Next year sheep and beef farmers will have their five yearly referendum under the Commodity Levies Act when they get to vote on whether they wish to continue funding Beef + Lamb New Zealand as their industry good body. Read the rest of this entry »
There are three possible responses to the prospect of an overseas, probably Chinese, investor buying seriously into the New Zealand meat industry: bring it on, not on your life or it’s inevitable.
So far Chinese interests have recently bought a minority stake in Blue Sky Meats and an application to buy Prime Range Meats is with the Overseas Investment Office; ANZCO is just under 75% Japanese owned with New Zealand management and staff holding the balance. ANZCO’s ownership structure has remained like this for over 25 years bringing positive benefits to the company, its suppliers and New Zealand as a whole.
This year rumours have been rife of Chinese interests looking seriously at buying one of the remaining large meat companies. There aren’t too many likely candidates for sale, although Keith Cooper, CEO of the rumoured target, Silver Fern Farms, laughed when I asked him the question and said he had heard the rumours too. However he denied there was any truth in them.
If we apply the old adage ‘where there’s smoke, there’s fire,’ there are at least three compellingly relevant issues here: first whether the farmer shareholders would be willing to sell, second how much a buyer would be prepared to pay for the assets which are substantially funded by bank debt and third the OIO’s criteria at the time.
In light of Shanghai Pengxin’s $70 million deal to buy Lochinver Station, currently subject to OIO approval, and the political uproar it has created, it seems like a good time to assess the merits of selling all or part of a meat processor and exporter to overseas interests. The ownership structure of ANZCO clearly establishes a precedent, but my instincts suggest it could attract a different response today, especially if there is a change of government in September.
I asked Minister of Agriculture, Nathan Guy, for his comments, but his one line reply indicated unwillingness to speculate or comment on a private sale matter. However Damien O’Connor, Labour’s spokesperson, was happy to give me his thoughts on the issue. He agreed any application would almost inevitably meet the OIO’s present criteria for approving an acquisition. However he was very concerned at the potential loss of control of the whole value chain which would condemn New Zealand farmers to taking the price at the farm gate without the potential to benefit from adding value. He would support a change in the Overseas Investment Act, although it isn’t clear what form this would take.
O’Connor’s concern at losing the value chain was echoed by Rick Powdrell, Federated Farmers’ Meat and Fibre Chair, and MIE’s John McCarthy, but as McCarthy said, it will be up to farmers to determine the ownership stake in the industry they desire.
Overseas investment does not necessarily imply total ownership, as ANZCO’s shareholding shows. But the debate about foreign ownership is in danger of becoming polarised; broader, more relevant questions would be about sources of capital, whether local or overseas, the degree of ownership and the structure of any partnership. More important than any of these is the alignment of an investor’s values and objectives with those of the company.
The sale of productive agricultural land seems to be an especially emotive issue. The concern about overseas, specifically Chinese, ownership of farmland is driven by fear of one country becoming too dominant. The fast rise of China to be the biggest buyer of sheepmeat by volume and whole milk powder makes us nervous. However it’s worth remembering the hundreds of thousands of hectares of forest that were sold earlier this century in the central North Island without much objection.
Although overseas ownership of our meat industry is not a new development (remember the Vesteys), it is appropriate to reassess how we should react to the prospect of one of our meat companies being the subject of a takeover offer from a Chinese investor, most particularly what sort of criteria we would expect the OIO to impose on a prospective buyer to retain some control of the value chain.
In the event the target actually happens to be Silver Fern Farms, its status as a modified farmer owned cooperative and the amount of bank debt on its balance sheet are two relevant factors. If any investor tried to buy 100% of the company, it would be a complicated exercise, but more significantly it would risk alienating a large number of suppliers. They might take the money and run, no doubt many of them to the south.
Therefore a wise investor, Chinese or otherwise, would attempt to find an investment structure which preserves the loyalty of the existing shareholder suppliers and delivers value to all parties. An investment also needs to offer a return which has not always been easy to achieve in New Zealand’s meat industry.
One thing is certain. The election has already provided a platform for some political parties to play the foreign ownership card as a means of attracting votes. If there is a change, the motley collection of parties forming the next government will have the challenge of agreeing their position on foreign investment. To see how they honour their various election promises while maintaining New Zealand’s international trade commitments will be interesting to say the least.
Livestock numbers forecast shows little change – unlikely to achieve MPI’s optimistic revenue forecastsAugust 13, 2014
The Beef + Lamb New Zealand Economic Service’s latest stock numbers survey shows only minor changes in next season’s predicted volumes. However total sheep numbers are estimated to fall below 30 million for the first time. Read the rest of this entry »
At the Red Meat Sector Conference Luke Chandler, General Manager of Rabobank’s Food and Agribusiness Research Advisory group in Australasia, presented an interesting perspective on global protein trends and the increasing complexity required to feed the world’s growing population. Read the rest of this entry »
It’s wonderful what a bit of buoyancy in the market for beef and sheepmeat will do for morale, especially when it coincides with a solid drop in the predicted dairy payout. It isn’t just about absolute price returns, but also a reduction in the gap which has opened up this year between red meat and dairy prices. Read the rest of this entry »
India has exported well over 500,000 tonnes of buffalo to Vietnam in 10 months of the latest July to June year. This figure easily exceeds the total of New Zealand’s beef exports to all countries. Read the rest of this entry »
While in the UK briefly last week I spent a couple of nights with an old university friend who actually got a First in Agriculture at Cambridge which was the best degree achieved by any of my friends or, not surprisingly, me. He farms near the M4 in Berkshire less than 100 kilometres from London.
As usual when I see him, we were chatting about the state of agriculture in our respective countries. He asked me whether I needed a ‘pommie farmer whinge’ to provide some material for a column, so not unnaturally I told him to go ahead. His first complaint was about the amount of New Zealand lamb competing with British lamb in the supermarkets. I suggested the view back home was the natural seasonal fit of New Zealand product didn’t really cut across, but rather complemented, the seasonal availability of British lamb.
He partly agreed with me on this, but said the British sheep farmer would still prefer it if the competition from our lamb didn’t exist. I was able to provide some reassurance here by telling him how China had come from nowhere to be the biggest market by volume, if not value, for New Zealand lamb which meant there was progressively less being exported to the UK than was the case even 12 months ago.
An aside here which I discovered soon after getting back at the weekend: apparently sales of stockinette are back up to levels last seen in the 1980s when most New Zealand lamb exports were shipped in carcase form. This is clearly a direct consequence of the increase in sales to China, so while we can be pleased with the diversification from our traditional markets, we should be less excited by the return to a product form from the 1980s.
As a crop farmer who has a contract with a contractor on a similar profit share basis to our share milking model, my friend is frustrated by the delay in setting the basis for the current season’s EU subsidy. While we may think he’s lucky to be receiving a subsidy at all, as I told him, his frustration is understandable, because until he gets this information, he can’t confirm the profit share with his contractor.
Interestingly his calculations indicate that this year’s profits will be higher than last year, in spite of a lower price. This is because the yield this year is so much better than last. After a very wet start to 2014, the weather has been much more favourable and this year’s crop is in much better condition.
My friend confirmed the continuing problems being experienced by British dairy farmers who are still losing money on every litre of milk they produce. The supermarkets still dominate the price of milk, while it appears farmers don’t have the ability to supply milk at a higher price for the manufacture of cheese and other value added products.
A final impression from my brief visit was the lack of sheep, at least in the parts of England I drove through. In the Cotswolds where I grew up sheep appear to be almost a forgotten species with only the impressive wool churches, built in the middle ages, to serve as a reminder of where the region’s wealth originally came from.
But I suspect that has probably been the case for the last thirty years or more. Land use change isn’t restricted to dairy farm conversions in Canterbury and Southland.
Analysis of the objectives and methodology of the RMPP suggests the programme has highlighted the most important issue facing the red meat sector. Briefly stated, it is to work out why there is still such a significant gap between the top farmers and those in the middle of the pack and to lift the average closer to the top performers.
When the Red Meat Sector Strategy identified behind the farm gate specifically as a major area of potential improvement, there was much mumbling about why the industry structure wasn’t being more usefully exposed as the area most in need of improvement. But figures released by the B+LNZ Economic Service show this isn’t the case.
The most graphic demonstration of this appeared in the RMPP brochure sent out last year. Sheep and beef farmers were grouped in 20% quintiles for comparison and in this table the second to bottom quintile was compared to the top 20%: there was a 3% gap in lamb price achieved, but a staggering difference of 135% between the groups when measured on dollars per lamb and dollars per hectare regardless of the class of farm. To put it simply the top 20% are nearly two and a half times as profitable on a pre tax basis.
Obviously the bottom 20% lags even further behind. However this position has improved markedly over the last 20 years with a much greater percentage of farmers moving up the performance scale into a higher quintile. It is tempting to ask how much smaller the national flock would be today, if the level of performance was still stuck at 1991 levels.
A great deal of work has already gone into the RMPP, first in preparation for obtaining Primary Growth Partnership funding and second in getting to the stage of signing up the parties to the limited partnership of industry contributors achieved a couple of weeks ago. There is a good cross section of participants including B+LNZ, six meat processors, two banks and Deloitte which have committed to $32.15 million which matches a similar contribution from PGP programme funding.
These are not small sums of money which the partners are willing to invest which should hopefully convince sheep and beef farmers that their future prosperity is considered really important. The target is to increase on farm revenue by $880 million and profit by $194 million per year by 2025.
The funding programme is designed to be spread over seven years, although Chairman Malcolm Bailey has said he wants to achieve the outcomes faster than that. There are five distinct projects, the first of which – to understand farmer behaviour – is already well under way towards completion before the end of this year.
This project is essential for setting a firm platform for the programme as a whole with one set of integrated information. This research seeks to establish across all farming groups barriers to change, what works and doesn’t work in farm extension, and what distinguishes the high performing farmer from the lower performing tiers.
The second project focuses on enhancing sector capability, using the banks’ expertise in governance and financial planning, alongside in excess of 80 pilot schemes to be carried out by farm advisors to achieve best practice in breeding, pasture, forage, technical innovation and the development of integrated applied farm systems. An important aspect of this work stream is to attract bright new talent to the meat industry.
The third project will concentrate on providing linkage and integration between farm reporting systems which at present are often not properly integrated. This will enable better farm management decision making through benchmarking against regional and national information. Another priority would appear to be teaching sheep and beef farmers the importance of budgeting, because a recent study found that 65% don’t budget, while a further 30% don’t budget effectively which only leaves 5% who do it properly.
While the other two projects certainly involve farmers, they also require significant input from other parts of the industry. AsureQuality has the task of ensuring consistency between processors’ QA systems which will make a common set of standards clear to all farmers. This will also enable the achievement of product consistency to meet the expectations of all customers.
The final project is one which farmers will no doubt welcome because it is designed to achieve efficiency in the chain linking farmer and processor. Knowing how much unnecessary transport happens at the moment, some of it driven by farmers and some by processors, this area touches on the need for capacity rationalisation which is not the responsibility of the RMPP. Deloitte has accepted responsibility for this piece of work.
I am encouraged by the amount of detail and careful planning which underpin this programme because it is of crucial importance to the future of the red meat sector. It demands a great deal of commitment from all the partners, including tax payers, farmers and commercial operators.
It won’t happen quickly, but far better to do it properly. Farmers stand to gain a lot from the programme’s successful implementation, but so do the meat companies, banks, all businesses that service or supply the sector, and ultimately New Zealand as a whole.
I am not completely sure why we spend so much time and effort complaining about the meat industry or which problems we are trying to solve. However in the interests of encouraging progress and stimulating debate, I will try to define the problem: this appears to be that the meat processing and export sector is not profitable enough, whether in absolute terms or in comparison to dairy. Both may be true.
It is worth stating the unique challenges of the red meat sector up front. First, there is a market at both ends of the chain, procurement and sale of the products; second, New Zealand exports a higher percentage of its production than any other country which must travel further to reach its markets, not all of them equally buoyant; third, sheep and beef must be disassembled into multiple cuts of meat as well as many co-products, all of which are sold into a wide range of markets for variable returns; fourth the climate dictates when the grass will grow and livestock will be ready for slaughter; and last, but not least, the producer can choose when and where to send the livestock for slaughter except in a drought.
Statistics and financial reports show that only a minority of participants in the industry are making much if any consistent profit, whether farmers or processors. So the conclusion must be that everybody, except for a few good farmers or companies with a niche market, would be happier with a more profitable industry.
Everybody keeps blaming everybody else, but nothing seems to change, because individually the parties must attempt to survive at the expense of others. That is the fundamental reason for the state of the meat industry. It may seem obvious to outside observers that cooperation is the way to make progress, but the complex nature of the red meat industry poses a difficult dilemma. The answers are extremely hard to find; otherwise some genius would have found them already.
MIAG thought they had found the answer – merge the two cooperatives – and MIE, after promising not to make the same mistakes as MIAG, seem to be taking the same path. In 2008 Owen Poole, Alliance Group Chairman at the time, tried to achieve an industry grouping with 80% of processing capacity, as the minimum required to create a robust business model, but this foundered on lack of agreement between the larger processors.
When preparing the Red Meat Sector Strategy, Alasdair Macleod of Deloitte started out from the premise that Zespri and Fonterra were the models for the meat industry. But he soon realised that the meat industry’s characteristics and complexity made it different.
In the 1980s Pappas Carter proposed the concept of Tradable Slaughter Rights as the best way to bring about industry rationalisation; this was raised again last year as an option by me and with greater publicity by retiring Beef + Lamb NZ chairman Mike Petersen.
Three of the major processors, the cooperatives and ANZCO, with just over 60% market share took this idea to government, which rejected it, unless 80% of farmers and processors were in favour. While seductively attractive at first sight, on reflection TSRs only suit some players, because they will reduce farm gate competition, while protecting less efficient processors.
In any case it seems to be impossible to achieve the agreement of such a high percentage of either farmers or processors. There are still enough farmers who want to maintain their traditional livestock supply methods and stock agent relationships to make such uniform behaviour unachievable.
There are also quite a few highly efficient farmers out there who are profitable, based on high lambing and calving percentages, good pasture management, intelligent use of technology and constructive relationships with their processor of choice. Equally there are several privately owned, efficient and profitable processors who would be seriously disadvantaged by the introduction of tradable rights.
Farmer ownership is touted as the answer to the challenge of controlling the value chain, because in good times there should be bigger profits and farmer ownership would mean farmers would keep these higher profits, which is not necessarily true. It is often forgotten that meat companies, like all processing businesses, must invest in modernisation and new technology, or they will become steadily less competitive. Profits must be reinvested in maintenance, new plants, new technology and people, not just paid out to shareholders.
It will be interesting to see how the successful MIE backed board candidates find life on the boards of Alliance and Silver Fern Farms. The realities of the meat industry, especially cash flow, balance sheets and banking covenants, will concentrate their minds on these critical aspects at the expense of more idealistic ambitions.
Ownership carries risk. Therefore farmer ownership of both ends of the value chain entails double the risk of losses, when world markets collapse, unless payments to suppliers suffer correspondingly. The present exporters, both privately owned and cooperative, have the expertise to move between 85% and 90% of New Zealand produced red meat and co-products which is a far more complicated exercise than exporting 90% of dairy exports in the case of Fonterra.
Obviously processing over capacity contributes to loss of value in the industry, while it also affects behaviour – both forcing processors to pay more than is economically sensible for livestock and encouraging cash flow generating sale of inventory at less than optimum prices at certain times.
However it is wrong to blame the structure of the industry for lack of farming profitability. If there were a perfect balance between supply and demand (impossible to achieve in a seasonal industry), processors would pay a consistent price at all times, neither too much nor too little. Overall, farmers would still receive a fair, but possibly lower, average price for their livestock than under the present system.
It is the companies’ shareholders that lose from the present competitive environment with excess capacity and those shareholders may either be farmers or corporate owners. In the long run those companies losing the most money, which are by definition the least efficient, will have to go out of business.
The losers will be the shareholders and the banks, as well as the suppliers who have livestock at risk at the time of receivership. Merging the two cooperatives will involve a huge write-off of surplus assets with no guarantee of long term survival.
I am not trying to pretend that all is right with the present industry model with no improvements possible, but, judging by the reaction from the farmers who attended MIE meetings in the first half of 2013, I sense many of them have an unrealistic expectation of the potential improvements.
It also seems that farmers think it is all the fault of the processors and exporters and, if somebody waves a magic wand to merge the coops and enforce farmer ownership of the industry, it will all come right. But life isn’t like that!
For a start red meat does not have a premium position in global markets that guarantees all New Zealand production a top price. Those markets are there, but they are comparatively small; however meat exporters are adept at shifting all types of product into different markets at a whole range of price points. Occasionally they have too much inventory and prices drop which leads to accusations of weak selling.
When one combines that scenario with procurement competition, some farmers do well, but there is an impression of a dysfunctional industry. So the question is what can be done to correct it. The usual solutions proposed are rationalise capacity and move to single desk selling.
The first one costs money and is hard to achieve in a free market except through receivership or voluntary plant closure; the second one is naïve and will never work. Ultimately farmers must get on and do what they are best at, except they must use more logic and do it better.
Logic dictates that, unless farmers have very deep pockets, they cannot lead and pay for industry restructure; but what they can do is adopt farming practices which will lift them up the curve and bring in higher profits, by using the technology and information available from, among others, Farm IQ, Beef + Lamb NZ and Primary Growth Partnership investments.
The next piece of logic could equally be termed common sense. Work with your processor of choice to ensure that you are producing livestock to the required specification and delivery for which you receive a transparently fair price. If you aren’t happy with your relationship, either because your processor isn’t transparent, fails to accept stock when agreed, uses third parties for procurement or doesn’t convince you of their payment security, then change your processor.
The way farmers and processors behave in their dealings with each other will have the greatest impact on the future of the meat industry because greater trust will enable both parties to get on with what they are good at. Global market prices will fluctuate as they always have, but there remains solid demand and eventually profitability will improve.