There are huge question marks over the long term future for sheep and beef farming and all the associated businesses that depend on it. Threats to the sector abound: the persistent fall in sheep numbers, pricing volatility with a mainly downward trend, agricultural land conversion to other uses including urban sprawl, and the increasing age of pastoral farmers all point to a sector that has passed its peak. The chances of it staging a permanent reversal are nil.
The two main exporting countries, New Zealand and Australia, will continue to obtain a certain level of demand for premium product from those consumers who can afford it, but the majority of the carcase must still compete as a commodity against cheaper proteins. Only countries where sheepmeat is preferred and which can produce it at a cost the population can afford or receive government support will have a sustainable, domestic market.
The past few years have been very tough for New Zealand farmers and serve to underline the threats to the sector’s longer term survival. After a period of strong demand from China, leading to unprecedentedly high prices and uncompetitive returns from established markets, the bottom fell out of the lamb and mutton price for which the traditional markets could only partially compensate.
Falling livestock numbers will eventually lead to sheep and beef farming losing its status as one of the country’s main wealth generators. This trend has been accelerated by the threat of climate change, while government policies directed at mitigating its effects have occupied a huge amount of airspace in the last few years, requiring farmers to cope with a host of new regulations. The present government’s changes are welcome, but may be too little too late.
At the moment there is solid demand out of the United States for beef, as well as a general market recovery for sheepmeat, which bodes well for farmers and processors for the immediate future, except for the likely outbreak of a global trade war, as Trump pursues his intention to introduce tariffs on imports from everywhere. In case we thought New Zealand might escape the worst effects, it now seems GST will be considered a tariff to be punished in return.
Volatility will be the defining characteristic which makes it very difficult for farming businesses to plan a sensible strategy for future investments. It will take a substantial risk appetite to plan an expansion in sheep numbers, when the market is so uncertain. Lamb is a niche, expensive product as well as being essentially a commodity for which consumers will only pay so much before it falls off the shopping list or menu.
Attempts to brand lamb, and beef for that matter, only apply to the high value cuts which make up a small proportion of the carcase. Silver Fern Farms and Alliance have invested more in branding than the rest of the industry, but to this point the more profitable processors would appear to be those that accept the largely commodity nature of the product.
As sheep and lamb numbers decline, processing capacity will come under pressure and less efficient plants will close. Short term procurement competition is likely to sustain the price to the farmer, whether or not this is justified by the market return. Evidence would suggest it is better business practice to invest capital in ensuring the efficiency of processing facilities than spending large amounts on marketing a commodity product.
Despite the MIA’s belief it can conduct a successful, targeted marketing campaign for natural, grass-fed red meat with Taste Pure Nature, I remain unconvinced of its potential effectiveness. It makes more sense to be the most efficient processor than to spend money on brand promotion.
Another challenge for the sector is the age and profitability of the average sheep and beef farmer who must inevitably sell up at some point, either within the family or to an outside party who is more likely to convert to an alternative land use. Some farmers are already reducing sheep numbers in favour of cattle which may be more profitable and are certainly less labour intensive. The collapse of the wool price has had a major impact on the profit to be made from sheep and this won’t change barring a miracle.
The processing and trading parts of the sector continue to work hard to maximise revenues globally for the whole carcase, including all the higher and lower value cuts and the co-products. But this is essentially a targeted trading activity based on customer knowledge and relationships, not a high cost marketing exercise.
All parts of the sector must work together to tackle strong and possibly irreversible headwinds to achieve the best future they can. But it is ultimately up to the key participants - farmers and processors – to decide what makes most sense for their individual business survival.
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19 Comments
Interesting note that the more basic commodity category cuts are offering a better trade than those sufficiently high end to be branded. NZ beef has long been a trusted and necessary supplement as a grinding meat to North American beef, the massive burger trade. This serves well for the manufacturing grades, cow fore’s and hinds and bull virtually as a by product of dairying. As well though the forequarter cuts from premier steer, chuck, shank, etc can serve the same market. Unfortunately the same does not apply to lamb where really only about 35% of the carcass can provide cuts for a white table service and even less if the mid leg is not wanted. That means invariably as a ratio, the upgrading does not cover the downgrading, nor the labour intensive small unit processing cost.
With the grinding beef market holding up price's as you say a by product of dairy, and the continued growth of convienence food, we have a unique opportunity as a country to use another 1.8 million animals to replace sheep, can utilize technology for grazing management reducing labour issues, and replicate the grass based production system of lamb with a young beef system, specifically designed as a low carbon ingredient for manufacturing able to be supplied to the very companies looking for solutions to their Scope 3 emissions, at 50% lower methane and simplified processing system, they also offer a valuable low carbon leather, while removing the social license issues that could disrupt our valuable dairy industry with our looming bobby calf animal welfare issue! Also of note is a fresian bull returns 3 x the margin than an Angus steer for a meat company!
The grinding meat market has growth opportunity beyond Nth America. The fact is that when consumption is price pressured in any market the population will likely commence eating more meat patty burgers than steaks. That commodity base is the broader and deeper segment of the triangle and will, in those times, invariably grow upwards. NZ may be well served by considering converting even more previous sheep grazing to dairying, including winter sheds. Before that though questions of effluence and other environmental issues would need to be solved.
Great comment and I wholeheartedly agree. Also as a farmer I could 3x my kg of meat per ha under this young beef system.
I can’t understand why there’s not more of a push for this young beef system, instead beef and lamb are spending our money looking at breeding cow genetics again for a measly 1% improvement.
I do fear for our food security if these industries decline. Will be interesting to see if tarrifs do anything to/for us.
As far as food security goes, protein isn't a problem. I would be more concerned about vegetables as there is little profit and a lot of work in growing these. NZ can supply a lot but to keep growers interested the price needs to increase a lot.
Missing export dollars will be the problem if farmers lose interest in farming livestock. And once again the only way to keep farmers farming is with high prices.
Vegetables have very low food value unless you mean all plants like seeds and fruits too. Even then they hardly compare to meat as a nutrient source.
You have to look at the amount of protein Zac, we are not going to run out any time soon in fact there is surplus. On the other hand more imported vegies are on the rise. Also grain is an issue.
This is just not true Zachary. Plants can provide all the nutrition required - except B12 (unless you don't wash your vege) - and they don't come with saturated fat, increased colorectal cancers, TMAO etc.
A bit left field.....but
I ponder about the role banks have played in ramping up the cost of farm land in NZ.
55 years ago, dad bought a second farm, 1200 acres hard hill country in southern Hawke's Bay - a sheep and beef breeding block, to complementthe homefarm finishingoperation. Cost $120k going concern. $70k land, $50k stock and chattels. 5 or so years ago the farm sold for $2.4m land only. An increase in value of x34. The productivity of the farm may have improved a bit and stock prices are higher, over that time period but neither by a factor of x34.
Looking at bank profits, I'm inclined towards a conclusion that banks are a major driver of hard asset value inflation.
Perhaps NZ should look at dusting off the Mortgage Relief Court to drive a reset of farm land values, along with regulations to maintain land classes 1-5 in food production.
There's no non-agricultural rising star out there that I'm aware of that has the potential revolutionise the export earnings (BoP deficit) to match or exceed agriculture. Therefore it has to be in the national interest to ensure that agriculture can thrive and support young farmers into farm ownership.
I hope there is something on the horizon besides Ag, forestry etc Lou, have to agree it doesn't look good at this point.
I don't believe the money lenders cause land prices to rise. It's the buyers pushing up prices. Anyone who can convince a lender that they are good for the money can pay whatever they like and so it goes on.
I guess if China takes over all land will be nationalized and people will get to farm on a rotational lease basis. What fun!
I don’t think the Chinese will buy the land. More likely wealthy Europeans.
Carbon credits/biodiversity credits maybe the best option for a lot of hard land?
How long can a 60 to 70 year old farmer keep going? Who will buy them out?
I was actually being "tongue in cheek" thinking of the war ships out there. The Chinese won't buy the land but if they were to control in the same way as their home land then land value won't be a problem.
Hans, My view is the complete opposite of yours on the cause of changes in rural land prices in NZ.
Vendors want as much as possible for their farms.
Using a simple scenario of a youngish farmer, say having $10 per milk solid as equity - farm prices reflect how much banks will lend in addition to the $10. If they will lend $10 the buyer can purchase to $20 however if the bank will lend $20 the purchaser can go up to $30 per kg ms.
History shows that when banks withdraw from lending the rural market declines and when they are aggressive farm prices rise.
The banks willingness to lend has a direct relationship with farm land prices.
Been saying it for years, exactly the same in the housing ponzi/ market. Bank lending determines the price. Other stuff has an effect but that is primary. But I'm of course not an economist so know nothing.
Love your sense of humour Hans.
Another way of looking at it is that farmers are their own worst enemies. Both recently legislated cooperatives had (probably still do) vocal detractors who were/are adamant they could do better on their own.
Meat is the food of the elite. Don't fall for the nonsense that says humans can get all that they need from vegetation. Nothing better for you than beef and lamb.
Again, patently untrue. The science (not funded by meat Co's) clearly states otherwise.
NZ produces great meat. The issue is simply we can’t make enough revenue from it to cover all the costs and make a profit for processors and farmers, especially in sheep. Low cost operations will be fine. It’s the higher cost end, sheep heavy that will/are struggling. This is occurring all over the world and not unique to NZ.
Other countries are producing protein, and at a price, consumers like and can afford.
The industry will sort it out either collectively or through natural attrition in processing and higher cost farms disappearing as they have done before.
Trumps dismantling of USAid and potential crop insurance changes are the next potential disruptor as without this a lot of crop in the US doesn’t have a home - where will this go and what will happen to those farms? Combined with the rise of massive S American farming, an ageing and shrinking rich world population the changes won’t stop for anyone. Blaming governments, banks etc etc will not help as these other factors are the main drivers of change.
As usual there will be new opportunities but what has worked in the past century won’t be the ticket to wealth it once was.
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