Posted on: 16 October 2015

Beef producer prices to be seen in perspective

This article aims to provide context and substance around the debate and the impact of the exchange rate on producer prices. We also refer to an article published in the New Era of 7 October 2015, with the heading “N$5 billion livestock industry needs bigger chunk of budget”. In the article the Chairman of the Livestock Producers’ Organisation (LPO), Mr. Mecki Schneider was quoted as saying that: “What is of huge concern is that beef prices specifically, have not increased despite the weakening of the exchange rate of the SA rand to which the Namibia dollar is coupled”.

Meatco’s response aims to bring into perspective various additional factors – apart from the exchange rate – that influence producer prices, putting it into perspective.

Meatco has repeatedly stated that producer prices are subject to a variety of factors. These include:

1. Fluctuations in actual sales prices;
2. Sales movement and production volumes;
3. Quality of product;
4. Seasonality of production and markets;
5. Size of cuts; and
6. Distribution costs associated with getting the product to market.

These factors have had a big influence on producer prices and 2015 has indeed been a difficult year in terms of a number of these factors. Therefore, producers need to view the average 2015 producer price holistically, and not just from a limited, one-sided perspective in terms of changes in the exchange rate. Having said that, also consider the following:

• The weakness in the SA rand / N$ only really began in August 2015 in terms of the euro vs. N$. The average euro vs. N$ exchange rate for the period before August 2015 (January 2015 to July 2015) was actually far below (N$1.2453 / euro) the average rate for the same period during 2014. For the period 1 January 2014 to end July 2014, the average rate realised by Meatco in terms of the euro, amounted to N$14.5714 / euro. For the corresponding period during 2015, the rate amounted to only N$13.3261 / euro – which is more than 8.5 % (or N$1.2453) less than 2014. This is also the period during which Meatco slaughtered most cattle as a result of the 2015 drought. Note that the GBP (£) appreciated against the N$ with an average of 2.58% when compared to 2014 (N$17.8374 / GBP for 2014 vs. N$18.2978 / GBP for 2015). However, 49.16% of our total sales value is euro-based sales compared to only 19.59% that is GBP-based.

• Namibia – actually Southern Africa as a whole – has been experiencing a follow-up drought year that in many cases is much worse than the drought of 2013. This had a negative impact on the composition and quality of cattle slaughtered in 2015 in terms of overall weight, condition as well as grading. The overall quality of cattle in comparison to the previous year, deteriorated in terms of:

 An increase in 0 & 1 fat grades of 21.4% (from 26.01% during 2014 to 31.57% during 2015); and

 A decrease of 6.67kg in terms of average carcass weight (from 243.73kg / carcass during 2014 to 237.06kg / carcass during 2015 – excluding feedlot A grades).

• Average sales prices, in euro, decreased mainly due to the economic downturn in Europe as well as Scandinavia (Norway specifically). This was mainly as a result of:

 A significant decrease in the global oil price (from USD106.18 / barrel to USD45.63 / barrel). Norway’s main income is derived from the sale of oil and gas to its neighbours, and the decrease in the oil price therefore had a significant impact in the Norwegian market.

 The overall economic climate in Europe. More than €60 billion is printed and injected into the European economy on a monthly basis in terms of the European Central Bank’s (ECB’s) Quantitative Easing (QE) program to keep the European economy going. This amounts to approximately N$900 billion per month and equates to more than 5 times the annual Namibian GDP (of approximately N$175 billion) per month. The QE program began in March 2015 and is estimated to continue to the end of October 2015.

 Economic sanctions imposed between Russia and mainland Europe. Due to the sanctions, significant volumes of traditionally exported European originated products have been redirected toward the local European market. This obviously caused a decrease in the local European market price due to the temporary oversupply of beef in the market.

 As a result of the economic environment in Norway, Meatco experienced a decrease of approximately 10.28% in actual sales prices (in euro) within the Norwegian market alone if compared to the previous year.

In addition to the decrease in retail prices, a further 8.10% sales decrease was realised in terms of the strengthening N$ against the euro during the first half of 2015. Similarly, sales prices in mainland Europe decreased by 6.29% by a further 8.69% due to the currency impact. To summarise, the following changes are reported for 2015 (if compared to the corresponding period during 2014):

Norway Europe United Kingdom
Change in retail prices (10.28%) (6.29%) 0.03%
Change in exchange rate (8.10%) (8.69%) 2.15%
Change in product mix 0.83% 0.55% 0.01%

Total change in (17.55%) (14.44%) 2.19%
sales returns

During the period under review, Namibian producer prices decreased as a result of, inter alia, the factors listed above. However, overall producer prices did not decrease at a similar rate as experienced in terms of sales returns.

The overall producer price decreased by only 4% year-on-year as opposed to the approximately 15% decrease experienced in most markets. The negative impact of the factors stated above was mainly mitigated via product redirection between various markets (specifically from South Africa to Europe, and from Europe to the United Kingdom). The following table indicates the decrease in average producer prices against the corresponding period in 2014:

Grade 2015/16 N$/kg 2014/15 N$/kg Difference N$/kg Difference%
A 32.26 31.74 0.52 1.65%
AB 30.07 30.60 (0.53) (1.73%)
B 28.37 30.66 (2.30) (7.49%)
C 24.82 27.26 (2.44) (8.95%)

Total 28.88 30.08 (1.20) (4.00%)

It is also prudent to mention that the current percentage of sales returned to producers amounts to 63.67% versus the average of 56.36% reported for the same period during 2014.