NZ sheepmeat – will the fairytale last?

New Zealand sheepmeat – will the fairytale last?

New Zealand sheepmeat producers can expect to continue to enjoy high prices and favourable offshore market conditions in the year ahead, according to a recently-released industry report.

The substantial lift in 2011 farm gate prices brought the country’s sheepmeat producers a level of buoyancy not seen for nearly a decade, Rabobank’s Global Focus report, ‘New Zealand sheepmeat – how long will the fairytale last’ says. And this is likely to continue into the coming year.

Report author, Rabobank analyst Rebecca Redmond says as the “fairytale 2010/2011 season” draws to a close, the future continues to look bright.

“Even at higher prices, overall demand for New Zealand sheepmeat has been holding steady in developed markets,” Ms Redmond says.

“Although some consumers are struggling to pay the higher prices, there are those that continue to enjoy lamb and the lift in revenue is balancing the fall in consumption.”

Rabobank expects demand for sheepmeat to soften slightly in developed markets and ultimately limit further upside in the current retail pricing while economic conditions remain soft.

However, Ms Redmond says the neutral outlook in developed markets is balanced by emerging market demand, such as China, which is expected to lift with income growth and the modernisation of supply chains in the retail and food service sectors.

The supply quandary

The Rabobank report says a decade of shortening of supply from key sheepmeat exporters including New Zealand, Australia and the United Kingdom, along with a decline in the world’s biggest domestic flock in China, reflect the changing dynamic around sheepmeat production.

“This limited supply is a key driver of the high prices,” Ms Redmond says.

“The reason these pressures haven’t always been apparent to New Zealand producers through farmgate price increases has been due to the lifts in production volumes during extended periods of drought, such as in Australia, and changes in land use increasing production from the reduction in capital stock across the globe”.

Production recovery from New Zealand is likely to remain limited for the next few seasons, Ms Redmond says, due to higher-than-average mutton slaughter in 2011, lower lamb numbers in 2010/2011 and some ewe losses after the September 2010 storms.

China – increasing affluence Media Release September 20, 2011 2 Increasing affluence leads to an increase in demand for meat, including sheepmeat, Ms Redmond says. Coupled with declining domestic production in China, imports have been lifting in volume and value to this region.

“In 2010 a Chinese consumer in the top 20 per cent of the income bracket consumed 1.5kg of sheepmeat per year, while a consumer in the bottom 20 per cent of the income bracket consumed one kilogram of sheepmeat on average. Lifting income levels has the potential to increase sheepmeat consumption by 50 per cent in this market.”

Although, at this point, China’s spending power does not offer immediate price upside when compared to existing markets in the EU and US. “However, Chinese consumers are continuing to reach new food spending levels year-on-year that have been as much as 14 per cent per annum, which will contribute to lifting overall carcass returns,” Ms Redmond says.

Rabobank’s forecast is that global sheepmeat supply adjustments will happen but it’s difficult to see this impacting for at least three years. Even then, the supply lift will not return to levels of the past decade.

“It is important to recognise that food markets are increasingly affected by non-food influences including the activities of speculators, government policy, coupled with exchange rate uncertainty,” Ms Redmond says.

“This culminates in greater volatility and a fast rate of change in global markets.” For sheepmeat producers, structuring farm businesses to capture higher returns needs to be balanced against the cost increases, albeit in an environment where farm gate prices are expected to stay above five-year averages, Ms Redmond says.

ENDS

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