Livestock suppliers will already have noticed a drop in schedules from the elevated levels processors were paying over the first couple of months of the season.
It’s tempting to fear the worst given past experience with high prices paid by meat processors that have inevitably been followed by a sudden crash and a long, slow recovery. This time the situation really does seem to be different if you look at the fundamental demand for product in China.
Affco sales and marketing manager Mark de Lautour sees the situation as more of a hiccup with traders collectively liquidating inventory in advance of Chinese New Year and the need for cashflow to cover large shipments of South American beef on the water.
Like Thanksgiving in the United States, Chinese New Year is the big holiday when everybody celebrates at home with family for one or two weeks, resulting in a trebling of food consumption. Not unnaturally, the Chinese authorities would welcome more product being available at lower prices to make sure there is enough in the market to satisfy the sudden increase in demand.
Buyers with cash are taking advantage of the availability of well-priced meat. Not surprisingly, the cheaper product washing around the system will need to be consumed before the previous price levels can be re-established but the good news is demand remains strong.
As confirmation fundamental demand remains strong, Affco reports a number of clients have continued to place considerable orders both sides of Christmas.
While not at the highest price, buyers continue to buy, which indicates no significant drop in interest. Unsurprisingly, there is a certain amount of pressure on prices, which is likely to be the case as long as surplus inventory washes through the system.
De Lautour expects the situation to last no more than three months before demand reverts to solid levels and, therefore, the biggest risk sits with New Zealand sellers not fully understanding the situation and overreacting.
Reasons for this optimism are as before – the continuing impact of African wwine fever and the shortfall in protein supply that has resulted in average monthly imports of 250,000 tonnes since early 2018.
Nothing has happened to change these market fundamentals.
In the short term logistics infrastructure shuts down for 10 days either side of Chinese New Year and customers don’t want deliveries for nearly a month when consumption is at its highest. Much of the inventory will have been sold and consumed by mid February but then strong demand is expected as buyers refill the pipeline.
From December to February schedule reductions are inevitable with processors protecting themselves against paying too much in a temporarily weaker market. For example, before Christmas Alliance sent a market pricing update to its suppliers outlining the latest developments in China and the immediate impact on livestock prices as a result of overnight price corrections of up to 15% on all beef and sheep meat categories.
Because of the company’s previous experience of a similar market correction in 2012, when it reacted too slowly and suffered a significant loss, Alliance decided to act decisively this time.
In its market update Alliance expressed the hope this would be a short-term issue and assured shareholders, in accordance with its co-operative principles, it will refund them any over-correction, if it turns out to have reduced livestock prices to a greater extent than necessary.
While this appears to be essentially a short-term Chinese trade issue there will also be broader implications for prices in other global markets, notably the American beef trade where there has been some downward price pressure.
China’s meat imports must be put in the context of other trade arguments and agreements, such as the conclusion of a phase one trade deal between China and the US, which will see a reduction in retaliatory tariffs imposed by both countries. The American National Cattlemen’s Beef Association has welcomed progress towards this agreement, noting, though it awaits further details, it will bring relief to farmers and ranchers who have been targeted with China’s tariffs for many months.
Over time American beef exports will gain a greater share of the Chinese trade, which makes it extremely important for NZ meat exporters to strengthen existing relationships with importers and focus on the higher value segments of the market.
There will always be blips in customer demand and price structures but China is likely to remain our most important trading partner for the foreseeable future.