Sheep meat producers set to be the real winners of the food boom.

By Robert Herrmann - Mecardo 

We have seen some optimistic headlines recently about the prospects for agriculture.

“Mining boom to dining boom” and “Australian farms to be the food bowl for Asia” are recognizable newspaper headlines that capture the promising outlook.

And when you look at where the growing population lives, there is no doubt that Australia is well placed to service this potential.

In the ANZ “Bluenotes” report titled “What Asia’s food boom means for Australia”, freelance journalist & editor Zilla Efrat notes, “Rising incomes are changing diets in Asia, encouraging a shift from traditional staple grains to more meat and processed foods."

The middle class of this region is rapidly growing and they want to eat more western style food.

The ANZ report also says that both India and the rest of Asia will bypass the US, who currently have 12% of the world’s middle-class. Emerging Asian economies such as Vietnam, Philippines and Indonesia will have 13% of the middle-class by 2020 and India 12% by 2021. In fact, by 2020 China will overtake the US to have the world’s largest group of people classified as middle-class.

Amazingly, there will be 10 times the number of middle-class people in Asia than in the USA!

We know that previous emerging economies have transitioned their diet preferences from traditional staple grains to more of a meat and processed food base as their income increases and the middle class grows. This concurs with reports from FOI & IMF that increased protein intake is closely correlated to rising incomes. The tipping point is around US$10,000 per annum per person, at which, a dramatic escalation in protein intake occurs.

But does increased demand always result in higher prices for farmers?

Wheat production has consistently grown over time in line with population growth and the subsequent increase in consumption.

However, there has been no significant shift in real farm wheat prices. This indicates that despite increased demand, farmers have increased production while improving efficiencies to keep a lid on the price. This has been a great achievement in the task of feeding the world and in keeping consumer prices in check. There has been some influence from expanding crop acres, especially recently in Russia and the Black Sea regions, but the credit for increased productivity must be acknowledged, by and large, as the results of improvement in farming.

To expand this idea, the real benefit to farmers of a growing population, whether middle class or not, is that demand for food increases. The farmers of the world have shown that they are more than capable to meet the extra demand without the incentive of higher prices.

As an example, for wheat this means that the supply/demand equation remains pretty much in equilibrium, with farmers either producing more (larger farms and more tonnes per acre) and/or operating more efficiently (better cropping practices to lower costs) as the pathway to improved farmgate returns. As an example, Western Australia’s farmers have achieved creditable increases in wheat yields over the past 80 years as better technology, machinery and cropping models have been employed.

But is sheep meat different?

We think it is, and could become the real success story of the Asian “food boom”.

Perhaps we are already in the sheep meat boom? To illustrate, since the early 2000’s lamb prices have increased at a time of increasing annual slaughter, with regular price step-ups.

In economic terms, this is counter-intuitive. Higher supply should lead to lower prices and vice versa. This looks like a commodity that has a demand growing faster than increases in production can match.

The optimism for Australian sheep and lamb is based on a couple of basic premises.

    1) Australia is located very close to the Asian emerging middle class. While this is good for all protein products, the Asian cooking style is well suited to sheep meat. In fact, the humble mutton product from surplus “old” sheep is perfect for “slow” or “long” cooked dishes; it provides necessary protein and flavour, and will retain texture in these Asian type dishes. Alongside this, is the growing demand for premium lamb products from discerning and cashed-up consumers.

    2) Unlike wheat, where any increase in price can be met with a rapid production response from a wide range of countries, sheep meat is a small world commodity available from few. Beef too has a large and diverse supply base, with South America the sleeper in potential world beef supply. The only countries with any real export capacity of sheep meat are New Zealand and Australia. The NZ flock has succumbed to the expansion of the dairy industry, with a 15% decline in sheep numbers over the past 10 years. In Australia, the prolonged period of underwhelming wool prices has resulted in an Australian sheep flock of 70 million, well below the recent peak of 170 million. Any response of increased supply as a response to better prices is therefore constrained, with those sheep farmers who have moved to grain production in southern Australia showing no remorse nor intention to return to sheep.

There was a time when Australia “rode on the sheep’s back”. Due to the low flock numbers and the growth in cropping, it is unlikely that sheep will again dominate the rural landscape like we saw in the 80’s.

It is, however, hard to argue against the fact that the buildings blocks are in place for Australian sheep farmers to ride on good times resulting from improved demand for sheep meat; and let's not forget the “record” prices currently on offer for the other “by-product” from sheep, wool.

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