Where's the beef?

It is perhaps significant that, when Farmers' Guardian journalist Alistair Driver ventures into the pages of The Daily Telegraph to write about the catastrophic decline in the British beef industry, he is given a home in the business section rather than in the main pages.

Again this marks a retreat from serious news coverage on the wide range of issues for which the newspaper was once famous, and we can expect the decline to continue with the resignation of the business editor, Neil Collins, angered by the treatment of the section.

Anyhow, returning to the Alistair Driver, who has built himself a reputation as a leading agricultural journalist, in today’s Telegraph he writes on how the changes in the CAP subsidy system are driving British beef farmers out of business.

The French might still call us "Les Rosbifs", he writes, but the reality is that home-grown beef - that most British of dishes - is on the wane. British farmers produce 68 percent of the beef consumed in the UK, compared with 78 percent in 1995, representing 10.5m head of cattle against 12m ten years ago.

Some of the decline is the result of the BSE affair and just as the industry was recovering from that, it was hit by Foot and Mouth. But this January, the industry has been hit by the infamous "mid-term" reforms of the CAP. These reforms expose farmers to the vagaries of the market in a way they have not experienced before.

Until this year, subsidies – known as the Beef special Premium - were paid on every animal in the herd, typically accounting for 40-45 percent of its value - say £350 out of £800. More often than not, this made the difference between a profit and a loss.

Now subsidies have been "decoupled" from production. Farmers receive a lump sum, the Single Farm Payment (SFP), based on individual historic subsidy levels and farm size, and conditional on what is known as "cross compliance" with a raft of EU directives.

Crucially, the payment does not vary with the number of animals farmers keep or the acreage of crops they plant. Thus, while "coupled" subsidies required farmers to keep producing, they are now better off producing nothing if they cannot sell in the market for a profit. For beef farmers, there is no incentive to produce. They can restructure their businesses in such a way as to keep the land ticking over, holding a minimum of stock, and let the money roll in.

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

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

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

The blip in prices is expected to be temporary but it has knocked already fragile confidence. North Yorkshire farmer John Seymour fattens about 3,000 animals a year, which he sells to Tesco via the processor St Merryn Meats. He says he was losing £40-£50 on each animal he sold after his prices plummeted to 175p per kilo in July.

"We have stopped buying and we have stopped selling. We are just waiting to see what price they are going to pay before deciding if we can carry on," Mr Seymour said. "Supermarkets and processors have to realise that if they do not pay reasonable prices farmers will stop and there will be no UK beef industry."

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

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

Driver then quotes Duncan Sinclair of the Meat and Livestock Commission's beef economics manager. Typically for a corporate organisation which is geared mainly to marketing to the supermarkets, he believes there is "no evidence" yet of a meltdown. However, he then goes on to note that 100,000 fewer calves have been registered in the first six months of this year - a 4 percent fall.
A four percent drop actually means that the industry is in decline, but there was never going to be an immediate collapse. Farmers are traditionally conservative and will take time to adjust to the new regime.

Robert Forster, chief executive of the National Beef Association, supports this. He believes the impact of the CAP reforms will take years to hit home. "We reached our first post-reform crisis in July," adding, "What happens over the next few months could determine whether the UK continues to have a viable beef industry from 2007." He says, "If prices remain where they are for long, there can be only one outcome - a lot less British beef and many more imports."

That is the rub – and the seminal problem. No advocate of free-market thinking can argue against cutting of subsidies, in principle. But, in fact, overall subsidies are not being cut. Farmers are being paid to do nothing, while we then import the beef that they would otherwise have produced. This seems to be the economics of the madhouse.