Processors need to extract more from retailers – TVC  

With UK prices rising slowly relative to Euro prices, Simon King spoke to Phil Woodall, general manager of Thames Valley Cambac, to see how this frustrating situation will develop

The country’s leading pig marketing co-operative has expressed frustration at the current market situation and has outlined various factors it believes are currently holding prices back.

Phil Woodall, general manager of Thames Valley Cambac said it was ‘extremely frustrating’ that pig prices in the UK have not risen at either the pace or by the amount they have across Europe, as the UK pig price, historically, tracks above the rest of Europe.

He said that the UK reference price has averaged 24p per kg above that of the five key importers to the UK over the last three years. This difference is now around 5-6p the other way, with EU prices ahead of the UK, if one takes into account hot weight pay weight, no transport costs and no factory charges.

Mr Woodall said: “For producers it is even more annoying because they have endured nine consecutive months of losses due to poor physical performance, which is as a consequence of health challenges coupled with high feed prices and a below the cost of production pig price.”

In Pig World, we recently asked if processors are holding back this price.

“To answer this we need to examine the key drivers which most influence the price,” Mr Woodall said. “Pig supply is currently tight and numbers are down, mainly due to the poorer performance with the winter weaning’s following a higher incidence of summer infertility last year, this has resulted in many producers tracking at below their normal supply levels, therefore from a price perspective a shorter supply generally pushes prices up.

“Cheap imports are often cited as the block on the UK price rising. Given the significant increases in pig prices across mainland Europe, cheap imports for now are a thing of the past. It is also worthy to note that numbers produced in certain EU member states are reducing due to poor financial returns over a longer period of time.|

Demand is a key factor and the growth in demand for exports is positive, driven as we know by the huge hole in production in China. One of the key issues for the UK is the number of processing plants that are either not approved for export to China or only partially approved.

Mr Woodall said: “The difference in value the processor can return if they have the full approval for export to China is significant circa £5-£6 per pig and that’s growing. Additional facilities obtaining approval has been very slow up until recently and given the shortage of product in China, the authorities have accelerated the process of approval and providing processors have completed the documentation correctly over the last couple of weeks, we should see many more UK single specie plants approved.”

The one weakness has been in the domestic demand.

Mr Woodall said that this is where the industry has ‘failed’: “We must recognise that domestic consumption for pig meat products is declining, even bacon which has traditionally been bullet proof in the past has seen a decline over the last 18 months –the three main sectors of wholesale, foodservice and retail have not kept pace. It’s fair to say that wholesale, and to a lesser extent foodservice have been pushed to pay more and have done so, mainly down to the fact if they didn’t they went without product. With imported more expensive, price increases have been extracted from this sector.

“The problem is processors are saying they can’t get the price increases out of retailers. This is where I believe the issue lies. Trying to obtain increases from this sector is extremely difficult and processors struggle with finding the balance between extracting price increases and avoiding the threat of swathes of business being retendered which generally results in margin erosion for the processor and as such, they will do all they can to avoid these scenarios.”

The retail sector is by far the largest in the domestic market.

Mr Woodall said he has no doubt that the retailers are fully aware of what’s required, as retailers have felt the full brunt of the EU price increases.

“My conclusion is that processors have not been holding back passing price increases obtained on as I don’t believe they have obtained sufficient increases from retail yet,” Mr Woodall said. “But I do believe this is where processors have failed the supply chain by not extracting from retail appropriate increases, which we accept is difficult for all the reasons stated but it is absolutely necessary and processors need now to deliver.”

Should we change the way prices are set?
With prices not predicted to rise in line with Euro process, does the industry need to change the way pig prices are set and introduce more transparency in the supply chain?

Mr Woodall said: “I have been involved trading, pricing and managing pig supply contracts for close to 38 years now and numerous ways of pricing have come and gone. Ostensibly there are two ways to price.

“One being an industry recorded average price produced independently by obtaining information from all the key processors and publishing the result which is then used as a base price. For example, the SPP, which used to be DAPP – and before that the AAPP. This is the most transparent, but the more pigs on this mechanism the more stagnant the price becomes and the industry lose the ability to move the price to reflect what the market is doing.

“The second mechanism is a processor announced price or processor supplier agreed price. This in the past has worked and is agile to market movements, however, we can all recall the old ‘Shout Price’, which failed because it got abused by processors. I believe a proportion of SPP with an agreed element in the mechanism works providing there is an agreed fall-back position if the parties can’t reach agreement.”

Mr Woodall warned that having more transparency in pricing inevitably moves towards cost plus pricing, which would not be conducive for independent producers.

He said: “Take a look at the broiler chicken industry. This sector has had much transparency over many years and is now mainly integrators with little room for the independent producers, many in this sector have become just contract growers which in my view is one step removed from being an employee of a much larger business.

“The conclusion for me is about having a relationship between processor and supplier that understands the needs of each other, but a pricing tool that can react to the market through agreement. If at any point agreement can’t be reached then there is a mechanism to go to which drives a behaviour for the parties to agree.”

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