads .......................................................................................................................... 43 EU Economic Indicators ......................................................................................................................................... 44

3

What is happening in the UK economy? Macroeconomic Indicators Economic Activity: Economic Growth Rates Source: ONS

Q3 2014 Q2 2014 Q1 2014 2013

q/q y/y q/q y/y q/q y/y y/y

Scotland (GVA1) n/a n/a +0.9% +2.6% +1.0% +2.6% 1.9%

UK (GDP) +0.7% +3.0% +0.9% +3.1% +0.7% +2.9% 1.7%

GDP After a strong finish to 2013, the UK economy continued to grow robustly in the first three quarters

of 2014. According to Office for National Statistics (ONS) figures, a 0.7% quarterly expansion pushed output 3% ahead of its year earlier level in Q3. After the economic difficulties of mid-2010 to late 2012, the sustained expansion since the beginning of 2013 has been a highly welcome development. Scotland’s economic expansion has closely matched UK economic growth since late 2012. The faster growth rate in Scotland during Q1 2014 can be explained by the recovery in production at the Grangemouth complex from the disruptions of Q4 2013 due to industrial unrest. The recent UK economic growth spurt has been fuelled by the service sector; a sector that accounts for nearly 80% of the UK economy. During Q3, services output grew 0.8% when compared with the previous quarter, and was 3.3% larger than in the same period of 2013. Service sector activity has been underpinned by consumer-facing industries and strong business confidence which has led to increased spending on recruitment and marketing. However, public sector activity continued to grow more slowly as

the large UK budget deficit placed downwards pressure on public spending. The production sector grew more slowly than the wider economy during Q2 and Q3 2014. Given that manufacturing accounts for around 70% of the production sector, this was largely due to slower manufacturing output growth. The recent slowdown has been attributed to lower export demand, which has in turn been linked to a downturn on the continent plus an unfavourable

1 GDP = GVA + taxes on products – subsidies on products. GVA (Gross Value Added) is used for regional output instead of GDP since taxes and subsidies can only be calculated for whole economy.

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106

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3

2007 2008 2009 2010 2011 2012 2013 2014

2011

= 1

00

Economic Activity Sources: Scottish Government; ONS

Scottish GVA UK GVA

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% C

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UK GDP by Category Q3 2014 Source: ONS

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strengthening of the sterling exchange rate. However, the sector had grown rapidly between Q2 2013 and Q1 2014, and it was still 3.4% larger than a year earlier during Q3 2014. The smaller sectors of construction and agriculture, forestry & fishing also expanded during Q3 2014. Strong UK housing demand helped push construction sector activity up by 0.8% on the quarter and by 3% on the year. The sector was also boosted by demand for commercial projects, linked to business expansion and higher consumer spending. Agriculture, forestry & fishing activity grew 0.3% on the quarter and by 0.9% year-on-year. In addition to a good harvest, this will have been influenced by the considerable increase in livestock reaching the market over the period. Purchasing Managers Index (PMI)

A more up-to-date measure of private sector activity comes courtesy of the PMI – a monthly survey of private sector firms. It has the further benefit of containing a commentary of the factors driving output at UK businesses. The November survey suggested that growth in the service sector firmed after a weaker October. The index lifted to 58.6 – well above the 50 level indicating no change; and slightly ahead of its year-to-date average.

Businesses reported strong growth in orders and with production unable to keep up with demand, backlogs of work built further. Marketing firms performed particularly well, and nearly half of the surveyed firms expected increased orders in the year ahead. In the manufacturing sector, activity has been more subdued in recent months. Activity growth began to slow in July due to weak export demand which was the result of a slowdown in the EU economy plus a strong sterling exchange rate which made UK exports less competitive and/or less profitable. By September, manufacturing growth had fallen to a 16-month low. However, the November reading of 53.5 was a 4-month high as stronger orders from domestic customers offset the difficult export trade. Meanwhile, throughout the past year, activity in the construction sector has grown rapidly. Though it dipped to a 13-month low in November as civil engineering reported a significant slowdown in expansion and house-builders were a little more cautious, the reading was still above 59. The PMI surveys have consistently reported that firms have been in expansion mode over the past 18 months due to increased levels of demand in the UK economy. These reports have been supported by ONS business investment data. Despite a slowdown from the previous quarter, provisional figures indicate that investment still showed a 6.3% annual expansion in Q3. Summary After seven consecutive quarters of growth the UK economy appears to have become self-sustaining with increased consumer and business confidence helping drive spending on consumption and investment. As a consequence, the UK has been one of the fastest growing developed economies over the past year. The pace of growth may have slowed in the autumn, but it remains at a robust rate.

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UK PMI Source: Markit

Manufacturing Services Construction

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Inflation: UK Rates of Inflation (y/y) Source: ONS

Aug to Oct 2014 May to Jul 2014 2013

CPI 1.3% 1.7% 2.6%

Core inflation2 1.6% 1.8% 2.1%

The government’s favoured measure of inflation, the Consumer Prices Index (CPI), edged up in October to 1.3%, having fallen to a 5-year low of 1.2% in the previous month. Meanwhile, core inflation held at 1.5%. The CPI has been below the BoE’s 2% target throughout 2014. While a large part of the decline in CPI inflation has been driven by lower food and fuel prices, that core inflation is also well below 2% indicates that the decline has been broad-based. Food Prices From the chart it can be seen that food prices continued to place significant downwards pressure on the CPI in October. The cost of food averaged 1.6% below year earlier levels, subtracting 0.16 percentage points from the inflation rate. The main influence on food prices has been increased supplies of grains and vegetables due to a good global harvest. In turn, lower grain prices have encouraged livestock producers to take animals to heavier weights, pushing up meat supplies and lowering prices. A stronger sterling exchange rate has also had an impact, placing downwards pressure on the price of food imports and reducing the profitability of UK exports, thereby pressuring producer prices. Cheaper raw material prices have fed through to retail prices due to heightened competition in the grocery market. With discount retailers capturing market share from large multiple retailers, the multiples have reacted by passing on lower raw material prices

to the customer in an attempt to maintain their customer base. This has also had an effect on manufactured food products – prices were 2.6% lower than a year earlier in October. ONS retail sales data also provides evidence of falling food prices as the price deflator used to convert sales values into sales volumes in predominantly food stores slipped to -0.4% in October. Furthermore, the British Retail Consortium (BRC) reported that overall food inflation was at a record low of 0.1% in October, with fresh food priced 0.4% lower than 12 months before.

2 Due to the tendency of food and energy prices to fluctuate sharply, the ONS publishes a more reliable indication of underlying inflation: CPI excluding energy, food, alcohol and tobacco. This is commonly known as ‘core inflation’.

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Different Rates of Inflation Source: ONS

CPI Core Inflation Target

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Different Rates of CPI Inflation Source: ONS

All items Food

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2.0

4.0

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CPI food price inflation (% y/y) Source: ONS

Apr-14

Oct-14

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Fuel & Energy Prices The CPI has also fallen back due to a decline in fuel prices plus a smaller rise in the cost of household gas and electricity. A resumption of oil exports out of Libya and continuing increases in shale oil production in the US have raised global oil production ahead of previously forecast levels, while at the same time, demand forecasts have been downgraded due to a slowdown in Chinese and European economic growth. As a consequence, oil prices have fallen from nearly $120/ barrel in June to less than $80/barrel in November; and this has borne down on petrol and diesel prices, which were down 5% year-on-year in October. Meanwhile, political pressure on energy companies forced them to reduce previously announced price increases last winter, slowing the rate of increase in household electricity and gas prices to around 5% from 7.5% last year. Consumer Goods Prices

As noted earlier, it is not just the more volatile food and energy prices that have contributed to the slowdown in UK inflation. A significant influence has come from consumer goods. Indeed, during October, prices for semi-durables and non-durables rose by 0.5% and 0.8%, respectively. Meanwhile, consumer durables were 1.1% cheaper than a year earlier. Looking more closely at the CPI data showed numerous categories in deflation during October. These included clothing (-0.3%); furniture (-1%); textiles (-1.8%); and electrical appliances (-

2.5%). Further evidence came from the BRC survey for October which found non-food prices to be 3.1% lower than a year earlier. In the ONS retail sales dataset, deflators for textile, clothing & footwear stores and household goods stores stood at -0.4% and -1.8% respectively. A number of factors have been placing pressure on the prices of consumer goods. According to the PMI surveys, lower input costs at manufacturing firms, due to lower commodity prices and a stronger sterling, have been passed on to output prices as a consequence of strong competition in the retail sector. This will also have been influenced from the demand-side from stagnant real wages, leaving little room for consumers to pay higher prices. Consumer Services Prices In the service sector, it has been a different story, however. The CPI dataset has been showing steady increases in the prices of services above the general level of inflation. Indeed, the cost of transport has been running 3-4% higher than last year, reflecting mandatory above-inflation increases. Meanwhile, prices in housing, catering and recreation have been growing at a stable pace of around 2.5% year-on-year. According to PMI surveys, services prices have been pushed up by relatively firm demand which has allowed increased wage costs to be passed on to consumers. Summary To sum up, it appears that inflation has fallen below target due to a wide range of factors. Global factors, such as lower commodity prices and exchange rates have been added to by stagnant real wages and strong competition across the retail sector. However, service providers have continued to have more pricing power, with firm demand allowing them to continue raising prices at a faster pace than the general level of inflation.

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CPI by Category October 2014 Source: ONS

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Labour Market: Employment

According to the ONS Labour Force Survey, during Q3 2014, the total number of people employed in the UK reached a new record high of almost 30.8m. This was up by 0.4% on the quarter and by 2.3% year-on-year. Although there have been some signs of a slowdown in employment growth in recent months, the pace of job creation was particularly rapid between the spring of 2013 and early summer of 2014. The UK economy has been creating jobs faster than losing them for most of the last four-and-a-

half years. However, it has only been since the beginning of 2012 that the net increase in jobs has been sufficiently large to outweigh population increases. As a consequence, the number of people in work compared to the total UK population remains slightly below its pre-2008 recession level. However, BoE estimates suggest that demographic factors such as an ageing population and increasing numbers of students should have lowered the employment to population ratio. Indeed, it estimates that the increased participation of women and over 65’s in the labour market has pushed the participation ratio 2 percentage points above where demographic changes would place it. This factor coupled with the rapid pace of job growth over the past 18 months has lifted the employment-to-population ratio away from its relatively stable post-recession trend of just over 58% to its Q2 and Q3 2014 level of around 59.5%. Rising employment has been a function of increased vacancies. During Q3 2014, there were 680,000 outstanding positions in the UK economy. Compared with Q2, this was a rise of more than 3.5%, while they have risen by a quarter over the last year. After consistently strong growth in job openings over the past two years, vacancies have returned to their pre-2008 recession level.

The official data is corroborated by the monthly PMI and ‘Report on Jobs’ surveys carried out on behalf of Markit. These surveys provide a narrative for the improving labour market. Both manufacturing and service sector firms added jobs at a fast pace through the second half of 2013 and first half of 2014 as higher levels of new orders had led to the build-up of backlogs. In addition, employees were being taken on in anticipation of further order growth. Between August and October, though robust

job growth has continued, a dip in the pace of hiring was reported by services and manufacturing firms, as the slower pace of activity growth allowed backlogs to be brought under control, reducing the need for additional workers. However, employment growth reportedly picked up again in November as the rate of increase in new orders once again exceeded output growth. Meanwhile, construction firms have continued to take on staff at close to record levels with a majority of firms expecting to expand over the next year. Furthermore, a net balance of 32% of UK firms surveyed during October for Markit’s UK Business Outlook intended to expand their workforce over the next year. Though marginally down on surveys carried out in February and June, intentions nevertheless remained strong, suggesting further improvement is on the way.

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08 09 10 11 12 13 1457.0

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UK Employment Source: ONS

Employment/Population Ratio (RHS) Total Employment (LHS)

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Labour Market Barometer Source: Markit

Scotland (Bank of Scotland Labour Market Barometer)

UK (KPMG/REC Report on Jobs)

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Underemployment A good barometer of the underlying health of the labour market is to look at indicators relating to underemployment, such as the level of part-time, temporary and self-employed work. On this front, recent developments have been positive. Indeed, the bulk of the increase in employment over the past year has been into full-time roles. Between the second and third quarters of 2014, 110,000 of the 112,000 net jobs created were full-time. Furthermore, compared with the previous quarter, fewer part-time staff reported that they were in their current roles because they could not find full-time positions, while growth in temporary employees came from people that did not want a permanent placing. In addition, there has been a reduction in self-employment (which tends to be lower paid and less secure) since the summer. These developments suggest that the economy is creating better paying, more steady jobs; and this will have increased job security. Indeed, survey evidence from the Markit Household Finances Index supports this. With people feeling more secure about their income streams, they are more likely to spend money. Unemployment Due to the rapid pace of job creation in the UK economy, unemployment has fallen sharply. Indeed, at 1.96m in Q3 2014, UK unemployment3 was 5.5% lower than in Q2 and 21% lower than 12 months before. Furthermore, it was at a 6-year low. 6% of the labour force were unemployed during Q34, down from 6.3% in the previous quarter and from 7.6% a year earlier.

Meanwhile, claimant count5 data for October showed a similar picture of a rapidly improving situation. The claimant count fell for a 24th consecutive month as the 220,000 people moving into work more than offset the 195,000 people that found themselves out of work and claiming unemployment benefit. There were 931,700 claimants in October, down 7% from July and by 28.5% on the year. This meant that just 2.8% of the labour force claimed Jobseeker’s Allowance, compared with 3.9% a year earlier.

The ratio of unemployed workers to job vacancies has fallen rapidly over the past year from 4.6 in Q3 2013 down to 2.9 in Q3 2014. However, since it remains above its pre-2008 recession level of around 2.5, it suggests that there are further declines in unemployment to come before the labour market has fully recovered. Earnings

3 Number of unemployed people aged 16+ that are part of the economically active population (able to and actively seeking work) 4 Proportion of the economically active population that is unemployed 5 Those aged 18+ claiming Jobseeker’s allowance

UK average weekly earnings growth Source: ONS

Q3 2014 (y/y) Q2 2014 (y/y) 2013

Whole economy total pay 1.0% -0.1% 1.2%

Whole economy ex. bonus pay 1.3% 0.7% 0.9%

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Unemployment: Aged 16+ Source: ONS

UK (LHS) Scotland (RHS)

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Average weekly earnings grew by an annual rate of 1% in Q3 2014. Meanwhile, regular pay, which excludes bonus payments, increased by 1.3%. Both rates recovered after a weak second quarter, and were driven by a strong increase in regular earnings during September. Indeed, average weekly earnings picked up by £3 in September to reach £455. This was up 1.8% from the average of £447 12 months before. In addition, it was above the 1.2% benchmark rate of CPI inflation, indicating that earnings were higher in real terms. However, it should be noted that pay growth remains very low in an historical context. Indeed, earnings growth averaged 4% during the 5 years to Q2 2008. It seems likely that wages have continued to grow slowly despite significant employment growth since there has been a considerable margin of spare capacity to erode. However, with the unemployment to vacancy ratio beginning to close-in on its pre-2008 recession level, employees may now be starting to gain some bargaining power. The combination of weak productivity growth and rising employment at the lower end of the wage scale may also help explain the historically weak pay growth. Indeed, according to the BoE, in the nine months to June, 72% of employment growth was accounted for by low skilled occupations, where weekly wages averaged £285. Prior to this, low skilled jobs had been declining at an average quarterly rate of 26,200 since the beginning of 2008.

The sector-by-sector breakdown showed that the recent pick-up in wages was broad-based. Indeed, compared with a year earlier, wages rose by 1.2% in services, by 1.8% in manufacturing and by 1.3% in construction during Q3 2014. In addition, the single month pay growth figures for September showed stronger readings of 1.8% in services and 2% in manufacturing. The single month figure was particularly strong in finance & business services as earnings grew 2.4%. Pay in this sector rose sharply through August and September, having

trended slightly lower over the previous two-and-a-half years. Perhaps this means that a prolonged period of strong hiring has fully eroded the slack that had built up in the sector, leading to recruitment difficulties, and hence higher wages. Meanwhile, wages in the lowest paid sectors of wholesaling, retailing, hotels & restaurants rose at a 1.2% annual pace in September compared with 0.5% in August and just 0.1% in July. Weekly earnings averaged £300 in September; 1% above their February to August average, but still marginally down on their January 2014 peak. Summary The upturn in the UK economy over the past couple of years has encouraged businesses to take on additional staff to deal with higher levels of orders. As a consequence, employment has been able to rise more quickly than the UK population and the fewest number of people are out of work since the autumn of 2008. However, it appears that the pace of job growth slowed in Q3; though it may have picked up again in November. More people are finding full-time and permanent roles, leading to increased job security. Furthermore, though pay growth remained historically weak during Q3, regular earnings rose faster than the cost of living, suggesting that the squeeze on real wages may be coming to an end. Forward-looking surveys suggest that there is room for further employment growth in the coming months.

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Average Weekly Earnings Growth Source: ONS

Regular Pay Public Sector Manufacturing Services

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Money & Credit: Money Holdings According to the latest BoE data, the aggregate level of money and credit in the UK economy (M4) stood at more than £1.77 trillion in September. This was up nearly 4% on a year earlier. This means that there was a significant increase in money sitting in bank accounts. Breaking this down, households’ money holdings grew in line with the average. Private non-financial corporations (PNFCs) saw holdings rise by 9%, but financial institutions held 1% less money than 12 months before. BoE statistics show that the overall increase in money holdings was not driven by an increase in net lending by UK banks and building societies to the private sector - M4 lending was down by nearly 5% on the year. Though mainly driven by lower lending within the financial sector, the level of outstanding lending to PNFCs also contracted, falling 1%. The contrast between sharply increasing PNFC money holdings and declining net lending suggests higher precautionary saving to shore up balance sheets and/or a greater degree of finance has been accessed from equity (shareholders) and bond markets. BoE figures show that of the £13.5bn of finance raised by PNFCs during Q3 2014, £7.5bn came from bond issuance, compared with £1.8bn of loans and £0.7bn from equity. Equity had been the largest contributor during H1 2014. In its November Inflation Report, the BoE reported that net lending to property companies was still contracting, and this has been offsetting increased lending to other non-financial corporations. Credit Availability The November BoE Agents’ summary of business conditions reported a further improvement in credit availability during October. The survey suggested that banks were willing to lend to large companies with strong balance sheets and were competing with each other in attempt to win this business. Although small firms were still finding it hard to borrow from banks, they were beginning to find alternative sources of financing. Consumer Credit Like for PNFCs, lending to households increased at a slower pace than money holdings, suggesting a switch to alternative sources of credit such as pay-day lenders and/or increased saving. However, the slow rate of increase is a result of mortgages accounting for 88% of lending to households and overall mortgage financing growing less than 2% year-on-year in September. Meanwhile, mortgage approvals continued to fall back following the introduction of tighter regulations in the spring. By contrast, consumer credit grew by 6% year-on-year. Approximately one-third of this category was credit card lending, which rose by 4.5%. Other loans to consumers increased by 7%. This is likely to reflect the rise in car sales, which, according to the Society of Motor Manufacturers and Traders (SMMT), grew at an annual rate of 14% in October, driven by the availability of cheap financing. Summary Where there is demand for credit, the UK financial sector is willing to extend it at low interest rates. However, the banking sector has remained more risk averse than in the run-up to the 2008 financial crisis and so alternative sources of finance are being accessed to ensure that investments can go ahead. The data indicates that, in an environment of weak wage growth, the rise in consumer spending has been supported by increased access to credit.

11

Consumer Indicators Household Incomes

In the first half of 2014 (H1), real household disposable income grew by just over 1% on the year to £544.2bn. This marks an improvement from 2013 when real incomes fell slightly. Though post-tax money incomes grew by 3% during H1, the rise in the cost of living lowered this when converted into real terms. Breaking down the ONS figures shows that post-tax income growth of 3% came from a near 4% increase in income which was partially offset by a 4% increase in national insurance. Taxes and benefits payments edged higher year-on-year but largely offset each other. Asda, in conjunction with the Centre for Economic & Business Research, produces a more timely indicator of movements in disposable incomes. The monthly income tracker indicates that UK households have seen a considerable lift in the level of income they have to spend on non-essential items since the summer. This has happened due

to the combination of a decline in the UK inflation rate at the same time as average earnings growth has increased. The tracker suggests that disposable income was up by an average of 4.5% year-on-year in the August to October period. With real wages now growing, households have found some additional money to spend. However, the monthly household finance survey carried out by Markit shows that UK households remain under pressure as more respondents were pessimistic than optimistic about their current financial situation in November. Nevertheless, the reading was

its second highest on record6 and has been higher than last year throughout 2014. Finances were supported by increased labour market participation and incomes. Looking forward, households were optimistic for a second month. Having dipped in the summer, optimism has returned due to the fall in inflation, increased wage growth and an expectation for a delay in the timing of the first interest rate increase. Indeed, during July, 50% of those polled expected an interest rate increase within the next 6 months. By November, this had fallen to 29%. 6 The HFI has been running since 2009

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UK Household Financial Situation Source: Markit

Household Finance Index (HFI) Future Finances Index

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276

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1

2007 2008 2009 2010 2011 2012 2013 2014

£bn

per

quar

ter

Real household disposable income (4-quarter rolling avg) Source: ONS

155

160

165

170

175

180

2010 2011 2012 2013 2014

£ pe

r w

eek

Monthly Asda Income Tracker

12

Consumer Confidence Since May, the closely watched UK consumer confidence survey carried out by the market research organisation GfK NOP on behalf of the EU Commission has lacked direction, fluctuating around

zero7. This has seen the level of consumer confidence hold at an historically high level. Although the index dipped one point on the month in October, perceptions of both the current and year-ahead personal financial situation improved. However, perceptions of general economic conditions worsened, and consumers felt less confident about purchasing a big-ticket item. Perhaps this explains the increase in the propensity to save indicated by the survey.

It is a worry that although UK consumers feel that their personal finances are now in much better shape, a weakening of sentiment about the general economy could lead to a rise in precautionary saving and slow the recent increase to consumer spending. Nevertheless, consumers remain much more confident than at any time since before the 2008 financial crisis. Consumer Spending ONS data shows that in real terms, UK household spending increased by 0.7% during Q1 and by 0.6% during Q2. As a consequence, this pushed spending up by 2.1% year-on-year in Q2; the strongest expansion for more than six years. Spending growth exceeded the rise in disposable incomes as more confident consumers saved marginally less of their income. Looking more closely at the data shows that the fastest growing category of expenditure was clothing & footwear; it rose by 2.5% on the quarter and by nearly 7% on the year. Other fast-growing categories included miscellaneous8 and recreation & culture. However, expenditure on food declined by 0.6% during Q2 but remained 0.5% above its year earlier level.

Within the food category, meat was one of the better performers, with spending edging up in Q2 to stand 2% higher than a year earlier. This contrasted with fish, which contracted sharply, and dairy, which fell on the quarter but remained 1% higher than in Q2 2013. The share of food in total consumer spending in the domestic economy edged down to 7.6%. This was a record low. In recent years it has held around 7.7-7.9%.

Real terms spending on meat continued to hold at 1.7% of total domestic spending and edged up to 22.3% of food spend.

7 The overall index is the average score for each of the five survey questions. Respondents are asked to give a score of 1 if there has been a large improvement; 0.5 for a small improvement; 0 for no change; -0.5 for a slight worsening; or -1 for a considerable deterioration. 8 Personal items such as hairdressing, beauty products, watches, insurance, social care and legal fees

-35

-30

-25

-20

-15

-10

-5

0

5

2011 2012 2013 2014

Inde

x sc

ore

UK Consumer Confidence Source: GfK NOP

1.60%

1.63%

1.66%

1.69%

1.72%

1.75%

1.78%

1.81%

7.4%

7.5%

7.6%

7.7%

7.8%

7.9%

8.0%

8.1%

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

2009 2010 2011 2012 2013 2014 % o

f to

tal d

omes

tic

expe

ndit

ure

% o

f to

tal d

omes

tic

expe

ndit

ure

Household Expenditure on Food Source: ONS

Food Meat

13

Seasonally adjusted UK retail sales: August to October 2014 Source: ONS

q/q change y/y change

Value Chained volume Value Chained volume

Total -0.1% 0.4% 2.0% 3.3%

Excluding automotive fuel 0.1% 0.5% 2.9% 3.8%

Predominantly food stores -0.3% -0.3% 0.2% 0.4%

Predominantly non-food stores 0.7% 1.4% 4.8% 6.0%

Non-store retailing -2.3% -0.7% 8.6% 9.9% During the August to October period, increased disposable incomes and consumer confidence continued to boost UK retail sales. Volume growth picked up to its highest level since June as retail sales rebounded strongly in October after a weaker September. Indeed, while volumes were 2.3% higher year-on-year in September they grew at an annual pace of 4.3% in October. From the above table it is clear that falling retail prices have been underpinning sales volumes given that volumes have been rising faster than values. It is also clear that there has been a continued rebalancing of sales away from fuel. In addition to cheaper prices, this is likely to have been driven by the increasing fuel efficiency of cars as older models have been replaced with newer ones. Retail sales have also been rebalanced away from food, despite prices now flat-lining due to strong competition between multiple retailers. In recent years, volume purchases of food had been held back by high levels of inflation, but now that price pressures are no longer there, the money saved has been used to purchase other goods and services. As a consequence, most of the non-food store categories showed strong annual rates of volume growth in the three months to October. The increases were led by household goods stores (+9.5%) and non-specialised stores (+8.5%), while other stores showed a near 6% increase. However, volumes rose more slowly in textile, clothing & footwear stores (2%). This may well be linked to the unusually warm September and October which led to below normal sales of winter clothing. Indeed, this was alluded to in the BRC retail sales survey for October. Rising sales in department stores and household goods retailers reflect a firm property market and that people are taking advantage of good deals to upgrade their homes. The BRC and CBI also provide monthly updates on retail sales performance. During October, the BRC reported that its members saw sales revenues rise by 1.4% year-on-year. With their shop prices index reporting lower prices in October, this indicates that sales volumes grew more quickly and perhaps in line with the ONS figures. While food sales cooled by nearly 1.5% from a year earlier, non-food sales lifted by 2.8% and were underpinned by household goods and furniture. As noted above, the clothing trade proved sluggish due to the warm weather. Meanwhile, after a slowdown in Q2, the CBI distributive trades survey has been indicating strong retail performance through the autumn with around 30 percentage points more businesses reporting increases to sales than those reporting declines. Summary Rising employment and job security in the UK economy have boosted consumer confidence and this has fed into robust consumer spending growth. Disposable incomes had begun to improve in the first half of the year as inflation eased. Since the summer, inflation has fallen further and wages have begun to rise at a stronger pace, suggesting that the rise in spending can be sustained. However, in contrast to the upwards trend in overall consumer spending, food retail sales have been sluggish.

14

What has been happening to economic policy in the UK? Monetary policy: At its November meeting, the BoE’s Monetary Policy Committee (MPC) left Bank Rate on hold at 0.5%. The stock of asset purchases (Quantitative Easing/ QE) was also left unchanged at £375bn. The MPC judged that this monetary stance was appropriate to meet the 2% inflation target in 2-3 years’ time while supporting economic growth and employment. However, the decision was split 7-2 for a fourth month as two members voted for an increase in Bank Rate to 0.75%. Minutes from the meeting revealed a range of views on the outlook for inflation. Amongst the majority voting for no change, some thought the risks to inflation were on the downside as the slowdown in overseas demand could lead UK economic growth to slow more than anticipated, potentially lowering medium-term inflation expectations. They worried that under such conditions, a premature tightening of policy could exacerbate these risks. However, others judged that inflation could overshoot the target if the recent signs of wage growth were to become sustained. The two members voting for an increase believed that underlying inflationary pressures were building due to the rapid pace of employment growth and that by the time a slight increase in Bank Rate would begin to affect the economy, labour market conditions would require a tighter monetary stance to prevent inflation from exceeding the targeted level. Fiscal Policy: Despite the rhetoric of fiscal austerity, the UK government continues to run a large budget deficit. On the revenue side, one contributor has been permanently lower tax revenues from the financial sector in the aftermath of the 2008/9 recession. In addition, increases to the earnings threshold at which individuals begin to pay income tax have narrowed the tax base. Furthermore, since the majority of the additional employment over the past year has come in low skilled sectors, the average tax-take per worker will have fallen. On the spending side, an ageing population has pushed up the cost of pensions, health and social care. These factors have placed considerable pressure on less essential areas of the government budget, leading to public sector job cuts and wage restraint. The rise in the income tax threshold to £10,000 for the current financial year has boosted the average spending power of UK workers by just over £9 a week. However, reductions to some in-work benefits payments may have offset this. As with all policy changes, some will have been net winners and others net losers and the economic impact of a higher personal allowance will depend on how much of the additional income is spent or saved. The immediate reduction in stamp duty for the majority of house sales may leave buyers with more to spend on household goods. To support business expansion, the annual investment allowance has been doubled to £500,000. This may well have helped underpin the sharp increase to investment and should help sustain it in the coming months. Summary The monetary stance has continued to support UK economic activity. Though two members of the MPC are now voting for higher interest rates, some weaker economic data and lower inflation expectations have pushed expectations for the first interest rate increase back to the autumn of 2015. On the fiscal side, the UK government continues to run a large budget deficit. To help support disposable incomes, the tax threshold was raised for the 2014/15 financial year; though a number of benefits were cut. The budget also contained some tax relief for business investment.

15

What has been happening in the European economy? Economic Activity

Economic Activity in Prominent Scottish red meat markets GDP Growth

(%Q/Q) GDP Growth

(%Y/Y)

Q3 2014 Q2 2014 Q3 2014 2013 Bel +0.3 +0.1 +0.9 +0.2 Fra +0.3 -0.1 +0.4 +0.2 Ger +0.1 -0.1 +1.2 +0.4 Hol +0.2 +0.6 +1.0 -0.8 It -0.1 -0.2 -0.5 -1.9 Spa +0.5 +0.5 +1.6 -1.2 Euro Area +0.2 +0.1 +0.8 -0.4 Den +0.5 +0.1 +0.9 +0.4 Swe +0.3 +0.5 +2.1 +1.6 UK +0.7 +0.9 +3.0 +1.7 EU28 +0.3 +0.2 +1.3 +0.1 Nor* +0.5 +1.1 +2.0 +2.2 Swi +0.6 +0.3 +1.9 +1.9

Sources: Eurostat; Statistics Norway; Statistics Denmark; SECO *Mainland GDP (excluding oil & gas) Economic activity has continued to prove weak across much of continental Europe. Gross Domestic Product is estimated to have only edged forwards in Q2 and Q3 2014 as the large economies of Germany, France and Italy proved particularly sluggish. All three contracted during Q2 and then output grew slowly in Germany and France in Q3 and continued to decline in Italy. However, Spain and Holland began to recover after contracting last year. The Nordic countries have shown varying performance with Denmark stagnating while Swedish and Norwegian economies have continued to grow steadily. The Swiss economy has generally performed better than most EU countries in recent years, but there have been signs of more subdued activity in 2014.

According to the monthly Markit PMI surveys, private sector activity has held slightly above the 50 level of no change. However, growth in activity has fallen back since the turn of the year. As can be seen in the chart, the slowdown has been centred on the manufacturing sector; though services activity growth has also begun to dip. Respondents to the survey noted that the slowdown can mostly be linked to weak demand for manufactured goods within the Euro Area as external demand edged up during October.

However, on a more worrying note, confidence in the service sector had fallen to its lowest level since the summer of 2013. November figures indicated that overall activity growth slowed to its lowest level in 16 months due to a decline in new orders; though manufacturing output reportedly edged higher. Unfortunately, declining backlogs do not point to a pick-up any time soon.

41

44

47

50

53

56

J M M J S N J M M J S N J M M J S N

2012 2013 2014Dif

fusi

on I

ndex

(50

= n

o ch

ange

)

Eurozone PMI Source: Markit

Manufacturing Services

16

Within the PMI surveys, France has consistently been the poorest performer this year, with reports of declining orders and output in both manufacturing and services. The small increase reported in French GDP during Q3 may well have been underpinned by government spending as France continues to run a budget deficit above the 3% Euro Area limit. Private sector activity in Italy has also been sluggish. In Germany, activity has generally been growing slowly. However, the November survey reported a slight contraction in its manufacturing sector due to weaker export demand. Following a prolonged period of recession, there have been much more optimistic signs that a sustained recovery has taken hold in Spain. The latest manufacturing PMIs for Sweden, Switzerland and Norway all indicated modest levels of expansion. Latest Eurostat industrial production figures also show weak output growth; output was just 0.6% higher than a year earlier in September in both the Euro Area and EU28. The main areas of weakness in September were intermediate goods, consumer durables and energy. This has been consistent throughout 2014. Lower energy output can be explained by warmer weather while flat intermediate goods production and declining consumer durables are likely to be linked to weak final demand within most European economies. However, capital goods and non-durable consumer goods production have been rising. Since investment has been weak at the European level, perhaps higher capital goods production has been linked to stronger export demand. On a country level, Eurostat figures suggests that industrial production was lower than 12 months before during Q3 2014 in Denmark, Italy and Sweden; relatively flat in Belgium, France and Germany; and higher in Holland, Norway (non-EU but still covered by Eurostat) and Spain. Meanwhile, latest industrial orders figures disappointed for Sweden, Germany and Italy. Inflation:

Inflation in the Euro Area has fallen well below the 1.5%-2% European Central Bank target. In November, the provisional estimate of HICP placed it just 0.3% higher than a year earlier9. This was the 14th consecutive month that the rate was below 1%. Like in the UK, inflation has been held down by more than falling fuel, food and energy prices; core inflation has been running at or below 1% for over a year and stood at just 0.7% in November.

A breakdown of the provisional data indicates that food, alcohol & tobacco prices rose by 0.5% as the strong global harvest and the Russian trade ban placed downwards pressure on food prices. Meanwhile, energy prices were down 2.5% as lower oil prices fed through into cheaper fuel and heating oil. Evidence of low inflation taking hold across the EU economy comes courtesy of non-energy industrial goods prices which were unchanged from November 2013. With producer prices for industrial goods broadly flat, weak domestic demand will have prevented firms from raising prices to increase their profit margins. Though services price inflation has been higher, at 1.1% in November, it remained below the ECB target, also indicating weak demand. Indeed, the largest upward contribution to the October inflation rate came from cafes & restaurants; and prices were only 1.5% higher than 12 months before – half the rate of increase in prices in this sector of the UK economy. Of the main markets for Scottish red meat exports, only France and Germany showed above average inflation rates during October of 0.5% and 0.7% respectively. Meanwhile, Dutch prices 9 HICP: Harmonised Index of Consumer Prices – allows international comparison of inflation rates within the EU

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

J M M J S N J M M J S N J M M J S N

2012 2013 2014

Y/Y

Cha

nge

Euro Area Inflation Source: Eurostat

HICP Core

17

rose in line with the 0.4% average and in Belgium, Sweden and Denmark they grew at marginally slower rate of 0.3%. With Italy in recession, its inflation rate has been an even weaker 0.2% while Spanish prices continued to contract despite economic activity showing signs of recovery. The weak inflationary trends across the EU reflect subdued consumer demand in addition to lower energy and food prices. The low level of inflation is a real danger as inflation greases the wheels of an economy. Once inflation is low, it can be difficult to turn as it leads people to adjust their expectations, and this can reduce the pressure on wages while purchases may be delayed in anticipation of price cuts, risking a downward spiral. In addition, since inflation erodes the real value of debts, low inflation makes it harder for households and businesses to repay loans, placing further pressure on spending power. It also reduces the propensity to take on new borrowing to finance investment projects by reducing the potential return on investment. A similarly low rate of inflation across Europe also makes it harder for a rebalancing of economies to take place. Firstly, the subdued demand implied by low inflation makes it harder for the less-well performing economies such as Italy to recover through exporting to stronger economies like Germany. Secondly, low inflation makes it more difficult for weaker economies to improve their competitive position in the global market given that wages will be growing at a similar pace. Labour market:

Labour market in prominent Scottish red meat export destinations

Total Unemployment Rate Youth Unemployment

Rate October 2014 (%)

Labour Cost Index10 Q2 2014

(% Change y/y) October 2014 (%) y/y change

(percentage points)

Bel 8.6 +0.1 24.0 1.0 Fra 10.5 +0.3 24.3 1.7 Ger 4.9 -0.2 7.7 1.8 Hol 7.0 0.0 9.7 -0.6 It 13.2 +0.9 43.3 1.0

Spa 24.0 -2.0 53.8 1.0 Euro Area 11.5 -0.4 23.5 1.5

Den 6.4 -0.4 12.6 1.4 Swe 8.1 +0.1 23.0 2.9 UK 6.0 (Q3) -1.6 16.2 (Q3) 0.5

EU28 10.0 -0.7 21.6 1.5 Nor 3.7 (Sep 14) +0.3 8.0 (Sep 14) 2.7 Swi 4.9 (Sep 14) +0.8 11.0 (Q3) n/a

Sources: Eurostat; Statistics Norway; Swiss Federal Statistics Office; ONS The Euro Area unemployment rate held at 11.5% for a third month in October. This meant that approximately 18.4m people were seeking employment. In the EU28 as a whole, 24.4m people were unemployed; 10% of the labour force. With economic activity making a slow recovery over the past year, unemployment was slightly lower than in October 2013, falling from 11.9% in the Euro Area and from 10.7% at the EU28 level. Whereas 22 Member States shared in this improvement compared with 12 months earlier, five saw deterioration while the unemployment rate remained at 6% in Luxembourg. 10 Wages & salaries in the business economy

18

Unemployment rates have fallen in most of the countries that Scottish red meat exporters sell to. However, unemployment did edge up in Belgium during October after a period of stability, while increases in unemployment in France at the beginning of the year have left its rate above year earlier levels. The situation in Italy continues to deteriorate with the unemployment rate rising from 12.7% in August to 13.2% in October. By contrast, there have been steady improvements in Holland, Denmark and Spain in recent months. The improvement in Holland is notable given its poor performance in 2012 and 2013. Meanwhile, the German economy, which has the lowest unemployment rate in the EU, continued to add jobs in October and the unemployment fell below 5% for the first time. Labour market trends can also be deducted from the monthly Euro Zone PMI surveys. The survey carried out in November did not make good reading with only minimal levels of job growth reported by private sector firms. Though there was some overall improvement in Germany, Spain and Holland, employment fell in the France and Italy. Due to weak demand, backlogs continued to decline and firms had little need to hire additional staff. This points to a self-fulfilling stagnation – to have the confidence to expand, firms need to anticipate increased demand, but this will not happen unless more people are in work and hence have a more secure level of income to spend from. In the Markit Business Outlook publications of October 2014, German firms on balance expected to create jobs in the coming year. However, the balance narrowed to its lowest level for a year and manufacturing firms were expecting to contract their labour force. In France, more firms were expecting to reduce employment than increase it, with job losses centred in manufacturing. There was some net optimism in Italy and Spanish firms were also looking to expand due to better prospects in the service sector. Moving on to cover wages, the picture looks brighter on the continent than at home as annual increases have been running higher than in the UK in most of Scotland’s key trading partners. Furthermore, during Q2 the annual increase across the EU was the strongest since the first quarter of 2013. Nevertheless, earnings increases remain relatively low and do not point to significant improvements in living standards for citizens in employment and are unlikely to help raise inflation back towards its targeted level. Summary The European economy has continued to recover. However, the pace of activity growth has been very weak. Though some of the economies worst affected by the 2008 crisis have shown encouraging signs, the largest economies of Germany, France and Italy are struggling; Italy is back in recession. As a consequence of weak economic activity, inflation has fallen well below the ECBs target and is threatening to prolong the period of economic weakness through its impact on expectations and debt burdens. Amidst this difficult economic environment, unemployment has been edging lower, but it remains elevated.

19

Consumer Trends:

Selected statistics - prominent Scottish red meat markets

Retail Sales Volumes Oct 2014

(% change y/y)

Retail Sales Volumes – food,

beverages & tobacco Oct 2014

(% change y/y)

Consumer Sentiment Nov 2014

(% balance)

Consumer Sentiment May 2014

(% balance)

Bel +4.0 +3.1 -14.1 -5.2 Fra +0.4 -0.5 -22.6 -22.0 Ger +1.7 +1.3 -1.6 5.5 Hol -1.7 (Sep) +1.5 (Sep) 2.8 3.9 It -0.2 (Sep) -0.8 (Sep) -17.6 -8.7

Spa +0.9 0.0 -11.8 -6.7 Euro Area +1.4 +0.4 -11.6 -7.1

Den +2.2 +1.8 +16.7 +17.4 Swe +3.6 +2.1 +13.5 +18.8 UK +4.3 +1.2 +2.6 +7.6

EU28 +2.0 +0.9 -8.2 -4.0 Nor +2.4 +1.7 +18.5 (Q3) +16.9 (Q1) Swi +0.3 (Sep) +1.3 -11 (October) +1 (April)

Sources: Eurostat; European Commission; Bloomberg; SECO The latest consumer data for the EU points to weak demand. Indeed, after adjusting for inflation, household disposable income per person edged up by 0.2% during Q2 and was only 0.3% higher than a year earlier. This was despite low inflation and growth in wages and social benefits of 2% and 1.5% respectively. Taxes rose by nearly 3% as governments tried to keep their budget deficits within the 3% maximum under the rules of the Stability and Growth Pact. As a consequence of limited income growth in the Euro Area, real terms household spending rose by 0.4% on the quarter and by around 0.7% on the year during Q2. However, that spending grew at a faster pace than incomes suggests that consumers were more willing to spend. Indeed, Eurostat figures show that the Euro Area household savings rate edged down to 12.9% in Q2 from 13.1% in Q1 and 13.3% in Q2 2013. Since the series was first published in 2003, the savings rate has only been lower twice – Q3 2011 and Q4 2012. Move forward six months and the picture looks less promising as consumer confidence has dipped back across much of Europe. Indeed, of Scotland’s main red meat export markets, just Norway saw a slight improvement in confidence between the spring and autumn. In Switzerland, the consumer sentiment report stated that assessments of both the general economic environment and job security have weakened. A statistic heavily linked to household incomes and consumer confidence is retail sales. After a weak September, which saw overall cash spending fall but total volumes rise modestly due to lower prices, there was a recovery in October with sales volumes picking up at a faster rate in most countries. The strongest growth tended to come where consumer confidence was highest – Denmark, Sweden and the UK, but it also picked up significantly in Belgium relative to 12 months before. Retail sales volumes in the food, beverages & tobacco category outpaced overall sales during September; but this appears to have reversed in October. Markit’s monthly Eurozone Retail PMI surveys have pointed to contracting retail sales since June; though the pace of decline did slow considerably through October and November.

20

What has been happening to economic policy in the EU? Monetary Policy: Due to the expected persistence of a low level of inflation in the Euro Area, the ECB has loosened its monetary stance over the past six months. At the June meeting of its Governing Council, the ECB lowered its 3 key interest rates. Three months later, with no sign of a pick-up in inflation and business and consumer sentiment weakening, it announced further cuts. The deposit rate which the ECB pays banks on their holdings of reserves at the ECB was lowered from 0% to -0.1% in June and then to -0.2% in September. Meanwhile, the refinancing rate, at which banks can borrow from the ECB, was also cut by 0.1 percentage points in both June and September and currently stands at 0.05%11. The marginal lending rate on overnight borrowing from the ECB was reduced from 0.75% to 0.4% in June and then to 0.3% in September. The aim of the interest rate cuts was to stimulate spending and investment in the Euro Area economy by making it cheaper to borrow money. In theory, increased spending and investment should help to boost economic activity and move inflation back towards the targeted level of ‘below but close to 2%’. The lowering of the deposit rate below zero was significant as zero tends to be a lower bound on interest rates. However, the ECB felt able to take its deposit rate slightly below zero as the alternative for a financial institution of paying the ECB to hold its excess reserves would be to store the cash; a process that would be costly. As a consequence, banks will have to increase their lending if they want to avoid paying interest on their excess reserves. In addition to lowering interest rates, the ECB also announced that it would launch a new round of targeted long-term refinancing operations (TLTRO)12. These are 4-year loans to financial institutions at low interest rates with the aim of stimulating lending to non-financial private sector firms. The ECB announced that they would be offered to banks in September and December. In a further attempt at lowering borrowing costs, the ECB began purchasing asset-backed securities in October. The first signs of recent ECB action have been mixed. While take-up of the September TLTRO was reportedly much lower than hoped, October data indicates that bank lending to households and non-financial companies picked up in the 3 months to October, having consistently shown declines since May 2012. However, the December TLTRO also disappointed, reflecting the general lack of demand for funds to finance investment. Unlike the BoE and the US Federal Reserve, throughout the past few years, the ECB has stopped short of purchasing government bonds from banks and investors (QE), as there are concerns in Germany that this would amount to the monetary financing of government borrowing. The latest speeches from members of the Governing Council suggest that they may consider a round of QE in Q1 2015 should there be no improvement in the outlook for inflation. Sweden is not a member of the Euro Area. Due to low inflation becoming persistent, its central bank, the Sveriges Riksbank, lowered its main interest rate from 0.75% to 0.25% in July.

11 These rates were cut by the same degree to maintain the functioning of the money markets. The deposit rate acts as an interest rate floor as if other lenders paid a lower rate, excess reserves would be directed to the higher rate offered by the ECB. Meanwhile, the refinancing rate acts as a ceiling as if a lender charged more, the borrower would be able to access cheaper funds from the ECB. Since market rates will be somewhere in between the two, a smaller gap could impair the functioning of interbank lending. 12 The initial LTROs were introduced in the winter of 2011/12 and successfully helped to ease a build-up of financial pressures which were threatening the flow of credit in the Euro Area.

21

Fiscal Policy: While monetary policy has been loosened significantly by the ECB, the European Commission continues to place pressure on Member States to meet the government budget deficit constraints set out in the Stability and Growth Pact. This has committed Euro Area governments to run a maximum budget deficit of 3% of GDP, and 0.5% of GDP once the economic cycle has been adjusted for. With many economies still slowly repairing, tax revenues are yet to reach normal levels while spending on social welfare remains elevated; and both may struggle to return to pre-2008 levels given the permanent losses of economic capacity caused by a prolonged period of economic stagnation. As a consequence, these limits are a significant barrier to economic activity; particularly as it places pressure on funds available for investment in infrastructure which should help increase the potential rate of future economic growth while stimulating spending in the short-term. It has also limited the ability of governments to raise public sector wages and has forced many to consolidate public sector employment levels at a time when the private sector is weak and is struggling to create employment opportunities. By contrast, the UK government did not sign up to the budgetary pact in November 2011 and continues to run a large budget deficit. In its assessment of draft budgetary plans for the 2015/16 financial year, the Commission states that fiscal consolidation came to an end in the current financial year and is likely to remain neutral in 2015/16 as countries react to the low growth environment. However, it also states that a number of countries will have to take further measures to return their budget deficits within the agreed limit. This includes France, which has received dispensation in the past. With its budget deficit still expected to exceed the limit, it faces a fine in 2015; unless it implements considerable economic reforms. A fine may be the least of its worries given the poor level of economic activity indicated by the latest business and consumer surveys. With each country committing to a balanced budget, it means that the stronger countries have little room available to take up the slack. Given the very weak economic environment in the Euro Area, a neutral fiscal stance overall is likely to be reinforcing the weak level of demand across the Euro Area this year and next; and trade channels mean that weak demand in the Euro Area has a negative impact on global economic activity. However, it should be noted that in conjunction with the neutral fiscal stance, the new President of the EU Commission, Jean-Claude Juncker, has announced a large-scale investment fund for Europe. It is to work by pledging money from the EU budget and the European Investment Bank, adding in private sector funds and then lending it out for investment projects. Summary In recent months, monetary policy has been loosened further in the Euro Area in reaction to low inflation and falling medium and longer-term inflation expectations. Interest rates have been reduced and banks have been offered cheap financing in an attempt to stimulate spending an investment. However, despite weak demand, the fiscal stance has remained neutral and this is continuing to place pressure on the European and global economies; although the EU Commission has announced a plan to stimulate investment.

22

A focus on exchange rate movements

Sterling had a strong second half of 2013 and first half of 2014 as financial markets adjusted interest rate expectations to reflect improved economic conditions. In July, this saw the trade-weighted value of sterling reach a 6-year high. In recent months, sterling has eased back as the prospect of an increased Bank Rate has been delayed. Following 18 months of steady appreciation, the euro has fallen in value since the ECB acted to lower interest rates. By contrast,

the US dollar has firmed on stronger US economic growth, which has brought the Federal Reserve’s monthly asset purchases to an end and pulled forward expectations for increased interest rates. What factors have been influencing the €:£ exchange rate?

Divergent monetary policy prospects in the UK and Euro Area was the key driver behind sterling’s rise against the euro between the mid-2013 and mid-2014. In the UK, economic activity unexpectedly strengthened during the summer of 2013, altering financial markets’ expectations about the likely timing of an increase to Bank Rate. As a higher Bank Rate would make investing in the UK a more promising prospect, investors began to purchase UK currency and assets, pushing up the value of sterling. As the

improvement in economic data persisted, the upwards pressure on sterling continued. Though some improved economic data also supported the euro in the second half of 2013, sterling rose faster than the euro, pushing up the relative value of sterling. From around 86p in July and August 2013, the pound reached 83p by the year-end. After a period of stability during the first five months of 2014, there was another step change in June as the ECB cut its 3 main interest rates while UK unemployment declined further. The BoE Governor also had an influence, stating that financial markets were expecting a later interest rate increase than he was. By late June, the pound had risen to 79p. Since then, weaker economic indicators have seen both currencies ease. Although the ECB cut interest rates again, sterling has not shown another step-change, fluctuating between 78 and 80p in the final quarter of 2014, as the expected UK monetary tightening has been delayed by slower activity growth and lower inflation. Sterling is currently around 5% stronger than a year ago; but this gap had been as wide as 7-8% for much of the period between July and October. What influence does movement in the €:£ have on the red meat industry? During the first nine months of 2014, 88% of UK red meat exports by value were sold within the EU while 79% of imports came from other Member States. A stronger sterling relative to the euro places downwards pressure on the prices of red meat imports and exports. However, it should be noted that the impact of an exchange rate movement will depend on the extent to which forward

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Real Effective Exchange Rates Source: BIS

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2012 2013 2014

€:£

Exchange Rate Movements - €: £ Source: OANDA

23

and spot exchange rates are used in transactions; whether pricing contracts have been fixed; whether UK exporters accept lower margins; and/or the sensitivity of demand to price changes. Taking imports first, if sterling rises in value then each pound can buy more goods at the same euro price. The likely knock-on consequence for the UK producer is to lower the price that processors are willing to pay for their livestock, given that the alternative is a cheaper import. However, the extent to which it lowers domestic prices will depend on whether the market deems the cheaper import as a suitable alternative. This means that exchange rate movements are likely to have more of an impact lower down the value scale and in food manufacturing where price sensitivity is stronger. On the supply side, if cheaper imports encourage an increased quantity to be purchased, then this will place downwards pressure on domestic market prices. On the export side, a stronger sterling requires more euros to buy the same sterling value. Therefore, a British exporter could only hold their sterling price by charging more euros. In a price sensitive market, the subsequent decline in sales volume would more than offset the rise in price. The alternative of remaining competitive in euro terms would require them to accept a lower sterling price, leading to lower sales revenues when converted back into sterling. Either way, the export trade becomes less profitable, reducing the price processors will be willing to pay producers for their stock. If UK exports become more expensive in the Euro Area and export quantities fall, then an increased volume of meat will remain on the home market, lowering its price.

An illustration of the impact of exchange rates on domestic prices comes from the lamb market. Indeed, over a prolonged period, when sterling has been stronger than 12 months before, the auction price for lambs in Scotland has tended to be lower than a year earlier and vice versa. This can be seen clearly in the chart. HMRC figures for trade in pork between the UK and the EU also provide an example of exchange rate impacts. While UK export

prices have mostly averaged higher than in 2013 in euro terms, they have been consistently lower when converted back into sterling. In August 2014, the average export price was €1,780/t, working out at just over £1,400/t. A year earlier, prices had averaged €1,830/t and £1,570/t. So, while the euro price fell 3%, exporters accepted a 10% lower sterling price. Consequently, while export volumes to the EU declined 10%, sales revenues fell 18.5% year-on-year. Lower export volumes therefore imply higher volumes remained on the UK market, placing pressure on prices. In addition, the significant decline in export revenues suggests processors would have had less money to buy pigs. On the import side, the average price paid by UK importers for pork during August averaged 8% less than a year earlier at £2,180/t. However, this came despite the average euro price only edging lower. There seems little doubt that exchange rate movements played a part in GB producer prices falling 5-6% short of year earlier levels; particularly given that when converted into euro, the GB average had been higher. The exchange rate with the euro also has an impact on the value of CAP support payments. Direct support is paid in euros, and the conversion rate is the exchange rate on the final working day of September. In 2013, the rate used to convert euro payments into sterling was €1 = £0.83605. This year it fell to €1 = £0.7773; 7% lower. To give an example, a direct payment of €10,000 in 2013 would have equated to £8,361 last year but will have fallen by £588 to £7,773 this year.

-40%

-20%

0%

20%

40%

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% c

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e y/

y

Lamb price movement vs exchange rate movement

Sco auction €:£

24

What has been happening to the $:£ exchange rate and why does it matter?

Over the past 18 months the main driver of exchange rate movements between sterling and the US dollar have been the prospects for monetary policy changes on both sides of the Atlantic. As the first UK interest rate increase moved closer, sterling rose steadily against the dollar, reaching a peak at 58p in July. However, as UK economic data pointed to a delay in this increase while the US economy has begun to grow at a stronger pace, the dollar has moved higher again, trading at 64p in late November.

Exchange rate movements against the dollar have implications for the cost of energy and imported raw materials. Commodities such as wheat and soybeans, that are imported for animal feed, and oil, which affects fuel, energy and fertiliser costs, generally have their price quoted in dollars. The stronger the dollar, the more expensive they are in sterling terms and the higher the cost of production is for UK businesses. While domestic firms benefited significantly from sterling strength between mid-2013 and mid-2014, they have fared worse again in recent months. To illustrate this point, Chicago futures market prices for soyameal averaged 3% higher in dollar terms in June 2014 than 12 months earlier. However, when converted into sterling, prices in fact fell by 6%. However, as sterling has weakened again, the 18% fall in dollar prices for soya between June and November 2014 worked out at a more modest 13% sterling terms decline. What has been happening to the NZ$:£ exchange rate and why does it matter?

With around 70% of UK lamb imports coming from New Zealand, the value of the pound against the New Zealand dollar (NZD) is important in determining import volumes and prices. Having risen strongly after the global financial crisis of 2008, the NZD has been on a weaker trend since the beginning of 2013. Although interest rate increases in March and June saw the NZD rise against sterling, it has since fallen back as further rate increases, which had been anticipated in the spring, have been put on hold. In

addition, the Reserve Bank of New Zealand intervened in the currency market during August, selling NZD in an attempt to support the price competitiveness of the country’s export industries which have struggled in recent years. With the NZD trading around 3.5% weaker against sterling in November than a year earlier, this has helped support the country’s exporters of lamb to the UK. Since export prices have been higher in sterling terms this year, the increase will have converted back into an even stronger rise in NZD terms, leading to wider profit margins, thereby supporting the ability of processors to pay a higher farmgate price for lambs.

0.56

0.58

0.6

0.62

0.64

0.66

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2012 2013 2014

$:£

Exchange Rate Movements - $: £Source: OANDA

0.46

0.48

0.5

0.52

0.54

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Exchange Rate Movements - NZD: £Source: OANDA

25

Economic Outlook UK General Economic Climate: The UK economic outlook continues to look positive. Strong domestic demand has led firms to expand capacity by investing in factory/office space, equipment and new staff. In turn, increased job security has given consumers the confidence to spend and the household savings rate has fallen. The self-fulfilling nature of this expansion is likely to support a prolonged period of economic growth. Meanwhile, costs of essential items such as fuel and food have fallen and wage growth is beginning to pick up, helping to support disposable income growth. Though there have been some signs in the economic data of slower activity growth, it is likely to remain at a robust level.

However, some downside risks do remain. These are mainly external. The recovery of demand in the Euro Area has dissipated and there are signs of a slowdown more widely in the global economy. Indeed, PMI figures for the main emerging economies have been poor of late and the US economy appears to have slowed having grown strongly through the spring and summer. The IMF has subsequently revised down its estimates of global economic growth in 2014 and 2015. These worrying trends suggest that UK export demand will be subdued, leaving the UK economic expansion highly dependent on domestic demand. Economic Activity: The UK economy is expected to continue growing strongly due to domestic spending, both from consumers and business investment. The BoE expects quarterly GDP growth to edge lower in Q4 to 0.6%. In 2015, it expects an expansion of 2.9%; slightly slower than in 2014. Inflation: The BoE is expecting the CPI rate of inflation to fall further, slowing to 1% in December 2014. It expects the inflation rate to hold close to 1%, with a considerable risk of it slipping below this level in early 2015. By the final quarter of 2015 it projects CPI to edge higher to 1.4%. Labour Market: The BoE projects that the UK unemployment rate will fall to 5.75% by the year end before continuing to edge lower to around 5.5% in the summer of 2015. Participation in the labour market is expected to increase further and productivity is likely to pick-up. Faster productivity growth will slow the pace of the decline in the unemployment rate compared with this year. Earnings growth is expected to reach around 2% by Q2 2015. Monetary Policy: Financial markets are not expecting the BoE to raise Bank Rate until autumn 2015. When Bank Rate does begin to increase, the BoE has advised that it will rise slowly and to a lower level of around 2.5% than its historical average of around 5%.

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JP Morgan Global Composite PMI Source: Markit

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Manufacturing PMI Source: Markit

US China Russia Brazil

26

EUROPE In its autumn forecasts, the European Commission has lowered its estimates for economic activity growth across much of the continent with trends in domestic demand and investment now thought to be much weaker than in the spring. It is now expecting only very weak improvements in the major economies of Germany, France and Italy during 2015. Belgium is also likely to disappoint. As a result, projections for inflation have also been revised down. However, the economic environment has

seen an upturn in Holland and Spain and outcomes are now predicted to be somewhat better. Denmark and Sweden should also see robust economic expansion next year. With economic stagnation and low inflation still the overriding picture on the continent, the ECB is expected to loosen monetary policy further next year. They are currently waiting to see the impact of the monetary loosening carried out in 2014, but if, as expected, little improvement is seen, then action is likely. This is likely to be in the form of the ECB purchasing government debt from institutional investors, supplying them with additional funds to invest elsewhere in the economy. However, there is a split within the ECB Governing Council over the effectiveness of this policy (quantitative easing) and there will be heavy debate prior to any implementation. With weak demand holding back the Euro Area economy then credit flows may see little benefit from looser monetary policy. Even so, some action is better than no action at all. Indeed, further monetary loosening will lead to a weaker euro, and this should support export competitiveness for Euro Area members. Sweden and Denmark would also benefit since they have linked their currencies to the euro. Furthermore, by raising the cost of imports it may help raise inflation expectations. Then, if inflation expectations are higher, real interest rates will decline, making investment projects more attractive, and firms will charge higher prices and workers may see higher wages, leaving them with more money to spend. Higher inflation would also make outstanding debt burdens easier to cope with, providing further help to disposable incomes. Nevertheless, any stimulus from looser monetary policy will come after a lag. Therefore, the short-term outlook remains one of weakness in consumer spending.

GDP Growth Forecasts for Prominent Scottish red meat markets Q4 14 Q1 15 Q2 15 2014 2015

% change q/q % change q/q % change q/q % change y/y % change y/y Bel 0.1 0.2 0.2 0.9 0.9 Fra 0.2 0.2 0.2 0.3 0.7 Ger 0.1 0.2 0.3 1.3 1.1 Hol 0.3 0.3 0.3 0.9 1.4 It -0.1 0.2 0.2 -0.4 0.6 Spa 0.3 0.4 0.5 1.2 1.7 Euro Area 0.1 0.3 0.3 0.8 1.1 Den 0.4 0.4 0.5 0.8 1.7 Swe 0.4 0.6 0.7 2.0 2.4 UK 0.6 0.6 0.6 3.1 2.7 EU28 0.3 0.4 0.4 1.3 1.5

Source: EU Commission (European Economic Forecast, Autumn 2014)

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90

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14 a

vg =

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Economic Sentiment Indicator Source: EU Commission

EU28 Euro Area

27

Other Economic Forecasts for Prominent Scottish red meat markets in 2015

Unemployment Rate Inflation (HICP) Domestic Demand Investment % % y/y % change y/y % change y/y

Bel 8.4 0.9 0.7 0.9 Fra 10.4 0.7 0.6 -1.2 Ger 5.1 1.2 1.1 2.0 Hol 6.8 0.8 1.2 3.3 It 12.6 0.5 0.4 1.4 Spa 23.5 0.5 1.7 4.2 Euro Area 11.3 0.8 1.0 1.7 Den 6.6 1.1 1.6 3.0 Swe 7.8 1.2 2.8 4.3 UK 5.7 1.6 2.8 8.4 EU28 10.0 1.0 1.5 2.9

Source: EU Commission (European Economic Forecast, Autumn 2014) Exchange Rate Movements €:£ The most likely scenario is for sterling to edge higher around the turn of the year as the UK economy continues to show positive signals while Euro Area activity remains weak, raising the probability of the ECB implementing a programme of QE in February/March. If the ECB does loosen monetary policy then there will be a movement in the exchange rate, pushing the rate towards 75p. However, if the ECB does not take further action then the likely scenario is for the exchange rate to fluctuate around its current level, possibly favouring the euro as a level of expectation of ECB action will already be reflected in the current exchange rate. In the longer-term, the BoE is highly likely to begin normalising interest rates well before the ECB, indicating an upside bias for sterling. If sterling does strengthen against the euro then it is likely to place downwards pressure on the cost of red meat imports. It would also make exporting more difficult, potentially lowering margins and/or sales volumes. In turn, it would bear down on the prices that processors would be willing to pay for livestock. It also indicates that the best trading opportunities will tend to come in the least price sensitive markets at the higher end of the value scale. $:£ In the coming months, sterling is expected to edge lower against the USD as interests rates are forecast to rise in the US before they do in the UK. As a consequence, if the prices of imported commodities decline, then they will fall more slowly in sterling terms; if dollar prices increase then they will increase faster in sterling. One risk to this base case is if the slowdown in activity growth in the US indicated by the most recent PMI figures continues. In addition, if the stronger USD and lower oil prices begin to impact more widely on prices throughout the US economy then this may also reduce the pressure on the Federal Reserve to raise US interest rates, placing downwards pressure on the dollar.

28

NZ$:£ Currency strategists in New Zealand are expecting to see a weaker NZD against sterling as 2015 progresses. This is based on the BoE beginning to increase interest rates while the Reserve Bank of New Zealand holds interest rates and talks the currency down in attempt at helping the country’s exporters. A stronger sterling against the NZD may stimulate import demand for New Zealand lamb by making it easier for NZ exporters to price more competitively in the UK market.

29

What has been happening in the red meat sector? Food Price Inflation: ONS RPI data for October showed food price deflation with prices averaging 1.1% lower than in October 2013. This was the fifth time in six months that food was cheaper to buy than 12 months before and is in stark contrast to the 3.7% annual increase in 2013. Meat prices were no exception. Average retail prices for beef, home-killed lamb, pork, bacon and poultry were all priced below October 2013 levels. Imported lamb was the one exception; indeed, despite the price index easing to a 4-month low it was still 7% ahead of its year earlier level. This reflects a weaker New Zealand dollar and higher producer prices in NZ on the back of tighter supplies.

In terms of competitor proteins to red meat, fish and cheese were more expensive than a year earlier in October, but eggs and poultry were cheaper. Fish prices were 1.6% higher and cheese prices were up by 0.2%. However, cheese was down significantly on the month, reflecting the fall in the cost of milk, and this downwards trend is likely to see cheese prices follow meat prices into deflation. Meanwhile, the cost of eggs was more than 4% lower than in October 2013 and poultry was down by 1.5%.

The general environment of lower protein prices will make it difficult for red meat to gain an increased market share. Beef: On average, UK retail beef prices were down by 0.7% year-on-year in October. As can be seen in the chart, retail prices have been trending slightly lower, though relatively flat, since September 2013. Retailers like to smooth beef prices to the consumer as much as they can, so the fall in producer prices during the first half of 2014 allowed this to happen. Lower farmgate prices meant

that retailers could regain the margin lost in late 2012/early 2013 when producer prices were rising at a much faster pace than could be passed on to the sluggish retail beef market. With producer prices remaining lower than 12 months before, there is scope for beef retail prices to remain on the current trend for a prolonged period. Though retail demand has been relatively weak, hopefully the easing of prices should begin to encourage consumers to purchase more

beef. AHDB Market Intelligence provides a monthly estimate of the GB producer share of the retail price. Its method breaks down an average carcase into its different retail components. In November, the

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Beef Prices: Retail Vs Producer Source: ONS; AHDB

GB Beef Retail Price GB Beef Producer Price

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Retail prices of competitor proteins Source: ONS

Poultry Fish Cheese Eggs

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producer price averaged 50.4% of the average retail price. Though still down by 7 percentage points on the year, it was up from a low of 45.9% in July. Furthermore, it remained higher than its average level in any year between 2002 and 2010. Lamb:

The average retail price for home-killed lamb was 3.4% lower than a year earlier in October. Though lamb prices have tended to fluctuate on a month-to-month basis, as retailers favour lamb for their promotional offers, they have trended broadly flat for three years. Indeed, the average retail price in October was in line with the average price in 2012. Although at times farmgate prices have shown significant differences to year earlier levels, they have been on a broadly level trend in recent years. This overall

trend has allowed retailers to smooth consumer prices. As a consequence, despite farmgate prices rising through the final quarter of 2014, the relative stability of retail prices is likely to continue. According to AHDB Market Intelligence, the producer share of the average lamb retail price picked up seasonally to a 4-month high of just over 48% in November. This was down 2 percentage points from a year earlier; though it was still above its November 2012 level. Pork:

The RPI for pork was 3.2% lower on the year during October. Prices have shown significant volatility this year, indicating a high degree of promotional activity. The overall trend has been slightly downwards in 2014 as weak demand has limited the prices retailers have felt able to charge. Though producer prices have been sliding steeply, retail prices have fallen more slowly as retailers are attempting to regain some of the margin lost through 2013 when producer prices picked up strongly but consumers

proved unwilling to pay more for pork. Nevertheless, with farmgate prices falling significantly through November, there will now be some more room for retail prices to begin to fall back. Bacon: Since bacon goes through a higher degree of processing than pork, its retail price will be less reflective of the price a processor pays for the raw material. The bacon RPI was down 1.3% year-on-year in October but it has shown a relatively stable trend for 18 months; except for a brief dip between May and July.

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GB Lamb Retail Price GB Lamb Producer Price

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Pork Prices: Retail Vs Producer Source: ONS; AHDB

GB Pork Retail Price GB Pork Producer Price

31

Review and Outlook for Meat Supplies

Beef:

Home Production During Q3 2014, the principal driver of higher UK beef supplies was increased home production due

to the combination of increased prime cattle throughput and heavier carcases. While prime cattle slaughterings rose 2.5% year-on-year, prime beef volumes rose nearly 6% to 163,500t. However, heavier cow carcase weights just failed to offset a 3% lower kill. Increased prime production more than offset the slightly lower cow beef supply. As can be seen in the chart, supplies have been pushed higher by an increased steer kill (up 13%). In Scotland, the picture was similar in terms of the overall supply. However, the mix was different. The steer kill grew more

slowly (7%); the heifer kill fell by more (7%); the young bull kill rose 15%; and the cow kill fell more significantly (-12%). The main reason for increased prime cattle throughput has been the rise in calf registrations across GB back in late 2011 and 2012. Indeed, registrations rose 2% in the period between November 2011 and January 2013, and with most cattle being slaughtered around two years of age, they have reached the market in 2014. Furthermore, slower growth, due to the harsh weather conditions experienced on GB farms between April 2012 and May 2013, has meant that a higher proportion of the cattle born in the spring of 2012 will have taken longer than 2 years to finish, pushing up supplies as 2014 progressed. English June census figures for 2014 reported a 2.5% increase in non-breeding females over two years of age and males older than 2 years increased by 11% year-on-year. It was a similar picture north of the border. Meanwhile, lower feed costs and farmgate prices per kilogram have contributed to the even stronger increase in volumes. Firstly, since feed has become cheaper and more available, it has encouraged producers to add weight; though better grass growth during the summer will also have had an impact. Second, many producers have taken this opportunity to add weight to offset some of the losses from a lower price per kilogram in terms of the total revenue per carcase. Trade Imports add to domestic beef supplies and during Q3 2014, the UK imported 62,500t of beef; 3% more than a year earlier. With Ireland the principal supplier of beef to the UK, significantly higher beef supplies there led to a sharp decline in prices, encouraging UK importers to buy more; particularly to supply the lower value end of the market where there is a higher degree of price

UK beef supply: Q3 2014 (t) 2014 2013 Change 2014/2013 (t) % change 2014/2013 Home Production 209,950 200,650 +9,300 +4.6 + Imports 62,500 60,800 +1,700 +2.8 - Exports 27,700 23,000 +4,650 +20.3 = Net Supply 244,800 238,500 +6,300 +2.6

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UK Beef Production Q3 2014 Source: Defra

Throughput Volume

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sensitivity. Imports from Ireland rose by 12% year-on-year during Q3 and accounted for 69.5% of total imports, up from 64% in the same period of 2013. While Holland, the number 2 supplier has also delivered more this year, less beef has been imported from France, Germany and Poland. Quarterly imports from outside of the EU were down by 15% to 8,000t. Exports deduct beef supplies from the UK market. Due to the higher levels of both domestic production and imports, there was a greater volume available for export during Q3 2014. Beef export volumes subsequently increased by a fifth. Nevertheless, they remained below Q3 2012 levels. In addition, export revenues grew more slowly than volumes as lower prices for cow beef across the EU and exchange rate movements placed a significant deal of pressure on UK export prices. When converted back into sterling, sales to the EU, which increased 15% in volume, rose by just 3% in value as the average price fell by more than 10%. Outlook

Looking forward into next year, it seems likely that domestic prime cattle throughput is going to fall back. Indeed, at the beginning of October, the GB cattle population showed declines for the 12-18, 18-24 and 24-30 month age groups. This has been influenced by the near 3% decline in calf registrations in GB during 2013; a year when mortality was higher during the key spring calving period. However, the extent to which overall beef production tightens will depend on the evolution of carcase weights. With both producer prices and feed costs rising since the summer, there may be less of an incentive to add weight, suggesting that carcase weights might begin to ease back, reinforcing the tightening of supplies. Nevertheless, a better year of weather and grass growth is likely to continue having an impact on carcase weights in the short-term, indicating that volumes may well hold up, which would imply that volumes may tighten to a similar degree as throughput. On the trade side, the Irish June census implied that supplies are going to tighten there as well. There was a 2.5% fall in the number of cattle aged between 1 and 2 years of age and a 4.5% decline in cattle less than a year old. With supplies expected to tighten up in Ireland then it is likely to place some downwards pressure on imports to the UK. Meanwhile, on the export side, tighter domestic supplies suggest that the summer surge is unlikely to last. If we look at potential supplies in volume terms then it seems likely that domestic production and imports are likely to fall back in the first half of 2015. However, a reduction in exports will be an offsetting factor, limiting the potential decline in total supplies reaching the UK market.

GB cattle population: October 2014 Source: BCMS

Still alive Oct 2013 Still alive Oct 2014 y/y Change

Calves registered: head %

6-12 months ago 990,076 971,408 -18,668 -1.9

12-18 months ago 1,238,178 1,225,058 -13,120 -1.0

18-24 months ago 835,067 779,686 -55,381 -6.6

24 to 30 months ago 651,561 646,716 -4,845 -0.7

30 to 36 months ago 348,915 373,141 +24,226 +6.9

Total pool 4,063,797 3,996,009 -67,788 -1.6

33

Sheepmeat:

Home Production During Q3 2014, UK abattoirs killed nearly 3.5m lambs; 4% more than a year earlier. With lambs thriving amidst the good grass conditions, carcase weights also increased and this pushed prime lamb production volumes up by close to 6% year-on-year. However, a 10% smaller ewe kill led to a 7% decline in mutton production, resulting in the more subdued increase in total UK sheepmeat production of 3.4%. The main driver of the increased production levels was the weather of last winter. With rainfall lower and temperatures higher, ewes were on average in much better condition than a year earlier when the weather had been notably harsh. As a consequence, scanning rates improved. Then, the weather around lambing was also much better than 12 months before, leading to lower mortality rates. The national lambing percentage subsequently improved. According to June census figures, it jumped from 119% to 125.5% in Scotland and from 124.5% to 131% in England. This saw the number of lambs reported in June rising by more than 5% on the year in Scotland and by 6.5% in England despite little change in the size of the GB ewe flock (it edged up in England but edged down in Scotland). Over the summer months, the good weather continued. As lambs grew well on a good supply of grass, carcase weights picked up, contributing to an even stronger increase in prime lamb production volumes. Trade With imports adding to UK supplies, a slightly lower quantity coming in than 12 months ago will have eased a small amount of the pressure on the market from increased home production. Supplies from Oceania continued to run ahead of 2014 with deliveries from New Zealand up 4% and imports from Australia rising by 15% during Q3. However, both countries delivered less than a year earlier during September. The combined increase in supplies from Oceania was more than offset by a halving in imports from the Irish Republic. Changes to deliveries from smaller suppliers then roughly cancelled each other out. Despite the well supplied market overall, imports from New Zealand and Australia were not only higher than 12 months before, but also more expensive with average prices rising by approximately 15%. Given their more competitive exchange rate positions, this suggests that higher value cuts of lamb were brought in than in the summer of 2013. With imports providing little evidence of falling back as domestic production increased, it may have been expected that UK sheepmeat exports would rise significantly. However, the opposite was true during the third quarter with volumes down nearly 9%, adding to the volume of sheepmeat on the UK market relative to 12 months before. The export trade is likely to have been hampered by a strong sterling which was generally valued 6-8% more than a year earlier during the period. In addition to volumes declining, the price of exports also had to fall in sterling terms to remain price competitive, particularly given the weakness of consumer demand on the continent. A weak consumer environment is likely to have been one factor behind the 21% annual decline in volumes

UK sheepmeat supply: Q3 2014 (t) 2014 2013 Change 2014/2013 (t) % change 2014/2013 Home Production 79,300 76,750 +2,600 +3.4 + Imports 17,750 18,000 -250 -1.2 - Exports 25,300 27,700 -2,400 -8.7 = Net Supply 71,800 67,000 +4,800 +7.2

34

exported to the main market of France. Belgium, Holland and Germany also proved difficult markets during Q3. However, Sweden and Austria saw volume growth and there was a near 80% rise in exports to Ireland. Outlook Looking into 2015, it seems likely that the UK market will prove well supplied with hoggs. The main reason for this expectation is that slaughter numbers have been rising at a slower pace than indicated by the sharp increase in lambs reported in the June census. However, the failure of throughputs to rise more significantly during the autumn may well suggest that producers have retained more lambs for future breeding. Indeed, in both the census for Scotland and for England, the number of ewes intended for first-time breeding in November 2014 was significantly lower than 12 months before, and so replacement rates out of this year’s lamb crop could well prove to be higher. Even so, the data points to a pick-up in supply in the New Year. Moving on to cover trade, imports are likely to be lower than in early 2014. Although the NZ October lamb crop was reportedly more than 1% higher year-on-year, lambs have been slow to reach abattoirs. Furthermore, increased farmgate prices and the end to a prolonged period of drought conditions have given NZ producers an incentive to increase replacement rates. As a consequence, Beef + Lamb New Zealand is forecasting that export lamb numbers will be down 2% in the 2014/15 lamb crop year (October 2014 to September 2015). Though carcase weights are likely to increase slightly, production volumes are still likely to fall around 1% short of 2013/14 levels. Though Australian exports have held up strongly, they are limited by a relatively small quota for the EU and so a further significant increase in imports seems an unlikely scenario. On the export side, it is difficult to see much room for improvement given the current economic gloom in France, plus there is unlikely to be any significant weakening of sterling against the euro. As a consequence, the most likely situation in early 2015 appears to be one of modestly higher supplies than a year ago. Domestic production is likely to remain above year earlier levels while exports are expected to be lower, but a decrease in imports will offset some of these increases.

35

Pigmeat:

Home Production Having reached an 11-year high in 2013, UK prime pig slaughterings have continued to increase in 2014. In the third quarter of the year, UK abattoirs slaughtered 2.57m prime pigs; a year-on-year increase of 1.5%. Cheaper feed costs encouraged producers to add weight, pushing up prime pigmeat production volumes by 3.5% to 206,400t. However, since 5.5% fewer sows were killed, the overall increase in pigmeat production was slightly smaller at just over 3%. The principal factor behind the increase in pig supplies has been strong productivity growth. In part this will have been down to the constant drive for efficiency within the largely unsubsidised pig sector. This has led to investments in recent years in genetics and herd health which are now paying dividends. Indeed, BPEX data showed that the average indoor herd within its sample had

seen each sow produce 1.5 more pigs in the year to June 2014 than in the previous year. This works out at an improvement of close to 6%. As a consequence, a smaller sow herd was able to produce more pigmeat.

As noted previously, increased carcase weights have also contributed to the increase in domestic production this year. During the third quarter, the average prime pig carcase was around 1.6kg heavier than twelve months before at 80.4kg as cheaper feed allowed longer finishing periods.

Trade With imports adding to UK supplies, the rise in imports has added to the pressure on the UK market. The likely reason for higher imports will have been the increased competitiveness of European pigmeat this year. With Russia banning imports from the EU back in late January, and supplies strong in a number of significant pig producing nations, there has been increased product on the EU market, lowering its price. Add to this a strong sterling and you have the perfect storm. Although less pigmeat came into the UK from Germany, this was more than offset by increases in deliveries from Denmark and Holland. The combination of strong domestic production and higher imports suggests that UK exports would also increase to balance the market. This has been the case; exports rose 4% during Q3 from a year earlier. Nevertheless, this increase was too small to offset the rise in production and imports. The likely factors holding back exports will have been the strong sterling and the increased availability of more competitively priced European product. The difficulty of trading with European partners is highlighted by the Q3 trade figures which show sales to three of the four major market declining. Higher sales to Denmark were more than offset by lower exports to Germany, Holland

UK pigmeat supply: Q3 2014 (t) 2014 2013 Change 2014/2013 (t) % change 2014/2013 Home Production 214,750 208,400 +6,350 +3.1 + Imports 151,850 149,200 +2,650 +1.8 - Exports 52,200 50,150 +2,050 +4.1 = Net Supply 314,400 307,450 +6,950 +2.3

75767778798081828384

80100120140160180200220240260

Jul-

11

Oct

-11

Jan-

12

Apr

-12

Jul-

12

Oct

-12

Jan-

13

Apr

-13

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Oct

-14

kg£/t

Feed costs vs prime carcase weights Sources: AHDB; Farmers Weekly

Feed Wheat (LHS) Carcase Weight (RHS)

36

and Ireland. Amidst this environment, the overall increase in exports was achieved through a 23% expansion in volumes delivered to China and Hong Kong. Outlook Moving into 2015, although BPEX are forecasting a small decline in prime pig slaughterings during Q1, this is likely to be offset by higher carcase weights when looked at in terms of overall prime pigmeat production volumes. The expected contraction in slaughter numbers of 0.5% is a consequence of June census figures for England which reported a 5% decline in the sow herd and an 8.5% decline in piglets (pigs weighing less than 20kg). By contrast, June census figures for Scotland showed increased numbers of sows and fattening pigs, helping to partially offset the lower numbers from England. However, lower feed costs and producer prices continue to point towards higher carcase weights. In addition, rising productivity suggests that this is likely to be short-lived and Q2 slaughter numbers are expected to increase by 1% before building further through the second half of the year. On the trade side, it is difficult to see a significant movement away from imports given that EU producer prices have steadied at a level 30% below current UK prices. It also seems unlikely that the exchange rate scenario will change. In addition, the Russian authorities have remained steadfast in their rhetoric against the EU despite mounting economic difficulties and rising food costs; therefore the ban on pigmeat imports from the EU is likely to remain in place for the foreseeable future. Similarly, the export trade is likely to remain difficult in the New Year due to the same reasons of price competitiveness. While trade with China has been rising rapidly since the market opened in 2012, it remains to be seen whether it can offer further growth, particularly as the Chinese economy has shown signs of slowing, and European product is significantly cheaper. It is therefore difficult to see much of a change in the overall situation of a well-supplied UK pigmeat market at the beginning of 2015.

37

Red Meat Sector Outlook

• UK economic prospects look strong, driven by consumer spending as wage growth looks set to outpace inflation. However, it is difficult to see any significant upturn in the economic environment on the continent.

• Factors influencing the recent declines in food retail prices are unlikely to diminish. Strong global harvest, increased livestock production in the EU, the Russian export ban and supermarket competition are expected to continue. Red meat will struggle to gain market share against other proteins given that their prices will be facing similar headwinds.

• Domestic beef production and imports are likely to fall back in the first half of 2015. However, a

reduction in exports will be an offsetting factor, limiting the potential decline in total supplies reaching the UK market.

• Sheepmeat supplies likely to begin 2015 above year earlier levels due to higher domestic production

and lower exports. However, lower imports will offset some of these increases.

• The UK pigmeat market is likely to remain well-supplied in early 2015 as higher case weights offset a slowdown in domestic production while imports rise on strong availability at competitive prices. Exports may stabilise as the EU market continues to prove difficult but trade with Asia grows further.

• Demand for beef, lamb and pork with UK national or regional identification is likely to remain firm at the higher end of the market as consumers continue to seek traceability, provenance and quality. However, household purchasing power at the lower end of the income scale is still likely to remain weak, suggesting that overall red meat sales volumes may continue to struggle.

• High end markets in the EU remain a potential growth market for Scottish product due to a relatively small current base. Better economic prospects continue to indicate that the Nordic countries and Germany may offer the most promise. The French economy looks likely to continue stagnating, suggesting subdued export demand.

• Expectations of further ECB action to prevent deflation in the Euro Area could see a slightly stronger

pound against the euro. If so, trade in price-sensitive red meat products will continue to prove difficult.

• Some Asian and African markets will continue to offer exporters opportunities to achieve better carcase balance. However, a number of significant trade barriers remain; including supply constraints, politics and logistics.

38

Sources AHDB Market Intelligence Bank of England Bank for International Settlements BCMS Beef + Lamb New Zealand Bloomberg British Chambers of Commerce British Retail Consortium BPEX Confederation of British Industry DEFRA Eurostat European Central Bank European Commission Economic and Financial Affairs European Commission Agriculture and Rural Development Farmers Weekly Interactive Financial Times GfK NOP HGCA IMF HM Revenue & Customs Markit Economics OANDA Office for National Statistics Scotiabank Scottish Government SECO Society of Motor Manufacturers and Traders Statistics Denmark Statistics Norway Swiss Federal Statistics Office

39

Statistical Appendix

40

UK Economic Indicators Sources: ONS; OANDA; Eurostat

Retail Sales Index

UK Inflation:

EU28

Inflation: HICP

Exchange Rate

Unemployment: Claimant Count

Whole Economy Average Earnings

Total Food

All Items RPIJ All items CPI

000 % £/week % change y/y 2011 = 100 Jan 87 =

100 % Change

Y/Y 2005 =

100

% Change

Y/Y

% Change

Y/Y €:£

2006 945.0 3.0

407 4.9

96.7 101.8

191.9 2.8

102.3 2.3

2.2

0.6821

2007 864.5 2.7

426 4.9

99.6 102.7

199.3 3.9

104.7 2.3

2.4

0.6840

2008 906.1 2.8

442 3.5

100.2 102.3

206.5 3.6

108.5 3.6

3.7

0.7964

2009 1527.7 4.6

442 0.0

100.4 103.0

204.6 -0.9

110.8 2.2

1.0

0.8917

2010 1496.4 4.6

452 2.3

99.8 101.2

212.8 4.0

114.5 3.3

2.1

0.8589

2011 1534.1 4.7 463 2.4 100.0 100.0 222.3 4.5 119.6 4.5 3.1 0.8678

2012 1585.2 4.7

469 1.3

100.8 99.9

228.1 2.6

123.0 2.8

2.6

0.8112

2013 1424.3 4.3 475 1.3 102.2 99.7 233.6 2.4 126.1 2.6 1.5 0.8489 3 month rolling avg

2013 Jan 1543.7 4.6 470 1.2 99.8 98.7 230.6 2.7 124.4 2.7 2.1 0.8306

Feb 1540.1 4.6 469 1.0 101.7 99.0 231.7 2.6 125.2 2.8 2.0 0.8618

Mar 1528.5 4.6 465 0.5 100.6 100.7 232.6 2.7 125.6 2.8 1.9 0.8599

Apr 1511.6 4.5 488 1.6 99.8 95.6 233.2 2.3 125.9 2.4 1.4 0.8502

May 1492.3 4.4 477 1.9 102.2 99.7 233.5 2.5 126.1 2.7 1.6 0.8480

Jun 1463.2 4.4 475 2.3 102.6 99.8 233.2 2.7 125.9 2.9 1.7 0.8518

Jul 1428.1 4.3 475 1.2 103.4 102.3 233.2 2.6 125.8 2.8 1.7 0.8612

Aug 1390.1 4.1 475 0.8 102.5 99.9 234.2 2.6 126.4 2.7 1.5 0.8600

Sep 1346.4 4.0 475 0.8 103.5 99.6 235.0 2.5 126.8 2.7 1.3 0.8424

Oct 1304.8 3.9 475 0.9 102.3 99.4 234.9 1.9 126.9 2.2 0.9 0.8471

Nov 1268.1 3.8 475 0.9 102.6 99.6 235.1 2.0 127.0 2.1 1.0 0.8386

Dec 1238.5 3.7 478 1.2 105.1 102.0 236.2 2.0 127.5 2.0 1.0 0.8363

2014 Jan 1206.5 3.6 477 1.3 103.0 98.5 235.4 2.1 126.7 1.9 0.9 0.8277

Feb 1171.7 3.5 478 1.7 104.5 100.3 236.3 2.0 127.4 1.7 0.8 0.8245

Mar 1141.8 3.4 475 1.9 104.9 98.7 236.7 1.8 127.7 1.6 0.6 0.8312

Apr 1113.4 3.3 482 0.8 105.7 101.3 237.4 1.8 128.1 1.8 0.8 0.8251

May 1080.6 3.2 479 0.4 105.7 100.2 237.5 1.7 128 1.5 0.6 0.8157

Jun 1041.1 3.1 477 -0.1 105.9 100.3 237.8 2.0 128.3 1.9 0.7 0.8044

Jul 1003.7 3.0 478 0.6 106.0 100.4 237.5 1.8 127.8 1.6 0.5 0.7931

Aug 970.5 2.9 479 0.7 106.2 99.7 238.3 1.8 128.3 1.5 0.5 0.7975

Sep 952.1 2.8 481 1.0 105.9 100.1 238.8 1.6 128.4 1.2 0.4 0.7911

Oct 931.7 2.8 106.7 100.4 238.9 1.7 128.5 1.3 0.5 0.7880

41

Retail Price Index: meat & other food items

Source: ONS

Jan 1987 = 100

Beef Lamb Home Killed Lamb imported Pork Bacon Poultry Fish Cheese Eggs All Food Catering All Items

2008 161.9 215.6 190.4 182.1 203.6 128.3 187.2 207.9 245.9 179.5 264.2 214.8

2009 175.4 239.6 214.0 196.2 213.7 130.9 196.8 216.1 255.1 189.1 271.4 213.7

2010 174.6 259.3 218.9 203.2 210.8 130.9 208.8 220.1 264.1 195.0 279.8 223.6

2011 181.8 291.3 284.1 213.8 215.3 138.4 228.0 232.7 266.7 206.6 291.2 235.2

2012 201.7 306.0 280.2 228.6 216.6 139.8 237.7 240.9 262.6 213.3 300.2 242.7

2013 213.4 307.9 261.5 240.6 228.6 145.2 246.8 241.9 259.1 221.2 308.4 250.1 % Change YoY 2008 14.6 12.6 5.0 15.1 9.3 13.3 7.2 15.2 26.6 9.3 4.2 4.0 2009 8.3 11.1 12.4 7.7 5.0 2.0 5.1 3.9 3.7 5.3 2.7 -0.5 2010 -0.5 8.2 2.3 3.6 -1.4 0.0 6.1 1.9 3.5 3.1 3.1 4.6 2011 4.1 12.3 29.8 5.2 2.1 5.7 9.2 5.7 1.0 5.9 4.1 5.2

2012 10.9 5.0 -1.4 6.9 0.6 1.0 4.3 3.5 -1.5 3.2 3.1 3.2 2013 5.8 0.6 -6.7 5.2 5.5 3.9 3.8 0.4 -1.3 3.7 2.7 3

2013 Jan 203.8 299.8 267.3 245.6 225.6 144.1 243.6 240.4 261.9 219.1 304.5 245.8

Feb 208.1 297.6 273.9 243.3 226.3 144.8 243.9 235.8 261.2 220.7 305.3 247.6 Mar 205.6 293.2 277.5 241.8 226.7 142.9 243.5 240.3 255.5 219.9 306.0 248.7

Apr 209.4 296.4 271.4 239.2 225.7 143.3 239.8 238.2 259.9 221.3 307.2 249.5 May 208.7 315.2 261.8 238.3 228.2 141.8 247.6 236.4 259.0 221.5 308 250.0 Jun 212.9 311.3 258.6 238.0 229.4 144.3 242.9 238.8 254.9 220.3 308.5 249.7 Jul 217.1 320.7 257.4 236.9 228.1 144.3 244.1 240.4 253.7 220.8 308.9 249.7 Aug 214.9 312.5 257.8 241.8 229.2 146.9 251.4 248.8 258.3 221.8 309.1 251.0 Sep 220.8 315.3 259.5 237.8 228.2 147.7 244.6 243.5 259.3 221.7 310.1 251.9 Oct 219.2 318.1 249.4 244.9 232.1 147.3 254.0 245.0 261.3 222.3 310.4 251.9 Nov 220.9 301.4 248.2 238.7 230.7 147.8 253.7 247.7 259.3 222.3 310.9 252.1 Dec 219.7 313.6 255.4 240.3 232.9 146.6 252.7 247.3 264.3 222.8 311.8 253.4 2014 Jan 219 316.8 257.4 237.3 225.7 145.2 253.4 251.6 266.4 223.7 312.1 252.6

Feb 219.1 324.1 262.2 244.6 230.2 146.5 257.2 252.4 265.1 224.8 312.8 254.2 Mar 221.2 316.9 255.8 230.2 231.3 147.3 260.5 253.4 263.5 224.1 313.8 254.8 Apr 217.6 321.2 246.5 244.1 229.5 145.2 249.1 253.3 254.5 223 314.1 255.7 May 219.3 314 256.3 239.5 223.2 144.8 258.1 251.6 242.2 220.8 314.7 255.9 Jun 220.4 327.5 261.7 233.0 224.1 144.1 249.7 253.9 243.4 221.2 315.4 256.3 Jul 221 308.8 268.1 239.6 222.6 145.6 254.6 249.3 249.7 220.6 316.3 256.0 Aug 217.9 304.5 267.2 240.2 230.3 143.3 254.2 251.7 245.0 219.9 316.4 257.0 Sep 218.8 330.6 269.4 234.5 230.2 142.6 246.5 252.3 250.8 219.6 316.6 257.6 Oct 217.6 307.3 266.6 237.1 229 145.1 258.0 245.5 250.1 219.9 317.6 257.7

% Change YoY Oct -0.7 -3.4 6.9 -3.2 -1.3 -1.5 1.6 0.2 -4.3 -1.1 2.3 2.3

42

Scottish Monthly Average Retail Prices of Selected Cuts (p/kg) Source: AHDB

Beef Topside

Sirloin Steak

Rump Steak

Fillet Steak

Diced Stewing Steak

Braising Steak

Premium Mince

Standard Mince

Pork

Leg (boneless)

Fillet End Leg

Shoulder (boneless)

Fillet of Pork

Loin Steaks

Loin Chops

Diced Pork

Minced Pork

2013 Jan 1162 2671 1623 3706 1096 1150 821 567

833 944 775 1118 1040 723 778 738

Feb 1165 2695 1613 3680 1106 1130 830 559

841 881 768 1128 1007 685 774 742

Mar 1200 2687 1658 3621 1102 1120 860 599

842 914 774 1089 1050 715 787 744

Apr 1217 2678 1638 3700 1103 1143 847 615

827 928 780 1085 1032 702 785 747

May 1188 2677 1625 3702 1097 1137 867 611

840 949 774 1122 1058 724 787 745

Jun 1185 2705 1662 3746 1100 1143 880 629

850 1003 793 1134 1058 732 806 762

Jul 1196 2695 1691 3754 1095 1136 835 601

858 949 773 1147 1053 717 791 747

Aug 1191 2693 1710 3750 1098 1120 848 603

861 1013 766 1131 1033 706 825 755

Sep 1214 2689 1696 3746 1102 1132 837 602 848 960 774 1142 1047 700 798 738 Oct 1218 2698 1659 3741 1101 1144 832 609 830 969 773 1141 1051 690 803 749 Nov 1230 2687 1659 3735 1105 1134 836 609 846 940 754 1141 1043 694 789 749 Dec 1152 2694 1693 3725 1113 1151 804 609 859 986 774 1156 1032 696 811 750

2014 Jan 1234 2740 1708 3758 1121 1138 859 609 847 969 775 1163 1051 700 804 750

Feb 1239 2738 1709 3766 1094 1165 854 633 833 929 780 1130 1011 724 785 750

Mar 1253 2733 1696 3765 1121 1152 854 633 828 929 772 1113 1046 689 779 673 Apr 1234 2563 1701 3797 1088 1139 879 686 809 952 718 1129 1054 783 803 684 May 1262 2549 1653 3855 1102 1154 904 701 759 961 723 1117 1018 790 784 674 Jun 1275 2633 1745 3955 1109 1156 900 701 710 889 707 1050 940 799 762 719 Jul 1271 2597 1773 3993 1142 1155 905 701 749 859 706 1050 1036 789 754 719 Aug 1277 2650 1750 3993 1140 1153 905 764 752 815 704 1029 1053 783 742 719 Sep 1287 2593 1745 3993 1147 1147 905 795 716 817 706 1043 1100 802 738 719 Oct 1227 2541 1748 3993 1117 1142 905 701 724 814 703 1049 1107 822 742 719

Lamb

Whole Leg

Fillet End Leg

Shoulder (Bone-in)

Shoulder (Boneless)

Lamb Steaks Loin Chops

Double Loin Chops Cutlet Chops

Diced Lamb

Minced Lamb

2013 Jan 1174 1320 824 1217 1838 1526 1646 1591 1361 1281

Feb 1184 1251 817 1226 1843 1538 1648 1615 1380 1305

Mar 1171 1259 823 1224 1859 1550 1658 1658 1384 1310

Apr 1171 1258 827 1218 1867 1564 1651 1660 1385 1314

May 1192 1276 838 1255 1883 1573 1668 1542 1385 1316

Jun 1201 1258 851 1282 1902 1610 1692 1578 1400 1323

Jul 1265 1304 844 1256 1867 1631 1684 1644 1384 1290

Aug 1255 1322 844 1261 1866 1626 1667 1622 1386 1287

Sep 1223 1277 835 1246 1861 1618 1650 1571 1383 1288 Oct 1244 1348 839 1220 1826 1553 1629 1497 1360 1279

Nov 1209 1346 832 1196 1820 1496 1616 1493 1346 1274 Dec 1153 1253 834 1198 1821 1511 1617 1420 1348 1275

2014 Jan 1202 1326 844 1242 1812 1514 1622 1519 1349 1263

Feb 1282 1298 837 1241 1809 1534 1626 1474 1349 1289

Mar 1237 1308 844 1230 1831 1519 1631 1468 1348 1288 Apr 1242 1338 849 1260 1845 1546 1646 1503 1452 1302

May 1336 1443 869 1312 1988 1607 1726 1632 1499 1346 Jun 1222 1464 812 1309 1981 1577 1717 1635 1513 1368 Jul 1235 1644 856 1317 1977 1569 1717 1634 1492 1378 Aug 1250 1613 873 1309 1975 1566 1717 1629 1458 1378 Sep 1191 1494 766 1291 1886 1551 1691 1586 1398 1331 Oct 1183 1496 767 1279 1912 1535 1691 1587 1399 1263

43

UK Farm-to-Retail Price Spreads (p/kg) Source: AHDB

Beef Lamb Pork

Average Farm Price

Average Retail Price

Price Spread

Producer Share (%)

Average Farm Price

Average Retail Price

Price Spread

Producer Share (%)

Average Farm Price

Average Retail Price

Price Spread

Producer Share (%)

2004 185.8 408.3 222.5 45.6

261.6 541.5 279.9 48.3

103.9 289.7 185.9 35.9

2005 186.9 421.8 234.9 44.3

250.7 556.4 305.7 45.1

103.9 283.7 179.8 36.6

2006 202.8 427.6 224.8 47.4

258.0 550.2 292.3 47.0

104.8 294.3 189.5 35.6

2007 206.0 453.1 247.2 45.5

235.8 576.6 340.8 40.9

108.0 304.0 196.0 35.5

2008 257.6 518.3 260.7 49.7

291.3 627.6 336.4 46.4

126.0 337.2 211.2 37.3

2009 279.0 558.6 279.5 50.0

358.3 679.7 321.3 52.7

146.2 364.7 219.0 39.9

2010 268.3 564.2 295.8 47.6

390.5 698.9 308.5 55.9

141.8 364.0 222.3 38.9

2011 307.0 584.4 277.4 52.5 433.7 751.9 318.2 57.8 141.6 363.6 222.1 39.3

2012 341.6 633.6 292.0 53.9

412.6 777.5 365.0 53.1

150.2 377.1 226.8 39.8

2013 385.8 668.7 283.0 57.7 417.1 790.6 373.6 52.7 165.5 391.6 226.1 42.2

Jan 13 363.2 654.4 291.2 55.5

332.1 775.5 443.4 42.8

159.3 382.2 222.9 41.7 Feb 13 367.1 649.0 281.9 56.6

359.5 776.3 416.8 46.3

156.2 382.2 226.0 40.9

Mar 13 382.3 663.0 280.7 57.7

434.7 773.3 338.6 56.2

157.0 390.1 233.1 40.2 Apr 13 391.2 661.0 269.8 59.2

459.8 787.3 327.5 58.4

160.9 385.8 224.9 41.7

May 13 397.1 664.3 267.2 59.8

473.1 794.6 321.5 59.5

164.1 388.3 224.2 42.3 Jun 13 397.0 671.7 274.7 59.1

490.4 790.9 300.5 62.0

166.8 390.7 223.9 42.7

Jul 13 395.5 671.7 276.2 58.9

453.7 803.4 349.7 56.5

168.6 393.1 224.6 42.9 Aug 13 382.5 671.0 288.5 57.0 420.5 799.7 379.2 52.6 167.9 396.8 228.9 42.3 Sep 13 391.9 685.0 293.0 57.2 392.4 794.6 402.2 49.4 170.1 397.4 227.3 42.8 Oct 13 391.3 687.6 296.3 56.9 392.1 811.5 419.4 48.3 171.9 396.8 224.9 43.3 Nov 13 387.1 674.3 287.2 57.4 399.5 797.5 398.0 50.1 171.6 398.6 227.0 43.0 Dec 13 382.9 671.7 288.7 57.0 397.0 782.9 385.9 50.7 171.3 397.4 226.1 43.1

Jan 14 374.7 691.6 316.9 54.2 400.5 803.4 402.9 49.8 167.9 396.8 228.9 42.3 Feb 14 364.2 704.9 340.7 51.7 415.8 818.1 402.3 50.8 164.2 393.1 228.9 41.8 Mar 14 361.9 704.9 343.0 51.3 453.8 814.4 360.6 55.7 162.8 395.5 232.8 41.2 Apr 14 354.6 707.6 353.0 50.1 480.8 827.6 346.8 58.1 163.5 407.7 244.2 40.1 May 14 336.8 710.9 374.1 47.4 499.0 857.7 358.7 58.2 164.3 399.8 235.6 41.1 Jun 14 326.9 704.9 378.0 46.4 502.4 841.6 339.2 59.7 164.1 388.3 224.2 42.3 Jul 14 325.5 709.6 384.1 45.9 412.0 841.6 429.6 49.0 161.5 398.6 237.1 40.5 Aug 14 333.8 710.9 377.0 47.0 378.7 826.9 448.2 45.8 158.3 397.4 239.1 39.8 Sep 14 345.4 708.9 363.5 48.7 359.2 806.3 447.1 44.5 156.2 392.5 236.3 39.8 Oct 14 349.0 686.9 338.0 50.8 355.2 804.1 448.9 44.2 156.1 390.1 233.9 40.0 Nov 14 351.9 697.6 345.7 50.4 387.9 807.1 419.2 48.1

44

EU Economic Indicators Sources: Eurostat; Swiss Federal Statistics Office

Country Q3 2014 Q2 2014 Q1 2014 Q4 2013

Economic Growth (%)*

Unemployment Rate (%)

Inflation Rate (%)

Economic Growth (%)*

Unemployment Rate (%)

Inflation Rate (%)

Economic Growth (%)*

Unemployment Rate (%)

Inflation Rate (%)

Economic Growth (%)*

Unemployment Rate (%)

Inflation Rate (%)

Bel 0.3 8.5 0.7 0.1 8.5 1.0 0.4 8.4 0.9 0.2 8.5 0.8

Ger 0.1 5.0 0.8 -0.1 5.0 0.9 0.8 5.1 1.0 0.4 5.1 1.3

Est 0.2 7.6 -0.2 1.1 7.6 0.4 0.3 7.9 0.9 1.0 8.6 1.9

Ire n/a 11.2 0.2 1.5 11.7 0.0 2.8 12.0 -0.2 0.1 12.2 -0.6

Gre 0.7 n/a -0.5 0.4 26.8 -0.8 0.8 27.2 -0.4 -0.3 27.6 -1.3

Spa 0.5 24.2 -0.4 0.5 24.7 0.2 0.3 25.2 0.0 0.3 25.8 0.1

Fra 0.3 10.5 -0.1 -0.1 10.3 0.2 0.0 10.1 0.3 0.2 10.2 0.6

Ita -0.1 12.8 -0.5 -0.2 12.6 0.0 0.0 12.7 0.1 -0.1 12.4 0.3

Cyp -0.4 15.5 -0.6 -0.4 15.9 -1.3 -0.5 15.8 -2.4 -0.6 16.7 -1.8

Lat# 0.5 10.8 0.8 0.8 10.8 0.7 0.3 11.4 0.3 -0.1 11.5 -0.3

Lux n/a 6.1 0.6 0.7 6.1 1.0 1.7 6.0 0.8 0.2 6.0 1.0

Mal n/a 5.7 0.4 1.4 5.8 0.3 0.4 6.0 0.9 0.8 6.5 0.4

Hol 0.2 6.6 0.0 0.6 7.0 0.1 -0.3 7.2 0.1 0.6 7.0 0.7

Aus -0.3 n/a 1.4 0.0 5.0 1.5 0.1 5.0 1.4 0.2 5.0 1.6

Por 0.3 13.6 -0.4 0.3 14.3 -0.3 -0.4 15.0 -0.2 1.0 15.4 0.1

Sln 0.7 9.1 -0.1 1.1 9.5 -0.5 0.1 10.2 -0.5 1.3 9.7 0.0

Slk 0.6 13.1 -0.2 0.6 13.4 -0.1 0.6 13.8 -0.1 0.6 14.1 0.5

Fin 0.2 8.7 0.8 0.2 8.5 0.6 -0.3 8.4 1.1 -0.3 8.3 1.1

Euro Area 0.2 11.5 0.1 0.1 11.6 0.4 0.3 11.8 0.5 0.2 11.9 0.7

Bul 0.4 11.2 -1.2 0.3 11.5 -1.6 0.1 12.2 -1.8 0.6 12.9 -1.0

Cze 0.4 5.9 0.5 0.2 6.2 0.1 0.6 6.6 0.2 1.1 6.7 0.2

Den 0.5 6.5 0.3 0.1 6.5 0.3 0.1 6.8 0.4 0.2 6.8 0.5

Cro n/a 16.3 0.3 -0.3 16.9 0.3 0.2 17.3 0.0 -0.6 17.4 0.7

Lit 0.4 9.9 0.1 0.9 11.4 0.1 0.4 11.6 0.3 0.8 11.2 0.6

Hun 0.5 7.5 0.1 0.8 8.0 -0.1 0.9 8.0 0.3 0.9 9.2 0.4

Pol 0.9 8.6 -0.5 0.7 9.2 -0.1 1.1 9.8 0.2 0.6 10.0 0.3

Rom 1.8 6.8 1.1 -0.4 6.9 1.1 0.7 7.0 1.4 0.9 7.1 1.4

Swe 0.3 7.8 0.2 0.5 8.0 0.3 0.2 8.1 -0.1 1.1 7.9 0.2

UK 0.7 6.0 1.4 0.9 6.3 1.6 0.7 6.7 1.6 0.6 7.1 2.0

EU28 0.3 10.1 0.3 0.2 10.3 0.5 0.4 10.5 0.6 0.4 10.7 0.8

Nor 0.5 3.6 1.8 1.1 3.3 1.5 0.5 3.5 1.8 -0.1 3.5 2.1

Swi 0.6 4.8 0.0 0.3 4.4 0.1 0.4 4.8 0.0 0.5 4.1 0.2

* % change compared with previous quarter

#Latvia joined the Euro Area on January 1 2014