25 October 2010

15 minute read

Demand for both is set to continue rising over the upcoming decade; at the same time, local producers are facing pressure on production growth, leading to an increase in opportunities for exports to the market. However, while the Chinese market offers opportunities, it can also be volatile. New Zealand exporters will not only face competition from a range of supplying countries, but also the possibility of changes in Chinese government policy; changes which can make or break markets almost overnight.

Introduction

With its massive population, surging income and rapid urbanisation, China has grown to become a giant consumer of a range of agricultural products, including meat. It is now the world’s largest market for sheepmeat and the fourth largest for beef.

Demand for both beef and sheepmeat is set to continue rising over the upcoming decade; at the same time, local producers are facing pressure on production growth, leading to a range of import opportunities for the market. However, while imports for beef and sheepmeat are likely to grow, this growth will be modest over the next decade.

For New Zealand, the Chinese market will continue to play a prominent role in sheepmeat exports, while for beef exports it is likely to remain a minor part of overall export sales. Like many developing countries, China’s meat markets can be volatile. New Zealand exporters will not only face competition from a range of supplying countries, but also the possibility of changes in Chinese government policy; changes which can make or break markets almost overnight.

Beef and Sheepmeat a Minor Share of Chinese ‘Meat Pie’

Beef and sheepmeat are niche products in China and combined make up only 14 per cent of per capita meat consumption. This is in contrast to 20 per cent for poultry and a massive 65 per cent for pork. This smaller share of the ‘meat pie’ is due to a combination of cultural and price factors. While the cattle herd is spread throughout China, cattle have traditionally been used in agricultural production (ploughing fields, etc.) and were therefore considered too valuable to slaughter for meat. It has only been in recent decades, with increased mechanisation in farming, that there has been a shift towards raising cattle for beef. Unlike cattle, the sheep flock is more concentrated in the northwestern regions of the country. Sheepmeat is a major part of the cuisine in these areas, which are influenced by Muslim and Mongolian cultures. In regions such as eastern China where the majority of cities are located, it is less common to eat sheepmeat.

For consumers in China, beef and sheepmeat have also been less affordable than pork and poultry (see Figure 1). Pork and poultry have shorter production times and greater efficiencies in feed conversion compared to cattle and sheep, making them less expensive to produce. For much of the previous decade, prices for both beef and sheepmeat have averaged between one and one-half to two-times higher than pork and poultry. Late 2007/08 was a notable exception; at that time, an outbreak of porcine reproductive and respiratory syndrome (PRRS), also known as blue-ear disease, decimated the local Chinese hog herd and pork production, leading to a spike in pork prices. However, since that time the gap between consumption of beef, sheepmeat and pork has increased as the supply of pork recovered and sheepmeat and beef supply tightened. With the Chinese government providing support to Chinese pork producers and rapid growth taking place in poultry production and imports, this price gap is likely to remain or could even widen. Given their high price and niche position in Chinese cuisine, beef and sheepmeat are generally considered more of a special occasion item, rather than an everyday meal option. Unlike pork, which is more often cooked at home, beef and sheepmeat tend to be consumed when dining out.

Niche Products But Total Chinese Beef and Sheepmeat Consumption Among Highest in World

Despite the relatively minor share of beef and sheepmeat in Chinese diets, total consumption of both has surged in recent decades, driven by a combination of increased population and a rise in GDP per capita. While population growth in China has slowed during recent decades, the population still increased by an incredible 184 million between 1990 and 2008, the largest growth of any country except India (319 million).

Even if consumption of beef and sheepmeat had remained stable at the 1990 level of 0.9 kilogrammes per capita, population growth alone would have driven sales of an extra 165,000 tonnes each of beef and sheepmeat over the past two decades. However, Chinese consumers have grown increasingly carnivorous over recent decades, consuming more of all meats, including sheepmeat and beef. When compared with other developing countries in Asia, per capita consumption growth in China has been particularly impressive (see Figures 2 and 3).

A major factor driving the consumption growth has been the increased purchasing power of the Chinese consumer, with the rise in incomes in recent decades. Urban disposable incomes in particular have surged from around CNY 1,500 (USD 314) in 1990 to just under CNY 16,000 (USD 2,336) in 2008. Although this has seen spending on food as a share of disposable income decline from around one-half to around one-third, in absolute terms, spending on food has risen more than five-fold (to over CNY 4,200). As incomes increase, Chinese consumers are increasing their spending on meat. This increased consumption is due to both the perceived positive nutritional attributes of meat and also the pure enjoyment of eating meat.

Another factor supporting consumption growth has been the migration of the Chinese population to urban areas, where average per capita beef and sheepmeat consumption is roughly one and one-half times consumption in rural regions. The population in urban areas of China rose from around one-quarter in 1990 to nearly one-half in 2007. Living in urban centres provides access to improved incomes and a range of products that may not be easily distributed to rural areas. For suppliers of meat, large urban areas are also more attractive in terms of the better cold-chain systems in place and, for imported meat, the growth of western-style supermarkets and restaurants, which cater to wealthier customers willing to pay higher prices for their meat.

Surging Local Supply Has Limited Import Opportunities

The combination of increased wealth, urbanisation, westernisation and population growth saw total consumption of beef and sheepmeat in China surge 2.5 million tonnes and 2 million tonnes, respectively, between 1996 and 2008. However, much of this increased consumption was met by local supply growth. During that time, China grew to become the world’s largest producer of sheepmeat and one of the largest for beef, dwarfing that of New Zealand and Australia (see Figure 4).

Much of the growth in China took place in the 1980s and 1990s. The Chinese government wanted to expand the range of meat products available to the population, and believed beef and sheepmeat were more nutritious than pork and less grain intensive, given their pasture-based production systems. Producers were supported by tax exemptions and subsidies on inputs, and given favourable access to finance. However, in recent years both cattle and sheep producers in China have faced downward pressure on margins. Much of the support that had been provided to cattle and sheep producers during the 1990s was removed as the government recognised that cattle and sheep production, which was becoming increasingly reliant on grain, was an inefficient way of utilising grain compared to pork and poultry. This removal of support left producers exposed to high input prices (such as fertiliser and grain), which surged as part of the global rise from 2006. Many of China’s cattle and sheep producers are small-scale operators. They are generally price takers and so found it difficult to pass these increased costs on to buyers. Producers also faced uncertainties in markets. China is subject to regular outbreaks of foot-and-mouth disease (FMD), and given the long production cycles of both cattle and sheep there were concerns that prices could collapse before livestock were ready to market.

The combination of reduced government support, uncertain markets and rising input prices saw cattle and sheep production becoming increasingly unattractive in China compared to other options such as grains, pork or chicken and resulted in a decline in both herd and flock numbers. The fall in livestock numbers has led to lower production in recent years, resulting in an increase in net imports for sheepmeat and a fall in its small export surplus for beef (see Figure 5).

China Important and Growing Market for New Zealand Meat Exports China has been an important market for lamb for more than a decade. It is by far the largest buyer of New Zealand wool, tallow, skins, hides and leathers and has been a small, but growing, market for sheepmeat, beef and offal. The Chinese beef market (including Hong Kong) has been a minor segment for New Zealand, reaching 10,000 tonnes (2.7 per cent of total New Zealand exports) in 2009. This is in contrast to 200,000 tonnes exported to North America; New Zealand’s largest beef export market. The amount of New Zealand beef exported to China is similar to that of Australian exports. For sheepmeat, China/Hong Kong plays a greater role, taking 42,000 tonnes (11 per cent) of New Zealand lamb and sheepmeat exports in 2009, compared to 189,200 tonnes imported by the EU under quota.

On a single country basis, exports to China/Hong Kong were 46 per cent of the volume shipped to the UK, New Zealand’s largest sheepmeat destination. While the volume of sheepmeat shipped from New Zealand to China has traditionally been more than double the volume exported from Australia, this market share is shrinking. Australia has now surpassed New Zealand in mutton, with exports doubling from 4,500 tonnes to 9,500 tonnes in 2009, while New Zealand’s exports remained at 4,500 tonnes. China has rapidly grown as an offal market, supported by strong consumer demand, reduce Chinese production and a crackdown on illegal meat imports. The growth in offal imports has taken place at both the high and low ends of the market (see Figure 6).

Opportunities for Meat Exports to China Will Grow

Demand for beef and sheepmeat (in fact, all meats) will continue to rise in China, with the FAO estimating that beef consumption in China will increase 1.5 million tonnes and sheepmeat more than 1 million tonnes within the decade. This growth will be supported by continued strong growth in China’s economy (with the IMF forecasting average GDP growth of over 9.5 per cent over the next five years). Urbanisation in China will also continue; already home to 160 cities of over one million people, this will increase to more than 220 cities by 2025.

Production growth for both beef and sheepmeat will also continue, but at a slightly slower rate than consumption, as producers face a more challenging production environment. In fact, China is facing challenges to expansion of agricultural production overall, particularly regarding limits on land and water availability.

China has 22 per cent of the world’s population, but only 7 per cent of its arable land. Of this arable land, over 10 per cent is estimated by the Chinese government to be polluted (mainly with heavy metals and chemicals). This leaves China with very low available arable land per capita of rural population (see Figure 7). While the government is implementing policies to maintain available arable land, there is little potential for expansion, with the country suffering from severe erosion and desertification in some of its existing productive areas. Water availability is also an ongoing issue in China, as China has only 6 per cent of global renewable fresh water supply. Water distribution is unbalanced between the north and south. While in the south of the country there is sufficient water supply, in the north, where grain production is concentrated, water access is limited.

Unable to fill all of their food needs through domestic production, China increasingly relies on imports of some commodities to support their consumption needs. The government is making decisions on which agricultural products it wishes to maintain (or achieve) self sufficiency in, and which it is comfortable increasing imports of. Local pork production is one of the major targets for self sufficiency, given its dominant share of Chinese meat consumption. After a severe disease outbreak decimated herds and production volumes in 2007, the Chinese government put major support systems in place with producers receiving support through a range of mechanisms, including direct payments and input subsidies. These support mechanisms appear to be working as China is returning to a position of self sustainment in pork. For beef and sheepmeat producers in China, support will be minimal, leaving them to face the challenges of limited land and water resources head on. Producers are also likely to face the added pressures of rising input prices (such as fertiliser and grains) and increasingly stringent food-safety requirements (after such issues as the melamine milk contamination of 2009).

These pressures are likely to limit a recovery in cattle herd and sheep flock numbers, slowing beef and sheepmeat production growth and providing a range of opportunities for exporters in the Chinese market. Pressures on land availability and rising input costs will also increase the importance of productivity improvements for China’s cattle and sheep producers and result in some consolidation of the industry. This could open up opportunities for the export of industry services, including supplying cattle and sheep genetics and providing training in improved animal husbandry techniques.

With production growth slowing and demand continuing to rise, China is likely to increase its level of beef imports over the upcoming years. The growth in incomes will see an increase in the number of consumers able to dine out rather than in the home. The traditional hot-pot restaurant segment will continue to grow, supporting increased beef consumption. While remaining a minor share of the food service sector, China will also see a continuation of the rapid growth in western-style eating establishments. Particularly impressive has been the growth in fast food chains such as McDonald’s. By the end of 2009, McDonald’s had already opened 1,175 stores in Mainland China, and is well underway in its plans to open an additional 175 new restaurants in 2010 alone. Also impressive has been the growth in five-star hotel restaurants and other fine dining establishments, to support the growing business and tourist trade in China. The growth in such western-style restaurants will support increased sales to both ends of the market, from high-cost loin cuts for fine dining to manufacturing beef for hamburger patties.

Sheepmeat offers good prospects for growth in China, with consumption expected to continue to rise beyond local production capabilities. As with beef, there is room for increased sales at both ends of the value spectrum, with lower value cuts like breasts, flaps and brisket popular for use in hot pots, while premium cuts such as racks and loins are used in the restaurant segment.

Offals will continue to offer some of the greatest potential for growth in exports to China, with demand expected to rise for beef, sheep, pork and poultry offals. These are popular for human consumption, in the growing pet food market and in Chinese medicine. New Zealand edible offal exports to China already provide steady and growing returns and should be well-placed to take advantage of this expected demand growth. The volume of edible beef offals exported from New Zealand to China increased 50 per cent year-on-year in 2009 to 2,000 tonnes, along with a 40 per cent improvement in average per kilogramme prices. Sheepmeat offal volumes remained static at 1,800 tonnes but average market returns per kilogramme improved 30 per cent.

With internal pressures on production in China, increasing food-safety awareness at the consumer level and increased sophistication in retailing, New Zealand’s high-quality edible offal products are well-placed to take advantage of increased demand. Green offal exports have also followed the trend of increasing export volumes over the last decade. In particular, exports of sheep casings destined for use in the processed meat market in China have increased year-on-year. The smaller part of this category, beef stomach, has seen strong growth, with a doubling of export volumes in 2009 year-on-year to 4,300 tonnes. The biggest challenge for New Zealand’s producers in continuing this rate of growth will come from supply availability of animals in New Zealand.

Free Trade Agreement

New Zealand entered into China’s first free trade agreement (FTA) with a developed country in 2007, and as a result meat tariffs on sheepmeat, beef and edible offal will be phased out. The FTA was implemented as of 1 October 2008, with tariffs reducing against an agreed schedule through to 2015. All beef and sheepmeat exports from New Zealand will be tariff-free by 2016. Tariffs on edible offal and lamb casings will fall by 2 per cent per annum and will be phased out in 2012. Australia has been pursuing the same agreement since 2005, but as the fifteenth negotiation round was completed in July 2010, without finalisation, New Zealand continues to have a small, but growing advantage (see Table 1).

Along With Opportunity Comes Potential Volatility

While the Chinese market will offer a range of opportunities for exporters, it is also a market that could be volatile. New Zealand will not have this market all to itself, with a range of suppliers in other countries either already granted access to the Chinese market, or expected to gain (or regain) access in the short to medium term. This includes suppliers at both ends of the price spectrum for beef, such as Brazil (low cost) through to Australia and the US (higher cost). Meanwhile, the major sheepmeat competition comes from Australia and internal Chinese production. In 2008, Brazil gained access for beef in the Chinese market for product from states certified as FMD-free with vaccination, with individual companies in those states now undergoing assessment for export approval. Significant volumes of product also enter via Hong Kong, which does not have FMD restrictions on imports. The US currently remains banned from supplying beef to the Chinese market due to the discovery of Bovine Spongiform Encephalopathy (BSE) in 2003. At this stage, there is no indication of when access will be regained. However, the US would be a significant competitor in the high-value segment of the market if it were to regain entry to China. US beef is largely served in foodservice outlets in Hong Kong, with a small presence in high-end restaurants.

Local distribution channels will also challenge those looking to capitalise on export opportunities in China. Complex supply chains, often without significant cold-chain infrastructure, can make the route to consumers difficult. While supermarket retail formats are becoming more common in the major cities, traditional market-based purchasing of meat remains the prevalent purchasing environment for many Chinese consumers.

Conclusion

The Chinese market for beef and sheepmeat will offer opportunities for New Zealand exports. However, sheepmeat and offals appear to provide the greatest opportunities over the next decade. For beef, export benefits will arise as a result of tariff differentials compared to Australian product. New Zealand is well-placed to supply beef and sheepmeat to the Chinese market but is certainly not in the driver’s seat and will face competition from a range of countries. New Zealand also faces volatility in the market, particularly through changes in market access conditions either directly or through competitors changing their access agreements. New Zealand suppliers’ volume constraints, producer costs and the threat of improved access from strong competitors such as Brazil and the US are the main threats to business expansion. The benefits of the FTA tariff differentials in meat from New Zealand are now here. This will provide a window of opportunity to continue the work started decades ago by New Zealand producers to strengthen relationships, gain market knowledge and improve supply relationships with key market players.