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Sheepmeat: Opportunities as supply tightens


Opportunities as supply tightens – sheepmeat industry report

Hayley Moynihan

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After two years of easing world sheepmeat prices, a recently released industry report from the world’s leading agribusiness bank, Rabobank, says that the tide appears to be turning. The Global Focus Report titled “Sheepmeat – opportunities as supply tightens” says that opportunities are arising as production in a number of key producing countries declines.

However, report co-author and senior Rabobank Food and Agribusiness Research and Advisory analyst, Hayley Moynihan says that in addition to tightening sheepmeat availability, the challenge of exposing more consumers to the attractions of lamb and mutton also remains.

“Current global market demand is likely to outweigh the ability of New Zealand farmers to supply sheepmeat over the short to medium term, which will strengthen prices,” Ms Moynihan said. “However, the ability to capture longer term gains from this favourable market position will require additional industry investment in consumer education, promotional activities and greater efficiencies throughout the supply chain,” she added.

In addition to these hurdles, the report says that New Zealand sheepmeat producers are likely to continue to face challenges in the form of currency, climate and competing land use in their quest to grow markets and increase production and profitability.

Meanwhile, a combination of drought and reduced returns to wool producers has seen the Australian sheep flock decline from 120 million head in 1997 to around 88 million head as of June 2007, the report said.

“The spring peak turn-off of lambs began earlier than normal in 2007, as producers facing feed and water shortages began de-stocking from August. Once seasonal conditions improve, both lamb and sheep supply is expected to tighten significantly as producers look to rebuild flocks or hold back lambs to grow out,” Ms Moynihan said.

“The eventual easing of growth in Australian lamb exports is expected to lower supply availability in export markets and assist in firming prices over the short-term, she added.

Potential for growth in developed and developing regions

Developing countries are expected to lead global meat consumption growth over the next 10 years, with a volume increase of 27 per cent projected, according to Ms Moynihan. This general growth in meat consumption should also provide opportunities for increased sheepmeat sales into these markets, for both lower priced and higher value sheepmeat items.

“Within the OECD Rabobank also expects to see a number of markets where falling sheepmeat production will offer opportunities,” she said.


Growing import need in Europe

The European market continues to be the largest market for New Zealand lamb, the report says, with a declining sheep flock and stable consumption trends presenting an opportunity for New Zealand exporters to meet a growing import demand.

Sheepmeat production in the European Union is adjusting to new market conditions, Ms Moynihan says with reform of the Common Agricultural Policy altering returns for sheepmeat producers, as subsidies are no longer linked to production levels.

“As a result many of the key flocks are in decline, with the five main producing nations, United Kingdom, Spain, Greece, France and Ireland, reducing their flocks by more than two per cent per annum over the past three years,” Ms Moynihan says.

European sheepmeat consumption is virtually static, according to the report. Despite good volume growth of 10 per cent over the past year in the most important market, the United Kingdom, other markets are in slight decline, Ms Moynihan said, adding that overall per capita consumption in Europe is likely to remain stable at current levels.

“Europe thus presents growing trade opportunities for sheepmeat exporters. The declining European sheep flock and relatively stable consumption trends indicate a growing import requirement. However, reversing the slowly declining appetite for lamb in some regions will be critical for long-term market development,” she said.

Exporters and traders will also need to accommodate disrupted internal trade flows within Europe, Ms Moynihan said, as producers adjust to structural changes in the industry and disease outbreaks introduce another source of volatility.

Korean market potential as yet untapped

While the Korean market is best known as a beef export destination, it also offers potential for growth in lamb sales, according to the report.

“Korea is a relatively high income country, and has cold-chain systems that are well-developed to handle both frozen and chilled lamb products,” Ms Moynihan said. “In addition, the cuisine is well suited to lamb, with BBQ restaurants popular and traditional strews and casseroles also cooking styles well suited to lamb.”

However, despite this potential, the Korean market has yet to experience significant growth in consumption of lamb due to a number of factors, including relatively high import tariffs.

“For lamb consumption in the Korean market to grow, Koreans need to be shown how easy and tasty lamb is when used in their traditional cooking methods. Popular food service channels such as family restaurants and BBQ restaurants are a good way to introduce lamb to a broad range of consumers. Success in retail markets would also require education,” Ms Moynihan said.

Looking to the future, when lamb supply rises, the growth of new markets such as Korea could prove to be important in maintaining lamb prices, Ms Moynihan says.

Positive longer term outlook for New Zealand sheepmeat despite current environment

Sheepmeat production volume in New Zealand has been static over the past 10 years at around 535,000 tonnes cwe, according to the report, however value from production and export has lifted by more than 50 per cent due to the increased proportion of lamb, versus mutton, exported and higher export returns.

“Lamb production has moved steadily upwards through productivity gains achieved, while mutton supply had languished with a relatively stable sheep flock,” Ms Moynihan said.

However, changing land use within New Zealand, combined with drought conditions during 2007 on the North Island’s east coast, have impacted on both flock size and expectations for 2007/08 lamb availability.

Changing land use will have the greatest impact on New Zealand’s sheep industry, according to the report, with the proliferation of lifestyle blocks around the main urban centres impacting on previously economic but smaller-scale pastoral properties. Whilst at the other end of the spectrum, larger, mainly lamb-finishing units, are being snapped up for conversion to dairying or to provide dairy support units on the back of strong dairy returns,” Ms Moynihan said.

In addition to changing land use and climate hurdles, achieving the rewards for on-farm efficiency and high quality remains challenging for a number of additional reasons, Ms Moynihan said.

“Producers are also grappling with reduced returns from export activities, the increasing costs of production and the reduction in processor efficiency as volume throughput falls in some regions and capacity utilisation is lowered,” she said.

Ultimately, widening the consumption base for mutton and lamb globally to sustain higher average returns is likely to alleviate some of the currency and cost pressures, provided the whole supply chain operates efficiently, Ms Moynihan added.

“New Zealand will need to take a leadership role in this regard. Together with Australia no other nation in the world has a sufficiently large scale sheep industry model or critical sector interest to devote the required resources to achieve significant market and producer development,” Ms Moynihan said.

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 is rated one of the world’s safest bank by Global Finance magazine.

Rabobank operates in 42 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank is one of New Zealand’s leading rural lenders and a significant provider of business and corporate banking and financial services to the country’s food and agribusiness sector. The bank has 29 branches throughout New Zealand.

ENDS

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