October 31, 2014
New Zealand beef cattle: Good export value, flat volumes and shift from milk to meat?
A tight world market makes for a good year but a culling driven supply surge runs out of steam. Can New Zealand's cattle sector meet new challenges? 
by Eric J. BROOKS
An eFeedLink Hot Topic
The changing relative profitability of New Zealand's dairy and beef cattle industries is shifting in the latter's favour. After years of high dairy prices encouraging the former's expansion, this year's dairy price crash coincided with record high beef high export prices.
Culling, dairy crash, high beef price coincide
This is causing New Zealand's cattle sector to redirect resources from its favoured dairy sector and more towards the rebuilding of beef production capacity, which is a process that will require several uninterrupted years. For now however, exports are marginally lower by volume, but significantly stronger by value.

This rise in beef export prices was fortunate, as an early year drought coincided with a dairy market price crash. With many dairy cows becoming unprofitable right after herds were expanded. This boosted the May to July cattle slaughter to 700,000 head.
It was 12% higher than 625,000 head slaughtered a year earlier during the three same southern hemisphere winter months a year earlier. Rather than bloating supplies and depressing markets, foreign demand turned the beef price surge into an opportunity.
May to July saw beef export volumes rise 15% over the previous year, totaling 115,432 tonnes shipped weight, but this momentum cannot be maintained after the dairy cow culling-induced surge exits the supply chain. Although Australia's early year drought and low dairy prices caused that country to cull many dairy cattle, competition from its neighbor was more than outweighed new export opportunities.
US, China lead exports
Low end ground beef exports were stimulated by demand from cattle-short America, which pushed up its international price by 34% by the third quarter of this year. With approximately 45% to 50% of New Zealand's beef exports going to United States, it ensured that the value of ground beef exports increased significantly more than their volume.
At the other end of the product spectrum, China's 20% rise in beef imports over 2013 levels boosted demand for higher end cuts. Despite New Zealand's beef's own headaches with Chinese customs, it gained market share at Australia's expense after the latter's beef was held up by tightened inspection procedures for hormonal growth promoters.
With beef suddenly becoming more profitable, New Zealand government statistics indicates that as of mid-September, farm gate cattle prices were 12% higher than a year earlier. With favourable pasture-friendly weather and record high export prices, interest in beef herd rebuilding is growing. This caused the price of North Island bulls to rise approximately 25%, from NZ$3.65/kg/cwt (US$2.86/kg/cwt) in April to an average of NZ$4.60/kg/cwt (US$3.61/kg/cwt) by the start of the fourth quarter, with some high end bulls fetching up to NZ$5.00/kg/cwt (US$3.92/kg/cwt). 
Nevertheless, export growth can only be maintained after the dairy cow culling-induced surge by the actual expansion of beef cattle herds. Unfortunately, cattle grow relatively slowly and would be a reversal of a long-term decline: According to Beef & Lamb New Zealand (BLNZ), from a secular peak of 5.18 million head in 1995, New Zealand beef cattle numbers fell to 4.79 million head by 2005 and 3.36 million head in 2013.
Although beef cattle inventories fell 28.8% over eighteen years, thanks to higher finishing weights and the culling of expanding dairy herds, beef production is only 0.7% lower than it was in 1995. All this is partly due to the China driven dairy market boom, which has encouraged the expansion of dairy pastureland at the expense of beef and other meat lines. Because of East Asia's insatiable thirst for milk (and the impact it had on the price ratio of beef to dairy), from 1990-91 to 2012-13, New Zealand's milk production grew 175% but its beef output only increased 19%.
With dairy prices looking to stay depressed for at least two years and China's domestic milk production poised to resume its rapid, pre-2008 melamine scandal growth, it is possible that this year's shift in the ratio between beef and dairy prices will endure for years. With Asian beef demand looking to go nowhere but up, that could encourage a rebuilding of New Zealand's dairy cattle herd.
Even so, any intended inventory rise will only boost beef supplies starting late next year or 2016. At this time, the above described export volume surge has already run out of steam: The USDA expects 2014's exports to total 524 thousand tonnes, 1.4% more than 2012's 517 thousand tonnes, but less 0.4% less than 2013's 529 thousand tonnes.

Inventory, value-added challenges
Going forward however, both production and exports look set to flatten out or rise nominally in 2015. There three reasons for this medium-term state of affairs.
First, while low dairy prices continue to encourage culling, the early 2014 drought has given way to a moist, pasture-friendly second half of the year. Late in the third quarter, the USDA reported that, "It was thought the nation-wide drought in the first half of 2014 would boost the other adult cattle kill numbers but really all it did was bring the kill forward. Then in the second half of the year the good pasture conditions prompted farmers to delay slaughter in an effort to increase carcass weights."
Second, it is estimated that the number of cattle slaughtered will 4.31 million, 0.6% more than 2013's 4.29 million but 8.8% more than 2012's 3.96 million, when good rainfall and high prices minimized the culling of dairy cattle -except that there will be no large increase in beef production over 2012 levels.
At 625.8 thousand tonnes, beef output is a mere 0.9% above 2013's 620.0 thousand tonnes. This is a short-term improvement over previous forecasts, which saw New Zealand's beef output falling marginally this year. On the other hand, it nominally matches 2012's 624.4 thousand beef production when there was 9% fewer cattle slaughtered.
Relative to 2012, the accelerated culling of dairy cows resulted in finishing weights for dairy cows, calves heifers and steers falling by 3.4%, 2.5%, 2.0% and 2.2% respectively. With beef prices going up, only bull finishing weights stayed relatively constant, down only 0.6% from a year earlier. But with interest in herd rebuilding rising, so is the price of bulls, thereby encouraging the retention of the heaviest cattle.
Third, along with the rebuilding of cattle numbers, another long-term issue for New Zealand's cattle industry is the value mix of its export product profile. Ironically, even though it is known for producing healthy, grass-fed beef, the industry's export profile is skewed in a decidedly downmarket direction.
On one hand, as the accompanying chart shows, processed beef, particularly ground beef, accounts for 64% of New Zealand's beef exports by volume -but only 23% of export earnings.
On the other hand, prime cuts make up under 10% of beef export volume but account for approximately 50% of export earnings. Clearly, it is in New Zealand's best interest to make the proportion of exports accounted for by high-end cuts rise at the expense of the portion accounted for by processed beef.
But there is a snag in the obvious plan: Nearly half of export volumes are accounted for by the United States which desires ground beef imports above all. Accounting for almost 5 times more beef shipments than New Zealand's next largest customer, America wants almost exclusively the cheapest, lowest grades beef available.
Fortunately, Asia has strong demand for high-end prime and secondary cuts; and it is situated much closer to New Zealand than the United States. But New Zealand has not developed any of these markets to the extent it has the United States. In fact, New Zealand's beef's Asian trade risks becoming as lopsided as its trade with the west. 
On one hand, China is a bright spot, with exports zooming up 7,129%, from a USDA estimated 0.83 million tonnes in 2008 to approximately 60,000 tonnes this year. Although China's rapidest beef import growth years are over, it looks set to increase beef imports by 5% to 10% annually for years, and New Zealand is in an excellent geographic position to meet this demand.
On the other hand, despite this year's lucky with America pushing up ground beef prices, it is exporting 2.8% less ground beef to the United States than it did in 2008. Unfortunately, in large or fast growing East Asian markets including Japan, South Korea, Taiwan, Philippines or Singapore, 2013 exports were anywhere from 2% to 40% lower than they were in 2008. Saudi Arabia and Malaysia, the only countries that saw exponential export growth, account for less than 3% of its beef shipments.
Hence, while China represents an excellent opportunity, for New Zealand to take advantage of fast growing Asian markets, it must do more than turn around its secular decline in cattle numbers: It also needs to avoid depending on China too much. It should start marketing those healthy, omega 3 oil-rich grass fed steaks to rapidly growing countries throughout Asia and the Middle East.

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