Analyst Intel

4 December 2020

PULSE | Consistency key for the long-term

By Mel Croad

Despite the turmoil that descended on global markets in the wake of covid-19, farm gate prices for sheep and beef have weathered the storm.

While lower than 12 months ago, farm gate prices have been void of erratic movements linked to procurement wars or volatile export market conditions. Over the last six weeks, AgriHQ data shows lamb slaughter prices have maintained a relatively even keel, averaging $7.10/kg in the North Island and $7.00/kg in the South Island.

It’s unusual for lamb prices to trade sideways through this time. This steadiness comes from meat companies forgoing procurement battles, instead aligning more closely with export returns. Beef prices have tracked a similar path, albeit at a lower level to September. While beef and lamb prices have begun their seasonal descent, it’s likely to occur more uniformly than last year.

It’s possible valuable lessons were learnt this time last year when overseas demand sky-rocketed to unsustainable levels. Meat companies responded by lifting schedules to record levels. Those levels may have reflected the markets at the time, however, farmers were often caught in the glare of those prices without understanding the mechanics behind them. This led to some expecting the good run would last well into 2020, when in reality it was a short-lived spike that had almost run its course by the time many had cottoned on to it.

The lessons learnt then appear to have changed the dynamics of the industry and the onset of covid-19 simply sped up the process.

For many years farmers have asked for consistent, stable prices that they can budget and farm to, not wide swings that create panicked decisions and impact cashflows. Sure, the markets have been more muted this year, but pricing for lamb, mutton and beef since late-May have performed better than many expected, with little fanfare. 

There is still uncertainty from many angles for prices heading into 2021. Weather, the dollar, market access and covid-19 all spring to mind as potential challenges. However, we have faced many of them already this year, and potentially the industry is better placed to deal with them again. 

NZ farmers are very fortunate that current pricing aligns with market conditions, rather than being artificially inflated. And that should provide some buffer if market challenges arise into next year. Maybe we should spare a thought for our Australian farming counterparts. They are in the midst of herd and flock rebuilding, which has pushed prices beyond what is sustainable. 

Australian beef prices are so disconnected from the global market that processors are losing hundreds of dollars per animal. The desperation to maintain slaughter throughput and service both the export and local market is coming at a significant cost. Those killing cattle are clearly benefiting from the tight supplies, but processors cannot play this game for much longer before there are long-term, industry-wide repercussions.

Unsustainable prices are also filtering through into the store market for breeding stock with a proven track record. Cows with calves-at-foot and ewes with lambs-at-foot are eye-wateringly expensive and well beyond anything achieved back here.

Australian farmers obviously have confidence in the long-term game, but they are set to face strong downside in stock values and farm gate prices in 2021 regardless of what eventuates in the global markets.