Some simple ways to improve the meat industry

Much is said and written about the cost to the farmer and industry as a whole of overcapacity, while many commentators see fundamental changes to the selling, processing and procurement structure as the only way to solve the problem. There are many suggestions ranging from single desk selling to company mergers to consumer led breeding and marketing of ‘designer’ products.

Yet I’m not convinced any of these are achievable or necessarily desirable. At this early point of my article the readers may well be asking themselves what on earth I suggest will help to resolve the undoubted inefficiencies in the meat industry, particularly with respect to improving sheep and beef returns. I don’t necessarily have any silver bullets to achieve this goal, but bear with me and I hope you will understand why I believe there are other more realistic ways of improving the industry’s performance.

First I propose to debunk some of the answers held up by the experts as their solution to the industry’s woes. I don’t think anybody seriously believes single desk selling is possible, but calls for mega mergers, committed supply to one exporter and market led product design suggest two convictions: one, a merger will solve the overcapacity problem, and two, single desk selling, or something like it, is somehow better than two or more companies scrapping in the market.

In reality, capacity rationalisation inevitably costs at least one company money and should only be a commercial decision by the business owners.

In respect of the second idea, a restriction on the number of sellers could risk under-achieving on price by putting too much reliance on a single selling network. The meat industry has an infinitely more complex product mix than the kiwifruit or dairy industries which are often held up as the model to be followed. No single marketer has a monopoly on expertise, product and market knowledge or customer relationships. Nor will major retail or food service customers put up with dealing with a minimal number of suppliers, because they all want different contracted sources of supply.

Having worked for a meat processor and exporter in the 1990s, I am firmly convinced the meat industry has a more challenging set of issues to be taken into account than any other – procurement of livestock to the required specification at the right time from farmers who can choose what, when and to which company they supply, processing a variable product to specification under extremely tight hygiene and food safety standards, inventory control and transport logistics to maintain a perishable product in top class condition, marketing all components of the animal to many different markets and customers and managing the exchange rate variations while deciding what to pay for next week’s livestock. And you still wonder why they make the odd mistake, for example paying too little or too much for your livestock, holding too much inventory or selling too cheaply!

There is undoubtedly overcapacity around, firstly because it’s a seasonal industry and secondly many plants were built in days when there was much more stock to process, some of them in the 1960s when the employment relations environment made it impossible to negotiate single plant agreements. But history shows that mergers or takeovers never achieve what was forecast in the financial justification. Remember Alliance and AFFCO acquiring Waitaki’s North and South Island plants, when both companies came within a whisker of bankruptcy, and more recently Silver Fern Farms taking over Richmond with significant loss both of equity and market share.

The regular calls for a merger with Alliance, both by Silver Fern Farms’ directors and by farmer groups, seem to be more founded on optimism than reality. The inevitable result of the merger would be distraction for the merged entity from its core business, destruction of value for the stronger partner’s shareholders, and a loss of market share to other less distracted and more efficient competitors. The mega merger proposing 80% of industry capacity under single ownership would have had a greater chance of short term success, but getting all the parties, cooperative and private, to agree would have been very hard; and it still wouldn’t have solved the problem of smaller, nimbler competitors pinching the merged company’s market share.

In spite of the improvements as a result of the Employment Contracts Act in the early 1990s, subsequent tightening of industrial law has made it very difficult to negotiate more flexible workplace provisions. The older companies – AFFCO, Silver Fern Farms and Alliance – are still caught in the trap of their Core Collective Agreements which specify seniority as a mandatory employment principle. In other words older workers who cannot legally be retired are blocking opportunities for younger, fitter workers to progress, while their Union simultaneously resists productivity improvements which would earn them more money.

Industrial relations is one area in which there is significant potential for better industry profitability, but as long as the Union’s main priority is job retention and industrial relations legislation assists this, nothing will be achieved. Insistence on monopoly meat inspection also hinders efficiency improvements because of union dominance of the inspection process.

Finding the right balance between capacity and stock numbers will arise from more efficient capacity replacing the less efficient, whether because of age, plant configuration, staff numbers, industrial relations, product specifications or marketing ability. Ultimately every processor survives or falls on its ability to compete for livestock, dictated by its debt levels, cost structures and marketing ability.

The recent introduction of the FarmIQ programme, led by Silver Fern Farms and supported by PGG Wrightson and Landcorp, is a bold attempt to change the way the meat industry does business, proposing to turn the process on its head by defining exactly what the customer wants and feeding that information back to the New Zealand farmer to enable animals to be bred to meet those requirements. In an ideal world all production would eventually be determined by the market which would pay a premium for it. However consider how customers didn’t realise they wanted a Sony Walkman or an Apple iPad before they were offered the chance. Consumers aren’t always the best guide to future needs, so it may not be very clever to spend years producing an animal to a specification which may have changed by the time it is available.

My suggestions for better industry performance are quite simple. My advice to farmers is to:

  • Choose the processor (or processors if you need more than one to handle your farm output) that you consider best meets your objectives and stick with the same one(s) for at least a season to give them a fair trial; keep them honest, but don’t keep shopping around.
  • Examine your farm practice for ways to improve your performance, because it is a fact that there are sheep and beef farmers performing very profitably in the current environment; if you aren’t one of them, try to find out why not.
  • Embrace the advantages of animal traceability for your cattle and be prepared to use it for sheep, because sooner or later the market will demand it across all species.
  • Only use your stock agent for assistance where he can add value, not cost; his main role is to source and sell store stock.

 

Areas I believe processors should focus on are:

  • Improving workplace practices and productivity levels.
  • Maximising the price obtained in the market by ensuring the right specification, delivering on time to the required quality standard and negotiating the best price possible.
  • Keeping plants to the optimum level of efficiency and accepting the need for rationalisation, if they are not efficient enough to procure sufficient livestock.

 

Finally the Government needs to create a more appropriate industrial relations environment, minimise the imposition of excessive costs on employers and keep pressure on trade access.

None of these suggestions is exactly earth shattering, but you may be surprised how much more effective they could make the sheep and beef industry, especially if wool prices could recover some of their former glory.

Advertisements

Tags: , , ,

One Response to “Some simple ways to improve the meat industry”

  1. Fawn Says:

    Amazing! Its genuinely remarkable post, I have got much
    clear idea on the topic of from this entry.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: