Limits to growth in New Zealand's agriculture markets

Beef exports have been one of our most consistently strong performers in recent years, with a steady uptrend in both prices and volumes. However, there is some looming constraints to this growth, according to Westpac research.

Beef is relatively unusual among our major agricultural exports in that China is not the dominant market (though it has grown rapidly in the last few years). Instead, around half of our beef exports go into the US, where the economy's slow but steady recovery has lifted demand for beef. Meanwhile, successive years of drought have led to a decline in US beef cattle numbers, leading to an increased reliance on imports.

New Zealand and Australia have benefited substantially from the US supply shortfall in recent years. New Zealand's lean beef is particularly desirable, as it can be ground together with US beef to achieve a certain overall fat content.

Unfortunately, the US beef trade is still subject to protectionism. New Zealand's export quota is limited to 213,402 tonnes per calendar year; a minimal tariff is applied to exports within that quota, but any exports that exceed the quota will attract a hefty tariff of 26.4% of their value.

Due to the strong growth in volumes to date, it is almost certain that the quota will bite this year, reportedly for the first time since 2004. In the absence of any changes, the out-of-quota tariff will apply to all beef exports that arrive in the US in December (and possibly earlier for some, as the quota is allocated to individual exporters).

It is possible to avoid some of the tariff by diverting product to other markets over the next few months. That is around 5% of New Zealand's total annual beef exports, so it's a substantial amount of product to be redirected, and would likely garner lower prices than would otherwise be available in the US.

And even once the next calendar year rolls around, the constraint to growth will remain. High beef prices and the accelerated cull of dairy cows suggest that New Zealand's beef production could be even higher next year, and exports to the US are likely to hit quota levels even sooner.

So what's the remedy? 

The best outcome would be trade reform. "We don't know what the TPPA has in store for the beef industry, but the reduction or removal of the tariff would allow for significant growth in the volume of New Zealand's beef exports to the US. Of course, other signatories to the TPPA would receive similar treatment, so increased competition from other exporters would dampen US prices to some degree. But that in itself would also help to spur US demand for beef, relative to other types of meat," notes Westpac research.

"The other option is to develop other markets. Again, the reduction of trade barriers via the TPPA would help this process along. The emerging economies on South-East Asia offer significant growth potential, as does China given its size. But each market will have different requirements; a one-size-fits-all approach to marketing and distribution won't work here."