Trust and commitment essential to meet the meat industry’s challenges in 2010

It’s time for a bit of crystal ball gazing, as we start a new year, although admittedly the end of the calendar year isn’t anything significant in farming terms. After all the pastoral season finishes at the end of September and the dairy changeover happens end June. Calving and lambing are long since over, hay and silage are in the barns and farmers have to continue with routine maintenance, while making sure they make the right decisions on stocking rates heading into the summer.

This season at least there is plenty of grass around in some of the traditional drought regions, but others like Northland, Auckland and the Waikato have been a bit short of rain and grass growth, although it doesn’t yet look like a major problem. Dairy farmers may have to consider moving to once a day milking, unless decent rain arrives soon. The main issue for sheep and beef farmers is the cost of store stock which is showing signs of a grass market and bears little relationship to the current or anticipated returns from slaughter prices.

Dairy payout forecasts have improved remarkably well with milk powder prices remaining strong in spite of the dollar, but sheep and beef are uncertain. The UK and European lamb returns have held up better and longer than expected, but there are concerns about the sustainability of these prices through the rest of the summer and autumn. Much will depend on the demand from Europe for UK lambs which has reduced availability in Britain.

Beef prices are sensitive to the demand from the US hamburger trade where McDonalds and other burger chains have noticed a drop in consumer offtake. If the volume of bulls to slaughter, currently down by 50% in New Zealand, increases substantially in the New Year, this could cause a weakening of imported beef prices.

There will be the usual questions about the prices farmers will receive from meat processors, which will depend on a combination of factors, notably climate impact, feed availability, exchange rate, and market demand. But further out there will be a continuing debate about the future structure of the meat industry, sheep and prime beef numbers and the rate of conversion to dairying. Even further out than this will be the impact of future government intentions with regard to emissions trading mechanisms, carbon taxes, or other proposals for bringing agriculture within the scope of whatever New Zealand agrees to combat the effects of climate change.

The past year has seen the meat industry move further away from the sort of consolidation farmers say they want, especially the vocal members of the Meat Industry Action Group. After a brief flirtation with the idea of a mega company floated in 2008, the industry’s major players have all gone their own way, seemingly becoming more entrenched in their individual business directions.

AFFCO, Alliance and ANZCO all appear quite happy with the way things have gone, although it will be interesting to see how content they are at the end of their half year in March and, perhaps even more, at the full year point in September after a full season of livestock procurement competition.

Silver Fern Farms, after a much improved year, is pursuing its ‘plate to pasture’ strategy with individually packaged lamb cuts targeted at building its retail brand. The company says its Rightsize project (matching livestock volumes to plant capacity) and Backbone livestock contracts have both proved successful, while its capital restructuring programme has encouraged most suppliers to convert their co-operative shares to ordinary tradeable shares, with some suppliers electing to take up more shares, admittedly only $22 million of new capital. The PGG Wrightson default enabled Silver Fern Farms to pay down debt and has left the company in a position to manage its own affairs without too much external involvement. However it is still essential for Silver Fern to become more profitable, so that it can repay further debt and reward its livestock suppliers in the same way its main competitor Alliance has done every year recently.

The long term prospects for sheep and beef farming are sufficiently uncertain for all those involved in the industry to have major concerns about the future viability of their business model. Further rationalisation of the processing industry will become inevitable, unless profitability returns to sheep and beef farming and stock numbers increase substantially. It still looks unlikely that both Alliance and Silver Fern Farms will be able to survive indefinitely as two separate companies, although attempts to merge them have been singularly unsuccessful to date. In spite of, or possibly because of, the difference in relative business size, Alliance is still much the stronger company and it’s hard to see any other long term solution than an eventual merger of the two with Alliance’s business model emerging as the dominant one.

The cries for industry restructuring consistently bemoan the fact that New Zealand marketing doesn’t optimise the return to the farmers for their on farm production, because the overseas retailer is seen to retain a disproportionate share of the final value of the animal. This, it is claimed, could be solved by combining all sales and marketing under one company, while presumably using a series of toll processors. The meat industry would be so much less cut-throat if it were more like the dairy industry. However it really isn’t as simple as this!

For one thing, Fonterra is facing an increasing number of competitors for raw milk supply, including AFFCO/Talleys owned Open Country Dairy, which means the dairy industry is becoming more like the meat industry. The next reason the dairy model won’t work for meat is product flow: milk has to be collected every day and supply changes can only happen once a year as a rule, whereas livestock suppliers can, and often do, play one processor off against another; weather conditions have a much greater impact on livestock condition and weight gain, than on milk supply; and the enormous range of products from one animal, different meat cuts, hides and pelts, casings, offals, pharmaceutical by products all require specialist marketing which no single company could ever hope to provide.

When the Meat Board controlled marketing by acquisition, it nearly went broke through build up of quantities of frozen inventory which couldn’t be sold. Now, innovation has developed an ever growing market for chilled lamb which usually, if not always, commands a substantial premium over its frozen equivalent. This has only happened through healthy competition between export processors.

The main thing farmers need to get their heads round is the need for commitment to one or, at most, two processors, while being prepared to plan a supply programme for the whole season. This would take into account the effect on livestock weight gain of weather conditions, but it would take the guesswork out of which company was going to get the stock to process when it was ready. Equally processors would have to commit to taking livestock they had contracted to take within a realistic timeframe.

The important factor is to build trust between supplier and processor which would be reinforced by regular meetings to discuss the business and an annual meeting to sign a memorandum of intent for the next season. If this meeting doesn’t result in a renewed agreement to supply and process, the supplier would be free to negotiate with a different processor for the next year.

After nearly 20 years looking at what works and what doesn’t work in the meat industry, I can’t claim to have found a radical or even failsafe solution to the industry’s problems. But I’m convinced the situation would be a lot better if all participants followed the two principles of mutual trust and commitment.

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One Response to “Trust and commitment essential to meet the meat industry’s challenges in 2010”

  1. Pearl Beads Says:

    This was refreshing. Its nice to finally find a site where the blogger knows what they are talking about.

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