Market Update - December 2022
We end 2022 in a very different space than a year ago. Markets continue to be hampered by three macro trends:
- The Ukraine conflict that looks set to drag well into 2023, with an adverse impact on energy prices and basic agricultural commodities including grains and oils as well as fertiliser
- The ongoing uncertainty surrounding China and how it will manage Covid-19
- The global economic downturn that is a result of high inflation and interest rates, which is continuing to impact consumer confidence, spending and general market sentiment
The sudden change in direction from the Chinese government around how it will manage Covid-19 moving into 2023 has come as a surprise to many, including those within China. The general feedback from customers and other contacts in-market is that while it is great to feel like China is starting to reopen to the world and relax its tight control over its citizens, there is a massive amount of uncertainty and anxiety over what the change will mean in terms of case numbers and the health outcomes for large swathes of the population, notably the elderly and those based outside of the major cities, both groups that are still relatively poorly vaccinated. The other point of interest to ANZCO Foods is the timing of this change. It may well have been forced on the government as a result of rising case numbers and a recognition that their previous approach was failing to deliver on its desired outcomes, but with less than a month until the beginning of Chinese New Year there remains significant risk around how this crucial holiday season plays out. What will the government do if deaths start to further escalate? Will people travel as is traditionally the case? Will they eat out as is commonplace during the holiday season or will people choose to go into an unofficial lockdown to manage the growing risk of infection? Is this change more about the government’s broader concerns regarding its slowing economy and the need to get things back on track to avoid even bigger social issues in 2023? Lots of questions and very few answers, but we will get some degree of clarity come early February, which will set the scene for the first half of 2023 for our sales into China and the wider global market for beef and lamb given their dominant position.
In the US, frozen beef prices continue to drift lower. While there have been reports published recently around the projected gap in domestic US supply that is apparently just around the corner, and the positive impact that will have on demand for New Zealand beef and pricing, it would be unwise to believe that this scenario will play out in the first quarter of 2023. The latest export statistics out of Brazil highlight that frozen beef volumes are now drifting away from China to the US as Brazilian suppliers eye the prize of tariff-free access for their beef come 1 January. With that 65,000MT back in the supply chain, and New Zealand and Australia starting to grow volumes seasonally, there is likely to be sufficient product in the US market well into the New Year even if we do start to see the brakes going on domestic kill numbers. In the premium lamb and beef space, US retailers continue to struggle to entice consumers to pay the money for premium cuts, which is keeping demand and pricing for New Zealand grass-fed products on a leash.
In short, the UK market for lamb remains a mess. There is very little we can do but hold on for the ride while retailers, foodservice distributors, and further processors work through existing inventories. We are starting to see some early signs of new demand for frozen lamb legs heading into the New Year, which provides hope, but it is a confusing environment there right now and we will be managing it carefully. Recent promotions in specific retailers have been very successful, highlighting that inherent demand for New Zealand lamb is good, but it would seem only if it is being virtually given away! (I noted with interest a recent article in our local media trying to explain why New Zealand lamb in the UK is currently cheaper than lamb in New Zealand, specifically referencing some of these promotions, but it missed the key point that New Zealand lamb is often used as a ‘loss leader’ by UK retailers to get people through the doors so they fill their trolleys with other products. Such promotional pricing certainly does not reflect our sell price. I don’t think any New Zealand lamb exporter likes how UK retailers leverage our product in this regard, but our ability to change behaviour is limited).
Our pre-Christmas sales in Europe have been solid and consumers seem to be determined to enjoy a good holiday season with anecdotal reports suggesting restaurants are doing a very good trade across much of the continent. The test will be what happens come January when the full impact of higher energy prices starts to bite on household budgets and the festive spirit has been well and truly extinguished. Our expectation is that Q1 2023 will be much slower than the same period this year.
Covid-19 cases across Japan are now trending above 100,000/day again. This is having an impact on foodservice sales as consumers stay away from their usual eating-out habits. Retailers are also reporting poor sales year-on-year. This is more to do with the high cost of food and the growing concerns over the wider economic conditions that the general population will face during the first quarter of the New Year.
Overall the story in global beef and sheepmeat markets is slightly more ‘Bah-humbug’ than ‘Deck the halls with boughs of holly’ as we head into the Christmas break, but there seems to be plenty of grass out there, the sun must come out at some point as we head away to the beach or lake, and our long-term confidence in global protein markets remains undiminished despite the immediate issues that we are facing, and which we are not alone in when we look across various commodity markets today.
ANZCO Foods General Manager Sales and Marketing