Market Update - June 2022

Market conditions remain positive but challenging as we enter the winter season.

In China the good news has been the re-opening of Shanghai this month. This is obviously great news for the residents of Shanghai, but also for supply chains, foodservice operators, and general protein consumption. The issue however, is that the Chinese government remains committed to a zero-Covid policy. Given the ‘success’ of the recent lockdowns, the vast majority of the population in Shanghai remains naïve to the virus, meaning that that the threat of future lockdowns will be a constant shadow over the city and nation. The lockdown in Shanghai and across some 50 cities in China during recent weeks has also hit the economy hard. The Chinese government is reacting by signalling a USD5 trillion stimulus package to kickstart the economy. History tells us that when China provides such support, it is good news for global commodity prices in general, including food. While prices for our beef and lamb are already high, this policy move does suggest continued good news for exporters in the coming months. This will only be supported further by signs that the languishing local pork industry has hit rock bottom after a massive liquidation of the domestic pig numbers. Prices for local pork have spiked over the past month, with expectations that this will continue in the weeks ahead. While the link between pork and beef markets in China is tenuous, the closing of the value-gap between pork and beef can only serve to support the current high prices being achieved. This will hopefully also flow through to sheepmeat pricing, which has suffered during the past month as featured in my last report. This market remains a watching brief and the hope is that we will see more cities return to normal in June, reigniting the foodservice sector that is so important for our sheepmeat customers and processors.

The US beef market has remained in the doldrums during the past month, albeit prices remain at historically very good levels in USD terms, and with the recent softening of the kiwi dollar this has been reflected when those funds have been repatriated. Brazilian beef continues to flow into the US frozen manufacturing beef market despite the out-of-quota tariffs that they are required to discount their pricing to remain competitive. The US domestic cow cull also continues to play a major role in the current market environment. One saving grace is the state of the Australian beef kill, which is now forecast to end 2022 at fewer than six million animals, some one million shy of the original predictions for the year and a kill that would be the lowest in Australia for 40 years. The US has been the market most impacted by this reduced Aussie kill, with beef imports from Australia down by more than 20% year to date. This does not compensate for the massive increase in supply caused by Brazilian and domestic beef but is providing some degree of offset. Despite the short-term supply-demand imbalances, we remain confident that current pricing can be retained, with the possibility of further upside as the US summer rolls on.

The European and UK markets for lamb have been the most interesting to watch in the past month, with signs of increasing stress on customers becoming more apparent. Food inflation is a massive issue across the world, and we have been waiting for this to start hitting our customers both in regard to pricing and in-market inventories, and this is starting to show through in the UK and on the continent for specific lamb cuts. A similar sentiment is starting to become more evident in the US lamb market also. This is a worrying sign of things to come and is perhaps the biggest risk to our business for the balance of the year (taking global supply chains off the table, which has become a given in terms of the challenges it presents New Zealand exporters on a week-to-week basis), particularly if the sheepmeat market in China does not rebound. We continue to work with our high-value lamb customers to find the best solutions and to help them with any immediate challenges that they may be facing. Conversely, premium beef demand on the continent, particularly for tenderloins, remains solid, as foodservice operators prepare for a busy summer period despite the ongoing concerns around the Russia-Ukraine conflict and inflationary pressures that are impacting all consumers.

As alluded to above, while the overall pricing environment remains generally positive, beef and sheepmeat markets are showing concrete signs of diverging, with global shortages of beef continuing to fuel optimism, while lamb markets conversely start to show signs of pressure thanks to wider economic factors. With lamb numbers processed this season well behind expectations, the market dynamics in markets such as the UK, Europe, US and China arguably present a bigger risk to processors and farmers than may normally be the case heading into winter, so this will be one to watch in the weeks ahead.

Rick Walker
ANZCO Foods General Manager Sales and Marketing