Peak price of $5.90/kg predicted

01-11-2008 | Mel Anderson

The start to the 2008-09 export season came and went with little fanfare on October 1 as the news the PGG Wrightson/Silver Fern Farm partnership was being put on hold, which stole the limelight.

Never-the-less there looks like there will be plenty of changes ahead for both farmers and those in the meat processing industry over the coming 12 months. A potential global shortage of lamb is looming at the same time as demand is growing in new alternative markets. The outlook is very positive for a further boost to NZ lamb prices in the new season.

Traditionally the South Island schedule operates at lower levels than the North Island, but Market Update still expects it to peak between $5.80-$5.90/kg for a 16kg CW lamb in November.

In the latter stages of the 2007-08 season, lamb returns lifted to levels not seen for a number of years. Average prices for a 16kg lamb in September averaged $5.05/kg-up $1.25/kg compared to September 2007.

So what is driving farmer operating prices for lamb higher?

Overall the national lamb kill for the season to date has been steady on last year-with the North Island down 5% and the South Island up 3%. South Island meat companies had experienced a heavy flow of lambs through the first quarter of 2008, as traditional sheep farms were snapped up for dairy conversions. With store prices flat, many lambs headed straight to the processing plants. However from June the earlier heavy slaughter caught up, with lamb kill numbers through winter well down on last year.

At the same time farmer operating prices began to move upwards. These increasing prices were not solely driven by meat companies chasing supply. In fact using the percentage of CIF price as an indicator, meat companies procurement "premiums" remained well below average through the winter months. The easing NZ dollar made some contribution to improved prices, but the real driving force was a surge in overseas prices.

Prices for NZ lamb exports in our main European Union markets have risen dramatically over the past 12 months. With demand solid, these markets are competing strongly to secure reduced supplies of product. This has seen UK market indicator prices reach historical highs.

Average prices for UK CKT leg (our main cut to the UK) are currently 39% higher than the same time last year. Demand has been mixed in NZ's other recognised markets this season but at the same time interest is growing from new emerging markets.

A shortage of NZ lamb looming

The Meat & Wool NZ Economic Service recently revealed that export lamb slaughter is forecast to drop by six million lambs nationally this season.

It's no wonder given the 32% lift in mutton slaughter this year. This was primarily due to the drive towards dairy conversions and the recent droughts. As a result national breeding ewe numbers are set to decrease 9.5% this coming season.

Six million less lambs are going to have serious implications for the industry, not only at the farm gate but also in our overseas markets. To put it in perspective, this season the peak national weekly lamb kill averaged about 850,000 lambs. Based on this peak kill rate, six million less lambs nationally could potentially mean seven weeks less kill.

This reduction will flow through to export volumes. Meat & Wool NZ are forecasting lamb exports to drop this coming season by 21% compared to the 2006-07 season and by 18% on the estimated volumes for the 2007-08 season.

This reduction in lamb production and subsequent export volumes is expected to continue. The drive to convert to dairy and the uptake of dairy support units is expected to continue into the 2009 season. Significantly better returns will be required to a see a greater retention in breeding ewe numbers in the medium term.

We are not alone

Fortunately for the NZ lamb industry sheep numbers globally are falling. This could be a good thing in the short term but may ultimately turn customers towards other meat products -especially if lower production also
creates holes in existing supply chains.

Australia has recorded its lowest sheep flock numbers since 1920. Like their NZ counterparts, Australian farmers are moving

out of sheep farming following years of
drought and poor returns. Cereal cropping rather than sheep farming is now the preferred option in Australia.

Tight lamb supplies are forecast to drop lamb slaughter and production by nearly 10% in 2008. The impact of this is already being felt, with export volumes down 4% between January and August compared to the same period last year. According to Australian Bureau of Agricultural and Resource Economics (ABARE), for the coming season Australian lamb exports are forecast to drop 5% to 158,000 tonnes, following a 5.5% reduction in lamb production.

It is a similar situation in the United Kingdom where the gradual decline in sheepmeat production is set to continue. The UK Meat and Livestock Commission forecast a smaller lamb crop for the coming season due to a reduced sheep flock and poorer lambing rates. The UK lamb slaughter is expected to drop 5%. The EU and more particularly France is the main export destination for UK lamb. Because of the forecast reduction in UK lamb numbers, total lamb exports are expected to drop by 3%, potentially opening doors for more NZ lamb imports.

Along with the UK, sheep numbers in the three other major EU sheep-meat producing countries (Spain, France and Ireland) are in serious decline. Sheepmeat production in Europe has fallen by 20% in the past 15 years, thus increasing the reliance on imported lamb.

Emerging markets set to play a role

For decades the UK has been an outlet for predominately large roasting cuts for which NZ has happily supplied them with. However it seems there is a desire to place less reliance on the UK and instead look to grow our market share within new emerging markets. There is also a growing awareness within the industry to align itself more with what the consumer wants; a key factor that goes hand in hand with building relationships within these new markets.

While overall demand in the UK has been rather static this season, other countries within the EU are demanding more NZ lamb. This has been pushing up prices in these overseas markets. Exports to Germany and France in the 2007-08 season have lifted by 3% and 8% respectively.

Elsewhere new markets are emerging for NZ lamb. China is growing as a player in the lamb market. Exports to China for the 2007-08 season have lifted by 11% to 28,500t. While the value of exports to China currently represents the lower value cuts, there is the expectation that growing disposable incomes in China will lead to the country importing more expensive cuts. Incomes within oil producing nations such as Saudi Arabia are also growing. These countries are becoming increasingly influenced by the western world which is changing food styles.

In the 2006-07 season NZ lamb exports to Saudi Arabia lifted 65% on the previous season and look set to hold steady at these higher levels this season. Russia is also becoming regarded as a high income emerging market. This country has a growing demand for meat that it cannot produce solely within its domestic market.

Better NZ lamb prices ahead

With global lamb supplies dropping at a rate faster than global consumption in our key markets, Market Update believes the outlook for the coming season can only be positive for NZ lamb on the world stage.

While we are a long way off from seeing the full benefits of targeting new emerging markets, they will no doubt provide higher priced outlets for some products. In the short term prices in the UK and EU are expected to continue to lift in line with 5 year average levels as importers look to secure what product they can for the Christmas trade and further out for the Easter trade, given the overall reduced supplies available.

Back home it is anyone's guess as to what influence the NZ dollar will have on lamb prices over the coming months. One thing that is for certain is that we are entering a season with a much reduced supply of lamb. Combine this with a continued strong overseas demand and we could see a marked change from the normal seasonal pattern in FOPs.

A procurement war early in the season could see prices tighten up further down the track. However tighter lamb supply could hold up prices where traditionally they have been soft (March/April).

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