Answer for the meat industry lies in the market

The Meat Industry Association’s (MIA) annual report paints a positive picture of achievement for the past year in spite of a decline in sales revenue across most products and markets which resulted in an 11% drop from the previous year.

Critics of the exporters will say this merely emphasises the industry’s failure to build value in the marketplace by competing on price when less reliance on traditional markets and better product differentiation would have cushioned the impact of the global financial crisis. In the first place it’s important to recognise the meat industry actually coped better than many with the downturn in worldwide consumer spending and secondly the effect of our exchange rate which was significantly stronger than the year before, particularly during the peak of the season.

But MIA has justification for being positive about industry performance when a careful study of the figures throws up some highlights of product and market diversification. Dependence on North America for beef exports reduced to 51% by volume and 46% by value to be compensated by a significant lift in exports to Asia especially South East Asia which bought 35% more beef in dollar terms; the Middle East and Asia took more of our sheepmeat at the expense of Europe, admittedly because of the consumer downturn and the high NZ dollar; and co-products remained an important contributor to the industry’s revenue with more than $1 billion sales representing 19% of total sales, despite the fall in demand for luxury goods made from hides and skins.

The pie charts in MIA’s annual report graphically demonstrate the importance of red meat sales which represent 26% of primary sector exports, compared with dairy at 41%, forestry at 17% and in stark contrast wool at only 2%; the charts also show the enormous spread of products and markets. For those who imagine sales efforts are solely reliant on our quota markets – USA for beef and EU for lamb – a study of the figures is informative: more than half beef sales go to markets other than North America and exactly half of sheepmeat exports by volume to markets outside Europe. The fact Europe still contributes 57% of category revenue underlines the continuing value of this quota – diversification is all very well, but not completely at the expense of profit.

The question no doubt uppermost in farmers’ minds will be why this hasn’t resulted in a sustainable industry which provides an adequate return on their farm investment. As most people will have concluded already, there’s no easy solution. But while the sector waits for positive outcomes from such initiatives as the Silver Fern Farms led PGP value chain integration programme and the meat sector strategy commissioned by Beef + Lamb NZ and MIA, I thought it could be interesting to have another read of James Parsons’ Nuffield Scholar’s report ‘Supply chain relationships and value chain design’ to see how his thesis stacks up and whether the industry has made any progress towards the ideal state he envisaged.

His first key point which surely nobody could argue with is ‘How can we collectively grow the pie rather than compete for our individual slice?’ He then affirms how important consolidation is to industry development because it results in a shift in power, unless each party consolidates at the same time. The increasing influence of retailers without a compensating consolidation by suppliers has resulted in a major shift in power causing a decline in the product value retained by the producer. This, says Parsons, arises directly from fragmented weak selling by New Zealand exporters. He acknowledges this is not a value judgement about the companies, but an automatic consequence of symptomatic flaws in the system which cause unhealthy competition and value destruction.

The main focus of those determined to sort the industry out is always the industry’s structure, but as Parsons maintains it’s the system that needs fixing. The answer lies in the value chain which starts with the market and the consumer instead of the individual components of the industry’s process. It appears all the main meat exporters have come to a similar conclusion about the need to improve involvement in the value chain, but not necessarily from the same perspective.

The very low poll result announced by SFF in response to its open letter suggest any idea of merging the two cooperatives is dead in the water, so perhaps the companies will now be able to focus on building the improvements to the value chain from market to producer which ultimately will provide the answer.

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