Great outlook for lamb

At MyFarm we mainly complete dairy syndicates and dairy farm investments.  This has been because the outlook for dairy has been more positive, because the nature of NZ dairy has been more 'investment friendly' (e.g. stronger industry structure, better cashflow) and because there is more investor demand for dairy.

Despite this, we have had several very successful forays into sheep and beef; the purchase of Kaiangaroa Station in 2010 was an example of a very successful syndication where we combine a quality farm, excellent management and a simple and profitable business plan.

We are very positive about the outlook and note we are not the only one; see the following excerpt from the USDA's Livestock, Dairy and Poultry Outlook, September 16 2011. 

Positive Outlook for Sheep Prices World-wide Amid Tight Supplies

Long term trends and recent market developments have acted to increase the price of lamb and mutton meat in markets around the world in recent years. Price increases are due to a combination of factors—reduced inventories in some of the major consuming and export-oriented markets; increased demand from rising incomes in a number of countries; and other macroeconomic conditions, especially in some of the export-oriented sheep producing countries. According to the Food and Agricultural Organization of the United Nations (FAO), lamb and mutton average producer price for its reporting countries was US$2.11 per pound in 2008 (the most recently available data), up 71 percent from 2001. In the last 2 years, sheep prices in Australia, New Zealand, and the United States have nearly doubled in all categories of the industry.

Though global sheep numbers have remained fairly stable since 1960, with inventories remaining close to 1.1 billion throughout the period, sheep numbers in some of the major sheep-consuming and export-oriented producing countries declined steadily (fig.1). Australia and New Zealand, the largest exporters of lamb and mutton globally, have seen drastic declines in inventory. Inventories in Australia and New Zealand have been reduced 17 and 18 percent, respectively, in the last 5 years. The European Union (EU) and the United States—major consumers of high-value lamb—have seen drastic declines in their sheep numbers as well. Much of the decline in these countries’ sheep inventories stems from structural adjustment in response to an underlying long-run decline in demand for raw wool and to low returns for wool relative to returns from prime lamb production and other farm enterprises. These adjustments have led to the continued declining sheep numbers and to fewer wool producing farms However, significant growth in sheep numbers in India and Pakistan, North Africa (Algeria and Sudan), and until recently, China, helped to offset some of the inventory declines among other producing nations.

Although sheep inventories have been quite flat for decades, the impact on meat production has been ameliorated somewhat by rising productivity which supported growth in lamb production and trade. Productivity, as measured by the change in dressed weight per animal over time, has increased nearly 60 percent since 1965, resulting in higher levels of lamb and mutton production (table 1). Productivity growth in U.S. sheep, for example, has increased by nearly 0.5 pounds per animal per year (a 48 percent increase since 1960), but the United States produces only 1 percent of the world’s sheep. China’s productivity growth has similarly increased 46 percent. New Zealand and Australia have also seen some productivity growth— 4 percent and 13 percent, respectively.

However, consumption in many countries has likely benefited from population growth, rising incomes, and urbanization. Asia, for example, has seen its per capita lamb consumption more than double since 1960, largely due to income growth and urbanization (table 2). According to Hsu, Chern and Gale, studies have shown that when people move to cities or towns, they tend to consume more meat, processed foods, and restaurant meals, and less grain. In 2000, China’s household surveys showed that per capita red meat consumption in urban areas was 40 percent higher than in rural areas. Per capita income growth has transformed some Asian countries into major importers of lamb and other meats. For example, China comprise about one-fifth of the world’s population. Its per capita lamb consumption has increased by 4 percent since 1980 and it has turned to international markets to supplement its production. In the last decade alone, China’s lamb and mutton imports have increased by more than 500 percent. In those countries where growth of demand has outpaced domestic production, there has been support for domestic lamb prices.

Those countries which are increasing imports to support their domestic consumption demand are providing support for prices in exporting regions.  Given the importance of New Zealand and Australia to the global lamb market, changes in their sheep inventories and macroeconomic conditions have also influenced recent developments in global sheep markets. New Zealand and Australia rank as the world’s top two sheep meat exporters and together account for nearly 90 percent of global export quantity. Declining inventories in these two countries has thus tightened meat supplies and led to higher prices. In recent years, the strengthening of Australia and New Zealand currencies has also contributed to rising prices, as imported lamb becomes more expensive in local currency terms.

Global lamb trade has trended moderately upward, increasing by nearly 30 percent since 1995, with export growth led by Australia and import growth led by United States and China.  Sheep inventories and lamb and mutton meat prices in many countries are at levels that would encourage herd rebuilding, a development that would be expected to negatively impact market supply and sustain higher prices in the short term. Under these conditions, lambs that could potentially form part of the current marketing chain would be retained for the breeding herd. The sheep cycle runs at least 2 years, and for much of the U.S. sheep industry, which operates on a seasonal pattern (breeding in fall, lambing in spring), the cycle could be closer to 3 years. Thus, if a producer chooses to retain lambs born in spring for its breeding herd, they normally would not be bred for the first time until they are about 18 months old. Hence, it would take closer to 3 years from their birth to the time their offspring could be slaughtered and ready for market.

Many sheep industries around the world are facing environmental challenges.  Debilitating drought conditions in the Southwest United States, a major sheep producing region, is hampering domestic opportunities for expansion. The sheep and wool industry in Australia is facing a number of environmental challenges.

Salinity problems, woody weeds, vegetation management, and degraded soil issues continue to pose a challenge to sheep production in the high rainfall zones of Western Australia. In New Zealand, increasingly severe weather events and pressures on the country’s natural resource base will test the resilience and sustainability of the sector.

In the face of constraints on expansion and the length of time inherent in the sheep cycle, total world sheep inventories are unlikely to show any significant increase in the near term. As a result, lamb and mutton production is expected to remain constrained, and global lamb and mutton prices are expected to remain strong. Australia and New Zealand, the primary exporters, will continue to shape global lamb and mutton prices well into the future, unless other countries emerge as major traders--an uncertain prospect given sanitary and animal health issues that restrict imports from many countries. While countries such as India, Pakistan, Algeria, and Sudan have seen growth in their sheep inventories, they have also seen significant growth in their populations causing their domestic demand to outweigh their domestic supplies and making it difficult for them to become important players as lamb and mutton exporters.