Market Update - February 2023

Conditions across the global market for beef and sheepmeat are challenging, with inherent weakness in major economies and a lack of consumer confidence flowing through into consumption and pricing for our products.

The UK market for lamb continues to struggle. While retailers reported better than expected Christmas sales, a lot of this was down to aggressive promotions. The traditional retailers are losing ground to the relatively new entrants of Aldi and Lidl that are focused on beating the likes of Waitrose, Tesco, Sainsbury and Asda on price day-in-day-out without sacrificing quality. This trend away from the major retailers is being accelerated by food inflation that is still running hot, with the latest UK figures coming in at 17%. Not surprisingly, forward sales of lamb are hard to come by. In the interim, our focus is on delivering on our chilled and frozen commitments for Easter. We are hoping that supply chains run smoothly, shipping lines keep to schedule and consumers find some solace and open their wallets as the long bleak winter comes to an end.

Likewise, the European market for beef and lamb is in state of flux, with customers generally cautious and pessimistic about the short-term outlook; hence buying patterns are focused on what they need as opposed to what they predict they will want. South American suppliers are leading the beef market down in value as they look to secure volumes at whatever price is necessary.

The situation in Japan also remains depressed, with foodservice sales slow as consumers stay at home and keep their money. Inflation is now at levels not seen for 40 years and is starting to cause pain. Retailers too are seeing poor sales, particularly for high value cuts.

While each of these markets is important in its own right, the key to where pricing and demand realistically will head globally in the coming weeks lies in the hands of just two markets – the US and China.

In my December update, I flagged several questions that arose from the Chinese government’s sudden decision to step back from its Covid-zero policy. Notably, how Chinese New Year would play out and what that would mean for beef and sheepmeat consumption, as well as forward demand. Now that Chinese New Year is behind us, the general consensus is that the outcome from the holiday period was mixed. Domestic travel was up by close to 80% versus Chinese New Year 2022, which is obviously positive. However, when compared to the last Chinese New Year that was not Covid-19 affected, that number was actually down by nearly 50%, hence there is a long way to go before we are back to the good old days. Likewise, initial reporting on hospitality and tourism spending during the holiday season shows that it experienced a year-on-year increase of 130%, but again, came in 20% lower than the amount of money normally spent pre-pandemic. Hence the foodservice sector remains a work in progress as consumers regain sufficient confidence to eat out as they once did. As such, inventory levels in-market remain stubbornly high and will need to be worked through before we can look ahead with real confidence. That said, there is a general belief that Chinese consumers will find their mojo as they work their way through catching and recovering from the virus, thus the outlook is generally upbeat as we look into the second half of the year. In the coming month though, the market will largely be in a state of flux with buyers and sellers seeing who will blink first when it comes to price and volume. February and March are historically quieter sales months anyway, as the hangover from the holiday period is worked through, but we are certainly looking for any sign that once the hangover fades, China will be ready to get moving again when it comes to their demand for imported beef and sheepmeat.

The North American market remains a challenging environment for lamb, with Australian imports increasing and being priced at very competitive levels that are keeping a handbrake on any possible recovery in value. On the beef side, however, there is more positive news. The US national herd ended 2022 at 4% down year-on-year, and some three million head down versus the end of 2019, representing the lowest number of cattle since 1960. The United States Department of Agriculture (USDA) remains consistent in its forecast of a material decrease in beef production in 2023 as a direct result of the lack of animals following two years of drought-driven slaughter rates. Indeed, the current forecast for 2023 is for the largest decline year-on-year in US beef production for some 40 years. With US beef consumption still looking relatively strong – despite the lengthening shadows of recession – all signs point towards a big gap between supply and demand. This is also being reflected in the Chicago Mercantile Exchange (CME), with cattle futures at prices not seen since 2015. We have certainly found buyers have been more willing to engage since the New Year, and pricing has plateaued and started to drift in the right direction. This all bodes well for the future, both short-term and longer term, as any major rebuild of the US herd will no doubt take years rather than months, and there are signs that weather patterns are turning which would encourage farmers to have sufficient confidence to get that process underway. US cattle farmers, however, are also facing other factors beyond just the weather as they look to the future. While headline inflation in the US is drifting lower, the cost of major agricultural inputs today versus where they were just two years ago is significant. Diesel is up more than 80%, natural gas is up 40%, soy is close to 100% up and corn has increased a massive 125%. This may impact the rate of any rebuild, but that will only keep domestic supplies even tighter for even longer. Overall, the US represents the brightest light across our global markets as we look ahead to the next three months and will be the market to watch to see if things play out as many are predicting, or if we might face another bump in the road that we are unable to understand as of today.

In summary, we’re seeing some systemic challenges in the UK, Europe, Japan and the US for lamb specifically, that show little signs of being resolved in the near term. These markets will continue to be a challenge for New Zealand exporters as a result. China is a work in progress, and ‘cautiously optimistic’ would be the best way to describe the short- to medium-term outlook. Finally, the US frozen beef market looks like it may well have turned a corner, which is a welcome development as we look ahead to a busy couple of months for our beef processing sites.

We shall see how the world looks next month, in an environment that remains unusually volatile.   

Rick Walker
ANZCO Foods General Manager Sales and Marketing