Challenge of creating a strong red meat sector

April 12, 2014

I am obviously not alone in trying to work out ways of creating a strong red meat sector with profits being shared equitably between the participants. But it is an elusive model which nobody has yet succeeded in identifying. It makes me wonder if it is an impossible dream, but there are a number of determined dreamers who are still intent on finding the solution.

 

Recently I have had an exchange of emails, not always amicable, with John McCarthy, chairman of MIE, who is committed to achieving consensus among farmers about a future industry structure which will get away from the price taker model.

 

He takes me to task, quite legitimately, for seeing things from the companies’ perspective which, he says, focuses on making a profit for shareholders. But this doesn’t satisfy farmers’ objectives of being sustainably profitable which is the only way a strong red meat sector will emerge. He agrees the top farmers are performing satisfactorily, but in his view these only comprise 20-25% of farmers.

 

McCarthy says what he would like to see as part of MIE’s push for reform is a credible analysis of the sector’s risks and rewards. Questions to be answered include whether we can grow the pie through a NZ Inc approach, if committed supply will give bankers certainty and allow for a more sustainable model. He would also like to know whether the companies can be transparent and share the marketplace, if there is an advantage and how to gain it.

 

These are the questions which the summit proposed by MIE would attempt to answer.

 

I agree wholeheartedly with McCarthy on the need to improve the present red meat sector model, because clearly the present model is not working equally for all participants. The traditional way it works is for meat processors to have control when livestock supply is plentiful, particularly in drought conditions, whereas farmers are in the driving seat when grass is plentiful.

 

However market demand and the exchange rate determine the final size of the pie, while the way the pie is shared depends on the flow of livestock. From one year to the next farmers make decisions about their farming enterprises and over the last decade this has seen a dramatic reduction in sheep and to a lesser extent prime beef numbers, primarily because of the improved economics of dairy farming in relation to red meat.

 

There are other factors such as farmers’ age profile and the increased influence of corporate farm ownership, but above all the cause of the change has been the relative discrepancy of earnings from dairy in comparison to sheep and beef.

 

This discrepancy is not the result of the formation of Fonterra, although the timing is coincidental. But earnings from dairy have been underpinned by a combination of growing global demand for dairy based commodity products and the growth of trade with China, especially whole milk powder and infant formula.

 

Conversely sheepmeat and prime beef are premium products being sold into high value, lower volume end uses; the red meat sector’s predominant mass market product is lean beef for the fast food trade which is provided ironically by dairy and bull beef.

 

So the key questions to be answered are how to grow the size of the pie and how it can be shared to all parties’ satisfaction.

 

I am not convinced there is much more the exporters can do to increase the value of sales apart from applying the principles of continuous improvement, because the industry has made, and continues to make, enormous gains in products and markets in spite of the strength of the exchange rate. Government and industry are working together to conduct research into new and better ways of doing things. The NZ Inc approach is also essential for the negotiation of market access and tariff agreements, but would not necessarily grow sales and profits in more generic ways.

 

In contrast the processing part of the sector has too much capacity which is capable of processing total throughput in a little over 20 weeks. This would not be possible in drought induced peaks, but nevertheless this overcapacity is a charge on the sector which reduces the amount of profit to be shared. However the location and ownership of the surplus capacity is not evenly spread across either country or companies.

 

The meat exporters have attempted several times in recent years to find a common solution to this problem without success. I don’t believe a summit would be any more effective because of the conflicting interests of the different companies’ shareholders and bankers.

 

The Rabobank Agriculture in Focus 2014 report identifies a lack of capital investment in infrastructure and productivity improvement as a serious handicap to the development of the sheepmeat sector, stating that new capital could be either local or international. Chinese investment in Blue Sky Meats may be the first such development.

 

Therefore it comes back to trying to achieve the achievable. Without wanting to incur John McCarthy’s annoyance again, I don’t believe farmers can make many gains, unless they can unite under a common banner. MIE faces a big challenge to organise a meaningful pan-industry summit with any hope of an agreed and constructive outcome.

Changing beef outlook

April 12, 2014

There have been some interesting beef market developments in recent days.

 

Of immediate interest is the news of a forecast excess of US exports over production in the second half of the year as against a relatively small increase in production, reported in the USDA livestock supply and demand report which was released yesterday.

 

This leads to a prediction of firmer prices for lean beef, although this will coincide with the seasonal downturn in New Zealand production. Australia is expected to be in a good position to take advantage of this situation.

 

The other item of interest is the bi-lateral trade agreement between Japan and Australia which will reduce the tariff on frozen beef from 38.5% to 19.5% over 18 years and on fresh beef to 23.5% over 15 years.

 

While this may appear to be unduly slow, all other countries’ beef tariffs will remain at the 38.5% rate, until or unless the TPP agreement is concluded. It would be difficult for Japan to expect to negotiate a less favourable deal with signatories to the TPP, and if more favourable the terms of the Australian FTA would be amended to match it.

 

In the meantime New Zealand’s beef exports to Japan will have to compete with Australian product at gradually decreasing tariff rates.

 

What is significant here is that the FTA has taken seven years to negotiate, but indicates an increasing willingness to open up the fiercely protective Japanese agricultural sector under pressure from Prime Minister Shinzo Abe. Cheese has also benefited under the terms of the FTA with Australia permitted to export a further 20,000 tonnes.

 

Japan has a highly protected and subsidised farm sector, particularly in the areas of rice, beef, pork, dairy, and sugar and its powerful farm lobby has long resisted any efforts to liberalise trade in those products. It will be fascinating to see how successful Abe is in encouraging more concessions in pursuit of the TPP.

 

Equally he could find himself going down the path taken by all Prime Ministers of recent years which has seen Japanese trade policy stagnate in the face of opposition and an inability to get reform measures through the Japanese parliament.

Whatever happened to the importance of the fifth quarter?

April 4, 2014

There has long been a belief in the crucial importance of the meat industry’s fifth quarter to profitability. This somewhat obscure term refers to the co-products which contribute an essential revenue component over and above the value of the meat.

Read the rest of this entry »

Smoke and mirrors or business as usual

April 2, 2014

This season shows many of the normal characteristics of the red meat sector, but it’s getting harder than ever to unravel the complexities of an industry which epitomises Winston Churchill’s 1939 quip about Russia – a riddle wrapped in a mystery inside an enigma.

Read the rest of this entry »

Guy prepared to help, but unwilling to interfere

March 26, 2014

Nathan Guy gave a very positive speech to Beef + Lamb NZ’s AGM on Saturday which covered three major points: what the government is doing for farmers, his vision for the red meat sector and thoughts on the discussions about industry structure.

 

Obviously, given MPI’s bullish view of agricultural exports, the Minister was extremely positive about economic performance. However he was at pains to point out the government’s role as an enabler, citing his focus on biosecurity resources, trade negotiations for market access, and investment in research.

 

He began by referring to his intention to strengthen resources at the border and to establish Government Industry Agreements (GIA) with various sectors which will ultimately involve the private sector in sharing the costs of biosecurity; different sectors are at various stages of negotiation on this issue.

 

Presumably the problem lies in negotiating just how much responsibility an individual sector is willing to accept when the border is the entry point for disease incursions. If the government agency fails to control this adequately, the result could be catastrophic. Foot and Mouth is an obvious example.

 

The PGPs are a major investment focus for this government with up to $700 million being invested in 17 new projects, while $400 million will be directed at irrigation infrastructure for water storage. Guy also drew attention to MPI’s work to improve the productivity of Maori land of which only 20% is in full production; this could lift exports by $8 billion.

 

He then moved to a positive assessment of the red meat sector, gilding the lily somewhat by claiming the same amount of sheepmeat now came from less than half the flock size. My own rough calculations indicate the flock has reduced from 72 million to 31 million (132%) in 30 years while the average lamb weight has increased by no more than 45%. To be fair I haven’t compared export volumes from 30 years ago.

 

He also gave the example of China as an emerging, fast growing market for New Zealand red meat which has dramatically altered the landscape over the last two years.

 

The Minister acknowledged that all isn’t rosy in the red meat sector, but change would be achieved through innovation, collaboration and new market opportunities, not by doing more of the same. He cited innovative PGP projects into which government and industry have committed $326 million which is expected to generate $2 billion benefits from a wide range of activities, including farm management systems and new products.

 

It’s not entirely clear how these benefits are calculated or defined, but presumably MPI as PGP gatekeeper and monitor can provide the basis of calculation.

 

Guy was adamant about the potential for the meat industry to be successful, as opposed to the view we often hear from MIE and others that the industry is doomed. However he also made it very clear it is not government’s role to take a heavy hand and legislate an industry restructure. Instead it is up to the various parties to agree on a solution which represents the views of a substantial proportion of the meat industry across the whole sector.

 

In conclusion he cast doubt on the value of the summit proposed by MIE unless the participants were prepared to engage and collaborate. The last thing anybody would want is another talkfest.

 

Therefore to summarise the Minister’s address to the AGM, agriculture is doing exceptionally well, the red meat sector has its challenges, but is performing well, future potential is good, and the government will be supportive, if a majority of the sector can agree on the change it wants. So in the short term nothing much will change and the participants will continue to operate from their own entrenched positions.

Let’s hope export prices can withstand the strength of our dollar and continue to provide sheep and beef farmers in the meantime with rewards which will avoid the transitional exit to dairy support or a terminal exodus to dairy conversions until the PGP projects come to fruition.

Silver Fern Farms ticks the boxes with Eating Quality System

March 21, 2014

I confess to a degree of scepticism when I read the press release about the launch of the new Silver Fern Farms retail range of prime beef cuts just launched in New Zealand supermarkets. But my research, admittedly not as comprehensive as I would like, suggests this is a well designed programme which ticks most of the boxes for suppliers, consumers and the company. Read the rest of this entry »

An overview of topical agricultural issues

March 14, 2014

There are four local issues exciting particular interest in the agricultural landscape at the moment: the ram breeders’ testy meeting with AgResearch in Gore, the case against Fonterra by MPI, the failure to award grants to three major research institutes, and Silver Fern Farms’ Eating Quality beef grading system. Read the rest of this entry »

Sheep farmers pushing for retention of Invermay

March 5, 2014

A group of southern sheep breeders and sheep and deer farmers is strongly lobbying the government to attend a meeting in Gore to be held next Wednesday 12th March. The meeting, to be chaired by past chairman of Beef + Lamb NZ Jeff Grant, will be the first time AgResearch has fronted up to breeders and farmers to talk to them about the planned transfer of research scientists from Invermay to Lincoln. Read the rest of this entry »

MIE seeks funds from B+LNZ

March 5, 2014

MIE Chairman John McCarthy put out a press release on Tuesday pressing Beef + Lamb NZ to put its weight behind the remit to the AGM in March which asks “that Beef + Lamb New Zealand provide funding support to the Meat Industry Excellence Group to secure red meat sector reform.” Read the rest of this entry »

China’s meat imports surge, while live cattle trade slows

March 3, 2014

An article in Global Meat News.com highlights significant changes in China’s live animal and meat trade with the rest of the world. Read the rest of this entry »


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