Sheep meat: September quarter 2020
COVID-19 to force down lamb and sheep saleyard prices
The average saleyard prices of lamb are forecast to fall in 2020–21 by 9% to 734 cents per kilogram and sheep by 6% to 549 cents per kilogram. The economic impact of COVID-19 will reduce international and domestic demand for sheep meat, placing downward pressure on prices. Consumer preferences are shifting towards more affordable protein sources, including chicken and fish. An appreciation of the Australian dollar will further reduce global demand for Australian sheep meat as it becomes relatively more expensive.
COVID-19 and depleted national flock to lower exports
Sheep meat exports are forecast to fall by 4% in 2020–21 to 444,000 tonnes shipped weight. Demand for sheep meat is susceptible to global shocks. Between 2016–17 and 2018–19, 73% of Australian sheep meat was exported. The impact of the COVID-19 pandemic on global demand has been more severe than anticipated. Global GDP is assumed to contract by 4.9% (see Economic overview), revised down from -3% since Agricultural commodities: June quarter 2020. Lower disposable incomes in most countries and a slow recovery of the food service industry have reduced consumer demand for relatively more expensive meats such as lamb. An appreciation of the Australian dollar since March has made Australian exports relatively more expensive for consumers. In the second half of 2019–20, these factors and reduced supply from a depleted national flock, reduced sheep meat exports to major markets, including China, the United States and the Middle East.
However, domestic saleyard prices remained strong because the fall in international demand coincided with restocking and a reduced national flock.
African swine fever supporting Chinese demand through the pandemic
Despite recent falls in export volume to China, export demand in 2020–21 for Australian sheep meat is likely to remain stable. In 2020–21 the impact of African swine fever on domestic pig herds will continue to drive Chinese consumer demand for other proteins, including Australian sheep meat. In 2019–20 the export value of sheep meat to China was $1.2 billion, an increase of 43% from 2018–19. However, according to the US Meat Export Federation, around 65% of sheep meat is consumed outside the home in China. Any delays in reopening the food service industry due to subsequent waves of COVID-19 are likely to continue to constrain demand in 2020–21.
Demand from United States and Middle East to fall due to the pandemic
In 2020–21 demand from the United States and the Middle East is expected to soften and the value of exports will fall further due to the COVID-19 pandemic. In 2019–20 exports to these markets were valued at $890 million for the United States (down by 5% from 2018–19) and $540 million for the Middle East (down by 13%). This was due to growing competition from Chinese consumers and a lower national flock limiting export volumes. Exports to the Middle East were most affected, with export volumes falling on average by 13% month-on-month between March 2020 and July 2020. Reduced demand for sheep meat in the Middle East is the result of various measures implemented to limit transmission of COVID-19. Peak consumption aligns with culturally significant festivals that were limited due to lockdowns and restrictions on social gatherings. Restrictions on tourism and the food service industry also dampened demand.
A significant fall in passenger flights between Australia and the Middle East contributed to supply chain disruptions and has played a role in lowering exports to the Middle East. In 2019–20, 51% of sheep meat exports to the Middle East were transported by airfreight. In April the Australian Government launched the International Freight Assistance Mechanism fund, a temporary measure to help restore global supply chains affected by COVID-19 containment measures. However, a recovery in passenger flights to pre-COVID levels is not expected in 2020–21.
Lamb production to remain high, but sheep production to fall
In 2020–21 lamb slaughter is forecast to rise by 3% to 20.9 million head, reflecting favourable production conditions, producers capitalising on high prices, and the need to service accumulated feed debt from the drought. As a result, lamb production is expected to increase by 4% in 2020–21 to around 500,000 tonnes carcase weight, compared with 482,000 tonnes in 2019–20. The increase in production relative to slaughter can be attributed to higher carcase weights resulting from favourable production conditions and a higher proportion of lambs being bred for meat production. Uncertainty in the wool market and the need for cash flow following the drought has driven this short-term change in the composition of the sheep flock.
In 2020–21 sheep slaughter is forecast to fall by 15% to 7 million head, reflecting a smaller national sheep flock after 2 years of drought-related destocking in 2018 and 2019. Mutton production is forecast to fall by 15% to 176,000 tonnes carcase weight in 2020–21, driven by higher retention of breeding ewes as production conditions improve.
Flock numbers to increase modestly in 2020–21
The national sheep flock is forecast to increase modestly to around 64 million head in 2020–21. Conception and lambing rates have increased as a result of turn-off of less productive ewes during the drought and favourable production conditions in 2020–21. These factors and the higher retention of breeding ewes will help maintain flock numbers. After 2 years of drought, producers are expected to prioritise cash flow and pasture recovery before they consider restocking. Consequently, high lamb turn-off in 2020–21 is expected to limit promotion into the flock. If saleyard prices fall more than forecast, restocking may commence earlier than anticipated.
Off-farm income is an important income source for many farming households. On average, off-farm earnings for sheep farms is around $44,000 a farm. COVID-19 containment efforts have affected access to off-farm employment. This may drive some producers to delay flock rebuilding longer than they would otherwise.
COVID-19 restrictions to have limited impact on production in 2020–21
In May, outbreaks of COVID-19 in meat processing facilities in Victoria caused several processors to close temporarily for deep cleaning. These facilities can be high-risk environments for COVID-19 transmission due to the close working conditions. Stage 4 restrictions enforced in parts of Victoria in early August required meat processors to reduce capacity by 33%. In 2019–20, 48% of Australian sheep meat was processed in Victorian abattoirs. Capacity limits in Victoria had little effect on national lamb and sheep slaughter. Supply chains are still functioning, and a small number of sheep were redirected to meat processors in New South Wales and South Australia. Drought remained the main driver of lower slaughter numbers in 2020–21.
Live sheep exports to stabilise
In 2020–21 live sheep exports are forecast to stabilise at around 1 million head after falling from 1.98 million head in 2017–18 to 1.1 million in 2019–20. Regulations implemented in May 2020 have increased certainty about future arrangements. The COVID-19 pandemic has had a limited impact on live exports – only one shipment was delayed in May 2020.
Opportunities and challenges
Adaptation reducing risk from consecutive waves of COVID-19
Meat processing facilities are high-risk environments for transmission of COVID-19. Victorian meat processors have been forced to lower throughput to meet the stage 4 restrictions enforced on 2 August 2020. A smaller national flock and adaptation by the industry has meant that COVID-19 measures resulted in little change to national lamb or sheep slaughter. The risk that sheep meat production will be disrupted by subsequent waves of COVID-19 is expected to be mitigated by adaptations such as staggered work schedules, use of personal protective equipment, and by redistributing livestock to other facilities.
Higher dollar could limit competitiveness
Appreciation of the Australian dollar makes Australian sheep meat relatively more expensive in export markets. Australia and New Zealand account for 71% of world sheep meat exports. Both currencies have appreciated against the US dollar since March 2020. These factors have lowered the affordability of sheep meat relative to other sources of protein that have more diversified sources of production. At the same time, consumer incomes in major importing countries have decreased, reducing demand for expensive protein.
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