It’s been a year to forget for the industry. Everyone’s squeezed between rising costs and less money coming in, with Mother Nature putting the boot into parts of the country that haven’t seen enough rain this year.
The industry is well aware that we need to get a lot more cash into schedules, especially lamb and mutton, or the sector will continue to struggle and shrink. The question is whether that’s realistic before we reach next year.
The No 1 handbrake in terms of overseas markets is China. It’s a problem for the sheep industry since it takes the bulk of our lower-value cuts, and few viable alternative markets will take these cuts, at least in the volumes we need.
For beef, we rely on China to pick up a lot of prime and secondary cuts, which are key for driving revenue on steer and heifer carcases. The United States beef market can be just as big in terms of pure volume, but it mainly takes grinding beef and trimmings, which mostly support bull and cow values.
Unfortunately, we’re yet to see any sign of improvement from China, to the point where it wouldn’t be surprising if we’re in the same position six months from now.
If anything, sentiment towards the Chinese market has worsened following a recent major food expo. Key buyers have reaffirmed that consumers are reluctant to spend while confidence in the economy is low and the property development sector keeps folding in on itself.
There were already signs of this beforehand as lamb exporters reported slightly weaker prices on key cuts, even though our lamb kill is winding down. The lifting exchange rate hasn’t helped anyone’s cause, chewing 5% out of NZ dollar returns over the past six weeks.
The supply side of the equation doesn’t help the outlook into China either. South America shipped a record 643,000 tonnes of beef to China through January-April. To give an idea of the scale, our exports to China over that time were only 63,500t.
Although South American beef doesn’t directly compete with us, its presence does have flow-on effects for lower-value cuts.
Brazilian beef production is forecast to decrease going forward, but it’s unlikely the flow of beef to China will slow. In March, 24 Brazilian beef processing plants gained approval for export to China, and plans have been announced to fast-track the approval of others that didn’t make the cut in the first round.
All of this is in addition to five key Australian meat plants also regaining access, which had been blocked in 2020 following a spat between the Chinese and Australian governments.
The torrent of lamb coming out of Australia doesn’t help the forward outlook, although New Zealand exporters have reported lifting prices in the European Union and United Kingdom, where we are partially sheltered from Australia due to either a better free trade agreement (the EU) or because the smaller size of our lamb suits buyers better (the UK).
Since data has been available, Australia’s weekly lamb kill (excluding Western Australia) had only broken 420,000 six times before this year. It’s gone over that in seven of the past eight weeks.
While this could mean this season’s lamb kill is burnt through quicker than expected, it’s reported that scanning results have been very high in key sheep-producing areas, so next season will likely see more of the same.
Obviously pulling in more money from overseas would help New Zealand farmers, but higher operating costs and general inefficiencies in our processing sector are keeping cash from flowing to the farmgate too.
For example, through the first half of 2018, lamb was selling overseas for a little less than what it’s made this year, yet schedules were around $1/kg better back then. Admittedly that season was a poor year for meat company profits, but it gives a rough indication of how value is being lost along the supply chain.
This article was written by AgriHQ analyst Reece Brick. Subscribe to AgriHQ reports here.
