Sector strategy vulnerable to grass growth

At the end of the sector strategy’s first stage there will be a plan which draws on the interviews with farmers, processors and stock agents, analysis of a huge amount of data, and input from the consultation meetings held round the country. I’m assured, and have no reason to doubt, there has been a robust consultation process across the industry and the meat processors are cooperating fully, because they are serious about showing leadership in the market.

Of course it’s easy to avoid cutting each other’s throat in the market place when there’s keen demand for every kilo of product on offer; in fact the only danger is under achieving on price, because it will probably be higher tomorrow than the contract concluded today. In-market price competition only occurs when buyers know they can afford to hold off before committing, because doing so inevitably means a supplier will be sufficiently keen to drop the price to shift some stock. This is exactly what happened last time the market got overheated – buyers suddenly realised their customers weren’t buying, high priced inventories had built up and they turned off the tap. And guess what? It will happen again, whether next week, next month or next year.

Conversely procurement competition is very strong at the moment, particularly in the South Island where supply is 20-25% down on last year, and, heaven forbid, third party agents are earning themselves a small fortune from headage. Consequently we’re into a procurement war because the processors have to meet market demand, also keep their biggest plants running. But this leaves a thinner margin for cost recovery and the minute the bottom falls out of the market, any margin will disappear.

The result will eventually be the capacity rationalisation everybody knows must happen, but it’s the elephant in the room the meat sector strategy specifically can’t talk about. The strategy is right to focus on issues it can resolve, such as adoption of best practice, but I’m less sure about the usefulness of in market behaviour and livestock procurement strategies. As illustrated earlier, these issues are entirely driven by market demand, livestock numbers, processing capacity and grass growth and all the strategising in the world won’t solve these easily, if at all.

One processor I spoke to is adamant the meat industry is a grass market, not a meat market, because New Zealand farming is totally driven by grass growth. In his opinion most farmers and processors want to believe the marketing story being pushed in particular by Silver Fern Farms; but in reality, however much each side promises to foreswear seeking or paying just a few cents more, while remaining faithful to the one true God of market led production, he’s not convinced things will ever change as long as grass drives the industry’s supply curve. He cites as evidence the present epidemic of Sunday night trading because of climate and overcapacity.

Another processor is ‘somewhat underwhelmed’ by the findings to date of the sector strategy, believing the major gains will be behind the farm gate, because adoption of best practice by all farmers will lead to substantially increased farm profitability which can only be good for the whole industry. Alasdair Macleod talks of the importance of using case studies of excellent farm practice, so other farmers can learn from them. One such case study on East Coast hill country shows lambing percentage lifted from 122% at weaning with an average weight of 26kg to 160% at 34kg over six years.

So the moral of the story is to be prepared to adapt farm practice to find one that delivers results, choose a processor you trust, and focus on the things you can influence.

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One Response to “Sector strategy vulnerable to grass growth”

  1. Rural round-up « Homepaddock Says:

    […] Allan also writes that the sector strategy is vulnerable to grass growth: […]

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