Content supplied by Rabobank
The New Zealand sheepmeat industry has been riding a ‘rollercoaster of returns’ in recent years, according to agribusiness banking specialist, Rabobank.
A perfect storm of high supply, strong local currency and weak consumer demand has reduced returns and some key challenges must be addressed in order to secure a prosperous future for the sector.
In its recently-released report ‘Sheepmeat – riding the rollercoaster of returns’ reviewing the sheepmeat sectors in New Zealand and Australia, Rabobank says in order to capitalise as conditions improve in established export markets, the sector will need to retain sufficient scale and market presence relative to competing meats.
Rabobank CEO New Zealand Ben Russell says the industry has experienced extreme volatility in returns throughout the value chain, and that is likely to continue with an expected supply shortfall looming in the coming season.
“The New Zealand sheep flock has been declining in size for many years with the drought and lower prices last season likely to see that trend continue next year,” he said. “The shrinking flock has created structural over-capacity that will need to be addressed, however there are risks and practical challenges in achieving this that need to be carefully considered by processing companies."
“Ultimately the path to greater industry prosperity and growth is creating more value for consumers and a more efficient supply chain, including on-farm, procurement, processing and marketing.”
Notwithstanding the challenges facing the sheepmeat industry, Mr Russell says Rabobank remains enthusiastic about the long-term potential for the sector in New Zealand, and working alongside its clients throughout the supply chain to capitalise on future opportunities.
Report author, Rabobank animal proteins analyst Matt Costello says that, given the sector’s exposure to and reliance on export markets, and the fact that sheepmeat is a higher valued product, the sheepmeat industry is dependent on the economic environment and consumers in these markets.
“Market demand for sheepmeat has been subdued as a result of higher prices and fragile economies, especially in Europe, whereas Asia and the Middle East have emerged as stronger markets and should be cultivated,” he says. “With an improving outlook in some of the lucrative sheepmeat export markets and with the optimism surrounding the potential of developing markets such as China – New Zealand and Australia will be the only countries positioned to supply consumers around the world."
“It is increasingly important that the sheepmeat sector retains significant scale and market presence in comparison to competing meats to remain viable and capitalise on the longer-term growth opportunities.”
The big ‘dip’
The Rabobank report finds that the variation in returns for sheepmeat producers and exporters over the past few years has been significant, with “unprecedented” volatility.
Mr Costello says there is a lack of confidence among producers across the sheepmeat industries in both countries.
“The extreme high and low points over the past few years have not helped anyone, only serving to add to frustration and disillusionment,” he says. “In simple terms, historically tight supply from both New Zealand and Australia underpinned the initial surge in livestock prices during 2010 and 2011, and the ensuing weak prices through 2012 and 2013 have been driven by higher short-term production due to the extremely dry conditions across both countries.”
While tighter supply in 2013/14 will assist to firm pricing over the coming year, a more sustainable market recovery will need to be driven by improved consumer demand and ultimately a more buoyant global economy.
Emerging markets
Globally, rising prices have been met by stubborn consumers in the major sheepmeat export markets of the EU, UK and the US.
The emergence of developing markets throughout Asia and the Middle East has helped to offset the declines in volumes and, to a lesser extent, returns from the traditional export markets.
Not only is weak consumer demand impacting returns for the industry currently, but a persistently high exchange rate has also been challenging both countries.
Even with a slight fall in recent weeks, the prolonged high dollar in both New Zealand and Australia has been pressuring competitiveness in the global market, resulting in substitution and weaker export demand for sheepmeat, the Rabobank report says.
China, the report says, is a good example of the emerging market demand for sheepmeat.
Mr Costello says China became the largest single sheepmeat export market for New Zealand in 2012, surpassing the UK for the first time ever.
Furthermore, China is now Australia’s largest sheepmeat export destination.
“The emergence of China has seen a much greater utilisation of the whole carcass as demand has grown for items that were once rendered or offloaded at a discount and sheepmeat demand is expected to grow as affluence continues to increase,” Mr Costello says.
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20 Comments
My family farm was sold by my brother two years ago for 2.8 million. I talked to a real estate agent who informed me that after the drought this year, these types of farms have collapsed in value.
He thinks as low as $400 a stk unit. That makes the farm worth $1.12 mill, or its value in 1973.
Thats 40 years ago!
That when Fert was @22 a tonne not $400,and we actually made some money. Rates were $300 not $10,000, a single shepherd was on $75 a week and fuel was cheap as chips, cattle were 1.47cents an lb, a new ute was $3000. My boarding school was $200 a term.
Now we sold 18,000 tonnes of lamb to China in the last quater, 1000 to the USA, 4000 to the UK. We sell meat to China at $4.00 a kg and pay farmers $6.00 while the meat industry borrows $738 mill last month.
What happened to our traditional markets they appear to have collapsed, anyone want to talk about that?
I think as farmers we have a right to be angry.
Things are going horribly wrong in NZs heartland and its going to hit a city near you soon.
That Ok with you David?
What happened to our traditional markets?
No idea from an export perspective but if I look at our own consumption over the years. When I grew up in the States 50s-70s, we used to eat lamb only on very special occasions - Easter, birthdays etc. as it was really expensive and considered a huge treat to have a leg roast.
Arrived in NZ late 70s and we were eating a leg roast every Sunday and chops at least 1-2 times a week. I thought I was in heaven! As lamb got more expensive through the 80s, Sunday roasts gradually turned into chicken - something I understand NZers had previously thought an expensive meat (compared to it in the US at the time where chicken was by far the cheapest meat available - still is there, I suspect).
So lamb became a delicacy here in NZ (a bit like fish) - crazy really.
Then there's wool. What a mess NZ Inc. has made of that. We tried our hardest to buy a wool carpet recently .. never heard so much bad mouthing of the fibre by retailers, just shocking. Couldn't believe it.
Ended up with a wool blend but it wasn't the product the retailers were pushing at all .. that's for sure.
Wally, the banks keep a lot of security when it comes to farms. They would not have lent more than 1.2 Mill, I dont think they would have gone as far as 1.4 and that includes livestock which should be worth 300k.
So even if the farm goes for a million, its going to leave the bank in the clear, dairy not so cut and dry.
The problem is that these farms need a lot of capital improvement. Woolsheds,houses,fences and fert. Often 100's of thousands needing to be spent.
yes yes a total right to be angry imagine
had to sell the 2.8 million asset --- no more boarding shools and well hard to buy that new ute this year!
yes a city near you sure goign to miss the trickle down effect of all that tax you pay ... but wait you dont do you
You must understand that farms are businesses. Some are bigger some are better, some farmers work harder some work smarter. Some inherit a fortune some get left with the debt.
When I went to boarding school it was %90 farmers, this year its less than %10.
Farming was great up to when the Uk joined the EU. We had an unrealistic expectation of the future.
In 1984 my farm expenses were %35 of my gross sales now they are %85. We have been bled dry so people in town can enjoy lifestyles that are not based on production, when we hit the limits of our production, we used credit to fill the void.
Love to see how you get on, when we get to live within our means and pay the interest bill on the previous debt as well.
Farming was never able to support 50 billion of debt let alone the 185 billion of household debt, but we all thought inflation would take care of it, no longer sure about that. I fact it looks like deflation.
Most farms pay tax, I always did, rather be paying it because I made money, than not paying it because I was losing money.
Went to Sacramento airport on Saturday, 8 people in it, looked like Napier, not the airport of a city with 1 million people.
The USA is not going to be able to support our inflation any longer.
Hypertiger
Well yield rates have been dropping for 30 years. Meaning that the productive sector of the economy has been producing less and less yield while the non productive sector has been consuming more and more debt to make up the difference with volume. Now that the minimum potential yield volume ratio is being hit. It's becoming harder and harder to live beyond the means of the productive sector of the economy. There are just too many people being sustained on borrowed time.
speaking of perfect storms...
"Manufacturing has begun to contract in the US and China for the first time since the Lehman crisis, raising fears of a synchronized downturn in the world’s two largest economies."
http://www.telegraph.co.uk/finance/economics/10096951/Global-shock-as-manufacturing-contracts-in-US-and-China.html
Pigs and chickens are monogastric, they are %80 more efficient than Ruminants.
Established in 2009, Jilin Baoyuanfeng produces 67,000 tons of processed chicken per year and employs about 1200 people. It serves markets in 20 cities nationwide and has won numerous awards for its contribution to the local economy, according to online postings. The plant is located outside the city of Dehui, about 800 kilometres northeast of China's capital, Beijing.
http://www.stuff.co.nz/world/asia/8752063/Doors-locked-in-deadly-China-fire
Wiki
A monogastric organism has a simple single-chambered stomach, compared to a ruminant organism, which has a four-chambered complex stomach. Examples of monogastric animals include omnivores such as humans, rats, andpigs, carnivores such as dogs and cats, and herbivores such as horses and rabbits.[1] Herbivores with monogastric digestion can digest cellulose in their diets by way of symbiotic gut bacteria. However, their ability to extract energy from cellulose digestion is less efficient than in ruminants.[2]
Herbivores digest cellulose via microbial fermentation. Monogastric herbivores which can digest cellulose nearly as well as ruminants are called hindgut fermenters, while ruminants are called foregut fermenters.[3] These are subdivided into two groups based on the relative size of various digestive organs in relationship to the rest of the system: colonic fermenters tend to be larger species such as horses and rhinos, and cecal fermenters are smaller animals such as rabbits and rodents.[4] Great apes (other than humans) derive significant amounts of phytanic acid from the hindgut fermentation of plant materials.[5]
Monogastrics cannot digest the fiber molecule cellulose as efficiently as ruminants, though the ability to digest cellulose varies amongst species.[2]
A monogastric digestive system works as soon as the food enters the mouth. Saliva moistens the food and begins the digestive process. After being swallowed, the food passes from the esophagus into the stomach, where stomach acid and enzymes help to break down the food. Bile salts stored in the gall bladder empty the contents of the stomach into the small intestines where most fats are broken down. The pancreas secretes enzymes and alkali to neutralize the stomach acid.
I work with many farmers in Australia. Virtually all sectors have found that their terms of trade (Income v/s costs) have been steadily deteriorating over the last 50 years.
Sheep farmers have been badly affected. 50 years ago the buk of their income came from wool while meat was almost a byproduct. Today it is almost the reverse. Export opportunities for meat to Britain are badly affected by the high value of the $(Aust) v/s the UK pound
Fruit growers are also badly affected. 25 years ago, a tray of stone fruit was worth the equivalent of 2 hours wages for a picker, now the same tray of fruit provides the orchardist with just 20 minutes of a pickers time. Additionally, exports have almost dried up to some traditional markets because the high $ (Aust) makes it uneconomic to continue the trade.
Many of the farmers I work with have the knowledge and capacity to increase production substantially. However to do so requires a substantial investment of both labour and capital which means borrowing money. With their margins being so tight, they do not have the confidence to make the investment in improving their productivity.
I find it rather ironic, that many people are talking about the worlds population increasing by about 40% over the next 40 years and that there is a bright future for food production while at the same time many farmers are dependant upon off farm, family income to survive. Unless the price being paid to farmers for their produce increases dramatically, so as to improve farm profitability, production on many farms is not likely to increase. However, any increase in the price of food is a political issue and many people are likely to criticise farmers if the price of food was to increase substantially.
In NZ we have applied a simple measure to fix the farm confidence issue - Treasury has forecast a 10% improvement in terms of trade for agriculture.
Our banks believe it. So too government ministries, Federated Farmers, our crown research sector, universities and everyone keen to defend the status quo.
Problem solved for the time being.
What man in his right mind would buy a farm when we are so dependent on China and Asia looks to be tanking. It looks to me like we have a problem Wellington
We are actually getting increasingly worried. The numbers have disappointed. Not just in China but throughout the Asia-Pacific over the last couple of months," Frederic Neumann, co-head, Asian economic research at HSBC told CNBC Asia's"Cash Flow."
"And it is not just a slowdown in exports. We also see some weakness in domestic demand coming through as well," he said.
What man in his right mind? That is certainly the nub of the question.
NZ has some deeply entrained belief systems when it comes to agriculture.
This is the first time though that I have seen any admission of falling demand from those defending the status quo:
weak consumer demand has reduced returns
Market demand for sheepmeat has been subdued as a result of higher prices and fragile economies
But it is all still rosy further out:
Notwithstanding the challenges facing the sheepmeat industry, Mr Russell says Rabobank remains enthusiastic about the long-term potential for the sector in New Zealand, and working alongside its clients throughout the supply chain to capitalise on future opportunities.
Not mentioned though is that there is probably going to be some sort of bailout needed to get there.
NZ has some deeply entrained belief systems when it comes to agriculture.
The problem seems to have migrated beyond the realms of agriculture.
A damning report has slammed the implementation of Novopay and revealed the troubled system has cost taxpayers double what was expected.
Two Ministry of Education staff will be investigated as a result of the report, but Labour education spokesman Chris Hipkins said the ultimate responsibility lay with ministers who should have drilled down into the advice given.
Thousands of teachers and school staff were underpaid, overpaid or not paid at all.
The Ministry of Education and Novopay provider, Talent2, have been scrambling to fix the problems since.
The relationship between the ministry and Talent2 was "not always healthy" but the ministry did not invoke breaches of the contract despite having grounds to do so.
"Talent2 missed agreed milestones and deadlines... Talent2's inability to deliver consistently against milestones led to a loss of trust and confidence in its ability to deliver the solution." Read and cry
Certainly Colin. Problems due to government management deficits are proliferating - it seems the failure to rein in our excessive cost plus culture has caused traditional meat market destinations to revolt in response to the expense of our delicacies. Read more
People in Britain should eat meat less often, in order to help ease the food crises in the developing world, an influential committee of MPs has urged.
It could also help to mitigate the rampant food price inflation that has seen the cost of staple foods in the UK rise by close to one-third in the last five years.
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