June 17, 2016
New Zealand beef: Live off dairy woes today, chase a golden dragon tomorrow?
by ERIC J. BROOKS
An eFeedLink Hot Topic
- Facing a harsher dairy market downturn than Australia but fewer problems with drought, New Zealand's post 2014 beef cattle herd inventory fell far less than Australia's
- Due to harsh dairy market conditions, cattle culling continues to support production more than in Australia
- Two years of aggressive dairy cattle slaughtering boosted output and exports to above trend levels but this is now over
- Despite a reputation for high quality, two countries that buy 66% of its exports prefer low-end cuts
- Coinciding with a recent free trade agreement, Shanghai Maling's proposed takeover of its largest beef exporting company could provide an important distributor for high-end meat exports
New Zealand's beef cattle sector finds itself in the ironic circumstance of having its production bolstered by the economic woes of its dairy farms. As is the case in neighboring Australia, a combination of high beef export prices and large dairy market losses have induced a cattle culling based boom in beef production.
On one hand, with dry weather not playing as large a factor as it did in Australia, animals culled were almost exclusively from the dairy herd. With drought not playing a major role in New Zealand's beef sector, y from 2014 through 2016 inclusive, total non-dairy cattle numbers will have fallen 4% in New Zealand, compared to 13.3% in Australia.
As a result, New Zealand's beef output rose a smaller 11.3% from 2012 through 2015, versus Australia's 20.5% increase over the same time period.
On the other hand, while two years of excessive culling have left less cattle to slaughter, New Zealand dairy farmers are still incurring large losses. With more of its beef coming from dairy cattle than is the case in Australia, 2016's low milk prices encourage the continued culling of dairy herds. This will result in a smaller decline in both slaughter rates and beef production than in its more northerly neighbor.
New Zealand's cattle slaughter is falling 8.1%, from 4.839 million head in 2015 to a USDA estimated 4.444 million head this year, which is only half the 15% to 20% decline in Australian slaughter numbers.
Beef production is only falling 4.8% from 690,000 tonnes in 2015 to 657,000 this year; considerably less than the 14.4% decline Australia will undergo. Falling 8.6% from 639,000 tonnes to 584,000 this year, exports are falling a sharp 8.1%, though this is only half as steep as Australia's decline.
The slaughter-induced surge in beef production dovetailed with 25% devaluation of the New Zealand dollar and high US beef demand. Due to its historically low cattle inventories, the past two years have seen hamburger-happy America's demand for ground beef stimulate a large rise in New Zealand beef exports. While nearly 50% of New Zealand's 2015 beef exports going to America, with US cattle herds rebounding its need for imported ground beef is waning. over half of 2016's USDA projected 55,000 tonne fall in exports is due to an 11.7%, 37,000 tonne fall in shipments to the US, from last year's 317,000 tonnes to 280,000 tonnes this year.
The proportion of beef exports shipped to America rose from 40% in 2010 to 49.6% last year but with US beef production poised to increase, looks set to fall back towards the 40% level by the end of the decade. On the other hand, China, which absorbed 1% of beef exports in 2010 saw this number rise to 10% in 2014, 16% last year, and is expected to account for 20% in 2016.
Shortly before publication, New Zealand beef's trade relationship with China entered a critical stage: Shanghai Maling Aquarius, a subsidiary of Chinese agribusiness giant Bright Foods Group, is proposing to acquire 50% of Silver Fern Farms, New Zealand's largest meat processor and beef exporter, for AZ$261 million (US$184 million).
The deal has raised both political and shareholder opposition, most observers expect it to be approved by both shareholders and regulators sometime shortly after the middle of this year. The proposed acquisition coincides with a China-New Zealand free trade agreement which takes effect this year and is cutting tariffs on its meat exports to that country.
Although New Zealand's beef exports to China are growing strongly, equity investment by a large, Chinese conglomerate has the potential to greatly increase not just the quantity of New Zealand's exports but also the quality. As the above chart shows, although China and the US account for nearly 66% of its exports, they also pay it relatively low unit price for New Zealand's beef. Countries that pay 20% or more of New Zealand beef's average export price only absorb 12.5% of exports.
This is because almost all the 50% of exports absorbed by America consist of ground beef. Similarly, beef exports to China began with low-end cuts used in slow cooking hot pot dishes. More recently, the rise of Chinese fast food restaurants, while boosting beef import demand, induced shipments of even lower end ground beef shipments to China to rise more quickly than before.
With its top importers showing a tendency to buy the cheapest cuts, the investment with Silver Fern Farms is an opportunity to use a billion-dollar Chinese corporations marketing channels to introduced the world's largest, fastest growing beef market to New Zealand's beef.
For New Zealand finds itself in a paradoxical situation. It is the largest of the second tier exporters that ships under a million tonnes of beef –but with 90% of beef exported, it is also the most trade-oriented of all large suppliers. While its limited arable land and dominant dairy cattle business model limits how much its exports can grow, its reputation for grass fed cattle (which produce beef with heart friendly fatty acid ratios) means that it should be a high-end value-added exporter.
On one hand, a wealthy developed market like the Netherlands happily pays US$12,000/kg for New Zealand beef, which is 2.5 times its average selling price on the world market. China's upmarket consumers are a minority of 200 million and have shown a marked tendency to eat more steak and less hamburger than the average American. Will New Zealand's government and dairy sector take advantage of the large opportunity just north of them? Only time will tell.
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