Market Update - May 2022

In last month’s report, I highlighted the potential risks associated with the ongoing lockdown in Shanghai and the hope that things would return to normal sooner rather than later. Unfortunately, ‘later’ appears to have won out. As of the time of writing this month’s report, the overall situation in China has arguably become worse, not better.

While much of the media attention has been on Shanghai and, to a lesser extent, Beijing, anecdotally our contacts in-market report that more than 50 major cities across China are now in a lockdown in one form or another, effecting around 25% of the total population – and to provide context that’s some 350m people. This is having a range of consequences that will become bigger issues for New Zealand exporters in the coming months if not quickly resolved.

Chinese ports are largely operating and containers are being unloaded, but there remains a significant backlog of goods sitting on vessels off-shore. One of our major customers suggested that there is around six-weeks of imports sitting on the water at the moment. In addition, while containers are slowly being offloaded, the real bottleneck is occurring beyond the port gates, with internal supply chains grinding to a halt. That is, in turn, resulting in massive issues around cold storage space across the country. In-market inventories are also being driven up by the impact of the lockdowns on the foodservice sector. Of greatest concern is the market for imported sheepmeat, which is largely focused on further processed products destined for the massive restaurant and hospitality sector. There are reports of further processors shutting down their production lines or running at bare minimums which means they are quickly building surplus of raw material as well as finished goods. This has the potential to significantly impact demand for New Zealand lamb and mutton over the remainder of the year if lockdown conditions persist for any further length of time. A further complication is the increasing supply of domestic sheepmeat at prices well below the high value currently expected by New Zealand exporters. The domestic season is just getting into gear, with supply seasonally increasing during the next three months. With high prices for imported product, made even higher by the devaluing local currency, many Chinese processors will be looking to internal sheepmeat supply for whatever demand they may need to supplement their existing stocks, as opposed to leveraging ongoing supply out of New Zealand.

Beef demand in China has been less affected, with customers still keen to lock in forward contracts to secure supply for the New Zealand winter period. However, while domestic beef supply is not the issue it is for sheepmeat markets, the same conditions around cold storge availability, devaluing currency, a stagnant foodservice sector and slow supply chain, will continue to be factors in how these sales contracts are ultimately fulfilled and where beef prices head into the second half of the year. One of the market segments most at risk is our chilled beef business. While chilled foods seem to be getting priority through ports such as Shanghai, ongoing testing requirements for chilled products plus the shelf-life risks associated with the slowing internal supply chains means that we are taking a conservative approach and working with our chilled beef customers as closely as possible to support their businesses and manage the short-term risks that are in play.

Elsewhere the world remains largely unchanged. Pricing and demand for lamb and beef across our major markets in North America, Europe, the UK and Japan have been generally good and we expect this to continue through May and into June. Nonetheless it is apparent that many customers are buying at current levels simply because they have little choice as opposed to being driven by increasing consumption or pricing deeper in their own value chains. Beef is an interesting case in point, with analysts suggesting global beef exports will be down more than 200,000mt in 2022 versus the year prior, despite a massive year-on-year increase in the supply of Indian buffalo, which is only able to access specific low-end markets.

European demand for lamb and beef remains strong despite the impact the Ukraine conflict is having on general economic conditions and consumer sentiment. Again, this is largely driven by tight supply out of New Zealand and all other major origins, but there is generally a good feeling around the upcoming summer period in relation to the major tourist markets.

Japan continues to recover well from its extended period of lockdown conditions. Foodservice demand has largely recovered and in-market inventories are tight, with both US and Australian supply of beef and lamb down on previous years. Prices are, however, pushing the limits of buyers’ patience, with a devaluing Yen complicating the picture further for many importers. Much will depend on how the next two months play out to get a better feel for how the Japanese market will look later in the year and there is certainly downside risk apparent.

The North American frozen beef market remains at very high levels for this time of the year, however the past month has seen a constant softening trend in pricing. Historically this trend may have been expected due to our seasonal increase in supply of beef from the dairy industry, but that realistically has not been the case due to our issues in recent months associated with labour and Omicron, meaning New Zealand supply has been relatively tight. Instead, it has been the ongoing presence of Brazilian frozen beef, which is now in excess of their quota and is subject to tariffs of 26%, that has kept certain segments of the market full. This has been supplemented by the continuation of the dairy cow cull domestically, which means that frozen beef inventories across the US are at levels well above five-year averages and what was in store this time last year. On the assumption that our access into the frozen beef market in China remains open in the coming month, we don’t see the current market drift in North America persisting, with the summer grilling season just around the corner and demand naturally increasing. Longer term, if the domestic industry continues to retreat, it can only bode well for prices for imported beef heading into 2023; this being subject to the wider economic headwinds that America currently finds itself in, related to record inflation, rising interest rates, declining share markets, and depressed consumer sentiment.

More broadly, shipping equipment and vessel schedules are an ongoing challenge for all New Zealand exporters. Despite some reporting in the general media around the first signs of lower freight rates signalling a recovery in global supply chains, it is not apparent that has reached as far as New Zealand, and in many respects the situation today is as bad as it has been during the past two years. While a major issue at our end of the supply chain, the issues are just as acute for our customers. This is having a material impact on the volume of chilled beef and lamb being shipped, with customers increasingly moving towards the safer option of frozen product. The China situation is obviously a major factor for the current supply chain predicament, as is the Ukraine conflict, with reports that some major European ports are physically inspecting every container arriving into Europe that is destined for Russia, slowing down port operations and creating another bottleneck for other logistics providers.

Last month I signalled that the veneer of buoyant global market conditions was arguably thinner than it had been for quite some time. One month down the track that veneer still appears to be holding, supported by generally tight global supply of beef and lamb, but there are signs of scratches around the edges that suggest we must continue to be vigilant as we head into an important winter period – one which will be busier than usual because of the backlog of animals that remain on farm as a result of the processing slowdown of recent months across the industry.

Rick Walker
ANZCO Foods General Manager Sales and Marketing