20 September 2010

12 minute read

Report Highlights:

MY2010 Slaughter is now estimated at 3.797million head and total exports stable at 510,000T CWE and the total inventory of beef livestock has been estimated to have fallen 4.3 per cent to 3.92m head in MY2010. For MY2011 total slaughter is forecast at 3.76m head and exports are expected to drop to 496,000T CWE.

Executive Summary

Total cattle slaughter rates are running marginally behind last year. The decline is not as large as originally forecast as a drought in the upper portion of the North Island encouraged farmers to send cattle to slaughter early. The MY 2010 total slaughter estimate has been revised upward by 1.6 per cent to 3.797 million head.

Total slaughter in MY 2011 is forecast at 3.76 million head, a 1 per cent decline from last year. The export forecast for MY 2010 remains unchanged at 510,000 tons carcass weight equivalent (CWE) or 364,286 tons product weight equivalent (PWE).

Although exports during the first half of MY2010 were running 2.4 per cent ahead of last year, demand in most export markets is sluggish. Subdued demand, combined with the lingering effects of the drought, a relatively severe winter, and a strong New Zealand dollar, suggest exports will not increase above the originally forecast level. The forecast decline in production, combined with stable domestic consumption, suggests that exports will fall 3 per cent in MY 2011 to 496,000 tons CWE.

The United States continues to be New Zealand’s single largest export destination. However, the importance of the U.S. market has drifted downward from 66 per cent in 2000, to 49 per cent in 2005 and 46 per cent in 2009. In the meantime, South Asian markets, particularly Indonesia and the Philippines, and to a lesser extent Korea and Japan, have grown in importance. This trend is expected to continue in the future. Absent any significant changes, exports to the U.S. market are forecast to fall to 221,000 tons (CWE) in MY 2011. Manufacturing or processing beef accounts for the bulk of New Zealand exports to the U.S. market.

Production

Beef Herd Numbers

According to Beef + Lamb New Zealand (formerly Meat and Wool New Zealand), total beef cattle numbers fell 4.3 per cent to 3.92 million head as of June 30, 2010. The decline was more pronounced on the South Island, where numbers fell 5.9 per cent compared to 3.7 per cent on the North Island. A tight supply situation for feed drove a decline in finishing cattle in many regions of the country. A return to lamb finishing, which has become more profitable over the last two seasons, also contributed to the decrease. Beef + Lamb also reported that the number of beef breeding cows increased 3.7 per cent to 1.136 million due to a rebuilding of beef herds, particularly in the hill country and the eastern regions of both the North and South Islands.

MY2010 Slaughter Numbers

Total cattle slaughter rates are running marginally behind last year. The decline is not as large as originally forecast as a drought in the upper portion of the North Island encouraged farmers to send cattle to slaughter early. The MY 2010 total slaughter estimate has been revised upward by 1.6 per cent to 3.797 million head.

The estimate for the number of steers slaughtered has been revised upward by 23,000 head to 609,000 head, and the estimate for heifers has been revised upward by 63,000 head to 483,000. The increase in the slaughter of heifers partly reflects surplus dairy heifers being culled. The drought, along with the ongoing conversion of beef and sheep farms to dairy farms, also resulted in more capital sock being sent to slaughter. While the steer and heifer slaughter is up, the estimate for bull slaughtered has been revised downward because of a lack of replacements being reared out of the surplus progeny in the dairy sector.

MY2011 Slaughter Numbers

Total slaughter in MY 2011 is forecast at 3.76 million head, a 1 per cent decline from last year. However, an expected 40,000 head (2.7 per cent) increase in the calf kill is masking a forecast 5 per cent drop in slaughter numbers of other adult cattle (heifer, steer and bull) to 1.45 million head. (A decline in heifer and bull slaughter, by 33,000 and 36,000 head respectively, account for 90 per cent of the reduction in slaughter numbers for the other adult category). An ongoing decline in the size of the New Zealand beef herd, which has fallen 11 per cent over the last five years, means there are simply fewer animals available for slaughter. A lack of profitability, especially compared to dairy production, is a primary reason for the drop in herd size. Drought and land use changes (conversions to dairy production) over the past three years have also played a part in the decline in stock numbers. In addition, land formerly used for beef is increasingly being used for dairy support, either for grazing replacement stock or supplemental feed production.

Future Prospects for Cattle Production

Slaughter numbers in the New Zealand beef sector are expected to continue to decline in the near term. Poor profitability is a major reason for the decline. Increases in on-farm costs, including compliance costs, combined with a continued reliance on supplying manufacturing/processing beef, have conspired to minimize returns to producers. In the current environment, many producers do not find it economical to feed supplements. Instead, they rely on pasture production, which can very significantly from year to year.

Beef Production

MY2010

The forecast for MY 2010 beef production remains unchanged at 619,000 tons. Although the total slaughter estimate has been revised upward, average carcass weights are likely to be down. The drought in the northern half of New Zealand during the first half of the marketing year hastened slaughter but resulted in lower live weights.

MY2011

MY 2011 production is forecast to fall 2.3 per cent to 604,750 tons. This is primarily the result of a 5 per cent drop in other adult cattle slaughter (steers, heifers and bulls) which reflects the ongoing decline in herd size. Although average carcass weights will likely increase, it will not be enough to stem the drop in production.

Consumption

Consumption is forecast to remain stable through MY 2010. Supermarket prices for beef are relatively high compared to chicken and pork, and unless relative pricing changes, consumption levels are not expected to change.

MY2010

The export forecast for MY 2010 remains unchanged at 510,000 tons carcass weight equivalent (CWE) or 364,286 tons product weight equivalent (PWE). Although exports during the first half of MY2010 were running 2.4 per cent ahead of last year, demand in most export markets is sluggish. Subdued demand, combined with the lingering effects of the drought, a relatively severe winter, and a strong New Zealand dollar, suggest exports will not increase above the originally forecast level.

Exports to the US Market Stable

At 111,278 tons PWE (155,799 tons CWE), exports to the US market during the first half of the marketing year were running 2,000 tons behind the same period last year. For the year, exports to the US market are forecast at 167,000 PWE (235,000 CWE), which is the same as last year. Exporters are reporting confidence in the US market at the moment. They are encouraged by the tight supply situation and don't see much downside risk to pricing in the US market over the next six months.

Although Asian markets are becoming increasingly important to New Zealand exporters and the New Zealand Government is aggressively negotiating FTAs with a range of countries, at 46.4 per cent of total exports, the US market is still the top export destination for New Zealand beef by far.

Korea is New Zealand’s Second Largest Market

Korea is New Zealand’s second largest market by volume, accounting for 9.3 per cent of total exports for the first six months of the MY. Exports during this period were up by 3,459 tons, or 18.4 per cent, but exporters are reporting a softening of demand during the third quarter. They also report heavy competition from U.S. and Australian exporters.

The New Zealand Government is in the process of negotiating a free trade agreement with Korea.

Exports to Japan Increase

During the First Half of the Year During the first half of MY2010, exports to Japan jumped 2,574 tons, a 14.8 per cent increase, but exporters report that current demand is sluggish.

Export to China and Hong Kong Down Significantly

During the first half of MY 2010, exports to China fell 17 per cent to 1,381 (PWE) and exports to Hong Kong fell 30 per cent to 3,600 PWE. Exporters report that price-sensitive Chinese buyers were able to find competitively priced, low-value cuts elsewhere.

While many New Zealand exporters see significant opportunities in China over the long term (with some estimating a market size of 20-30,000 tons PWE), they note that their regular customers are still predominantly taking low-value cuts. Although Chinese buyers tend not to want to go beyond a certain price level, New Zealand exporters report that there are opportunities to widen the product range going into China. In addition it has been reported that Chinese buyers have been sampling a wider range of products.

New Zealand’s free trade agreement (FTA) with China, which went into force in 2008, hasn’t yet had a measurable impact on trade. Under the agreement, Chinese tariff rates on beef have been decreased from a range of 12 per cent to 25 per cent, to 4 per cent to 16.7 per cent. Tariffs on New Zealand beef will be completely phased out by 2016.

Indonesian Market Shadowed by Uncertainty

During the first half of MY 2010, exports to the Indonesian market jumped 32 per cent. However, exporters have become cautious after the Indonesia’s Director General of Livestock Services (DGLS) said in June 2010 that imports would be limited for the rest of the year. Exporters are uncertain as to how events will unfold and whether or not import permits will be required. Exporters have indicated that the rules on the age limit for live cattle imports, which haven’t been enforced strictly in the past but were part of the June 2010 directive from the DGLS, will affect Australia but not New Zealand.

Exports to Canada Down

Exports to Canada dropped by 7,576 tons, or 35 per cent, during the first half of the year. Exchange rates and strong demand from other markets both played a role.

MY2011

The forecast decline in production, combined with stable domestic consumption, suggests that exports will fall 3 per cent in MY 2011 to 496,000 tons.

While exports to developing countries, particularly South Asia, have grown significantly, the United States continues to be New Zealand’s single largest export destination. However, the importance of the U.S. market has drifted downward from 66 per cent in 2000, to 49 per cent in 2005 and 46 per cent in 2009. In the meantime, South Asian markets, particularly Indonesia and the Philippines and to a lesser extent Korea and Japan, have grown in importance. Post expects this trend to continue in the future. Absent any significant changes, exports to the U.S. market are forecast to fall to 221,000 tons CWE in MY 2011. Manufacturing or processing beef accounts for the bulk of exports to the U.S. market.

Policy

Animal Welfare – New Code of Welfare for Sheep and Beef Cattle

A new code of animal welfare for sheep and beef cattle was released in March 2010. More details can be found at: http://www.biosecurity.govt.nz/animal-welfare/codes/sheep-beef-cattle

National Animal Identification and Tracing Scheme (NAIT)

NAIT has now become law in New Zealand and will be implemented as of November 1, 2010. Initially, the electronic ear tagging and animal tracing scheme will be voluntary for cattle owners but will be mandatory as of November 1, 2011. At the moment, only cattle and deer are included. More detail on the scheme can be found at: http://www.nait.org.nz/

Meat Industry Strategy

In response to the continued lack of profitability, both at farm and processor level, and with the prospect of less stock to process in the future, a broad-based meat industry strategy is being formulated. In July 2010, Beef + Lamb NZ, the Meat Industry Association, New Zealand Trade and Enterprise, and the Ministry of Agriculture and Forestry (MAF) all agreed on terms of reference and funding levels for the first phase of a two-stage strategy. The first phase is expected to be completed during the first quarter of 2011. More information can be found at: http://www.beeflambnz.com/main.cfm?id=31&nid=290

Primary Growth Partnership (PGP)

The PGP, which replaced the Fast Forward Fund, is a government matching program intended to stimulate research and innovation in the primary, food and forestry sectors. In May 2009, the Government announced that it would make NZ $30 million available under the program and gradually increase that amount to NZ $70 million by 2012/13. The funding is to be appropriated directly from the annual agriculture and forestry fiscal budget rather than from a dedicated capital fund. More details on the fund can be found at: http://www.maf.govt.nz/pgp/

One of the first projects funded under the PGP is a partnership between the Government, Silver Fern Farm (largest meat processor in NZ), PGG Wrightson (NZ’s largest farm servicing company), and Landcorp (a state owned enterprise that owns and manages NZ’s largest farm). The seven-year program will focus on the value chain for red meat - from the farmers to the consumer. The project is expected to cost NZ $151 million with the Government contributing NZ $59.5 million over seven years.

TransPacific Partnership Agreement

A FTA with the United States has long been a policy priority for New Zealand. The Obama Administration announced on November 14, 2009 that the United States will engage with the Trans-Pacific Partnership (TPP) countries, which includes New Zealand, Singapore, Chile and Brunei, “with the goal of shaping a regional agreement that will have broad-based membership and the high standards worthy of a 21st century trade agreement”. Australia, Peru and Vietnam are also participating in the negotiations. The first round took place in March and the second round of negotiations took place in May 2010.

Meat and Wool NZ (now called Beef + Lamb NZ) and the Meat Industry Association jointly made submissions to the Ministry of Foreign Affairs and Trade on the TPP. In summary, they would like to see the US tariff rate quota, which currently stands at US 4.4 cents/kg, reduced to zero. They are also advocating elimination of the over-quota tariff rate, which is currently 26.4 per cent on FOB value. They maintain that New Zealand’s beef exports to the US are complimentary to US beef production because lean meat from New Zealand is blended with US fat trimmings to manufacture burgers, patties, and pizza toppings. Beef + Lamb contends that New Zealand only supplies at most 2 per cent of total US consumption, and because of land constraints, is not going to be able to increase this.

Further Reading

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September 2010