Beef and veal

Outlook for 2003/04 to 2006/07

Production

Latest situation and outlook

Statistics New Zealand released their provisional 2003 survey results in February 2004. The beef breeding herd was up 4 percent to 1.31 million with total beef numbers up 4 percent to 4.66 million. Higher inventory numbers appear to reflect a carryover of slaughter animals because of low beef schedule prices in June 2003. Beef cattle numbers are expected to decline over the outlook period due to a weakening of the beef to lamb price ratios, a slight rise in sheep numbers and moderate increases in dairy cattle numbers.

Beef production for year ended September 2004 is estimated to be down 7 percent because of an unusually high cow slaughter in the previous year. Beef production is projected to fall 16 percent by September year 2007 (the end of the outlook period), reflecting the declining beef herd. While the number of cull cows from the dairy herd is expected to rise, cows of all origin have much lower carcass weights than other categories of the adult cattle slaughter mix, such as bulls. Veal production is dominated by the slaughter of bobby calves from dairy farms and as the milking herd rises over the outlook period so too will the number of bobby calves for slaughter. Veal is estimated to contribute about 4 percent of total beef and veal production for the year ending September 2004.

Significant changes from SONZAF 2003, and reasons for the changes

Beef production is now projected to be 15 percent lower in September year 2007. This mostly reflects a new, more accurate forecasting model used for forecasting beef cattle numbers. Furthermore, when SONZAF 2003 projections were being finalised the unusually high cow slaughter for September year 2003 was thought to indicate an upward shift in cull numbers from the dairy herd over the outlook period. This was assumed to result from the slowing of the expansion of the dairy herd. This is no longer thought to be the case: rather it is now thought to have been an unusual bubble in the cow slaughter, perhaps an aftermath of the autumn 2003 drought.

Exports and product prices

Latest situation and outlook

Export quantities of beef and veal are expected to follow the trends in production. Beef includes a number of product classes, e.g. manufacturing cow and prime steer and heifers. Export quantity is projected to be 18 percent lower in September 2007. An increase in domestic consumption of beef and veal reflects a rising population trend.

The US (US) beef market is used as a basis for forecasting New Zealand's manufacturing cow prices. A quarterly beef price forecasting model has been developed replacing the previous annual model. The model forecasts manufacturing cow prices in the US, beef prices at FOB, and manufacturing cow schedule prices. Prices for New Zealand manufacturing cow in the US are estimated to peak in September year 2004. Over the outlook period, prices are projected to fall but to remain above the 2002 price level.

The determining factors of New Zealand manufacturing cow prices in the US are the US choice beef price and the US cow slaughter. Low choice beef prices are expected in 2004 because of the market shock following the discovery of Bovine Spongiform Encephalopathy (BSE) in one dairy cow in Washington State. Prices for US choice beef are expected to peak in December quarter 2006. The US cow slaughter numbers are influenced by dynamics in the US cattle inventory. The US beef cattle numbers have been steadily declining in recent years and rebuilding is not expected to start until December year 2006.

Significant changes from SONZAF 2003, and reasons for the changes

Returns from the US market for manufacturing cow are expected to be lower for 2004 to 2006 because of the consequences of the BSE case.

Schedule prices

Latest situation and outlook

The manufacturing cow schedule is estimated to be down 6 percent for the year ending September 2004 as gains from higher prices in the US are more than offset by unfavourable exchange rates against the USD during the year. Exchange rates are assumed to depreciate over the next three years but to remain above the long term average of 0.55 for the NZD/USD. This means falling prices next year and then a slow recovery out to the end of the outlook period.

Table 3: Beef and veal situation and outlook

September year Units 2002 2003 2004e 2005f 2006z 2007z
Mated cows & heifers1 mil 1.47 1.26 1.31 1.26 1.23 1.16
Total beef cattle1 mil 4.79 4.49 4.66 4.36 4.11 3.97
Production              
Bobby kill mil hd 1.35 1.60 1.50 1.55 1.60 1.62
Cattle kill mil hd 2.18 2.49 2.33 2.16 2.03 1.96
Veal production 000 t 22.3 26.8 25.0 25.9 26.7 26.9
Beef production 000 t 554 633 592 554 521 500
Export volumes              
Total2 000 t 473 543 517 476 443 424
Product prices              
Mcow US3 USc/kg 224 200 239 225 227 228
Schedule prices - baseline scenario              
P steer5 NZc/kg 376 297 279 254 268 302
Mcow4 NZc/kg 308 205 193 175 185 208
NZD/USD USD 0.444 0.550 0.660 0.651 0.608 0.571

Sources: MWI Economic Service, Statistics New Zealand and MAF

1Opening numbers as at 30 June.
Statistics New Zealand census data as at June 2002 and provisional survey data as at June 2003.
MAF estimates, forecasts and projections for other dates.
2Exports of beef and veal in carcass weight equivalents.
3New York CIF imported 90 percent chemical lean (CL) cow beef price.
4Schedule price cow M grade (145.5-170 kg), MWI Economic Service for 2002, and thereafter MAF estimate, forecast and projections.
5Schedule price weighted average prime steers and heifers (245.5-270 kg), MWI Economic Service for 2002 and thereafter MAF estimate forecast and projections.

Figures may not add or reconcile due to rounding.

Significant changes from SONZAF 2003, and reasons for the changes

The main reason for lower manufacturing cow schedule prices for New Zealand producers over the outlook period is the significantly stronger exchange rate assumptions. For the year ended September 2007, the schedule price is 17 percent lower than projected in SONZAF 2003.

Alternative exchange rate scenario analysis

Exchange rate volatility is a major cause of variation in export prices for beef products and schedule prices received for beef animals presented for slaughter. The dominant currency for the beef trade is the USD.

Table 4: Manufacturing cow schedule prices: baseline and alternative exchange rate scenarios

September year Units 2002 2003 2004e 2005f 2006z 2007z
Mcow schedule prices - baseline exchange rate scenario              
NZD/USD USD 0.444 0.550 0.660 0.651 0.608 0.571
Mcow schedule1 NZc/kg 308 205 193 175 185 208
Mcow schedule prices - higher exchange rate scenario              
NZD/USD USD 0.444 0.550 0.669 0.670 0.618 0.590
Mcow schedule1 NZc/kg 308 205 190 165 178 199
Mcow schedule prices - lower exchange rate scenario              
NZD/USD USD 0.444 0.550 0.653 0.603 0.546 0.540
Mcow schedule1 NZc/kg 308 205 194 194 219 232

1Schedule price cow M grade (145.5-170 kg), MWI Economic Service for 2002, and thereafter.

MAF estimate, forecast and projections.

Over the period 2004 to 2007 the baseline manufacturing cow schedule price is projected to fall by 8 percent. In the high exchange rate scenario, the schedule rises by 5 percent over this period while in the low scenario the schedule rises by 20 percent.

Comparing the high and low scenarios to the baseline in 2007, a 3 percent appreciation of the NZD/USD indicates a 4 percent fall in the schedule, and a 5 percent depreciation indicates an 11 percent rise in the schedule. Comparing the low and high scenarios over the outlook period, on average, a one US cent change in exchange rate is equivalent to a five NZ cent rise in schedule price.

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