Market Update - October 2022
Posted on Sunday, 16 October 2022 under Market Updates
Global protein markets have continued to soften in the past month with a less than optimistic short-term outlook as the northern hemisphere heads into a long winter fuelled by rising interest rates, food inflation, and energy costs, as well as the possible return of Covid-19 and the ongoing stalemate in Ukraine.
In China, all eyes are on Beijing this coming week as the Communist Party Congress gets underway. Hopes are high that a key outcome from the meetings will be a commitment to slowly but surely reopen borders and retreat from their zero-covid policy that has decimated the foodservice sector in 2022 and which is holding back the wider economy. This hope has been supported by positive news from Hong Kong this month, with their own restrictions being eased. This is being seen by many as a possible precursor to a wider policy change on the mainland. Hope is far from a guarantee however, with a counter view being that the Chinese leadership will hold firm on their approach as we head into 2023. This would be a real concern to our future trade into this market, particularly once the Chinese New Year period is over.
If any evidence of the case for freeing things up in China is needed, then the Golden Week holiday that has just come to an end across China should be seen as a useful indicator. Retail sales during this peak demand holiday were down 26% versus the same period in 2021. This represented the lowest sales value for this period since 2014. Meanwhile, Brazil continues to fill its boots in China, exporting more than 60% of its record 230,000mt of beef in September to Chinese customers. This eclipsed the previous record set only one month earlier. The question is where this beef is going and what impact it will have as we head into 2023. Our customers are in general far more reluctant to commit to sales volumes than was the case just a few months ago, which suggests Brazil is buying market share and importers are speculating on their inventory positions and future consumption. By the very definition of speculation, this can be a risky strategy with long-lasting consequences.
The US beef market remains in the doldrums, which is in line with the general economic mood. A number of key indicators are heading in the wrong direction right now. New and existing house sales numbers in September came in below pre-pandemic levels for the first time. Directly linked to that was a 26-year low in the number of new mortgage applications as interest rates spike in line with the Feds' efforts to curb inflation. To date, those attempts have yet to help food prices, which recorded an inflation rate of 14% in September. One implication of the current economic challenges in the US is sea freight costs between China and the US, which are down close to 50% year-on-year. Statistics of course can be dangerous – the freight rate 12 months ago was at an all-time high, hence the current cost is still expensive based on pre-pandemic levels. What it does suggest however is that there is perhaps a glimmer of hope for New Zealand exporters who have suffered through massive increases in the cost of servicing our global customer base during the past three years. We do not necessarily foresee that improving markedly in the next six to 12 months, but there is hope that we may not see it get any worse and that a correction is finally looking possible further out.
The issue globally across most commodities and consumer goods, including beef and lamb, is inventory. Again, the US is a good bellwether in this regard. Frozen beef inventories in the US totalled around 250,000mt in September, up 24% year-on-year. That bulge in the system has been created by a continued strong cattle cull linked to extremely dry conditions for much of the cattle and dairy belt. September US beef production exceeded one million MT, with more than 50% of the cattle killed YTD being dairy cows and heifers, well ahead of historical averages. This suggests a moment of reckoning will hit the US market as we look beyond the next six months. The question is whether the expected economic slowdown will push that moment of reckoning out or lessen the impact of tightening domestic beef supply. The other factor to consider is the potential for Australian beef imports into the US to increase during 2023. The Australian cattle kill YTD is down, yet cattle numbers are growing, suggesting that we should see a greater number of cattle coming to market in the coming months. Add to this mix the role of Brazil as the possible spoiler, particularly if China does turn off the tap after the New Year holiday, and it makes for a messy picture in the US as we end 2022 and look ahead to the new year.
On lamb markets, again China is key. The latest export data shows that 55% of NZ sheepmeat volumes are headed to China and this dependency will not easily be resolved through proactive attempts to diversify our market mix. As with beef, much will depend on the Chinese government's approach to Covid-19, with sheepmeat consumption far more reliant on the ailing foodservice channel than is the case for other proteins such as beef and pork.
The UK lamb market remains incredibly challenging given the overall environment in which our customers are operating. Uncertainty is the general theme in conversations with market participants, as they look ahead to a difficult six months. In both the UK and Europe, businesses are not just slowing down but shutting down as they reel under the escalating cost of energy, and consumers are trading down or away from relatively expensive New Zealand lamb. European foodservice operators are starting to feel the impact of economic pressures as the summer season fades in the rear-view mirror and winter looms on the horizon.
Likewise, lamb sales into Japan have been poor of late, with retailers struggling under the pressure of a devaluing yen and increasing costs of doing business. Our customers in the important Hokkaido foodservice market are signalling cautious optimism for the end of year, which is one positive sign to hang our hats on.
Currency is currently our saviour. A weak NZD benefits NZ exporters. A frozen beef price into the US today of circa US$2.60/lb at an exchange rate of 57c is essentially the same return as a price of US$3/lb price at 65c. However, the benefits of a weak currency are easily offset by the cost of inputs and raw materials imported into New Zealand for use within our business and yours. It can also make it more difficult for our customers to absorb market prices, even if they are well down on levels seen during the past 12 months in USD terms. The current seasonal ebb in livestock has also been a useful buffer to market volatility in recent weeks, however that too will be short-lived as the main season kicks into gear and throughput increases at our plants across New Zealand. This will put further onus on how we manage our inventory position, supply chains, and our customer mix across global markets.
All-in-all, a challenging start to the new season, but one that the industry has dealt with many times before and which we will no doubt work our way through yet again.
ANZCO Foods General Manager Sales and Marketing