September 3, 2015
New Zealand's cattle sector shifts gears
Dairy cows are being culled, beef prices are high and for the first time in decades, meat is more profitable than milk.
By Eric J. BROOKS
An eFeedLink Hot Topic
After two decades when New Zealand's cattle sector converted many farms from growing beef to making milk, the tide has turned. Two years of exceptionally low dairy prices and high beef prices have shifted dairy and beef farming returns in opposite directions. The net result has been an unexpected upwards bump in New Zealand's beef production, mostly at the expense of its dairy sector.
Meat more profitable than milk
As a result, beef output, which peaked at 697,000 tonnes in 2004 seems to have finally broken out of its 610,000 to 640,000 tonne plateau. From 620,000 tonnes in 2013, output reached 656,000 tonnes in 2014. This year, with beef cattle herds taking time to expand and the supply of culled dairy cattle topping out, production is plateauing at 658,000 tonnes.
However, with the rate of dairy cattle culling expected to increase later this year and beef cattle inventories slowly starting to rise, beef production is forecast to total 674,000 tonnes in 2016, making for a 9% increase over three years. Moreover, there are factors at work which could make for several years of sustained increases to 700,000 tonnes and beyond before the end of this decade.
For now, the incentive to cull dairy cattle for quick returns and motivation to begin expanding cattle inventories can both be seen in New Zealand beef cattle selling prices. During the decade spanning 2003-04 to 2013-14, the average beef cattle across all grades fluctuated between NZ$700/head to NZ$900/head for eight of those ten years, and approximately NZ$950/head during the other two.
According to Beef + Lamb New Zealand, for 2014-15, average live cattle prices are estimated at NZ$1,171/head, nearly 40% above their average price during the previous decade. Coinciding with global dairy prices falling 55% below their seven year average, it created an irresistible motivation for dairy farmers to cut losses and boost revenues by selling their excess dairy cows to slaughterhouses. In other cases, younger dairy cows were either selected to be grown out for beef production or used to boost cattle inventories.
With 88% of beef output exported and domestic consumption only rising by 5,000 tonnes over the past two years, 33,000 of the two year 38,000 tonne production increase is being exported –and finding ready customers. Since 2010, China's beef imports have risen 1,150% at a time when cattle herds from America to Australia were declining. America is the world's largest beef importer and has seen its consumption of this meat is starting first sustained rise in four decades at a time when domestic cattle inventories are at the lowest level since the mid-20th century.
Hence, it is not surprising that America and China collectively drive New Zealand's beef export surge. These two countries account for 60% of New Zealand's beef trade. Moreover, January to June 2015 beef shipments to America and China are up 16.8% and 44.1% respectively from their levels in H1 2014.
Previously, these two countries accounted for approximately 76% of 2014's 50,000 tonne, 9.5% export increase to 579,000 tonnes, from 529,000 tonnes the previous year. America on its own took in 174,544 tonnes in 2013 and an additional 18.3% or 206,522 tonnes in 2014. The bad news is that in 2015, the previous year's rapid export growth cannot be sustained.
Accounting for 50% of beef exports, the recovering American economy's voracious appetite for ground beef exceeds domestic consumption. Due to a voluntary export restraint quota, 2015 beef exports to America will decelerate their growth to 3.4% and be limited to 213,500 tonnes (with an additional 8,000 exported tonnes held in bond into early 2016).
H1 2015 exports to China jumped 44% from their January to June 2014 volume. Annual beef exports to China are on track to jump by more than 50%, from last year's 41,700 tonnes into the 63,000 to 68,000 tonne range. The bad news is that even the estimated 25,000 to 30,000 tonne rise in exports to America and China cannot counterweigh market losses in the rest of the world.
For example, in the first half of 2015, a 33,000 tonne rise in exports to China and America counterbalanced 13,900 tonnes fewer exports shipped to Japan, South Korea, Malaysia and Indonesia. But with 70% of the permitted beef exports to American already shipped in the first half of this year, export growth to America and China will be less than the drop in shipments to other destinations.
Consequently, 2015 exports are expected to total 576,000 tonnes, 0.5% below 2014's 579,000 tonnes. This however, is still represents a healthy 8.9% increase over two years. There are two sides to this short-term levelling out in New Zealand's beef trade.
The first factor is pure politics alone. Under the terms of New Zealand's free trade agreement (FTA) with China, beef exported to that country is subject to 1.5% tariff, and even this will be abolished in 2016. On the other hand, exports to South Korea face a 40% tariff and its FTA with that country will see this tariff fall by only 2.67% a year over the next fifteen years beginning in 2016. Because Australia and America signed beef trade liberalization agreements with South Korea several years before New Zealand did, its beef exports will be at a tariff rate disadvantage for at least a decade.
Moreover, unlike China where beef imports are increasing by more than 10% annually, Japanese and South Korean import volumes down 5% to 7% form their levels of four years ago. Moreover, US beef is not allowed into China but was reintroduced into South Korea and Japan in the late 2000s. Along with flat Japanese and South Korean beef consumption, this makes the exporting of New Zealand beef to these wealthy Asian countries much more challenging.
Japan's imports of New Zealand beef, for example, fell 25%, from 34,129 tonnes in 2010 to 25,536 tonnes last year. With Japan's flat beef demand coinciding with its recent liberalization of American and Australian imports, H1 2015 exports of New Zealand beef to that country fell by 28% from the levels of a year earlier.
Similarly, South Korea beef imports from New Zealand jumped from 27,000 tonnes in 2003 to 50,000 tonnes in 2004, after a five year ban on US beef took effect. After the ban was lifted, exports to South Korea kept falling, totaling 24,000 tonnes in 2014, the lowest amount since 2002. With South Korean tariff reductions on US and Australian beef already underway but those on New Zealand beef not taking effect until next year, its H1 2015 beef shipments to that country fell by 11% from January to June 2014 levels.
Another problem is the value-added component of exports: Shipments to the EU and Middle East do not even amount to 20,000 tonnes, compared to the over 300,000 tonnes shipped in total to America, China, Japan and South Korea –but whereas shipments to America and North Asia typically bring in US$4,700/tonne of revenue, exports destined to the EU or Middle East bring in an average of US$7,200/tonne in revenue.
Inventories, carcass weights, live exports to China
Aside from the difficulties of exporting more beef to markets other than China, another constraint on New Zealand's beef trade is one of supply. The coincidence of crashing dairy prices and beef price inflation boosted 2014 cattle slaughter by 8% over the previous year. This was mostly due to a USDA projected a 3% to 6% culling of dairy cows to minimize non-forage feed costs at this time of low dairy prices. What makes this culling so necessary is the fact that dairy cattle numbers rose sharply just as the world dairy market fell off a cliff.
Due to the previous decade of high dairy prices, dairy cattle numbers (both in-calf and dry) rose from 5.04 million head in 2013 to peak at 5.66 million head at the start of 2015 –just in time for one of the worst ever dairy price crashes. The ongoing culling of excess dairy cattle will reduce inventories to 5.42 million head by the start of 2016.
On one hand, this is still in excess of what the world market can sustain at today's price and demand level. On the other hand, the slaughtering of unneeded dairy cows is allowing New Zealand to boost its export numbers until its beef cattle herd can catch up to world demand.
Cattle inventories would have fallen even more, except for the fact that dairy cattle exports to China, which totaled 79,000 head in 2014 –and which were initially projected at 100,000 head this year– will instead only total 22,000 head. Without China's slashing of New Zealand live dairy cattle imports, dairy cattle numbers would total no more than 5.3 million by 2016, instead of the 5.42 million currently projected. Although the killing of young dairy cattle by strapped dairy farmers caused average carcass yield to fall 2.8% from 144.5kg in 2013 to 141.1kg this year, it still made for a 6.1% net beef production increase over the past two years.
By comparison, beef cattle inventories barely changed, going from 3.67 million head in 2014, to 3.59 million this year. High beef and cattle prices are expected to make their number rebound 3.1%, to 3.7 million head in 2016.
As the initial 'bump' from dairy cattle culling gave way to fewer animals available for slaughter, it caused rapid beef production growth to taper off in the latter part of this year. However, with high beef prices motivating higher grow out weights, 2016 beef production is projected to rise another 2.4% to 674,000 tonnes –with newly grown out beef cattle only sustaining consistent production increases after the second half of 2016.
Going forward, forecasts for 2016 and beyond are laced with much uncertainty. On one hand, increased production from higher grow out weights, beef cattle inventory growth and the moving of animals from dairy to beef herds will not make a strong impact until the fourth quarter of 2016. –This however, assumes that ongoing El Nino conditions do not bring about such an intense dry spell as to accelerate current slaughter rates at the expense of post 2016 beef production gains. Anything from drought to a sudden drop in live cattle prices could derail a beef cattle rebound which is only beginning.
On the other hand, with dairy prices looking to languish at low levels for quite some time, the USDA notes that, "both the beef and dairy sectors are in a period of change which has not played out in its entirety yet." Clearly, as the attached graph shows, dairy cattle numbers are headed for a medium term decline while beef cattle numbers are about to rise for the first time in years.
However, it will take another year before we can ascertain the extent to which New Zealand's cattle sector's animals and resources are being shifted from milk production to the making of beef.
At this point, persistent dairy market deflation and high beef prices, "Is leading to dairy farmers questioning their business models." Many of the country's dairy farms are relatively new operations that had been converted from beef cattle ranching over the last two decades. While factors such as El Nino and rainfall's impact on slaughter rates will impact beef production through to 2016, the real question is if many farms will find it more profitable to revert some of their pastureland resources to beef cattle farming?
The longer beef prices stay high and dairy prices stay low, the greater the chance that New Zealand's cattle sector will shift gears, keeping milk production flat and consistently boosting beef production and exports for the first time in two decades.
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