We continue to favour the grain and livestock industries in the UK because of good export opportunities and a strong domestic market. The country turned into a net importer of wheat in 2012/13 but we believe this was a temporary fact and we continue to expect the UK's wheat exports to be competitive in the near term. The pig industry could be boosted by a recent trade deal to export to China while the domestic market is appearing resilient to move in pig and pork prices. We see limited growth for the sugar and dairy industries. We highlight strong results from pig producer Cranswick in spite of a weak economic environment.
- Wheat production growth to 2016/17: 6.1% to 16.2mn tonnes. We see a challenging environment for the UK wheat industry in the near term with increased competition for exports from the Black Sea region, decreasing direct payments to farmers as a result of the CAP reform and diseconomies of scale on the back of a shift of the EU ethanol policy towards non food biofuels.
- Beef consumption growth to 2016/17: 8.5% to 1.4mn tonnes. This will come as the domestic market is saturated and consumption habits move away from red meat and to healthier alternatives.
- Milk production growth to 2016/17: 4.0% to 14.1mn tonnes. We expect production to recover slightly; however, we note that EU Common Agricultural Policy (CAP) reforms could make UK farmers less competitive.
- Real GDP growth: 1.3% year-on-year (y-o-y) in 2013 (from 0.2% y-o-y in 2012).
- Consumer inflation: 2.0% y-o-y in 2013 (down from 2.9% y-o-y in 2012).
- BMI universe agribusiness market value: 1.0% y-o-y decline to US$26.9bn in 2012/13, forecast to grow on average 1.2% annually between 2011/12 and 2016/17.
Dairy Crest disappointed investors in February when it announced that it will not be using any of the cash recently raised for acquisitions but that it would favour to finance capital expenditures and restructuring in order to increase profitability. The company raised EUR430mn (GBP344mn) in cash when it sold its spread brand Saint Hubert in 2012 and speculation increased that the group was targeting Cathedral City Cheese and Clover brands.
We have revised down our forecast for 2012/13 wheat production in the UK to 13.2mn tonnes (compared with 15.0mn tonnes previously) in line with the latest official estimates. Lower production is a result of a decline in yields as droughts during plantings destroyed part of the wheat crop in spite of higher plantings. Defra's estimates for yields show a decrease of 14.1% y-o-y and of 14.2% compared with the 10-year average. The increase in area harvested for 2012/13 was minimal and has not compensated for the sharp decrease in yields witnessed that season. However, it kept production slightly higher than implied by the decline in yields.
Shortlisted for the 2012 PLC Awards company of the year, Hull-based food producer Cranswick, which is mainly engaged in the production and supply of pork products to retailers, has been one of the great success stories in UK food and drink over the past year or so. With a business model that aims to bridge the gap between farmers and retailers, Cranswick produces private label products for a number of UK retailers and has continued to perform well even as pork prices have risen quite substantially.