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China’s Sheep Meat Market Weak, Due to Increased Domestic and Foreign Supplies

Retail-Mutton-Prices-in-China

China recently surpassed the European Union as the world’s largest importer of sheep meat. Now a surge in domestic sheep production, coupled with these high import levels, has weakened China’s domestic sheep and sheep meat prices.

After peaking in early 2014, retail mutton prices stabilized and then declined last year as domestic supplies increased due to improved breed performance and gains in feeding efficiency. China’s slowing economy and lower rate of growth in the foodservice sector also contributed to falling prices. Reports of culling among producers suggest the industry is seeking a new equilibrium level, although provincial information collected by USMEF suggests that in both the northeast grassland areas and the north China plains production areas, most producers are still earning profits.

At the end of the third week of March, live market-ready sheep prices (approximately 45 kg) stood at approximately RMB 17/kg ($1.19/lb), up 42 percent from the July 2015 low of RMB 10-12/kg, but still off from the historic high of RMB 25/kg in January 2014. With an estimated total production cost of approximately RMB 550-600/head ($84.90-$92.60), producer profit margins have rebounded from last year’s negative territory to an estimated current profitability level of RMB 100-150 per head ($15.40-$23.20). Feeding margins are higher in some production areas, such as those south of Beijing.

China’s retail mutton prices were higher than beef until about one year ago, as beef prices stabilized while mutton prices continued to drift lower. Although live sheep prices fell nearly 50 percent from their peak, national average retail lamb prices have fallen only 15 percent from the January 2014 record. Current prices are RMB 57.66/kg, down 11 percent year-on-year. Demand for lamb meat surged over the past decade with total estimated domestic and imported supplies increasing from 3.68 million metric tons (mt) in 2006 to 4.63 million mt last year. Total imports, including variety meat, jumped from 56,869 mt in 2010 to a record 281,210 mt in 2014, before falling more than 20 percent last year. Through February, China’s 2016 imports were 7 percent ahead of last year’s pace at 38,959 mt, driven by larger volumes from New Zealand. Nearly all imports are from New Zealand or Australia, although the market is also open to imports from Uruguay, Chile and Mongolia. China is closed to U.S. lamb.

China-Mutton-Production

The roots of the current sheep cycle began toward the end of 2010 when new restrictions on grazing in key northeast and western production areas were implemented as demand for sheep products surged. Compounding these supply constraints was an outbreak of ovine rinderpest. Provincial governments placed restrictions on movement of live animals, resulting in temporary upward pressure on prices. At the same time, the national and local governments instituted support programs whereby larger-scale feedlot production and breed improvements were encouraged by awarding per-head subsidies on a sliding scale, based on operator size. As a result, lambing productivity increased significantly, resulting in a quick rebound of the national herd size. According to data from China’s Ministry of Agriculture, the national sheep inventory increased 15 percent in the first half of 2015. According to the Inner Mongolia Sheep & Livestock Exchange Center, 2015 mutton production in the province increased 30 percent over the previous year.

While it is difficult to estimate the impact of China’s economic slowdown and moderating growth in foodservice receipts, demand for sheep meat grew sharply over the past decade as rising disposable incomes led to continuous increases in meals consumed outside the home. The growing popularity of hot pot restaurants throughout the country – as well as the spread of western Chinese ethnic lamb barbecue and shashlik – has led to a surge in lamb demand. According to research by the online group buying giant Meituan-Dianping, China has an estimated 350,000 hot pot outlets, with lamb a staple ingredient. Lamb consumption has expanded in the summer months as outdoor grilling of lamb leg and kebabs has become more popular, especially in northern China. According to the Ministry of Agriculture’s Research Center for Rural Economy, away-from-home lamb consumption accounts for 65 percent of the national total.

As with beef, most of China’s large-scale lamb processing plants practice halal slaughter. National standards for halal food, including meat products, are under consideration in China but have not yet been adopted.