Market outlook reasonable, but demand answers from your processor

In spite of the upheaval caused by the financial crisis the outlook for the meat industry is cautiously optimistic and quite a bit better than last year turned out to be. Farmers had any number of reasons to feel disgruntled about the chain of events last year – summer and autumn drought in many regions, the wettest winter in memory in the north, low livestock prices, unsatisfied ambitions for meat industry restructuring, failed investment by PGG Wrightson in Silver Fern Farms – so 2009 would have to be very bad to come anywhere near matching it.

 

The first good thing about this year is the strength of the processors’ balance sheets as a direct result of the favourable flow of livestock during last year, especially the high volumes of capital stock being slaughtered, which meant companies could maintain downward pressure on payments to suppliers. While suppliers obviously didn’t enjoy the experience very much, they can take comfort from the fact that a year like that comes round only rarely. More important, the processing sector of the industry is financially secure which should inspire sensible behaviour.

 

The second piece of good news is the opportunity Silver Fern Farms took to rationalise its capacity in both islands, announcing its intention to use its newly created efficiency to match its throughput to the demands of the market.

 

Thirdly, the reduction in sheep flock to its lowest level and a sharp downturn in export lamb numbers, both in New Zealand and Australia, mean market returns will benefit from a shortage of product, especially if suppliers can supply more according to demand than the dictates of the climate. The prospects for protein are still fundamentally good and prices in Europe are already showing positive signs.

 

A fourth positive aspect is the increasing emphasis from processors on doing business by supply contract. Silver Fern Farms has made the most public statement about its intention to procure livestock through its Backbone contracts, although backing off signing 100 bull contracts in December wasn’t the best way to gain future commitments. ANZCO, through its Riverlands and Canterbury Meat Packers subsidiaries, has offered supply contracts for many years and coincidentally has the best profit record in the industry, only posting one loss in its history when it had to bear the costs of exiting its Australian business. Alliance Group has also offered quality linked supply contracts in recent years and rewarded suppliers for supply to specification.

 

Last year I questioned the probability of the mega merger succeeding, as well as expressing doubts about whether it was the right answer to the industry’s problems. In the first half of 2008 the meat industry suffered painfully from comparison with dairy, but since the record payout things have gone steadily pear shaped for the dairy farmer, and the sheep and beef farmer no longer needs to feel like the poor relation. In fact those who resisted the urge to convert to dairy or sell the flock and take up dairy support may have cause to feel quietly satisfied.

 

In spite of the failure to bring industry restructuring to fruition, I have confidence the present industry configuration will actually serve suppliers well, in fact better than a mega company representing 80% of the industry would have done. I have already covered the strength of the respective balance sheets which assures suppliers of payment; the market outlook for beef and lamb is much better than last year, despite the weakness of the world economy – after all people will continue to eat, although their buying patterns will change; and the continuation of a competitive industry structure will preserve market innovation while at the same time offering suppliers real choice of processor.

 

It’s this last point which commentators have either ignored or claimed to be a negative outcome of the meat industry’s inability to behave logically, suggesting the success of the dairy industry has been entirely due to Fonterra’s virtual monopoly. But suddenly cracks in this structure are appearing, with the collapse of Whole Milk Powder prices and several smaller, more innovative competitors taking advantage of the provisions of the Dairy Restructuring Act. Big is not necessarily best.

 

I am convinced sheep and beef farmers prefer to choose when and where to send their stock, even if they are members of a co-operative or have signed a binding supply contract with one processor. At the same time this prevents a processor making assumptions about supplier commitment which can lead to laziness and casual treatment, instead of treating all suppliers as valuable contributors to the supply chain.

 

As stated already, 2009 looks a lot brighter than 2008, although it won’t be easy for exporters to fund inventories, gain forward commitments from customers, or even obtain payment. The markets will remain difficult to read and each one will be different, so it makes sense to keep in close touch with your processor and ask searching questions about where they intend to sell your product, especially if you are encouraged to make a forward commitment to supply to specification. Exporters must have market programmes actually nailed down with foreign exchange rates locked in, if they are to match them to contractual supply arrangements with guaranteed livestock prices.

 

Lamb prices are forecast to be up 38% or $22/head on last year because of the fall in the NZ dollar and improved market fundamentals, but this improvement is on a much reduced export volume. Another factor is the weakness in demand for wool and by-products, particularly pelts which are mainly used for high value apparel and travel bags. Similarly with cattle hides, used for shoes, furniture and the automotive industry, there is little prospect of an upturn in demand for the next two to three years.

 

The American beef market looks positive with good demand for manufacturing cow and bull beef for the fast food industry, as a result of the US herd liquidation and consumers trading down. But more critically for producers of prime beef, the Asian markets have yet to regain their confidence, in addition to the readmission of US grain fed beef after five years of exclusion because of BSE. The Korean market alone has reacted badly to an extent which has knocked $1 per kilo off the beef price here, while Japan always goes very quiet early in the New Year. In addition the reduced returns for by-products have taken a further $100 a head or 35c a kilo off the beef schedule.

 

The uncertainty, especially in beef, makes the local market an important alternative option for prime beef producers to consider. It represents nearly 20% of beef sales and a much larger proportion of prime beef; for which it is one of the top two markets. Local processors, now almost all export licensed, are increasingly looking for steers over 300kg as well as the traditional local trade heifers at lighter weights. There is also a solid, if smaller, demand for local trade lambs which must meet stricter specifications than before.

 

It is critically important in times of uncertainty for suppliers to keep in closer touch than usual with their processor of choice and to demand convincing answers to their questions: (Where are you proposing to sell my stock? What forward sale commitments have you negotiated? What are the most important specifications you require? Are you willing to sign a forward supply contract with me? At what price? What are the terms and conditions I have to meet?) If, as is probably the case, your buyer can’t give you full answers, you should ask to receive a visit from somebody who can. In these tough times, you deserve careful answers to help you make decisions about your future.

Advertisements

Tags: , ,

One Response to “Market outlook reasonable, but demand answers from your processor”

  1. electric fireplace insert Says:

    The above writing was great. I find it very interesting and II will surely forward this to my friends online. Anyway, thanks for sharing this.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: