Slump spells cold winter for lamb prices

Winter lamb contract prices look unlikely to lift the spirits of farmers disappointed by a season that failed to fire, but sector sentiment about longer term lamb market prospects remains relentlessly positive.

Winter contract prices are down on last year, some by 50c/kg and more. This probably won’t surprise farmers who started the season earning $100-plus a lamb but have seen returns fizzle this year because of a demand slump in key markets China and Europe, and look like ending it with an average price of about $94, or $5.26kg.

Affco is offering two winter lamb contracts based on a guaranteed minimum price of $5.35kg for July and $5.45kg for August. Alliance Group is offering a winter schedule price range of $5.20 to $5.80 to mid-November.

Its chief executive, David Surveyor, said it had been a tough year for farmers and processors and expected prices to remain soft for the next six weeks or so.

Silver Fern Farms has yet to offer winter contracts. Chief executive Dean Hamilton said his company is waiting to see ‘‘where markets settle down’’. He said the winter contract market looked ‘‘relatively subdued’’ with competitors showing caution by inviting only moderate volumes with only a slight price pick up from current market prices.

Anzco declined to discuss its winter schedule prices, saying contracts were offered in April and early May and kick in this month, running until September.

The consensus is that a season that started with high hopes was kneecapped after the first quarter by a demand dry-up in New Zealand’s biggest sheepmeat market, China, whose own production soared, a knock-on effect in the Middle East, and high domestic lamb production in Britain and Europe.

The post-Easter chilled lamb market was sluggish and the current frozen leg market is described as ‘‘flat’’ and ‘‘dead’’.

Other price dampeners were record lamb exports from Australia, a Chinese U-turn on paying handsomely for low-value cuts like breast and flap meat, and weak demand for byproducts like pelts for leather.

Lamb was not alone in feeling the bite of a commodity demand drop, tracking the same downward path as dairy, oil and iron ore.

But sector leaders share the view of Rabobank animal proteins analyst Matt Costello that the outlook for New Zealand lamb is good. The recent softening of the kiwi against the US dollar, English pound and the euro could also prove helpful.

Australia-based Costello said the real story of the season had been China. The extent of its demand withdrawal and own production increase had been a surprise to the sector.

Chinese sheepmeat production since 2013-14 increased around 5 per cent, or 200,000 tonnes, he said.

It was challenging to get accurate, timely information out of China, but its sheep flock is thought be about 130 million head and it produces about 4.2 million tonnes of product a year, Costello said.

The New Zealand sheep flock is 30 million.

China last year bought an average 160,000 tonnes of New Zealand sheepmeat, up 20,000 tonnes on 2013. Britain is our second-biggest market, last year buying an average 60,000 tonnes, and the US is third at 20,000 tonnes.

Costello said demand from China had been steady then boomed in 2013 and 2014, when it bought about 45 per cent of New Zealand’s production. Compounding the Chinese demand problem this season was that it stopped paying good money for low value cuts, whose traditional markets were food aid and island nations, he said.

‘‘The Chinese paid a bit extra for it and we had good returns. While the European markets were pretty soft we saw values across the whole carcass get lifted, but this year they are paying a lot less.’’

China’s explosive production growth had reversed a 10-year trend. But it was expected a gap would emerge between China’s production capability and growing appetite for lamb, Costello said.

Middle class growth would increase. ‘‘Our analysts are saying there will be a massive shortage of red meat [in the world]. So the China market has softened slightly, but I don’t think we can say China has run its course.’’

Alliance’s Surveyor believed the Chinese halt on paying high margins for low-value products was permanent.

The short-term environment for lamb sales was challenging, but the medium and longer term outlook for red meat and protein was positive, he said.

‘‘I wouldn’t even try to guess a date [for recovery] . . . and in any case the entire industry proved itself wrong at the start of this season.

‘‘But one thing you are unlikely to see in the coming season is the rapid ramp-up in prices you had in October, November and December period [last year]. I doubt it will be as aggressive.’’

He noted the increase in British lamb production and said another market complication there was some major retailers with their own business pressures were rethinking their business models as they tried to compete with discount retailers.