New meat industry model emerging

After several false starts a new model for the meat industry looks to be evolving tentatively in a more strategic way than appeared likely 12 months ago. Then, various companies, farmer groups and industry bodies were thrashing about trying to find a magic answer to solve the industry’s problems, but all the attempted changes sank without trace under a combination of mistrust and lack of enthusiasm for the proposals.


It’s amazing what can happen in a year, particularly one where the world has been through economic turmoil. Who would have picked simultaneously a global financial crisis and over $30 improvement in the lamb price? Nobody except Federated Farmers could have believed consumer resistance to these prices wouldn’t bring sales to a grinding standstill and that could still happen, unless exporters show some restraint.


I had a long chat to Keith Cooper, CEO of Silver Fern Farms, the other week and I expected him to be disappointed at the company’s loss of market share and EU quota, but not a bit of it! He was positively bullish about SFF’s progress towards achieving its objectives of differentiation through an integrated market led ‘plate to pasture’ strategy. Cooper said he had identified the seasonal peak of the lamb kill as a threat to profitability, not an opportunity, and flattening the curve as essential to the success of the right sizing project.


I was also sceptical about SFF’s focus on heavier weight lambs than the industry standard 17kg, believing the market preference for smaller cuts to be set firm with a distinct limitation on markets for heavier lambs. But here again Keith Cooper is adamant there is a sizeable demand for this specification both in Europe and North America which provides an opportunity to process lower numbers profitably at heavier weights, at the same time extending the season.


This viewpoint contrasts strongly with the traditional view the UK in particular won’t accept legs heavier than 1.7kg, while SFF says it is successfully encouraging chilled lamb customers to align the leg size with the heavier domestic product on sale for the rest of the year. In answer to the claim lambs can’t be finished to heavier weights in the far south, SFF is shifting them further north to take advantage of later finishing country in Otago and Canterbury.


While it’s tempting to see this as a prime example of making a virtue out of necessity, it’s at least worth waiting to see how successful this strategy is, firstly in returning more money to sheep farmers and secondly in enabling SFF to be profitable at lower throughputs. However I don’t see the same strategy working for beef, where SFF’s 2009 share of US quota of 60,300 tonnes is nearly 20% less than the combined Richmond – PPCS share in 2003. It’s possible the efficiency gain from the rightsize programme has offset some of the volume loss, but a tonnage quota permits no compensatory weight gain in this commodity market sector.


SFF’s restructuring of its livestock procurement arm, coupled with a focus on livestock supply to market specification and consumer demand, is an important feature of the new model being developed. There are now four supply options through which SFF intends to move suppliers progressively up the value chain, from spot trader at the bottom end through committed supplier and Backbone partner to Integrated Value Chain supplier at the top end. Clearly the rewards will be better for those suppliers who make the most extensive commitment to work with the company to breed, develop and produce lambs to strict market specifications.


This strategy demands a corresponding marketing programme to ensure export and domestic customers reward suppliers for their extra investment in producing the right product. SFF has committed itself to an ambitious brand related marketing approach which will take time to be successful.


So the industry appears to be segmenting along different lines – the market led model and the more traditional production led sales model. Although there is some philosophical similarity between the companies which appear to favour one or other of these models, this is unlikely to lead to further significant industry rationalisation any time soon. Farmers will have to choose their preferred method of supply and await developments.


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