April 6, 2017
Boxed in by dairy production: New Zealand beef output falls back to earth
After three years of unsustainably high culling, output is returning to its constrained long-term range. Due to changing cattle herd demographics, beef exports are now a derivative of dairy industry fortunes.
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After a three-year surge induced by a mass culling of dairy cattle, New Zealand's beef production is returning into the 600,000 to 650,000 tonne range commonly seen from 2006 through 2013.  Specifically, from a USDA estimated 689,000 tonnes in 2015, output plunged 5.8% to 649,000 tonnes in 2016. It is projected to fall another 2.9% to 630,000 tonnes this year and bottom out 1% to 2% below this amount in 2018.

With most of New Zealand's cattle herd consisting of dairy industry cows, that industry's three brutal years of deflation resulted in a mass culling. A coincidence of high beef prices and low dairy prices made the temptation to reduce numbers irresistible in the middle years of this decade.
Consequently, cattle slaughter which had stayed in the 3.6 million to 4.0 million head range from 2005 through 2012, turned sharply upwards. It rose to 4.6 million head in 2014, when the dairy market crash took hold and peaked at 4.8 million head in 2015, when beef prices hit their cyclical peak.
Last year's lower beef prices and dwindling cattle herd was partly counterbalanced by the highly-indebted state of many dairy farmers. Many farmers continued culling their herds to meet short-term financial obligations. As a result, the 4.4 million cattle were slaughtered in 2016 while historically high, reflected poor dairy market conditions and not that of an expanding beef cattle herd.
In fact, due to fifteen years of high dairy prices and poor beef farming returns, the actual number of beef cattle underwent a serious long-term decline. From 1977 through 1997, in response to a worldwide bear market for beef, New Zealand beef cattle numbers fell 25%, from 2.13 million head to 1.56 million.
The decline accelerated in the 20 years after encompassing 1997 through 2017. As dairy demand boomed amid relatively stagnant world beef consumption, beef cattle inventories fell an even steeper 39%. By 2016, total New Zealand beef cattle had fallen to 982,000 head.
Even during the 2013 to 2015 era of high world beef and cattle prices, the New Zealand beef cattle herd slipped below 1 million for the first time since 1960. By the end of 2017, they will have fallen by another 1.6% on-year to 966,000 head.
This long-term secular decline has changed the New Zealand beef exporting model. Back in the late 1970s, beef cattle made up 24.5% of New Zealand's herd while dairy cattle comprised 23.0%. By 1997, dairy cattle made up 36.6% of all animals while beef cattle only comprised 17.9% of the national herd.
This year, dairy cows will make up approximately 50% of New Zealand's herd and beef cattle's share will fall to 9.7%. By comparison, beef cattle make up 24% of Brazil's cattle herd, 33% of US cattle and 45% of the Australia's cattle herd. Compared to its fellow beef exporters, New Zealand beef production responds to the world dairy sector more than it does world cattle market price signals.
This can be seen in the fact that while beef production is at roughly the same level today in the 2010s as it was in the late 1990s, the total number of steers and bulls slaughtered fell 18.8%, from 1.69 million in 1997 to 1.37 million this year, the lowest number in more than two decades.
By comparison, the number of dairy cows and calves slaughtered jumped 54%, from 1.37 million in 1997 to a peak of 2.11 million in 2015, before falling back to 1.90 million this year, as the supply of cullable dairy cattle dwindles.
Even so, with both dairy and beef prices bottoming out, farmers have entered an inventory rebuilding phase. As a result, the national cattle herd entered 2017 at 9.97 million head, 70,000 more than the 9.90 million the USDA had initially projected.
Going forward, overall cattle inventories are expected to rise 2% to 10.14 million head in 2017. This will put New Zealand's cattle herd close to its all-time peak of 10.37 million set in 2013. This however, will be achieved by retaining cattle, thereby reducing slaughter by 4.6%, from 2016's 4.4 million head to 4.2 million head this year.
On one hand, this is 13.2% fall over two years from its all-time peak slaughter volume of 4.84 million set in 2015. On the other hand, this is still a rather high slaughter rate, relative to the 3.5 to 4.0 million cattle slaughtered annually in the ten years prior to the dairy market crash.
Going forward, the cattle herd's mild, sustained expansion will be offset by a side-effect of an imminent world dairy market recovery: As returns on exporting dairy commodities recover, the incentive to slaughter productive dairy cows will fall.
That will bring New Zealand's annual cattle slaughter back into the 3.5 to 4.0 million head range. Higher finishing weights that accompany using dairy cattle through to the end of their productive lives will be offset by incentive to retain more of them for a longer time. This will put New Zealand beef output in its now predictable 600,000 to 650,000 tonne range –and exports in the 550,000 to 600,000 tonne range–well into the mid-2020s.
Ironically, the same good fortune that turned New Zealand into a major dairy exporter has locked beef exports at a constant level just as world beef demand begins to expand. It would take decades of high beef prices and low dairy prices to restructure New Zealand cattle farms back to an even number of animals producing meat and milk. For the foreseeable future, dairy market circumstances will constrain how this country responds to new beef exporting opportunities.

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