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REPORT: British Chicken – What Price?

by 5m Editor
15 May 2006, at 12:00a.m.

This report, drafted by the NFU in consultation with the BPC, sets out the minimum criteria needed for the British chicken industry to keep the present self sufficiency level and maintain a modern industry with the critical mass to meet customers demands for local home-produced chicken.

REPORT: British Chicken – What Price? - This report, drafted by the NFU in consultation with the BPC, sets out the minimum criteria needed for the British chicken industry to keep the present self sufficiency level and maintain a modern industry with the critical mass to meet customers demands for local home-produced chicken.

Aim:

To keep the present self sufficiency level and maintain a modern industry with the critical mass to meet customers demands for local home-produced chicken.

Objectives:

To discuss how costs and pricing has affected chicken businesses in recent years. To establish a price that will allow the industry to invest in its future and meet the requirements of forthcoming legislation.

Summary

The report cites three main issues that have developed to make the poultry meat industry vulnerable at the current time.

  1. Downward price pressure in the supply chain has been a strong disincentive to further investment in the industry. The report suggests that many farms will be out of business in the short term.
  2. Avian Influenza has also had an adverse impact on the industry caused by surplus meat from other EU countries being dumped onto the UK market, and the cost of aggressive price promotions needed to maintain consumer demand at the cost of the processor and farmer.
  3. The high costs of the forthcoming IPPC regulations are unaffordable given the economic state of the industry.
The NFU and BPC as representatives of the farming and integrated farming/processing sectors of the poultry meat supply chain now ask for a fairer share of the price paid by the consumer for poultry meat in order to continue to provide fresh farm assured chicken to the market place. No further regulatory costs can be absorbed at this time and the industry requests the help of the Government by deferring defer the PPC Regulation for existing poultry farms for three years.

Introduction

The British industry rears and processes around 850m chickens every year, mostly under the Assured Chicken Production assurance scheme carrying the Red Tractor banner. The scheme stipulates high health, welfare and hygiene standards and delivers traceability of product from farm to fork.

The industry has been one of the most successful British food industries since the Second World War and has increased in output significantly. In 1953, production stood at 5m chickens a year, between 1986-’88 total average production was 590m, between 1994 – ’96 this increased to 778m (‘Agriculture in the United Kingdom’, Defra, 2005). The British poultry sector is an integral and vital part of the rural economy. It buys some 19% of the UK’s annual wheat and barley crop (Source: NFU).

The British chicken industry is worth an estimated £3 billion at retail level, and is the largest producer of chicken meat in the EU, accounting for 17% of total EU (25) production. . Average consumption of chicken meat in the UK is 23kgs per person per year, exceeding that of any other type of meat and accounting for about one third of total meat production in the UK. In 1950 consumption was around 0.750 kg per person, per year. Some 6% is produced on outside rearing premises (free-range and organic) both of these markets are growing dramatically in the chicken sector.

The British chicken industry has successfully worked together to actively promote British chicken. The joint NFU/BPC British Chicken Marketing initiative is relatively young. The British Chicken Marketing brand has been promoted at retail and has driven increased sales and raised the profile of the product with retailer supported competitions and promotions. It has enabled strong consistent messaging through branding and has improved consumer understanding and recognition of British Chicken.

1. Increases in on-farm costs of production

The NFU produces figures every two months in its specialist on-farm costs report ‘Business brief’ for chicken. A telephone survey is carried out with farmers. These input costs provide the industry with a benchmark for production as well as an indicator of historic trends. The chicken input cost is made up of chick price, feed, energy and water, labour and management, the clean out of the flock, medication and vaccinations, rent and other costs (litter, insurance, disposal and repairs) and is calculated on a cost per kg, live weight received at the processor.

The biggest single input cost with regards to chicken production is feed; currently this is around two thirds of the cost. Chick price, energy prices, rent and overheads typically make up the other significant costs.

Not a current issue

In April 2004 the production cost was similar to that in April 2006. The major change has been in the prices received by farmers between 2004 and 2006. In 2004, chicken farmers on average, received a price largely sufficient to recoup the cost of production. However, some farmers would have been making losses even then as the NFU average producer price was only 50p per kg. The ‘average’ cost of production as stated by the NFU was 51.42p per kg (NFU Business brief, May - June 2005).

Current situation

For April 2006, the cost of production is 54.69p per kg. Feed costs have been stable in the last year and the market situation has led to decreased feed costs of 3.6%. However, chick price and energy costs have seen a significant rise of 21.3% and 17.8% in the last year, respectively. It is also worth considering that in the same period between 2004 and 2005, energy costs had risen 50%. Energy increases have affected all industries, and farming is no different. Increased energy costs have impacted on the farmer. On last years’ costs, the NFU average figures show an increase in total costs of around 6.4%.



Summary: Real costs to business on downward price pressure
  • Since 2004, energy prices have gone up by nearly 70%
  • The price paid to farmers in 2004 was 50p/kg.
  • In April 2006 it was 48.5p/kg, but production costs average 54.69p per kg.
  • Most poultry businesses will be making a loss of 6.2p/kg.
Although, these differences may seem marginal, this has huge implications for farming businesses. A chicken farmer normally rears 6.5 flocks per year. Farming businesses can operate from very small enterprises (mainly organic and free-range) to large scale sites built to provide the optimum rearing environment for the bird. A middle sized grower may rear 140,000 birds on one site in a number of houses.

Most growers supply chicken to processors that supply the retail market (around 85%), whilst others grow for processors supplying the wholesale and catering markets (15%). Taking a medium sized grower as an example, based on these costs as previously discussed, the reader can now begin to appreciate what effect this will have on a business. With a loss of 6.2p/kg based on NFU figures and a production of 280,000 kgs: 280,000 x 6.2 pence equates to: £17,360 per flock or £112,840 per annum LOSS These costs are being incurred by individual farmers and integrated company owned farms alike. In the loss of price rises, which is difficult to quantify but is estimated to be between 2p - 6.2p per kilogramme (over the course of the year), or between £31.7 - £98.3 million per annum, based on 1.586m tonnes (Defra, 2006) of production in 2005.

2. Increases in Costs of Processing

As well as higher farm costs, integrated chicken companies and others engaged in processing have had significant additional costs which have not been recognised or recouped in prices paid by retailers and other industry customers. Chicken processing companies are experiencing extremely difficult trading conditions without any increase in the prices they receive. Additionally, the companies cannot meet cost increases to the farming businesses, and cannot invest in necessary and ongoing new technologies and efficiencies.

Higher costs of fuel, utilities, fuel related packaging, by-products disposal and loss of byproducts markets, are estimated to add 5.5p/kg of product weight onto total processing costs. Why is the chicken industry raising this issue now?

Farmers and processors must have an increase to the price paid for Britain’s favourite staple meat that is provided fresh to consumers all year round. Chicken companies can no longer absorb increasing costs. In fact, in order to sustain their business it is essential that the higher costs be recognised and recouped in the prices received from retailers and other customers of the chicken farmers and processors.

3. The cost of Avian Influenza

Avian influenza in the rest of Europe and in the UK is having a considerable cost to the British Poultry Industry. However, it must be stressed that sales volumes have held up well compared with other European member states. The issue has affected the British industry in a number of ways.

i. UK chicken sales, unlike that of Italy and the rest of Europe, have held up overall in volume terms but with falls around 10% in some products since autumn 2005. Other member states experienced sudden falls of 70% in Italy and 30% in France and although sales have risen again, they are still down by around a quarter in those countries’ markets.

British chicken processors have attempted with some success to keep chicken selling by heavily funding in-store promotions rather than cut back sharply on chicken production. The cost of this promotion has been around £5 million each week across the processing sector. This cost is unsustainable. Average retail prices during March 2006 were down 9% on the same time in 2005 and 13% below average prices in 2004, despite sales volumes being up overall.

ii. The British Chicken industry invested in building consumer confidence through the respected Chicken Assurance Scheme and through industry funded promotion that as helped sustain demand. Other member states’ industries have suffered a loss of consumer confidence, and as a consequence have been dumping chicken meat onto the UK market, in particular the wholesale markets. These very low priced imports have pushed prices down below the cost of production severely damaging British companies who supply into those markets. It has also created a loss of market share and loss of production at farm level.

iii. Another serious effect of the AI situation throughout Europe is the loss of export markets for poultry meat cuts and poultry products. These are not just loss of direct sales from the UK to many third countries, but also sales to other member states that use British poultry meat as an ingredient in products they export to third countries. The loss of these markets means product has to be frozen and stored or rendered. Both courses are adding significant costs to products which previously generated income streams for the company.

iv. In recent weeks the turkey meat market has also been heavily affected by the surplus European supplies. This sharp decrease in imported meat price had a dramatic impact on the UK wholesale market at a critical time before Easter. Many birds were left unsold and have been stored, ultimately losing the ‘fresh’ price and additional storage costs have been incurred.

Many producers that grow turkeys for the UK all year round are now in serious threat of closing business as the processing part of the business competes with greater volumes of European imports sold into the retail market.

4. Further cost increases on the way

The Poultry sector is dealing with an unprecedented amount of legislation, much of which will impact on the industry in the next year, in particular environmental legislation. Poultry farmers, processing plants and feed mills already work in partnership with Defra to reduce energy use under the Climate Change Levy Agreements. But by the end of 2006, all existing poultry farms with over 40,000 birds will also have to comply with the Integrated Pollution Prevention and Control Directive (IPPC).

This legislation was designed protect the environment in respect of industrial plants such as steel works, oil refineries or glass makers. It aims to prevent, monitor and control emissions to air, land and water and to address, amongst other things, energy efficiency, the consumption of raw materials, noise and site restoration. All poultry farms with more than 40,000 birds will have to apply for a permit by the end of this year.

The IPPC regulations will have a large cost impact on existing poultry farms, in terms of compliance, administration, and fees payable to the Environment Agency and the enforcement bodies in the devolved administrations.

Current Environment Agency (EA) fees for farms which can comply with ‘standard farming rules’, are £3,331 for a permit application and £2,229 - £2794 (depending on size) for the annual subsistence fee. These costs are supposed to relate to full cost recovery of annual inspections by the EA. Clearly, this is a disproportionately high charge for poultry farming businesses.

Impact of Costs of IPPC

The industry is required to meet new legislative requirements and charges or cease operating. At minimum, in the first year, this will cost between £5560 - £6125 per farm for the application and subsistence fees alone, or £7m – £8m in the first year (based on an average of £6000 per farm). For the initial compulsory IPPC fees alone, chicken farmers need an additional 0.015p per kg or £15 per tonne of meat produced.

In addition to the fees, IPPC compliance costs are estimated by Defra Consultants (Rural Development Service Report, February 2006) to be £46m in capital costs in England alone. Ongoing annual costs are estimated at 14.6m (including annual subsistence fees). Farms in Scotland and Wales will face similar cost levels.

5. Government commitment to a sustainable food industry

Sustainable Consumption and Production is one of Defra’s four key priorities of the UK Sustainable Development Strategy Securing the Future. The Poultry industry has already successfully reduced its carbon emissions and now has much higher targets set by the Government. The industry has worked hard in partnership with Defra on the application of the IPPC regulations on the poultry industry in the development of ‘standard farming rules’. There has also been dialogue on forthcoming welfare regulations under new Directives and four years have been spent working on the contingency plans for notifiable diseases. The Poultry meat industry believes in working together with the Government on a common sense approach in place of more regulation.

The industry now needs urgent assistance from the Government to remain sustainable, as highlighted in Defra’s objectives for the food supply chain. However, the Food industry must also be responsible in acting fairly to their suppliers.

6. Conclusion

Two areas of support are now required to ensure that the UK Poultry meat industry continues to sustain the demand for farm assured chicken to consumers.

  1. The integrated companies and other processors must obtain a price increase from customers averaging 8% or across all product lines, or 12p per kg at the very least. The price increase is essential to the financial security of the processing sector and to the farming sector. This is the minimum price increase necessary to sustain the business and allow the most efficient producers to expand and survive to develop a vibrant, unsubsidised efficient industry that can operate in a free trade marketplace.
  2. Any forthcoming legislation with a cost impact should be delayed in its implementation, or at least the costs should be mitigated and any charges or fees waived. We urge the Government through Defra and the Environment Agency to support this urgent request and to champion the Poultry industry’s concerns in the European Union. In its current state, the UK poultry industry, quite simply, is financially unable to meet any additional legislative costs.

    The NFU and BPC are united in calling for a three year suspension of the implementation date for IPPC on poultry farms.

7. References

Integrated Pollution Prevention and Control. Assessment of the Cost of Implementation of the Directive for Farm Businesses in England. RDS Report for the Agricultural Policy Analysis Unit, Defra. February 2006.
Agriculture in the United Kingdom, Defra, 2005. http://statistics.defra.gov.uk/esg/publications/auk/2005/Chapter5.pdf NFU Business Brief, Editions 3, 2005 and 7, 2006.

Source: NFU - May 2006