Change is needed to deliver stronger and more consistent sheep meat returns, and lifting domestic consumption is one of three key pathways, Rabobank says

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While the long-term outlook for New Zealand sheepmeat remains positive, the current industry ‘down cycle’ has highlighted change is required to create more consistency in earnings along the supply chain, according to a new report by food and agribusiness banking specialist Rabobank.

In the new report, titled Watering the green shoots in New Zealand sheepmeat, Rabobank says New Zealand sheepmeat values dropped dramatically in the 2023/24 season following two years of strong export returns.

“Total average export values dropped from $12.63/kg free on board (FOB) in October 2022 to as low as $8.08/kg FOB in December 2023, dragging farmgate prices down in the process,” report author senior animal proteins analyst Jen Corkran said.

“In our assessment, the major factors that caused the cycle to bottom were global macroeconomic and geopolitical factors filtering through to New Zealand’s primary producers, and a fall in New Zealand sheepmeat exports to China. This was then made more challenging due to increased competition from Australia.”

“The timing of this downturn was unseasonal, and the price challenges coincided with high on-farm costs that squeezed margins for both producers and exporters.”

Ms Corkran said New Zealand’s sheepmeat sector would be wise to reflect and learn from the downturn and to embrace the change needed to deliver stronger and more consistent returns year-on-year.

“For New Zealand sheep production to be a competitive part of the farm system for red meat producers, change is required,” she said. “And in this new report, we identify three pathways that we believe could help lift sheepmeat returns moving forward: focusing on increasing domestic consumption, reassessing trade and diversifying export markets away from China, and investing to boost the competitiveness of New Zealand sheepmeat.”

“The good news is that 2023/24 likely saw the bottom of the cycle and, based on both supply and demand dynamics, lamb projections for 2025 and beyond show upside. If the industry takes a strategic approach, our view is that the medium-to-longer-term upside could be greater from 2026.”

More lamb on Kiwis’ dinner plates

The report says the majority of New Zealand lamb is exported, and over the past five years, New Zealand’s domestic consumption has averaged just five per cent of total production.

“Obviously, domestic consumption is limited by population size, but at 1.95kg, New Zealand per capita consumption is not even one-third of Australia’s 6.4kg (2023 OECD data),” Ms Corkran said.

“If Kiwis were to increase per capita consumption to Australian levels, it would place the domestic market behind only China in terms of overall consumption of New Zealand sheepmeat. Australia’s much higher domestic consumption adds resilience to the lamb market, as strength in domestic retail trade can help balance out global demand dynamics and associated price volatility.”

“What Australia has done well to support domestic consumption is to promote Australian lamb quality and nutritional value. New Zealand has pushed these messages in the past, but opportunity exists for industry bodies to invest in marketing the New Zealand lamb story to reposition lamb in the eyes of local consumers.”

Strategic approach to trade

In the years ahead, the report says, New Zealand has an opportunity to deeply understand the export markets and consumers it supplies with its valuable sheepmeat.

“Lamb is a small part of global protein consumption, and the number of exporters is limited with Australia and New Zealand dominating global sheepmeat trade. New Zealand should aim to be clever and careful in finding a good balance of trade partners for both commodity and differentiated products in the coming years,” Ms Corkran said.

The report says China, the EU, UK, and US are currently the top export destinations for New Zealand sheepmeat volumes, with China taking nearly half of New Zealand lamb in recent years.

“Although exports to China do not have the highest value per kilogram, the market has served New Zealand well in taking volumes of lamb and mutton,” Ms Corkran said.

“The main advantage of trade with China is that more of the sheepmeat carcass is utilised, for both mutton and lamb. Although shipments to China have the lowest export value per kilogram of product, the market takes high volumes of lower-value meat, with exports peaking in 2021 at nearly 250,000 tonnes valued at close to $1.43 billion.

“With New Zealand lamb being recognised in China as a high-quality and nutritious product, more work could be done to ensure a foundation for ongoing success when it comes to the value this can gain. Chinese consumers’ growing interest in nutrition and health provides an opportunity to promote how New Zealand lamb fits alongside beef and seafood as a highly nutritious and naturally produced protein.”

While markets that can and will take lower-value carcass sheepmeat cuts like China will remain important for New Zealand, Ms Corkran said, opportunities in the UK, the EU and the US should also be reassessed.

“NZ has historic trade relationships with the UK and EU and must continue to foster relationships to make full use of free trade agreements and tariff-free access. In 2015, New Zealand sent more than a third of total combined sheepmeat exports to these markets, but as exports to China increased, the dial shifted slowly downward,” she said.

“With the UK sheep flock in decline and lower production from the UK expected for the medium term, import demand is likely to increase. Although domestic demand is unlikely to grow in the UK, New Zealand’s share of the pie could. New Zealand lamb is a seasonal favourite in UK retail and is often promoted for holidays like Easter.

“Further opportunities also exist in the US market where the value of New Zealand lamb is fully realised via consumers’ willingness to pay for higher-value frenched racks. But sheepmeat is a small part of retail in the US and, in order to maximise shelf inventory, New Zealand needs to find a way to add to existing inventory in the retail space or, alternatively, turn focus to just foodservice. This won’t be easy, but there is scope for incremental gains.”

The report says sending the right cuts and carcasses to the highest paying markets and leveraging the nature-positive attributes of New Zealand’s sheep farming systems are further factors which should be taken into consideration as part of the sector’s overall approach to optimise export markets.

Investing to lift sheepmeat competitiveness

The report says technological advances that can add efficiency and reduce cost are worthy of research and development (R&D) spending to help future-proof the sheepmeat industry.

“For producers and the industries supporting on-farm productivity in New Zealand, this could mean accelerating the rollout of R&D programs that look at genetics on-farm for efficiency in liveweight gains, as well as efficiency in animal production around total feed eaten, fertility and disease risks,” Ms Corkran said.

“Investing in potential opportunities around value-added products from parts of the sheepmeat carcass, for example blood or offal for future high-value pharmaceutical products, could also add to export income.

“The government and industry bodies would be wise to invest in research into all areas of technology, as technologies and innovation will only increase in the future. Sectors and businesses that invest in R&D can stay ahead of the curve, and New Zealand will need to do the same to keep up with the rest of the world.”