Sheepmeat – maximising the cut
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Sheepmeat – maximising the cut

September 8, 2015

Australian sheepmeat producers have profited from strong prices over recent months, despite sluggish demand out of China and the European Union. And the most notable decline in demand has been recorded in China for the forequarter portion of the carcase, says agribusiness specialist Rabobank in a recently-released report.

In the report, Maximising the Cut – Breaking It All Down, Rabobank says it is important for sheepmeat producers to understand the drivers of their farmgate price – as it is largely determined by the market demand for specific products of the animal carcase.

“While farmers are paid on a per head or per kilogram basis, the price they receive is calculated from the summation of all the products derived from the animal – from the extensive array of cuts, to the offal, co-products, skin and wool,” says report author, Rabobank animal protein analyst Matthew Costello.

Mr Costello says that by examining the values of the different sheepmeat products, it has become apparent that demand has weakened for the forequarter cuts – which account for nearly a quarter of returns from the carcase.

While this has curtailed farmgate returns in New Zealand, up to now it has been a different story in Australia, with farmers largely buffered by the strong domestic market and diversity of export markets.

The report – which looks in detail at the New Zealand sheepmeat sector – warns that prices may start to level off in Australia however, with the very strong returns not aligning with the subdued demand in some export markets.

Breaking it down

The Rabobank report says understanding the demand for different parts of the animal, based on the product and its intrinsic demand is paramount, as it ultimately determines the overall profitability of the sheepmeat sector.

“Not only is it important for the producer to understand the demands of the customer from both a carcase production and by-products viewpoint – so they can supply stock to those market specifications – but it is essential that this understanding is held across all sections of the supply chain,” Mr Costello says.

“For example, processors need to communicate transparent pricing signals and market information to producers, while the government needs to continually work in conjunction with producers and processors to capture new markets.”

Key markets

Unlike New Zealand, where the domestic market only accounts for around 10 per cent of sheepmeat consumption, in Australia, it remains the biggest market for local producers, according to Mr Costello.

“In 2014, the Australian domestic market fell to an historical low (to account for 43 per cent of lamb production), however this year we are expecting the local market to absorb slightly more lamb than last year due to softer global demand and potential substitution away from beef due to record beef prices,” he says.

Mr Costello says China accounted for roughly 20 per cent of Australia’s sheepmeat shipments in 2014 – compared to 40 per cent of New Zealand’s.

“However recently, China – the world’s largest sheepmeat producer – have ramped up their domestic production to equate to around eight times that of total Australian sheepmeat production,” he says. “This combined with record imports from both countries, together with record Chinese production, have created an oversupply in that market,” he says.

Despite the short-term oversupply problem, Mr Costello says growing demand for high-quality, safe and traceable lamb and mutton will ensure China remains a key destination for sheepmeat exports into the future.

The largest market for Australian sheepmeat remains the Middle East with close to 120,000 tonnes of product exported to that market last year, as well as an additional two million sheep in live trade agreements.

“Shipments to the Middle East are likely to increase further – with demand bolstered by the growing population and rising incomes, as well as consumers’ propensity for lamb and mutton based on cultural and religious demographics.”

Market opportunities

Mr Costello says while Australian producers will continue to benefit from the diversity of export markets, current returns are not aligning with subdued demand – particularly out of China and the EU.

“We only need to look back to 2011, where consumers in overseas markets reacted to then high prices by substituting with cheaper alternatives,” says Mr Costello, “and this consumer behaviour could put a lid on current prices.”

The outlook for Australian producers remains positive however, with strong domestic demand, unprecedented export demand given the record slaughter levels, favourable seasonal conditions in most key producing regions and the weak exchange rate.

Rabobank Australia & New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 115 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 41 countries, servicing the needs of approximately 10 million clients worldwide through a network of more than 1600 offices and branches. Rabobank Australia & New Zealand is one of Australasia's leading rural lenders and a significant provider of business and corporate banking and financial services to the region's food and agribusiness sector. The bank has 94 branches throughout Australia and New Zealand.   
Media contacts:
Denise Shaw
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Rabobank Australia & New Zealand 
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Jess Webb
Media Relations
Rabobank Australia & New Zealand 
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