I have been pondering this question for some time. Having been brought up on a sheep and beef farm in the rolling hills of South Canterbury, and worked in the meat industry during the early part of my career, I have a great affinity and passion for the product.
Yet I wonder what the future holds for lamb and our highly productive sheep farmers who continue to produce high quality lamb products for consumers across the globe.
Despite the national sheep flock having halved during the past 25 years to around 29 million, the amount of lamb exported to world markets has remained relatively stable dropping just 2% to 385,000 tonnes. Which is a positive indication of the inventiveness of both producers and processors alike.
New Zealand has one of the most productive flocks in the world. Our sheep farmers have made great strides in increasingly productivity through better on-farm management systems and genetic improvements. But have the on-farm productivity gains been rewarded to reflect these improvements, or are they simply needed to keep pace with increasing cost structures within the farming business? Can these gains be reduced to a cost savings' argument in response to declining revenues on farm?
Over the last 10 years, the average lamb farm-gate price has increased by 60% in nominal terms and 29% in inflation-adjusted (real) terms. Part of the increase has been the price signal to produce heavier lambs and carcass weights have increased 5% (+0.85 kg) over the decade. Over the same period, inflation in the price of farm inputs has been 23%.
Diminishing supply?
There has been a steady decline in the national sheep flock over the last 25 years for a number of reasons including dairy conversions of high-performing lamb finishing areas; changing land use such as subdivision of land into lifestyle blocks near metropolitan areas; loss of extensive High Country land to the DOC estate; and, reversion of uneconomic land to scrub and in the 1990s when whole farms were converted to blanket forestry.
Land farmed under sheep, beef, goat and deer pastoral systems decreased by 3.9 million hectares (-31%) from 1990-91 to an estimated 8.6 million hectares in 2015-16. Over the same period the amount of land used by dairy farms has increased by 1 million hectares to 2.37 million hectares.
It is truly remarkable that although some of the best sheep and beef farmland has been lost to other uses, and sheep numbers declining 50% over the last 25 years, lamb production on a carcass weight basis has only dropped around 3%.
In terms of future supply, the prevailing view is that the New Zealand sheep flock is expected to continue to fall, but at a much slower pace in future with a continued offset of continued underlying productivity growth.
The Market
New Zealand accounts for five per cent of world sheep meat production and supplies over half of world lamb exports. By volume, our biggest market for lamb is still the European Union, ahead of North Asia taking 42% and 32% respectively.
European Union
Approximately 40% of New Zealand's lamb export volumes are to the EU, and about half of that is to the UK. This includes steady growth in sales of chilled higher value cuts for the Christmas and Easter periods.
In the UK and most other markets, retailers do not like to alter prices as price increases lead to consumer resistance. Consumers generally face a steady price regime but the wholesale price market that New Zealand exporters sell into is more volatile than at retail. This is further compounded by currency fluctuations between GBP and NZD.
Overall there is lower sheepmeat consumption in the UK than 15 years ago largely due to the competitiveness of alternative proteins. Per capita sheepmeat consumption in 2000 was 6.6kg but by 2014 had declined to 4.6kg. Lamb is the highest priced meat protein followed by beef, pigment and then poultry. This price relativity pattern is the same across most markets.
China
New Zealand's sheepmeat exports to China are heavily dominated by lamb value cuts and mutton. China is our largest volume market for mutton, but also takes around 30% of our export lamb. The value of lamb exports to China has increased 350% over the last five years from $102 million to $459 million.
China has been underpinned by rising sheepmeat consumption and a lift in disposable incomes. However, future in-market values will be moderated by growing domestic production of their own flock, and for the short term a looming Chinese economic slowdown. Overall, China has a significant growing middle class that has sufficient income to make choices about what they consume.
What does the future hold for lamb?
New Zealand sheep farmers have made significant productivity gains over the last 25 years through better on-farm management systems and a focus on genetic improvement.
There is an expectation that similar productivity gains can be made in the future with a large proportion of the flock on a genetic improvement path that will continue to lift overall productivity at a national level. But can we expect or be reliant on achieving similar gains over the next twenty-five years?
In New Zealand we have an aging group of sheep farmers, typically with high equity positions in their farm businesses. According to UMR research funded under the Red Meat Profit Partnership there is greater resistant to change within the older farmer demographic, which is properly expected. The key question for the industry is how to encourage the uptake of new information and knowledge in striving for increased productivity at a pace similar to that of the last 25 years.
Looking to our markets New Zealand lamb racks, loins and leg cuts are high-end market products competing for shelf space alongside alternative meats. As it stands we have a niche product in a niche product category. The focus now clearly needs to be on growing demand for premium New Zealand lamb cuts with affluent consumer groups in select international markets as well as increasing the value of other lamb cuts, offal, and lamb skins. But such conclusions are not new and mimic past commentaries on the industry, accompanied with bookshelves full of various reports saying the same sorts of things.
In writing for The Journal in December 2014 Sir Graeme Harrison (Chairman of ANZCO Foods Ltd) succinctly summed up the situation as follows, '.. important elements for success require developing a credible provenance story based on deep integrity systems, which are linked to specific consumers, often via a partnership value chain. For this to grow, true partnerships will be vital between farmers, processors and other links in the value-added chain. The trader and transactional relationship which has characterised the New Zealand meat industry to date will need to change.'
The question is whether there is the appetite within the sheepmeat industry to move toward a true partnership of trust between farmers, processor-exporters in the value chain to the consumer, or do we accept the industry as it is and simply continue to grumble when prices fall and say nothing when prices rise?
Do we protest the need for closer alignment between the farmer and the first stage processor in the knowledge that may take time, effort and energy to ensure that products better meet specifications? The industry does not appear to be without considerable opportunity, however, that opportunity appears to sit mostly beyond the realm of the simple transactions that may have served the industry adequately for the last 150 years.