Focus on New Zealand - China syndrome

For New Zealand beef and lamb, China is the fastest-growing international market, with imports up 115% in volume terms in 2013 relative to 2012. While economies around the world have faltered and spluttered in recent years, a growing Chinese middle class, buoyed by remarkable GDP growth of 7.3% in 2013, has ensured demand for meat is booming.

Traditionally China has been a low-value lamb market for New Zealand, made up largely of breast of lamb. However, in more recent seasons the demand for breast has outstripped supply and, as a consequence, China has bought more high-value shoulder and leg.

One interesting feature of the Chinese market is that it takes more of the lamb carcase than any other international market. This includes both a broader range of cuts and also by-products such as skins, tallow and casings. In addition, the demand for full carcases in 2013, relative to 2012, has also been strong, up 77%.

Most consumers in China still only have stand-alone cook top units, as opposed to Western-style ovens and stoves. This means they are precluded from eating lamb cuts such as legs and shoulders, roasted in the way Westerners do. However, says Craig Finch, general manager, market development, Beef + Lamb New Zealand (B+LNZ), "As the economy grows, so too will the demand for Western-style infrastructure environment and food."​

New Zealand is the only OECD country that has a free trade agreement (FTA) with China, entered into in October 2008, and it has now becomes New Zealand’s single largest trading partner.

While China takes the most volume, the UK is still the most valuable market for New Zealand, because it takes a greater percentage of higher-value, chilled lamb. New Zealand’s meat export trade to China is made up largely of frozen product, and it is anticipated this will remain the case for a number of years to come.

The UK takes 22% of New Zealand’s total lamb exports in volume terms, but actually makes up 27% of New Zealand exports in value terms. "So while China figures strongly, the relative importance of the UK as New Zealand’s single most important market from a value perspective cannot be ignored and is unlikely to change for a number of years to come,"​ says Finch.

The top five markets by volume for New Zealand lamb are China at 28%, the UK at 22%, the USA at 6%, Saudi Arabia at 5% and Germany at 5%.

In October, November and December 2013 – the first three months of the 2013-14 meat export season – total exports of lamb decreased by 5.3% over the quarter, to 61,000 tonnes (t) shipped weight. This reflects a decrease in demand for heavier bone-in cuts. The decrease in volume was offset by an 8.9% increase in average value, resulting in the total value of lamb exports rising by 3.2% to an average $8,400 FOB per tonne over the quarter. Compared to the same period a year ago, the total volume and value of mutton exports rose by 16% and 22% respectively. The average return increased by 4.9%, to $5,200 FOB/t.

China remains the largest market for mutton and continues to grow rapidly. New Zealand’s mutton exports to China doubled in the first three months of the 2013-14 season, compared to last season’s first quarter.

Beef has also shown huge growth in China. Sales have climbed 478% in 2013 over 2012, with further demand and growth expected in 2014. Because supply of New Zealand beef has remained relatively static, this growth in volume has come about largely at the expense other traditional markets such as South Korea, Japan and, to a lesser degree, Taiwan. It is expected these markets will remain static in volume and could possibly decrease as China grows.

China has strong demand for a broad range of beef cuts, including high demand for premium loins, together with secondary and processing cuts. In addition to this, there has also been strong growth in demand for full carcases in 2013 relative to 2012.

New Zealand’s single largest market for beef remains the US, which has a quota of 213,000t. Around 65% of this is made up of manufacturing grade beef that gets blended with US product for burgers, with the balance made up of secondary cuts. Beef exports into the EU, meanwhile, are restricted by quota and New Zealand has a very limited provision of 1,300t and this is unlikely to change for the foreseeable future. 

Overall there was little change in the volume and value of beef and veal exports during the first quarter of the 2013-14 meat export season, down 0.5% year-on-year to 68,000t shipped weight. This reflected a notable decline in exports to North America – down 13% – although partly offset by rises in exports to Indonesia, Saudi Arabia, Taiwan and China.

The drop in exports to North America reflected a decrease in exports of manufacturing beef and veal, related to low bull and cow slaughter figures for the period. This drop in manufacturing beef and veal was not fully compensated by the exports to Indonesia, Saudi Arabia, Taiwan and China. Meanwhile, exports of boneless beef, both chilled and frozen, increased.

Volumes exported to Indonesia quadrupled in the first quarter of the 2013-14 season, compared to the same period a year ago, due to a change in import regulations. Exports to Indonesia are now back to levels seen in late 2011.

The total value of beef and veal exports increased 0.5% in the first quarter of the 2013-14 season, compared to the same time last year. Overall, revenues for beef and veal exports averaged $5,900 FOB/t – up 1%.

The importance of free trade agreements​

Market access is critical for the success of New Zealand’s red meat sector as over 80% of beef and 90% of all sheep meat the country produces is exported.

In 2008, New Zealand successfully negotiated an FTA with China – the only such deal China has with any OECD country. New Zealand also has an FTA with ASEAN (comprising Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam). These FTAs have laid the foundation for significant trade growth in these markets, says Ben O’Brien, general manager, market access, B+LNZ. "Our red meat and co-products exports to China have increased dramatically – from $469m in 2006-07, the year before the FTA came into force, to more than $1.6bn in 2012/13. That has more than tripled in a very short time. Not all of that increase in trade is down to lowered tariffs, but the increased competitiveness brought about by those lower tariffs has definitely helped."​

The New Zealand government is actively trying to set up more FTAs. Just recently, the Economic Cooperation Agreement (ECA) with Taiwan has come into force. "This agreement demonstrates how two countries with truly complementary economies can quickly make real gains through a free trade agreement,"​ says O’Brien. It was negotiated in less than two years. "That’s incredibly fast for a modern FTA negotiation.  The deal was signed in July 2013, came into force in December 2013 and will eliminate tariffs on beef by 2015 and on sheepmeat by 2017."​

Ongoing negotiations include expansion of the so-called P4 agreement to become the Trans-Pacific Partnership (TPP), an FTA with Korea which is starting to make progress after being stalled for a little while, an FTA with Russia, Belarus and Kazakhstan, and an Indian FTA. "A new one to start negotiations more recently is the Regional Comprehensive Economic Partnership which involves the likes of China, but also countries we don’t yet have bilateral FTAs with like Japan, Korea and India,"​ O’Brien adds.

The Trans-Pacific Partnership (TPP) negotiation is between 12 Asia-Pacific countries, including, most recently, the addition of Japan, Canada and Mexico, to create a regional free trade area for the Asia-Pacific region.

"New Zealand has pretty good access into some of the TPP countries already, through existing FTAs, but the fact that Japan, Canada and Mexico are now at the table mean there is potential for this agreement to have a significant impact on New Zealand’s trade. Future TPP members could possibly include South Korea, Thailand, Indonesia and the Philippines,"​ explains O’Brien.

The TPP negotiations are also focused on improving the smoother flow of business; tackling some of the non-tariff barriers that can affect trade is an important part of that.

The Russia, Belarus and Kazakhstan negotiation is a strategic opportunity to get improved access into a significant beef market (Russia has historically been the second largest beef importer in the world), and an important existing market for sheepmeat.

Historically, there has been no trade in meat from New Zealand to India, due to stringent market access restrictions. However, in December 2012, the two countries agreed some new improved market access arrangements for sheepmeat, which suggests there is potential for significant growth in trade. "India is an exciting market as it has an increasing population, rising incomes and an affinity for sheep meat,"​ says O’Brien.

In another important trade development, the Regional Comprehensive Economic Partnership (RCEP) is to be negotiated between the 10 ASEAN countries and the partners with which they have already signed FTAs: New Zealand, Australia, China, India, Japan, and Korea.

"The RCEP has the potential to create a trade bloc with a combined gross domestic product of over US$18 trillion, and provide New Zealand unprecedented market access to countries with which it does not currently have FTAs, including Japan, India and Korea,"​ says O’Brien. Negotiations began in 2013 with an ambitious target completion date of 2015.