Meat industry
Introduction
New Zealand’s pastoral-based meat industry encompasses sheep meat, beef, venison and related products such as hides and velvet. Many in deer farming consider their industry to be somewhat different to the sheep meat and beef industries, however they are addressed together in this paper. There are extensive inter-linkages between the different industries, with meat, wool and by-products such as hides produced from the same animals, sheep and beef cattle raised in similar farm production systems, and links between the beef industry and dairy farming, with much beef production coming from dairy cull animals.
In the year ended June 2002 New Zealand’s pastoral-based meat industry exported:
- $1.989 billion of lamb
- $269 million of mutton and hogget
- $1.82 billion of beef and veal
- $279 million in deer products (largely venison and velvet)
- $311 million in other meat products
- $1.358 billion in other animal-related products such as hides, leather, animal fats and other by-products and live animal exports.
Main pastoral exports
Years ended June (NZ$million fob)
Source: Statistics New Zealand
The meat industry is internationally competitive and earns premiums in markets such as the EU and the US for the quality of its product and its responsiveness to customers. New Zealand lamb in particular has a very good image due to its consistency, quality and New Zealand’s “clean, green” image.
Overview of sector structure, size and dynamics
The industry is made up of sheep meat, beef and deer farms and the companies that process and export their products. Many producers farm some combination of sheep, beef and deer within a mixed farming system. Statutory boards continue to play a role in these sectors, with the New Zealand Meat Board (“Meat NZ”) responsible for the allocation and management of quota rights to overseas markets and for industry good activities funded through a statutory levy. The Game Industry Board (“Deer Industry New Zealand”) funds industry good activity relating to venison and velvet. It is funded through a statutory levy.
The major processing and exporting companies are the co-operatively owned Alliance and PPCS and the publicly-listed Affco and Richmond. PPCS is currently seeking to take over Richmond and if it succeeds the processing industry will be dominated by three companies, two of which will be co-operatives. There are a large number of smaller meat processing and exporting companies such as Taylor Preston, Canterbury Meat Packers, Blue Sky, Crusader, Te Kuiti Meat Processors and Progressive. Most of these are investor-owned but unlisted companies, and a number are quite entrepreneurial in their business strategies.
The barriers to entry into meat processing and exporting are relatively low, despite significant capital costs in processing, however it is an industry that has proven difficult to be sustainably profitable in. This is because of factors such as the high levels of competition in the industry, and the dependence of meat processors and exporters on successful stock procurement and on achieving high throughput to utilise capital plant efficiently and to minimise long-run marginal cost. There is some evidence that over time the large co-operatively owned meat companies have out-performed investor-owned, publicly-listed businesses, however it should be noted that Affco was formerly a struggling co-operative business before it became a publicly-listed company. Co-operatively owned meat companies can take a longer-term view and their farmer shareholders may be prepared to accept lower dividends in return for higher stock prices. However, it should be noted that small meat processing companies, some of them growing significantly, are often investor-owned firms and such firms are often well suited to niche market development.
Pastoral meat production is made up largely of:
Sheep meat
New Zealand is the world’s largest exporter of sheep meat, accounting for 55% of world sheep meat export trade (excluding trade within the EU). Australia is the only other significant net exporter of lamb, with its exports totalling 112,000 tonnes in 2000, compared to 292,000 from New Zealand in that same year. The largest importing country is Britain, with 81% of its imports coming from New Zealand.
Lamb exports
Years ended September
*All grade average. Source: MAF and MIW Economic Service
Sheep numbers peaked at 70.3 million in 1982 and are now 39.2 million, the lowest levels since 1955. This reflects shifts into other land uses, however the sheep meat industry is much more profitable and has better prospects than is often recognised. In 1994 predictions were made of what the sheep meat industry could achieve by 2001. It was predicted that the average price for a lamb would rise from $40 in 1994 to $46 in 2001, and in fact the real price rose to $64. Total lamb receipts were predicted to rise from $1.1 billion to $1.4 billion but have reached over $1.9 billion, achieving this with ten per cent fewer sheep. Average lamb weights rose to 16.6 kg, 1 kg higher than expected.
Beef
New Zealand is a major beef exporter ($1.82 billion in the year ended June 2002), however unlike lamb and venison New Zealand beef tends not to earn premiums in international markets compared to competitors. This is largely because New Zealand grass-fed beef is rated less highly than grain-fed product in high value markets and is often used for manufacturing grade processed meat applications such as burgers.
Beef exports
Years ended September
*Schedule. Source: MAF and MIW Economic Service
The US remains New Zealand’s most important beef market. In the year ended September 2002, the US took 193,000 tonnes product weight (60% of New Zealand’s exports), of which 129,000 tonnes comprised manufacturing beef and veal. Other major markets are in Asia and Canada. Food safety continues to be an issue in international markets. The recent discovery of BSE in Canada may have a detrimental impact on all beef exporters to North America, including New Zealand, as well as on Canadian producers.
Over the period 1994 to June 2002 beef cattle numbers dropped from 5.048 million to 4.483 million, with much of this drop reflecting shifts into dairy, deer, forestry and other land uses. By June 2007, total beef cattle numbers are projected at 3.76 million, the reduction mainly due to declining beef prices leading to shifts into other land uses. It should be noted that international beef prices are to a great extent driven by US production and price cycles.
Productivity is improving incrementally in the beef industry, for example average steer weights have risen from 297 kg in 1990/91 to 315 kg in 2001/02. However, unlike sheep and dairy research, New Zealand is not at the leading edge of beef research and innovation.
Deer
Deer farming focuses largely on venison markets, with velvet a relatively minor product. New Zealand is the world’s largest producer and exporter of farmed venison, earning $215 million in 2002. The EU buys 90% of our exports, with Germany being the main market taking 52% of the volume. Other major markets include Belgium and the US. Venison is a high value niche but also competes with other meat and protein products such as beef and white meats.
Velvet exports earned $37.7 million in 2002, with $26.3 million earned from other deer by-products. Around 97% of velvet goes to Asian markets, with the Chinese and Korean markets being critical.
Deer numbers reached 2.25 million as at June 2002 and are projected to increase further. This creates new opportunities for growth in venison and velvet exports in the next few years. However it should be noted that currently venison schedule prices are low and sheep are more profitable.
Venison exports
Years ended June
*AP2 schedule price. Source: Deer Industry NZ and Agrifax Co NZ
Dynamics
The dynamics of the meat industry flow from changes in the business environment and in market structure, the effects of the quota allocation system, and from productivity improvements and innovation.
Changes in the business environment and market structure
The current profitability of the meat industry owes much to the economic reforms of the mid-1980s. These reforms removed market-distorting price supports, subsidies and other interventions and made farmers and exporters focus on markets, customers and what they were signalling. Meat exporters have improved their returns from international markets through increased utilisation and further processing of carcasses into added value cuts and through an increase in the proportion of chilled exports rather than frozen. New Zealand has also diversified the number of export markets for New Zealand lamb.
New Zealand preparation, packaging and processing innovations have helped sales, including rapid cook cuts from frozen product, marinated product and the use of sheep meat in ethnic cooking. New Zealand has world class processing facilities, ongoing product innovation and processing efficiencies and high food handling and safety standards.
Meat companies stipulate and monitor farm quality control measures to ensure that the needs of markets and customers are met. New markets have been developed, such as for halal meat in the Middle East. Farmers have become much more market-oriented and have adapted their production systems accordingly, for example to produce lean lamb for processing into chilled lamb and other added value markets. Lamb market clubs have been developed to assist in the sharing of information between farmers supplying particular supermarkets such as Tesco and Waitrose. On-farm quality assurance systems are set in close consultation with offshore retailers.
A good case study of a smaller enterprise within the meat processing industry is Lean Meats. Lean Meats was established about 15 years ago by around 100 entrepreneurial farmers to maximise the value of their lambs in international markets, especially through chilled lamb and direct marketing to the retail and restaurant sectors in the US. The company now has around 250 suppliers and earns $20 million a year in export sales.
Effects of quota allocation system
Around two thirds of New Zealand’s sheep meat and beef exports are controlled by tariff quotas in importing countries, and this has profound effects on the meat industry’s structure, dynamics and returns. The tariff quotas are:
- EU sheepmeat tariff quota: 227,000 tonnes
- EU beef tariff quota: 300 tonnes
- US beef tariff quota: 214,000 tonnes
Because imports are restricted into these markets the cost of meat to consumers in quota controlled markets is correspondingly higher than it would be if an open market prevailed. As a result New Zealand earns revenue from quota markets that is substantially higher than would otherwise be the case, and these “quota rents” are in large part passed on to farmers because the meat export companies holding quota entitlements have to compete on price to procure supply from farmers.
The meat processing industry is to a great extent driven by economies of scale and by the economics of marginal throughput. The companies therefore have a strong incentive to maximise throughput, driven by the declining long-run marginal cost of additional stock processed and by quota entitlement being determined by throughput. Quota is allocated to meat export companies on the basis of the amount of product they process (based on a three year rolling average). The meat companies therefore have a strong incentive to bid up the price of sheep meat to increase their processing throughput and thereby earn more quota entitlement.
Productivity improvements and innovation
The sheep meat industry in particular has achieved major productivity improvements over the last twenty years. On-farm productivity gains tend to be incremental, however they have accumulated over time to substantial advances in productivity and profitability.
Production methods (higher lambing percentages, higher killing weights) and efficiency of grass conversion to sheep meat have improved considerably. Ewes are better fed, hoggets are increasingly lambed, farmers have bred from more prolific breeds and poor performing sheep are being identified and culled through scanning. Genetic gains have increased the performance of our sheep flock to the extent that gross farm incomes are 8% higher now compared with ten years ago through better sheep genetics alone. Improved pasture species and better management of lambs have led to higher lamb growth rates. The old norm of 150 grams liveweight gain a day is now being replaced with 200 grams a day, and some progressive farmers are exceeding this level.
Table 1 below illustrates production comparisons between 1990/91 and 2001/02:
Table 1: Production comparisons between 1990/91 and 2001/02
|
1990-91 |
2001-02 |
|
|
Lambing percentage |
100.4 |
119.2 |
|
Average lamb weight (kg) |
14.35 |
16.93 |
|
Lamb kg yield/head |
9.76 |
13.66 |
High productivity sheep farming now stacks up well against beef, deer and dairy in terms of return on capital.
Future growth potential
It is difficult to forecast the growth potential of the meat industry, given uncertainties around exchange rates, market access and other factors. A key issue is the extent to which meat companies can develop and expand high value opportunities, for example for chilled lamb and for direct marketing of cuts to restaurants in the US, the EU and other high value markets.
Land use changes to dairy and forestry have the potential to lead to further reductions in sheep numbers, however there are arguments that sheep farming is regaining competitiveness compared to other sectors and that this could end the long-term decline in sheep numbers and therefore of sheep meat production. Sheep industry productivity gains are likely to be significant and there are growth prospects in international markets.
One measure of growth potential is the difference between the highest and average performing farm business. MAF has calculated the differences in the profitability of sheep and beef farms in the top 25% compared with the average for all sheep and beef farms. The difference between the top performing 25% of farms and the average is $220 ha. If all sheep and beef farmers were to reach the performance level of the top 25% of producers this would correspond to a lift in farm gate income of $1.95 billion per annum.
There is considerable growth potential in the agritech sector that services the meat industry and which is also a major export sector in its own right. New Zealand companies compete effectively in niche markets characterised by economies of scope, demanding customers and leading edge technology. One limitation is that New Zealand’s agritech sector focuses on pastoral rather than the much larger intensive animal industry markets. Agritech businesses also tend to be small to medium sized businesses that face high fixed costs of exporting and complex marketing and distribution challenges.
New Zealand is a niche player in high value biochemicals that draw on meat industry by-products such as blood extracts and fine chemicals. There may well be great potential from the triangulation of New Zealand’s agribusiness and meat industry capabilities, modern biotechnology and high value niche markets. PharmaZen (which now owns Waitaki Bio Sciences) is an example of a business that see opportunities in high value products developed from sheep.
Contact for Enquiries
Monitoring and Evaluation
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0623
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