I thank the Chairman and members for the invitation to speak to them about the quality payment grid for beef cattle. This is a very important development in the beef industry, so we are glad to have the opportunity to outline our role in its development.
Before I start the presentation, I would like to set things a little in context. All sectors of the agriculture industry have had a couple of bad years in terms of prices and incomes. Our own data from the national farm survey and CSO figures all outline the difficult year 2009, in particular, was for all sectors. The beef sector had several difficult years. This is the second year in a row that winter finishers are having a particularly bad time in terms of prices for cattle. That is merely part of the context in which the new payment grid was introduced in December.
Notwithstanding the difficulties of the sector, it is still a significantly important sector, both nationally, in terms of the exports derived from the sector and the number of jobs involved in it, and from farmers' perspective. There is a large number of farmers involved in beef production. It spreads into every parish. It is a significantly important industry from the country's point of view and developments like this are quite important for it.
My presentation is comprised of four parts I want to cover. First, I will address why we need this new grid payment system for cattle. Once I conclude on the necessity for it, I will address how the grid was established and the scientific basis that underpinned the grid that was introduced in December. Then we will briefly touch on the current operation of the grid, but I suppose that is not really an issue for Teagasc. That is an issue, in terms of pricing, between the industry and farmers. We will outline the way the grid is structured. The final issue, on which we will not spend much time but which is now the important issue, is how farmers capitalise on the opportunities that the grid now presents in terms of producing quality cattle and getting paid appropriately for them.
The first part is the rationale for introducing this grid. To take it back to basics, all beef carcases are not equal in value. They vary in fatness and in conformation. Conformation determines the proportion of high-value meat that might be in a carcase. As with milk all gallons of which do not have the same value and which is paid for on the basis of fat and protein content, and as with grain which is paid for on the basis of moisture content and other quality parameters such as protein, hardness or whatever, the same applies with cattle in that there are variations in the quality of a carcase of beef.
For 30 or 40 years, cattle have been graded on the basis of fatness and conformation. That is nothing new. I suppose we should ask ourselves then, what should that kind of pricing system, which grades cattle on fatness and conformation, aim to deliver to farmers. First, the pricing structure should reflect the true market value of the cattle. It should reflect the proper differential between different grades of cattle. It should give a proper reflection of the different value of carcases of different grades.
It also should send a clear signal to producers. Producers should be clearly aware of what the market requires, where the best price is to be obtained or what type of animals will give the best price if they can produce them. It also should send a clear signal to producers as to what they should produce if we want to maximise the returns from the market.
The system that has been in operation approximately since we joined the EU is known as the EUROP system. Animals are graded into one of five conformation classes, E, U, R, O, P, and then they are graded into one of five fat classes, 1, 2, 3, 4 and 5 — grade 4 was always split into 4L and 4H. That is the scale that has been in operation for more than 30 years in the country. That system is used to grade all the cattle killed in our export plants.
Where that meat or those carcases go is the next question. As the committee will be aware, 90% of Irish beef is exported. In recent years, that has been split fairly evenly, with approximately 50% of it going to UK markets and 50% of it going to continental EU markets. The continental EU markets are consistently the markets that return the best prices for beef. They are the premium markets into which we would like to have much of our beef go. The type of animal suitable for those high-price continental markets is an animal with high conformation, a lean animal that does not have a high fat score.
If we were to try to maximise the returns to the industry and to farmers, we should have as much of our cattle going into those high-price markets as possible. The next question then is, was the payment system we used previously fit for purpose. In other words, did it send a signal to producers to produce that type of cattle where we would get the maximum return? Did it reward sufficiently producers that produced those type of cattle that were going into those high-priced markets?
To help us answer that question, my presentation shows the price differential between two grades of cattle on a number of EU markets for last week, based on Bord Bia figures for approximately two weeks ago. These figures show the difference between an O grade and a U grade in the different markets. The figure for Ireland is the differential that existed for those grades prior to the grid, at which stage the difference was 18.4 cent/kg between grades O and U, which is two steps along the EUROP scale. Therefore, farmers got an 18 cent premium for U grades over O grades.
In the British market, that premium was 25 cent/kg. Looking at some of the continental markets, in France producers of U grade animals were getting 93 cent/kg more for U grades than O grades and in Italy, which data refer to bulls because they have very few steers, the premium was €1.16/kg for U grades as opposed to O grades.
The conclusion from that type of data is that there is not a significant premium for good quality cattle in the Irish payment system, the pricing system was not sending a strong enough signal to producers to produce good quality cattle, and a new pricing structure, which would be underpinned by scientific data on the value of the carcases of different conformation and fat score, should be developed.
I suppose that is where Teagasc came in. Several years ago we started research on the value of different carcases. Over a number of years we dissected one side of each of almost 700 carcases. Then different cuts of meat were isolated and weighed, the wholesale value of each of those different cuts was established, the weight was multiplied by the value and in that way we worked up to the value of each carcase. These carcases were spread from across the grid — the EUROP scale in different fat classes — and we got sample animals from throughout the existing classification scheme.
Once we had the value of the carcase established, based on the weights of meat and the value of the meat, the carcases were graded using the new mechanical grading system that has been in operation in the factories for years, and the two were put together. Statistically, the value of carcase was related to the conformation and fat score of the animals coming off the grading system, and we established the relationship between grade and value.
A slide in my presentation shows the impact of a one-unit increase in conformation score on the value of steers. It shows the impact of moving from an O3 steer — an animal grading O with a fat score of 3 — to an R3 — a animal with the same fat score but grading R. It shows that in that carcase there was a 3.5 percentage unit increase in the percentage of meat, a 1.3 percentage unit drop in the percentage of fat and a 2.2 percentage unit drop in the percentage of bone. When one compares the value of the O grade versus the R grade, the methodology of calculation for which I outlined earlier, there was a difference of 18 cent/kg in the value of the R grade carcase compared to the U grade carcase.
Another slide in my presentation shows a similar scenario for a change in fat score, this time keeping the conformation score constant at R and looking at the effect of moving from fat score 3 to fat score 4. It shows that by doing so, the meat percentage declines by 2.9 percentage units, as one would expect the fat percentage increases, by 3.6 percentage units, the bone percentage declines by 0.7 percentage units, and overall the value of the fatter carcase diminished by 17 cent/kg.
The requirements relating to fat are more complex than those which obtain in respect of meat yields. Some markets have different requirements in respect of fat content. The continental market requires very lean animals, whereas the UK market requires slightly fatter animals. There are different market requirements in respect of fat and this impacts on the value one might place on fat. The differential does not apply equally across the grid that has been developed.
We carried out the research and published it in various organs in recent years. The outcome of carrying it out has been that the meat industry has, with the agreement of the IFA, adopted these differentials as the basis of the new payment structure. As already stated, that new payment structure was introduced in mid-December. At the same time, we moved to a 15-point scale which replaced the old five-point model. The reason for this is quite simple. The impact of moving between grades would be too great and there would be too large a tipping point by moving, for example, from an R back to an O.
I have tried to illustrate the position on this theoretical slide. As members will see in a moment, these are not the actual figures from the grid. If we take the middle grades — the R grades — and if one takes the R= grade as being the base point and if one moves up to an R+ grade, one gains 6 cent per kilo. At the U- grade, one gains a further 6 cent per kilo. The steps in the new grid are based on a 6 cent progression. If the meat industry had continued to use the old system of E, U, R, O and P grades, a move from an R to a U grade would result in an 18 cent per kilo bonus. If the move was in the opposite direction, there would be a reduction of 18 cent. That is too great a tipping point in respect of animals that might be at the margins. A decision was taken to split each grade into +, — and = subgrades. This means that there will be more even steps within the pricing structure. In other words, one would not have lost 18 cent as a result of a small change in grade.
The new payment grid is split into the categories of U+, U=, U-, R+, R=, R-, O+, O= and O-. This grid was introduced by the industry in December. The grid contains greater resolution in the context of the differences between the grades. It is based on the differential we established of an 18 cent per kilo variation in value in transferring from one grade to the next.
Some modifications were introduced to the grid following negotiations involving the meat industry and the IFA. I will not discuss these in great detail. The change in the 4= grade, which is shaded white, will remain in effect until October. The change to the 4+ grade, which is shaded green, will remain in effect until next month. The purpose of these modifications is to ease the impact the grid will have during its first season in operation. They will also provide farmers with an opportunity to respond and facilitate a bedding down of the system. We did not have a role in respect of the negotiation of these modifications.
An additional quality assurance bonus was introduced at the same time as the new grid. This bonus is based on Bord Bia's quality assurance scheme and leads to the payment of an additional 6 cent per kilo in respect of all eligible grades. The next slide shows the grades that are eligible. Any grade O= or better and any fat class 4= or better qualifies for this bonus.
The grid was introduced on foot of our research. We established the differential between the grades, and the industry has used this as the base differential for calculating the value of carcasses. If we consider to where that has brought us in the context of the differential between grades compared to other countries, the next slide contains the graph I showed members earlier, which now includes data for Ireland from the second week of February. In that week, the differential between O and U grade carcasses was 30 cent per kilo. Prior to the introduction of the grid, this stood at 18.4 cent per kilo. Our differential is now slightly higher than that which obtains in the UK. However, we are still quite far behind France and Italy in this regard. There are various local marketing reasons which explain why the differentials in those two countries might be so high. Members can see the impact of the grid. People are now being paid more in respect of good quality cattle than was the case prior to its introduction.
It is hoped that the grid will drive change and improvement within the industry. What should farmers do in this regard? Breed selection is the key to obtaining good conformation scores in respect of cattle. For many years, we have been emphasising, via our advisory programme, the need to improve the breeding structure relating to the beef herd. With the advent of the Irish Cattle Breeding Federation, ICBF, there is a great deal more awareness among farmers. In addition, there are many more tools available to them to improve the conformation scores relating to their cattle through breeding.
A long-term strategy is of more immediate relevance to farmers in the context of breeding. As a result, there is a need to ensure the proper drafting of cattle for sale in order that the penalties relating to fat might be avoided. From a management point of view, proper nutrition for cattle during their lifetime is critical in order to ensure they achieve their conformation potential and are finished at the optimum fat score and carcass weight. The latter will facilitate their being sold at the most favourable grade on the grid.
The research carried out by Teagasc in the context of establishing the differential in value between carcasses of different grades is some of the most important it has conducted in recent years. It provides a real basis on which to decide the value of cattle of different grades. There have always been arguments with regard to how much extra people should pay for good quality cattle. At least now there is solid scientific data available that those in the industry can use to underpin the decisions they make in that regard. Ultimately, the market dictates what factories will pay in respect of cattle.
Now that the system is in place, there is great potential to drive quality in Irish beef production. Irish beef is justifiably regarded as being of very high quality in all of our export markets. It is produced to the highest welfare standards and very high environmental standards also apply. We now have a system that will hopefully send a strong signal to farmers regarding the type of cattle they should be producing in order that access might be obtained to more of the premium, high-priced markets.
The research should also assist in the maintenance of the suckler herd because it is from here that the best quality cattle will come. While more is paid for good quality animals and less is paid for their poorer quality counterparts under the new system, we are of the view that there is no disadvantage in this regard. The value of each animal is now based on its meat yield. The advantage arises in respect of animals that deliver extra meat and additional high-value cuts. The industry uses the data we have provided as the basis of its decisions in respect of pricing structures and it is this which facilitated the introduction of the grid last December.
My colleagues and I will be glad to answer any questions members may wish to pose.
