NZ sheepmeat- will the fairytale last?

More good news for the sheepmeat sector.  On the back of a welcome recovery of farmgate prices last season, NZ sheepmeet producers can expect prices to hold steady for the coming year. Rabobank analysts report that some customers have been lost due to the high price of lamb but this has been balanced by increased demand from China.

Supply has been a key driver to lamb prices and a decade of shortages worldwide has driven them up. Key recent influences have been a higher than average mutton slaughter in 2011, lower lamb volumes, and higher ewe deaths from last year's disastrous spring, and a favourable grass growing season in Australia.

Rabobank suggests that the impact of these better prices should not influence worldwide supply levels for at least three years but warn NZ producers to watch the costs of production and the environmental impact of sheep enterprises.

Report author, Rabobank analyst Rebecca Redmond says as the “fairytale 2010/2011 season” draws to a close, the future continues to look bright. “Even at higher prices, overall demand for NZ sheepmeat has been holding steady in developed markets,” Ms Redmond says. “Although some consumers are struggling to pay the higher prices, there are those that continue to enjoy lamb and the lift in revenue is balancing the fall in consumption.”

In developed markets, demand for sheepmeat to is expected to soften slightly ultimately limiting further upside in the current retail pricing while economic conditions remain soft. However, this neutral outlook in developed markets is balanced by emerging market demand, such as China, which is expected to lift with income growth and the modernisation of supply chains in the retail and food service sectors.

 The Rabobank report says a decade of shortening of supply from key sheepmeat exporters including NZ, Australia and the UK, along with a decline in the world’s biggest domestic flock in China, reflect the changing dynamic around sheepmeat production.“This limited supply is a key driver of the high prices,” Ms Redmond says. Production recovery from NZ is likely to remain limited for the next few seasons, due to higher-than-average mutton slaughter in 2011, lower lamb numbers in 2010/2011 and some ewe losses after the September 2010 storms.

Increasing affluence leads to an increase in demand for meat, including sheepmeat, Ms Redmond says. Coupled with declining domestic production in China, imports have been lifting in volume and value to this region. Lifting income levels has the potential to increase sheepmeat consumption by 50 per cent in this market.” Rabobank’s forecast is that global sheepmeat supply adjustments will happen but it’s difficult to see this impacting for at least three years. Even then, the supply lift will not return to levels of the past decade.For sheepmeat producers, structuring farm businesses to capture higher returns needs to be balanced against the cost increases, albeit in an environment where farm gate prices are expected to stay above five-year averages, Ms Redmond says.