ANZCO Foods Market Update - July 2024

Global supply dynamics currently underpin a more favourable forward view on demand and price for New Zealand beef and lamb, as we await the beginning of our new production season.

The coming months are always a difficult time for meat processors as livestock numbers dwindle and we close plants to complete much needed repairs and maintenance, meaning less revenue and even less margin flowing through to our bottom line in what has already been a challenging year. However, if there was ever a time to be largely out of the market, this is likely to be the ideal moment, as we look ahead with cautious optimism to a tightening global market for the balance of 2024.

All eyes have been on the US for many months and the state of its domestic supply base. Prices for its domestic 90s have yet again hit another record this past week, which in itself is a positive sign for New Zealand exporters. Of more interest, however, is the differential between US domestic and imported beef prices, which is now well out of kilter with historic norms. Inevitably this can only lead to more demand from our US customers for imported beef as they look to minimise their exposure to an already dwindling supply of domestic product. This should allow New Zealand exporters to push harder on current price levels that have been recovering nicely during the past month anyway.

Some industry commentators are expecting a surge in pricing during the next two months. I tend to be a bit more measured in my forecasts, but New Zealand’s seasonal lack of supply can only add to any acceleration of current price trends in the US market and should position us well to capture greater value later in the year once livestock supply begins to free up once again.

The upside of a firing US beef market will not just benefit us in this important geography. If prices for New Zealand manufacturing beef and premium cuts do start to ramp up duriong the next few weeks and months in the US, it will mean there will be less supply of beef for our customers elsewhere in the world, and they will face increasing pressure to meet the market to secure their essential demand.

Another consequence of the current supply dynamics in the US is the cost of cattle US processors are being forced to pay to keep plants full. One implication of this is that processors are having to get back to basics and minimise their exposure to any additional costs they may have previously been willing to absorb in the name of ‘adding value’. One of the largest processors in the US, Tyson Foods, has announced it intends to retreat from its current range of antibiotic-free beef programmes because of its current lack of profitability. This presents an opportunity for New Zealand exporters to keep driving our ABF story in lamb and beef. The ABF category in the US beef market is estimated to be around 5% only. For a major processor like Tyson Foods, that is a niche they don’t need to play in. For New Zealand exporters, 5% of a market the size of the US is more than enough to get us excited, and news of a major domestic competitor stepping aside should encourage our industry to push our ABF messaging even harder to that subset of consumers who do value this claim – one that is far easier for us to offer than our US counterparts.

All-in-all, the outlook is positive for beef driven by the expectation of increased value from the US. Nothing is guaranteed in this world, but we can only hope that the above scenario starts to play out in the coming months.

Likewise on lamb, while markets remain generally subdued, particularly in China, it was interesting to see the latest reports out of Australia, highlighting that Australian sheep farmers will suffer their third consecutive year of losses as their input costs increase and livestock prices struggle to keep up. There is a growing expectation we will see more sheep farmers leave the Australian industry and potentially switch across to more profitable land use options such as cropping. While we have had to endure an increased supply of cheap lamb out of Australia during the past 12 months as farmers have looked to liquidate their flocks to minimise their losses, it is inevitable the next 12 months will see significantly tighter supply out of our largest export competitor, which can only serve to provide more opportunity to add value for New Zealand lamb in markets such as Japan, the US, UK, and Europe.

On a final note, Wagyu has attracted a bit of unwanted attention here in New Zealand during recent weeks. This is systemic of deeper issues within the global Wagyu market and a classic case of too much supply coinciding with too little consumption. It was noticeable at the SIAL trade show in Shanghai earlier this year just how many brands of Australian grain-fed Wagyu were in the market trying to find their unique space and story. China was seen as the ‘next big thing’ for the Australian Wagyu industry only a handful of years ago, and more and more players entered the market based on the apparent endless opportunity. Instead, what we have seen is Chinese consumers back away from Wagyu as they trade down in their beef purchasing behaviours due to underlying economic pressures. That, coupled with increased supply and the proliferation of brands out of Australia and other origins, has led to a collapse of this once golden opportunity.

Even the ‘real deal’ Wagyu out of Japan is finding life difficult in its domestic market and across many of its major export destinations. While the super-premium foodservice sector Japanese Wagyu plays in tends to survive, even in tough economic times, this market has also suffered as chefs and distributors trade down, either in terms of marbling scores or cuts, as they look to limit costs and preserve margins.

In this environment it is therefore not surprising that New Zealand operators in the Wagyu space may be facing some challenging times, particularly for brands that lack scale, are relatively new to the game and are trying to compete in the grain-fed Wagyu category against many other options from around the world. That is where a brand like First Light has done well to position itself with a relatively unique story linked to its grass-fed Wagyu offering, with a heavier focus on the emerging premium grass-fed beef market in the US.

Wagyu certainly can be a fantastic product. It will no doubt have its day in the sun once again. In the short-term however, there may well be some further shaking out of the global industry required as the supply/demand equation recalibrates