Current season better than last

After what all processors termed a challenging season last year, the mood this season is decidedly more buoyant after a solid first four months when dry weather throughout the country produced good stock flows. Regular rain since early February in the main farming regions has slowed things down a bit, but the onset of autumn and the dairy cow cull will ensure reasonably consistent livestock availability without any likelihood of a seasonal peak.

The deep south had a late, slow start to the season on top of heavy lamb losses which meant farmers have had difficulty getting their lambs up to weight, while none of the plants are operating at full capacity and unlikely to for the rest of the year. In fact some regions are greener than ever at this time of year which means there is no pressure on farmers to kill stock until the weather turns cold.

Farmers will continue to benefit from procurement competition, because processors want to fill capacity and also need product to meet their market commitments. Strong global demand for beef and lamb looks almost certain to underpin market prices. The big difference between the 2004 peak and the strong prices now is the empty pipeline and current product shortage which mean importers have to pay the money to secure the product.

A concern is whether consumers will stop paying and there are indications lamb may be in danger of pricing itself off some restaurant menus. But this time round lamb is not alone, with all protein sources becoming more expensive, while in spite of predictions there doesn’t appear to be large volumes of product available from anywhere else in the world. In fact both Australia and New Zealand will have no more than 19 million lambs available this year, while in the USA cattle numbers are at their lowest since 1958 and the price of corn will see less cattle going onto feedlots.

It is encouraging how prices have held up in all main markets in spite of the recession and, although there is uncertainty arising from the Japanese earthquake and tsunami, demand from North Asia is thought likely to be strong. Equally as important as the strong meat prices has been the strength in prices for lower value cuts, wool and co-products, boosted by the retreat in the exchange rate from 2010 peaks.

In summary, farmers can look forward to a good season on the back of several positives: strong product demand and market prices, a weaker exchange rate, favourable growing conditions and procurement competition. The processors will have some concerns about tight margins because of the last factor, coupled with lower plant throughput, but they will also be reassured by the strong demand and weaker dollar.

Indications are for a better profit performance across the processing sector than 2010, when the big four processors posted a combined comprehensive after tax income of $6.9 million and even that was boosted by AFFCO’s equity accounted contribution from Open Country Dairy. Processors can’t survive for long on such a minute return on their combined sales of more than $5 billion.

This brings us back to looking at how the industry can improve its overall performance, both behind and in front of the farm gate, which is the thrust of the meat sector strategy scheduled for release on 4th May. The main areas highlighted for performance improvement in the preliminary report were livestock procurement, in market collaboration, and adoption of best practice, notably behind the farm gate.

There is no doubt procurement competition in times of scarcity leads to the use of third parties, while in times of plentiful supply in market competition results in price reductions to secure sales. Under the present industry structure there will always be one or the other, but seldom both at the same time. Owen Poole, Alliance Group’s chairman, has been very open in his call to farmers to make a choice of processor for their livestock and stick to it instead of splitting their supply or, even worse, using a third party or selling on the spot market. In this way it will become apparent where the overcapacity sits, but as long as farmers flit from one processor to another overcapacity will not be immediately evident. In Alliance’s case Poole says Alliance gets 60% of its lambs from loyal suppliers who don’t use third parties, but life would be easier, if the other 40% came the same way. He also believes the question of market competition has been exaggerated, particularly for lamb where major supermarket chains insist on a choice of suppliers.

Unusually the prospects this season for sheep and beef farmers and processors alike appear favourable despite natural disasters, rising oil prices and economic nervousness, so just keep your fingers crossed.

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One Response to “Current season better than last”

  1. Rural round-up « Homepaddock Says:

    […] Current season better than last – Allan Barber […]

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