Wednesday, April 24, 2024

China and US dictate red meat’s fortunes

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The meat industry does a great job of markets for all NZ’s products, says Allan Barber, but it is still at the mercy of what global markets will pay.
Alliance chair Murray Taggart strenuously disagreed with the interpretation that the company’s forecast loss was caused by the need to compete for declining livestock volumes with inefficient plants, Allan Barber says.
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The market outlook for red meat in 2024 appears only slightly better than it was in 2023, which will make discouraging reading for sheep and beef farmers hit by lower returns and higher costs. 

As noted by Meat Industry Association CEO Sirma Karapeeva in last month’s media release on meat industry exports for last year, these are a “barometer of the global economy”. This means there is unlikely to be a significant improvement until consumers across the world become more confident of a lift in their standard of living and security of employment.

The meat industry does extremely well in finding alternative market destinations for all the products New Zealand produces, but it is always to a great extent at the mercy of what world markets are prepared or able to pay for those products. 

Last year’s sales value of $10.2 billion was 11% below the previous year’s record, although the actual tonnage exported was higher for both beef and sheepmeat. This proves consumers are still keen to buy NZ’s beef and sheepmeat, but not to pay more than they can afford. 

The other important constituent of our exports is the “fifth quarter”, which comprises edible offals, casings, tripe, hides and skins, petfood, meat and bone meal, tallow, and blood products for pharmaceuticals. All these must be saved and processed for sale at a price that does not exceed the recovery cost. 

Coincidentally the export value of all these byproducts of the red meat processing sector is approximately one-fifth of the total. Without the fifth quarter, New Zealand red meat returns would be 20% lower than they are.

The year-on-year value drop was equivalent to more than a billion dollars off meat companies’ revenues, which was reflected in lower payments to farmers. 

Alliance’s published pre-tax loss of $97.9 million for the year ended September was a stark reminder of the susceptibility of company profitability to market conditions, even if costs, including payments to farmers for livestock procurement, are strictly controlled. 

Alliance’s result is unlikely to be the only sign of red ink among meat companies for last year, although both Silver Fern Farms and ANZCO are yet to declare their 2023 calendar year results.

The best prospect for performance improvement is the United States economy, which is finally showing distinct signs of growth, coupled with a decline in beef production following heavy slaughter rates as a result of drought in 2022 in some regions. 

Last year the US took the same amount of New Zealand beef exports by value as China, a dramatic turnaround from the previous year, although China remained the biggest market by tonnage. This trend has continued into 2024 with exports to the US increasing 12% by value on January 2023, while the value of beef exports to China was 19% lower. 

The China trend reflects difficult economic conditions there leading to a loss of confidence and spending power on the part of Chinese consumers, as well as a high level of competition from exporters like Brazil and Australia. 

As reported recently, the hoped-for lift in sales for Chinese New Year does not seem to have happened and this does not bode well for the current year.  

This pattern is even more pronounced in sheepmeat, for which China continues to import well over half NZ’s exports. In 2023 it took 56% of NZ exports by volume, which was 10% more than the year before, although the value was 10% lower, effectively a 20% drop in the average price received. 

This change may unfortunately turn out to be longer lasting because of serious competition from Australia which, following flock rebuilding, not only has higher quantities of lamb and mutton to sell, but also from the beginning of 2023 a zero tariff on sheepmeat exports to China. 

Australia’s free trade agreement with the United Kingdom is also likely to have a negative impact on NZ’s lamb exports to that market, where our lamb has long enjoyed a prime position.

However, the UK is no longer anything like as crucial to the fortunes of our red meat sector as it used to be, though it remains our second largest market by tonnage. Last year the value of UK exports fell below $300m, well behind the US at $544m and China at $1.4bn. 

These figures put China’s importance into perspective and indicate why the downturn in that market has had such a disproportionate effect on the whole red meat sector, but most critically sheepmeat. All the other markets, essential as they are to overall value, are supplementary to China.

For beef, NZ is fortunate to have two main importers – the US and China – which provide the pricing tension missing in sheepmeat. 

Apart from these two buyers the remaining importing countries follow a similar pattern, with Japan, Canada, Taiwan and Korea all taking substantial but not game-changing amounts of product.

There is no doubt NZ’s farmers and exporters do a magnificent job of maximising the returns from our red meat production, producing and selling a massive range of cuts and co-products to a diverse set of markets. 

The gains to be made from trade negotiations in an increasingly protective world are fewer and smaller than they were, with the remaining big prizes like FTAs with India, the US and the Gulf States still looking frustratingly out of reach, despite optimistic statements from the new trade minister. 

The best hope for 2024 is a recovering global economy and the avoidance of greater geopolitical unrest.

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