Market Update - July 2022

In 2020/21 we could not get away from the word ‘Covid’. In the first half of 2022 ‘Inflation’ was the new kid on the block. During the past month, the torch seems to have passed to ‘Recession’ as our buzzword of choice, with governments, central banks, customers, and consumers all looking ahead to a rocky economic outlook for the balance of 2022. This will certainly set the scene for ANZCO Foods’ global business and the red meat sector as a whole, as we look to work our way through this potentially challenging period.

In last month’s report I suggested that while the sheepmeat market was under considerable pressure in China, beef demand remained robust. In recent weeks it has become apparent that beef is not immune to the challenges within the Chinese economy as a result of its zero Covid policy. Prices and demand for beef have softened and we expect that trend to continue in the near term. In-market inventories are reportedly far higher than normal levels and specific importers are struggling to manage cash flow and keep product moving through their internal supply chains. Our customers generally remain optimistic for the all-important Q4 sales period leading into the 2023 Chinese New Year holidays, but this will be an evolving situation and the overall risk profile in this market has certainly increased.

The US beef market is also key to the next few months. We have seen yet another month of generally poor demand because of high in-market inventories of local and Brazilian alternatives to NZ frozen beef, but this past month we have also seen some material decreases in pricing that have brought values back in line with historical norms for this time of year. The short-term outlook suggests the potential for further softening, with consumer sentiment at its lowest levels for more than 40 years. The threat of recession is clearly hanging over many in this market, however, we have seen in the past that the beef market, particularly for manufacturing ingredients that head into the fast-food channel or into retail as ground beef, can be far more resilient to serious economic downturns than many other food items, with consumers trading down, both in their supermarket shop and in their out of home eating choices. This provides some hope in the longer term, as does the massive cull of domestic beef which has facilitated the current market conditions, and which can only lead to material shortage of product as we head into 2023. The real risk will be to our premium beef and lamb markets. Rack pricing and demand actually remains strong, and we are lucky to have a vehicle such as The Lamb Company to support our business in North America as more challenging times loom on the horizon. We certainly hope The Lamb Company can continue to work with its retail and foodservice partners to keep product moving and incentivise consumers to invest in our lamb, which remains the most expensive form of protein on the menu or supermarket self.

The other interesting development in the past month has been the discovery of foot and mouth disease in Indonesia. While theoretically a risk to our own industry given the relative geographical proximity, the immediate issue has been a decrease in demand for imported beef as the local industry goes into an accelerated culling process, leading to a flood of domestic beef in the marketplace. While a loss of trade into this market is not that significant for ANZCO Foods, the impact will be felt in South America, which just heightens the pressure they are facing given their slowing trade into China of late, meaning a far more aggressive competitor in other parts of the world where we do have far more vested interests.

A case in point is Europe, where we are seeing an increased volume of South American beef entering the market. This is a trend we expect to see continuing through the remainder of the year and which will keep pressure on pricing. Lamb demand remains solid for specific items and softening for others. The foodservice sector will be the one to watch in the coming months across the continent as the fear of recession grows. The cost of eating out is fast becoming prohibitive for the general public. History tells us that one of the first products to come off menus is lamb, so we will see how this develops in the weeks ahead.

Our business in Japan is also being affected by overall economic challenges. The Japanese Yen has devalued materially against the USD in recent weeks, far more so than our own currency, which hits importers’ bottom lines immediately. Retailers are struggling to keep good value lamb and beef cuts in front of their customers, with consumers trading down or away as they look to keep a closer eye on their purse strings. Foodservice sales, notably of lamb in the northern Hokkaido region, have been surprisingly good as summer tourism kicks into gear, and we hope that this trend continues during July and August.

So, in summary, general market sentiment is more downbeat than was the case a month prior and we forecast this to be the case for at least the next quarter. Much will depend on how China manages its internal challenges with the economy and Covid-19 during that time. Meanwhile, we will all have to be prepared to respond to more challenging market conditions. At the same time, we will continue to look ahead to the many new opportunities that also exist for our products in a world that remains inherently short of protein.

Finally, a quick note on the recent announcement that an agreement in principle has been reached on the Free Trade Agreement with the EU. While commentary out of both the dairy and red meat sectors has been generally negative around the outcomes in our specific areas of interest, I tend to be slightly more pragmatic in my views. Arguably trade deals are only becoming more difficult to get over the line and having spent three years in Brussels working with industry groups across the continent, I can appreciate first-hand how veraciously they defend their patch and how difficult it would have been for the European negotiators to have seriously contemplated any material increase in market access for a country that realistically offered very little in return. There is also an argument that due to the potential that is looming in Europe, the deal on the table was probably stronger than the one potentially on offer in six months’ time, and it’s always better in my view to be in the room than outside looking in, so I think our negotiating team has done a good job for New Zealand. The key for us is the cut in the in-quota tariff for our existing beef access, which makes that limited volume more meaningful and valuable. And while the new beef access is not huge in the scheme of things, it is actually a material increase versus what we currently have and, if we leverage it to its full potential, Europe would suddenly become one of ANZCO’s largest premium chilled beef markets. There is still significant water to go under the bridge before this deal becomes a reality and we can have the chance to test the theory. Let’s hope we get that chance and the politics within Europe don’t create further roadblocks to securing an important piece of New Zealand’s trade policy jigsaw.

Rick Walker
ANZCO Foods General Manager Sales and Marketing