Low lamb prices are short term predicts Rabobank

Low lamb prices are short term predicts Rabobank

Declining lamb prices are likely to be a short term issue driven by the high New Zealand dollar and an easing of international prices from record high levels, with medium term expectations for a return to above average prices, according to a newly published report on the sheepmeat industry from Rabobank, the world’s leading food and agribusiness bank.

“We should not underestimate the impact the high dollar has had on lamb prices in early 2006. This has combined with weakening prices in some markets, particularly the United Kingdom, resulting in lamb prices dropping below the 10-year average for the first time since the 1999 season,” says Hayley Moynihan, Senior Analyst with Rabobank’s Food and Agribusiness Research division.

“However, inherently markets are sound. The issues in the UK market are driven by changes in the Common Agricultural Policy (CAP), which does not necessarily favour sheep farming, meaning that capital stock have been slaughtered. Combined with a good lambing season, the amount of sheepmeat available has increased. In the medium term New Zealand farmers will benefit from lower British and Irish production.”

The CAP reforms include the decoupling of payments from livestock numbers. Farmers used to receive the Ewe Premium payment, accounting for as much as 30 per cent of a British farmer’s income. This has moved to the Single Payment Scheme, a subsidy based on area and land type. The new payment system provides few incentives for UK farmers to rebuild flocks following Foot and Mouth disease (FMD) outbreaks in 2001, demonstrated by the cull ewe slaughter in the UK which increased by 16 per cent in 2005.

“New Zealand has good quota access to the European market in relation to competitors. New Zealand quota sits at 227,854 tonnes, compared with Australia at 18,650 tonnes. This places New Zealand in the prime position to meet the demands of our most valuable market as UK lamb production continues to fall below consumer demand,” continues Ms Moynihan

The report highlights the cost of lamb against competing meats such as beef and chicken, showing that in the UK, the retail price of lamb leg cuts increased by 39 per cent year-on-year to March 2005. This resulted in a move to lower value products such as mince, shoulders and steaks. In the US, wholesale prices of lamb have increased by as much as 30 per cent, making it USD 2 per kilogram more expensive than beef.

“There is no doubt that lamb holds an enviable position with wealthy consumers,” says Ms Moynihan. “Food scares and animal health issues, such as BSE, have highlighted lamb as ‘safe’. However, there is a limit to how much consumers are willing to pay. In 2005, the weighted average price for lamb was around USD 4,400 per tonne compared with USD 3,500 for beef and USD 1,200 for chicken. This definitely places lamb in the dining out or special occasion portion of markets,” she adds.

The report shows there are some challenges emerging. Australian farmers are continuing to move from wool-based systems to lamb production. Since the early 1990s, sheep and lamb income for Australian producers has quadrupled as a proportion of farm income, from six per cent to 24 per cent, with declining returns from wool forcing farmers to look for alternative income streams. The move away from breeding solely for wool has boosted sheep meat, with lamb production increasing by around 30 per cent in the last 10 years.

In 2004, Australia exported 40 per cent of lamb produced, up from only 14 per cent in 1990, and the forecast trend is for further production increases and export share. Australian sheep meat exports to the US reached record levels, increasing 15 per cent by volume, with the US market now accounting for 41 per cent of Australia’s export lamb value.

“The other real issue facing New Zealand sheep farmers is cost of production. The prices of inputs such as fuel, labour, land and fertiliser have increased. The role of wool in New Zealand sheep farming has also changed. It has moved from being a significant contributor to farm income (+30 per cent) to accounting for less than 15 per cent in 2005,” Ms Moynihan says. “Wool is becoming more of a cost to farm businesses. In the last 10 years wool prices have dropped 13 per cent but shearing costs have increased by 64 per cent.”

The report documents the achievements of the New Zealand industry over the last twenty years. Sheep numbers have declined by 42 per cent from 69.7 million in 1983/84 to 40.1 million in 2004/05, whilst lamb exports over the same period have declined by only 7 per cent. The average lambing percentage has increased from 103 per cent to 123 per cent. Average lamb weights have lifted from 13.6kg to 17.5kg (+29 per cent). In export terms, the industry provides NZD 2.4 billion in earnings per annum, representing an increase of over 80 per cent in the last 10 years.

Ms Moynihan concludes the report by saying that “As producers have become more efficient, further lifting the productivity bar becomes increasingly challenging. Gains at the rate of the past 10 years should not be expected looking forward. Producers will need to be actively involved with processors and research bodies to determine the basis for future growth, assess how to continue the productivity growth trend and ensure that sheep production remains an efficient and competitive enterprise.”

Rabobank New Zealand is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 100 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and, in recent years, has twice been awarded the title of the world’s safest bank by Global Finance magazine. Rabobank operates in 35 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank New Zealand is one of the leading rural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 29 branches throughout New Zealand.

ENDS

Rabobank Global Focus Autumn 2006

© Scoop Media