Red Meat Sector Operating Environment December 2014

The Red Meat Sector Operating Environment Half yearly review: December 2014

Iain Macdonald Economics Analyst Quality Meat Scotland 0131 472 4118 imacdonald@qmscotland.co.uk

Executive Summary •

After seven consecutive quarters of growth, the UK economy appears to have become selfsustaining 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.

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

2

What is happening in the UK economy?

Macroeconomic Indicators Economic Activity: Economic Growth Rates Q3 2014

Source: ONS

Q2 2014

Q1 2014

2013

q/q

y/y

q/q

y/y

q/q

y/y

y/y

Scotland (GVA 1)

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

2011 = 100

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 Economic Activity Statistics (ONS) figures, a 0.7% quarterly Sources: Scottish Government; ONS expansion pushed output 3% ahead of its year 106 earlier level in Q3. After the economic difficulties 104 102 of mid-2010 to late 2012, the sustained 100 expansion since the beginning of 2013 has been a 98 highly welcome development.

96 94 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2007

2008

2009

2010

Scottish GVA

2011

2012

UK GVA

UK GDP by Category Q3 2014 7 6 5 4 3 2 1 0 -1 -2 -3 -4

2013 2014

Source: ONS

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.

% Change

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. q/q y/y

The production sector grew more slowly than the wider economy that manufacturing accounts for around 70% of the production slower manufacturing output growth. The recent slowdown has demand, which has in turn been linked to a downturn on the

1

during Q2 and Q3 2014. Given sector, this was largely due to been attributed to lower export continent plus an unfavourable

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.

3

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)

Diffusion Index (50 = no change)

UK 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.

Source: Markit

70 65 60 55 50 45

The November survey suggested that growth in the service sector firmed after a weaker J M M J S N J M M J S N J M M J S N October. The index lifted to 58.6 – well 2012 2013 2014 above the 50 level indicating no change; and Services Construction Manufacturing 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.

40

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 selfsustaining 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.

4

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 inflation 2

1.6%

1.8%

2.1%

Different Rates of Inflation

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.

Source: ONS

6%

Y/Y Change

5% 4% 3% 2%

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.

1% 0% CPI

Core

Inflation Target

Different Rates of CPI Inflation

Food Prices

Source: ONS

6

From the chart it can be seen that food prices continued to place significant downwards 3 pressure on the CPI in October. The cost of 2 food averaged 1.6% below year earlier levels, 1 subtracting 0.16 percentage points from the 0 inflation rate. The main influence on food prices -1 has been increased supplies of grains and -2 vegetables due to a good global harvest. In All items Food turn, lower grain prices have encouraged livestock producers to take animals to heavier CPI food price inflation (% y/y) Source: ONS weights, pushing up meat supplies and lowering 6.0 prices. A stronger sterling exchange rate has 4.0 also had an impact, placing downwards pressure 2.0 on the price of food imports and reducing the 0.0 -2.0 profitability of UK exports, thereby pressuring -4.0 Apr-14 producer prices. Cheaper raw material prices -6.0 Oct-14 have fed through to retail prices due to -8.0 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.

Y/Y Change

5 4

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’.

5

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 12 10.0 the slowdown in UK inflation. A significant 10 8 influence has come from consumer goods.

5.2 6 Indeed, during October, prices for semi-durables 3.2 4 2.5 2.2 and non-durables rose by 0.5% and 0.8%, 0.5 0.6 1.0 2 -1.4 -0.2 -0.3 0.1 0 respectively.

Meanwhile, consumer durables -2 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.

Source: ONS

% change y/y

CPI by Category October 2014

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.

6

Labour Market:

UK Employment 31.5

64.0

31.0

63.0

30.5

62.0

30.0

61.0

29.5

60.0

29.0

59.0

28.5

58.0

28.0

57.0 08

09

10

11

12

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.

Source: ONS

13

14

% of those aged 16-64 in work

Number of UK residents in work (m)

Employment

The UK economy has been creating jobs faster than losing them for most of the last four-and-ahalf 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%.

Employment/Population Ratio (RHS)

Total Employment (LHS)

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 70 carried out on behalf of Markit. These 66 surveys provide a narrative for the improving 62 labour market.

Both manufacturing and 58 service sector firms added jobs at a fast 54 50 pace through the second half of 2013 and 46 first half of 2014 as higher levels of new J M M J S N J M M J S N J M M J S N J M M J S orders had led to the build-up of backlogs.

2011 2012 2013 2014 In addition, employees were being taken on Scotland (Bank of Scotland Labour Market Barometer) in anticipation of further order growth.

UK (KPMG/REC Report on Jobs) 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.

Source: Markit

Diffusion Index (50 = no change)

Labour Market Barometer

7

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 unemployment 3 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 Q3 4, down from 6.3% in the previous quarter and from 7.6% a year earlier.

Meanwhile, claimant count 5 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.

Source: ONS

2.9

250

2.7

225

2.5

200

2.3

175

2.1

150

1.9

125

1.7

Scotland (000)

UK (m)

Unemployment: Aged 16+

100 2009

2011

2010

UK (LHS)

2012

2013

2014

Scotland (RHS)

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 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%

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

8

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.

3.5 Indeed, compared with a year earlier, wages 3.0 rose by 1.2% in services, by 1.8% in 2.5 manufacturing and by 1.3% in construction 2.0 during Q3 2014. In addition, the single month 1.5 pay growth figures for September showed 1.0 stronger readings of 1.8% in services and 2% in 0.5 manufacturing. The single month figure was 0.0 particularly strong in finance & business services 13 11 12 14 as earnings grew 2.4%. Pay in this sector rose Regular Pay Public Sector Manufacturing Services 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.

Source: ONS

3-month avg (% y/y)

Average Weekly Earnings Growth

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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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 nonfinancial 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.

10

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.

Real household disposable income (4-quarter rolling avg)

Source: ONS

£bn per quarter

276 272 268 264 260 256 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2007

2008

2009

2010

2011

2012

2013 2014

Monthly Asda Income Tracker 180 175

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.

Diffusion Index (50= no change)

£ per week

Asda, in conjunction with the Centre for Economic & Business Research, produces a more timely indicator of movements in 165 disposable incomes. The monthly income 160 tracker indicates that UK households have seen a considerable lift in the level of income 155 they have to spend on non-essential items 2010 2011 2012 2013 2014 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 UK Household Financial Situation Source: Markit average of 4.5% year-on-year in the August 55 to October period. With real wages now 50 growing, households have found some additional money to spend.

45 170

40

However, the monthly household finance survey carried out by Markit shows that UK 35 households remain under pressure as more 30 respondents were pessimistic than optimistic 2010 2011 2012 2013 2014 about their current financial situation in Household Finance Index (HFI) Future Finances Index November. Nevertheless, the reading was its second highest on record 6 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

11

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 zero 7. This has seen the level of consumer UK Consumer Confidence Source: GfK NOP confidence hold at an historically high level.

5

Index score

0 2011 -5

2012

2013

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.

2014

-10 -15 -20 -25 -30 -35

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 fast8 growing categories included miscellaneous and recreation & culture. However, expenditure on food declined by 0.6% during Q2 but remained 0.5% above its year earlier level.

Source: ONS

1.81%

8.0%

1.78%

7.9%

1.75%

7.8%

1.72%

7.7%

1.69%

7.6%

1.66%

7.5%

1.63%

% of total domestic expenditure

% of total domestic expenditure

Household Expenditure on Food 8.1%

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.

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

The share of food in total consumer spending in the domestic economy edged 2009 2010 2011 2012 2013 2014 down to 7.6%. This was a record low. In Food Meat 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.

7.4%

1.60%

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

12

Seasonally adjusted UK retail sales: August to October 2014 q/q change

Source: ONS 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.

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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 72 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 inwork 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.

14

What has been happening in the European economy?

Economic Activity Economic Activity in Prominent Scottish red meat markets GDP Growth (%Q/Q) Bel Fra Ger Hol It Spa Euro Area Den Swe UK EU28 Nor* Swi

GDP Growth (%Y/Y)

Q3 2014

Q2 2014

Q3 2014

2013

+0.3 +0.3 +0.1 +0.2 -0.1 +0.5 +0.2 +0.5 +0.3 +0.7 +0.3 +0.5 +0.6

+0.1 -0.1 -0.1 +0.6 -0.2 +0.5 +0.1 +0.1 +0.5 +0.9 +0.2 +1.1 +0.3

+0.9 +0.4 +1.2 +1.0 -0.5 +1.6 +0.8 +0.9 +2.1 +3.0 +1.3 +2.0 +1.9

+0.2 +0.2 +0.4 -0.8 -1.9 -1.2 -0.4 +0.4 +1.6 +1.7 +0.1 +2.2 +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 56 the 50 level of no change. However, growth in 53 activity has fallen back since the turn of the 50 year.

As can be seen in the chart, the 47 slowdown has been centred on the 44 manufacturing sector; though services activity 41 growth has also begun to dip. Respondents to J M M J S N J M M J S N J M M J S N the survey noted that the slowdown can 2012 2013 2014 mostly be linked to weak demand for Manufacturing Services 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.

Source: Markit

Diffusion Index (50 = no change)

Eurozone PMI

15

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: Euro Area Inflation

Source: Eurostat

3.5%

Y/Y Change

3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% J M M J

S N

J M M J

2012

S N

2013 HICP

J M M J

S N

2014

Core

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 9 than a year earlier . 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 nonenergy 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

16

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 October 2014 (%)

y/y change (percentage points)

Youth Unemployment Rate October 2014 (%)

+0.1 24.0 Bel 8.6 +0.3 24.3 Fra 10.5 -0.2 7.7 Ger 4.9 0.0 9.7 Hol 7.0 +0.9 43.3 It 13.2 -2.0 53.8 Spa 24.0 Euro 11.5 -0.4 23.5 Area -0.4 12.6 Den 6.4 +0.1 23.0 Swe 8.1 -1.6 16.2 (Q3) UK 6.0 (Q3) -0.7 21.6 EU28 10.0 +0.3 8.0 (Sep 14) Nor 3.7 (Sep 14) Swi 4.9 (Sep 14) +0.8 11.0 (Q3) Sources: Eurostat; Statistics Norway; Swiss Federal Statistics Office; ONS

Labour Cost Index 10 Q2 2014 (% Change y/y) 1.0 1.7 1.8 -0.6 1.0 1.0 1.5 1.4 2.9 0.5 1.5 2.7 n/a

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

17

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.

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Consumer Trends: Selected statistics - prominent Scottish red meat markets Retail Sales Retail Sales Volumes – food, Consumer Sentiment Consumer Sentiment Volumes beverages & Nov 2014 May 2014 Oct 2014 tobacco (% balance) (% balance) Oct 2014 (% change y/y) (% change y/y) 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.

19

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 These are 4-year loans to financial targeted long-term refinancing operations (TLTRO) 12. 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.

20

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 pre2008 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 shortterm. 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.

21

A focus on exchange rate movements Real Effective Exchange Rates

Source: BIS

112

2012 = 100

108 104 100 96

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.

92

2012

2013

2014

What factors have been influencing the €:£ exchange rate?

Divergent monetary policy prospects in the UK and Euro Area was the key driver behind 0.89 sterling’s rise against the euro between the mid-2013 and mid-2014.

In the UK, 0.87 economic activity unexpectedly strengthened 0.85 during the summer of 2013, altering financial 0.83 markets’ expectations about the likely timing of an increase to Bank Rate. As a higher 0.81 Bank Rate would make investing in the UK a 0.79 more promising prospect, investors began to 0.77 purchase UK currency and assets, pushing 2012 2013 2014 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.

Exchange Rate Movements - €: £

€:£

Source: OANDA

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

22

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.

Lamb price movement vs exchange rate movement 80%

% change y/y

60% 40% 20% 0% -20%

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.

-40%

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.

Sco auction

€:£

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.

23

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 - $: £ Source: OANDA

0.68

$:£

0.66 0.64 0.62 0.6 0.58 0.56

2012

2013

2014

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 0.58 pound against the New Zealand dollar (NZD) is important in determining import volumes 0.56 and prices. Having risen strongly after the 0.54 global financial crisis of 2008, the NZD has 0.52 been on a weaker trend since the beginning of 2013. Although interest rate increases in 0.5 March and June saw the NZD rise against 0.48 sterling, it has since fallen back as further 0.46 rate increases, which had been anticipated in 2012 2013 2014 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.

Exchange Rate Movements - NZD: £

NZD:£

Source: OANDA

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.

24

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.

Manufacturing PMI

JP Morgan Global Composite PMI Diffusion Index (50 = no change)

Diffusion Index (50 = no change)

Source: Markit

57 56 55 54 53 52 51 50 J F M A M J J A S O N D J F M A M J J A S O N 2013

58 56 54 52 50 48 46 J F M A M J J A S O N D J F M A M J J A S O N 2013 US

2014

Source: Markit

60

2014 China

Russia

Brazil

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%.

25

EUROPE In its autumn forecasts, the European Commission has lowered its estimates for 112 economic activity growth across much of the 108 continent with trends in domestic demand 104 100 and investment now thought to be much 96 weaker than in the spring.

It is now 92 expecting only very weak improvements in 88 the major economies of Germany, France 84 and Italy during 2015. Belgium is also likely 80 to disappoint. As a result, projections for 2012 2013 2014 inflation have also been revised down.

EU28 Euro Area 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.

Source: EU Commission

1990-2014 avg = 100

Economic Sentiment Indicator

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 Bel Fra Ger Hol It Spa Euro Area Den Swe UK EU28

2015

% change q/q

% change q/q

% change q/q

% change y/y

% change y/y

0.1 0.2 0.1 0.3 -0.1 0.3 0.1 0.4 0.4 0.6 0.3

0.2 0.2 0.2 0.3 0.2 0.4 0.3 0.4 0.6 0.6 0.4

0.2 0.2 0.3 0.3 0.2 0.5 0.3 0.5 0.7 0.6 0.4

0.9 0.3 1.3 0.9 -0.4 1.2 0.8 0.8 2.0 3.1 1.3

0.9 0.7 1.1 1.4 0.6 1.7 1.1 1.7 2.4 2.7 1.5

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

26

Other Economic Forecasts for Prominent Scottish red meat markets in 2015

Bel Fra Ger Hol It Spa Euro Area Den Swe UK EU28

Unemployment Rate

Inflation (HICP)

Domestic Demand

Investment

%

% y/y

% change y/y

% change y/y

8.4 10.4 5.1 6.8 12.6 23.5 11.3 6.6 7.8 5.7 10.0

0.9 0.7 1.2 0.8 0.5 0.5 0.8 1.1 1.2 1.6 1.0

0.7 0.6 1.1 1.2 0.4 1.7 1.0 1.6 2.8 2.8 1.5

0.9 -1.2 2.0 3.3 1.4 4.2 1.7 3.0 4.3 8.4 2.9

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

Exchange Rate Movements â‚Ź:ÂŁ 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. $:ÂŁ 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.

27

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.

28

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.

Retail prices of competitor proteins

Source: ONS

2012 RPI = 100

112 108 104 100 96 92 88 J F MAM J J A S OND J F MAM J J A S OND J F MAM J J A S O 2012 Poultry

2013 Fish

Cheese

2014 Eggs

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:

2012 = 100

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 Beef Prices: Retail Vs Producer Source: ONS; AHDB late 2012/early 2013 when producer prices 120 were rising at a much faster pace than could 115 be passed on to the sluggish retail beef 110 market.

105 100 95 90 J F MAM J J A S OND J F MAM J J A S OND J F MAM J J A S O 2012 GB Beef Retail Price

2013

2014

GB Beef Producer Price

beef.

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

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

29

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 140 October. Though lamb prices have tended 130 to fluctuate on a month-to-month basis, as 120 retailers favour lamb for their promotional 110 100 offers, they have trended broadly flat for 90 three years. Indeed, the average retail price 80 in October was in line with the average price 70 in 2012. Although at times farmgate prices J F MAM J J A S OND J F MAM J J A S OND J F MAM J J A S O have shown significant differences to year 2012 2013 2014 earlier levels, they have been on a broadly GB Lamb Retail Price GB Lamb Producer Price 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.

Source: ONS; AHDB

2012 = 100

Lamb Prices: Retail Vs Producer

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: Pork Prices: Retail Vs Producer

Source: ONS; AHDB

116

2012 = 100

112 108 104 100 96 92 88 J F MAM J J A S OND J F MAM J J A S OND J F MAM J J A S O 2012 GB Pork Retail Price

2013

2014

GB Pork Producer Price

proved unwilling to pay more for 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

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% yearon-year in October but it has shown a relatively stable trend for 18 months; except for a brief dip between May and July.

30

Review and Outlook for Meat Supplies Beef: UK beef supply: Q3 2014 (t) 2014 Home Production 209,950 + Imports 62,500 - Exports 27,700 = Net Supply 244,800

2013 200,650 60,800 23,000 238,500

Change 2014/2013 (t) +9,300 +1,700 +4,650 +6,300

% change 2014/2013 +4.6 +2.8 +20.3 +2.6

Home Production

Change y/y

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 UK Beef Production Q3 2014 Source: Defra prime cattle slaughterings rose 2.5% year20% 15% on-year, prime beef volumes rose nearly 6% 10% to 163,500t. However, heavier cow carcase 5% weights just failed to offset a 3% lower kill.

0% Increased prime production more than offset -5% the slightly lower cow beef supply. As can -10% be seen in the chart, supplies have been -15% pushed higher by an increased steer kill (up -20% Steers Heifers Young Prime Cows Total 13%). In Scotland, the picture was similar Bulls Cattle in terms of the overall supply. However, the Throughput Volume 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% yearon-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

31

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 GB cattle population: October 2014 Still alive Oct 2013

Still alive Oct 2014

Calves registered:

Source: BCMS y/y Change 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

4,063,797

3,996,009

-67,788

-1.6

Total pool

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.

32

Sheepmeat: UK sheepmeat supply: Q3 2014 (t) 2014 Home Production 79,300 + Imports 17,750 - Exports 25,300 = Net Supply 71,800

2013 76,750 18,000 27,700 67,000

Change 2014/2013 (t) % change 2014/2013 +2,600 +3.4 -250 -1.2 -2,400 -8.7 +4,800 +7.2

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

33

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.

34

Pigmeat: UK pigmeat supply: Q3 2014 (t) 2014 Home Production 214,750 + Imports 151,850 - Exports 52,200 = Net Supply 314,400

2013 208,400 149,200 50,150 307,450

Change 2014/2013 (t) % change 2014/2013 +6,350 +3.1 +2,650 +1.8 +2,050 +4.1 +6,950 +2.3

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%.

Feed Wheat (LHS)

kg

Oct-14

Jul-14

Jan-14

Apr-14

Jul-13

Oct-13

Apr-13

Jan-13

Jul-12

Oct-12

Jan-12

Apr-12

80 79 78 77 76 75

Jul-11

180 160 140 120 100 80

Oct-11

ÂŁ/t

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 Feed costs vs prime carcase weights year to June 2014 than in the previous year.

Sources: AHDB; Farmers Weekly 260 84 This works out at an improvement of close 240 83 to 6%. As a consequence, a smaller sow 220 82 200 81 herd was able to produce more pigmeat.

Carcase Weight (RHS)

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

35

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.

36

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.

37

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

38

Statistical Appendix

39

UK Economic Indicators Retail Sales Index

Jan 87 = 100

% Change Y/Y

2005 = 100

% Change Y/Y

EU28 Inflation: HICP % Change Y/Y

101.8

191.9

2.8

102.3

2.3

2.2

0.6821

102.7

199.3

3.9

104.7

2.3

2.4

0.6840

100.2

102.3

206.5

3.6

108.5

3.6

3.7

0.7964

0.0

100.4

103.0

204.6

-0.9

110.8

2.2

1.0

0.8917

2.3

99.8

101.2

212.8

4.0

114.5

3.3

2.1

0.8589

463

2.4

100.0

100.0

222.3

4.5

119.6

4.5

3.1

0.8678

4.7

469

1.3

100.8

99.9

228.1

2.6

123.0

2.8

2.6

0.8112

1424.3

4.3

475

1.3

102.2

99.7

233.6

2.4

126.1

2.6

1.5

0.8489

Unemployment: Claimant Count

2013

2014

Sources: ONS; OANDA; Eurostat Whole Economy Average Earnings

Total

000

%

£/week

% change y/y

2006

945.0

3.0

407

4.9

96.7

2007

864.5

2.7

426

4.9

99.6

2008

906.1

2.8

442

3.5

2009

1527.7

4.6

442

2010

1496.4

4.6

452

2011

1534.1

4.7

2012

1585.2

2013

3 month rolling avg

Food

2011 = 100

UK Inflation: All Items RPIJ

All items CPI

Exchange Rate €:£

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

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

40

Retail Price Index: meat & other food items

Source: ONS

Jan 1987 = 100 2008 2009 2010 2011 2012 2013 % Change YoY 2008 2009 2010 2011 2012 2013

Beef 161.9 175.4 174.6 181.8 201.7 213.4

Lamb Home Killed 215.6 239.6 259.3 291.3 306.0 307.9

Lamb imported 190.4 214.0 218.9 284.1 280.2 261.5

Pork 182.1 196.2 203.2 213.8 228.6 240.6

Bacon 203.6 213.7 210.8 215.3 216.6 228.6

Poultry 128.3 130.9 130.9 138.4 139.8 145.2

Fish 187.2 196.8 208.8 228.0 237.7 246.8

Cheese 207.9 216.1 220.1 232.7 240.9 241.9

Eggs 245.9 255.1 264.1 266.7 262.6 259.1

All Food 179.5 189.1 195.0 206.6 213.3 221.2

Catering 264.2 271.4 279.8 291.2 300.2 308.4

All Items 214.8 213.7 223.6 235.2 242.7 250.1

14.6 8.3 -0.5 4.1 10.9 5.8

12.6 11.1 8.2 12.3 5.0 0.6

5.0 12.4 2.3 29.8 -1.4 -6.7

15.1 7.7 3.6 5.2 6.9 5.2

9.3 5.0 -1.4 2.1 0.6 5.5

13.3 2.0 0.0 5.7 1.0 3.9

7.2 5.1 6.1 9.2 4.3 3.8

15.2 3.9 1.9 5.7 3.5 0.4

26.6 3.7 3.5 1.0 -1.5 -1.3

9.3 5.3 3.1 5.9 3.2 3.7

4.2 2.7 3.1 4.1 3.1 2.7

4.0 -0.5 4.6 5.2 3.2 3

2013

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

203.8 208.1 205.6 209.4 208.7 212.9 217.1 214.9 220.8 219.2 220.9 219.7

299.8 297.6 293.2 296.4 315.2 311.3 320.7 312.5 315.3 318.1 301.4 313.6

267.3 273.9 277.5 271.4 261.8 258.6 257.4 257.8 259.5 249.4 248.2 255.4

245.6 243.3 241.8 239.2 238.3 238.0 236.9 241.8 237.8 244.9 238.7 240.3

225.6 226.3 226.7 225.7 228.2 229.4 228.1 229.2 228.2 232.1 230.7 232.9

144.1 144.8 142.9 143.3 141.8 144.3 144.3 146.9 147.7 147.3 147.8 146.6

243.6 243.9 243.5 239.8 247.6 242.9 244.1 251.4 244.6 254.0 253.7 252.7

240.4 235.8 240.3 238.2 236.4 238.8 240.4 248.8 243.5 245.0 247.7 247.3

261.9 261.2 255.5 259.9 259.0 254.9 253.7 258.3 259.3 261.3 259.3 264.3

219.1 220.7 219.9 221.3 221.5 220.3 220.8 221.8 221.7 222.3 222.3 222.8

304.5 305.3 306.0 307.2 308 308.5 308.9 309.1 310.1 310.4 310.9 311.8

245.8 247.6 248.7 249.5 250.0 249.7 249.7 251.0 251.9 251.9 252.1 253.4

2014

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

219 219.1 221.2 217.6 219.3 220.4 221 217.9 218.8 217.6

316.8 324.1 316.9 321.2 314 327.5 308.8 304.5 330.6 307.3

257.4 262.2 255.8 246.5 256.3 261.7 268.1 267.2 269.4 266.6

237.3 244.6 230.2 244.1 239.5 233.0 239.6 240.2 234.5 237.1

225.7 230.2 231.3 229.5 223.2 224.1 222.6 230.3 230.2 229

145.2 146.5 147.3 145.2 144.8 144.1 145.6 143.3 142.6 145.1

253.4 257.2 260.5 249.1 258.1 249.7 254.6 254.2 246.5 258.0

251.6 252.4 253.4 253.3 251.6 253.9 249.3 251.7 252.3 245.5

266.4 265.1 263.5 254.5 242.2 243.4 249.7 245.0 250.8 250.1

223.7 224.8 224.1 223 220.8 221.2 220.6 219.9 219.6 219.9

312.1 312.8 313.8 314.1 314.7 315.4 316.3 316.4 316.6 317.6

252.6 254.2 254.8 255.7 255.9 256.3 256.0 257.0 257.6 257.7

% 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

41

Scottish Monthly Average Retail Prices of Selected Cuts

2013

2014

2013

2014

Beef

Topside

Sirloin Steak

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

1162 1165 1200 1217 1188 1185 1196 1191 1214 1218 1230 1152 1234 1239 1253 1234 1262 1275 1271 1277 1287 1227

2671 2695 2687 2678 2677 2705 2695 2693 2689 2698 2687 2694 2740 2738 2733 2563 2549 2633 2597 2650 2593 2541

Lamb Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Whole Leg 1174 1184 1171 1171 1192 1201 1265 1255 1223 1244 1209 1153 1202 1282 1237 1242 1336 1222 1235 1250 1191 1183

Fillet End Leg 1320 1251 1259 1258 1276 1258 1304 1322 1277 1348 1346 1253 1326 1298 1308 1338 1443 1464 1644 1613 1494 1496

Source: AHDB

(p/kg)

Rump Steak

Fillet Steak

Diced Stewing Steak

Braising Steak

Premium Mince

Standard Mince

1623 1613 1658 1638 1625 1662 1691 1710 1696 1659 1659 1693 1708 1709 1696 1701 1653 1745 1773 1750 1745 1748

3706 3680 3621 3700 3702 3746 3754 3750 3746 3741 3735 3725 3758 3766 3765 3797 3855 3955 3993 3993 3993 3993

1096 1106 1102 1103 1097 1100 1095 1098 1102 1101 1105 1113 1121 1094 1121 1088 1102 1109 1142 1140 1147 1117

1150 1130 1120 1143 1137 1143 1136 1120 1132 1144 1134 1151 1138 1165 1152 1139 1154 1156 1155 1153 1147 1142

821 830 860 847 867 880 835 848 837 832 836 804 859 854 854 879 904 900 905 905 905 905

567 559 599 615 611 629 601 603 602 609 609 609 609 633 633 686 701 701 701 764 795 701

Shoulder (Bone-in) 824 817 823 827 838 851 844 844 835 839 832 834 844 837 844 849 869 812 856 873 766 767

Shoulder (Boneless) 1217 1226 1224 1218 1255 1282 1256 1261 1246 1220 1196 1198 1242 1241 1230 1260 1312 1309 1317 1309 1291 1279

Lamb Steaks 1838 1843 1859 1867 1883 1902 1867 1866 1861 1826 1820 1821 1812 1809 1831 1845 1988 1981 1977 1975 1886 1912

Loin Chops 1526 1538 1550 1564 1573 1610 1631 1626 1618 1553 1496 1511 1514 1534 1519 1546 1607 1577 1569 1566 1551 1535

Double Loin Chops 1646 1648 1658 1651 1668 1692 1684 1667 1650 1629 1616 1617 1622 1626 1631 1646 1726 1717 1717 1717 1691 1691

42

Pork

Cutlet Chops 1591 1615 1658 1660 1542 1578 1644 1622 1571 1497 1493 1420 1519 1474 1468 1503 1632 1635 1634 1629 1586 1587

Leg (boneless)

Fillet End Leg

Shoulder (boneless)

Fillet of Pork

Loin Steaks

Loin Chops

Diced Pork

Minced Pork

833 841 842 827 840 850 858 861 848 830 846 859 847 833 828 809 759 710 749 752 716 724

944 881 914 928 949 1003 949 1013 960 969 940 986 969 929 929 952 961 889 859 815 817 814

775 768 774 780 774 793 773 766 774 773 754 774 775 780 772 718 723 707 706 704 706 703

1118 1128 1089 1085 1122 1134 1147 1131 1142 1141 1141 1156 1163 1130 1113 1129 1117 1050 1050 1029 1043 1049

1040 1007 1050 1032 1058 1058 1053 1033 1047 1051 1043 1032 1051 1011 1046 1054 1018 940 1036 1053 1100 1107

723 685 715 702 724 732 717 706 700 690 694 696 700 724 689 783 790 799 789 783 802 822

778 774 787 785 787 806 791 825 798 803 789 811 804 785 779 803 784 762 754 742 738 742

738 742 744 747 745 762 747 755 738 749 749 750 750 750 673 684 674 719 719 719 719 719

Diced Lamb 1361 1380 1384 1385 1385 1400 1384 1386 1383 1360 1346 1348 1349 1349 1348 1452 1499 1513 1492 1458 1398 1399

Minced Lamb 1281 1305 1310 1314 1316 1323 1290 1287 1288 1279 1274 1275 1263 1289 1288 1302 1346 1368 1378 1378 1331 1263

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 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13

363.2 367.1 382.3 391.2 397.1 397.0 395.5 382.5 391.9 391.3 387.1 382.9

654.4 649.0 663.0 661.0 664.3 671.7 671.7 671.0 685.0 687.6 674.3 671.7

291.2 281.9 280.7 269.8 267.2 274.7 276.2 288.5 293.0 296.3 287.2 288.7

55.5 56.6 57.7 59.2 59.8 59.1 58.9 57.0 57.2 56.9 57.4 57.0

332.1 359.5 434.7 459.8 473.1 490.4 453.7 420.5 392.4 392.1 399.5 397.0

775.5 776.3 773.3 787.3 794.6 790.9 803.4 799.7 794.6 811.5 797.5 782.9

443.4 416.8 338.6 327.5 321.5 300.5 349.7 379.2 402.2 419.4 398.0 385.9

42.8 46.3 56.2 58.4 59.5 62.0 56.5 52.6 49.4 48.3 50.1 50.7

159.3 156.2 157.0 160.9 164.1 166.8 168.6 167.9 170.1 171.9 171.6 171.3

382.2 382.2 390.1 385.8 388.3 390.7 393.1 396.8 397.4 396.8 398.6 397.4

222.9 226.0 233.1 224.9 224.2 223.9 224.6 228.9 227.3 224.9 227.0 226.1

41.7 40.9 40.2 41.7 42.3 42.7 42.9 42.3 42.8 43.3 43.0 43.1

Jan 14 Feb 14 Mar 14 Apr 14

374.7 364.2 361.9 354.6 336.8 326.9 325.5 333.8 345.4 349.0 351.9

691.6 704.9 704.9 707.6 710.9 704.9 709.6 710.9 708.9 686.9 697.6

316.9 340.7 343.0 353.0 374.1 378.0 384.1 377.0 363.5 338.0 345.7

54.2 51.7 51.3 50.1 47.4 46.4 45.9 47.0 48.7 50.8 50.4

400.5 415.8 453.8 480.8 499.0 502.4 412.0 378.7 359.2 355.2 387.9

803.4 818.1 814.4 827.6 857.7 841.6 841.6 826.9 806.3 804.1 807.1

402.9 402.3 360.6 346.8 358.7 339.2 429.6 448.2 447.1 448.9 419.2

49.8 50.8 55.7 58.1 58.2 59.7 49.0 45.8 44.5 44.2 48.1

167.9 164.2 162.8 163.5 164.3 164.1 161.5 158.3 156.2 156.1

396.8 393.1 395.5 407.7 399.8 388.3 398.6 397.4 392.5 390.1

228.9 228.9 232.8 244.2 235.6 224.2 237.1 239.1 236.3 233.9

42.3 41.8 41.2 40.1 41.1 42.3 40.5 39.8 39.8 40.0

May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14

43

EU Economic Indicators Country

Bel

Sources: Eurostat; Swiss Federal Statistics Office

Q3 2014

Q2 2014

Economic Growth (%)*

Unemployment Rate (%)

Inflation Rate (%)

0.3

8.5

0.7

Economic Growth (%)* 0.1

Q1 2014

Unemployment Rate (%)

Inflation Rate (%)

8.5

1.0

Economic Growth (%)* 0.4

Q4 2013

Unemployment Rate (%)

Inflation Rate (%)

Economic Growth (%)*

Unemployment Rate (%)

Inflation Rate (%)

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

44