Sector weathers the COVID-19 storm

// Industry

Rabobank analyst Blake Holgate told farmers on a Beef + Lamb New Zealand, Western North Island Farming for Profit webinar that the NZ red meat industry is well-placed to weather the COVID-19 storm. While there will be challenges, the crisis presents an opportunity for the sector to reposition agriculture in the eyes of the public, government and future talent.

Blake Hoalgate

This is first in a two-part series looking at markets, prices, challenges and opportunities.

New Zealand’s red meat producers are well placed to weather the COVID-19 storm although prices will ease as the economic impact of the pandemic becomes apparent.

Rabobank analyst Blake Holgate says while global economies founder in the wake of COVID-19, there are factors that will cushion the blow for red meat producers. These include a softening New Zealand Dollar, the ability of NZ’s red meat industry to shift supply quickly as opportunities arise, the continued impact of African Swine Flu on protein stocks in China and globally tight supplies of lamb.

“We will see prices ease rather than see a significant decline, but this is still a fast-moving situation.”

Speaking on a Beef + Lamb New Zealand, Western North Island Farming for Profit webinar, Blake told the audience that both NZ red meat producers and processors came into this crisis in good shape.  Commodity prices had been performing well and processors had been able to reduce debt, driven by the strong emergence of China as a new market, particularly in the last two to three years.

China is now this country’s predominate export market and while there is valid concern about over-reliance on one market, Blake believes this relationship might prove to be particularly beneficial in the next 12 months.

Global situation

The global economy has been growing solidly at 3-4% in recent years and economists had signaled a slowdown even before COVID-19.

However, from February COVID-19 dominated news as China and then the rest of the world took actions to stop the spread of the virus.

This meant the closing down of restaurants and supply chains as people were locked down.

Fortunately for NZ, China began opening up as other parts of the world were closing down, which allowed product to be diverted as markets changed.

Blake pointed out that the economic damage isn’t the disease, it is the containment efforts and there are both immediate and long-term implications of these.

In February, there was a 54% decline in red meat shipments to China compared to the previous year and in March this was reduced to a 25% decline and shipments were expected to increase again in April.

Product was diverted to Europe, the US and secondary Asian markets in February and product value was retained, but as other parts of the world have shut, it is the high value cuts destined for the food service sector that have taken the biggest hit.

In many countries, quick service restaurants have managed to continue to operate in some capacity, so while there hasn’t been a complete shutdown, there has still been a significant reduction in volumes.

Panic buying and the reduction in eat-out options hasn’t entirely off-set the loss of spend in the food service sector.

In the US, both beef and lamb are typically eaten in restaurants, although a high proportion of NZ’s beef exports into this market are processing beef which goes into quick service.

In Europe, there is more of a focus on retail markets for NZ beef and lamb, although the food service sector is still an important market for these products.

Blake says it is not easy to switch product between retail and food service as there are supply chain and packaging issues.

“It’s the cuts rather than the product that has been impacted.”

“We are struggling to keep up with demand for the lower value cuts (rounds) while demand for primal cuts that has nose-dived.”

The downstream effect of COVID-19 is that people won’t be able to afford to eat out and are more likely to trade down in their food choices; opting for the burger rather than the steak.

Unfortunately demand and price strengthening of the lower value cuts are unlikely to off-set the drop in value of the primal cuts.