I am obviously not alone in trying to work out ways of creating a strong red meat sector with profits being shared equitably between the participants. But it is an elusive model which nobody has yet succeeded in identifying. It makes me wonder if it is an impossible dream, but there are a number of determined dreamers who are still intent on finding the solution.
Recently I have had an exchange of emails, not always amicable, with John McCarthy, chairman of MIE, who is committed to achieving consensus among farmers about a future industry structure which will get away from the price taker model.
He takes me to task, quite legitimately, for seeing things from the companies’ perspective which, he says, focuses on making a profit for shareholders. But this doesn’t satisfy farmers’ objectives of being sustainably profitable which is the only way a strong red meat sector will emerge. He agrees the top farmers are performing satisfactorily, but in his view these only comprise 20-25% of farmers.
McCarthy says what he would like to see as part of MIE’s push for reform is a credible analysis of the sector’s risks and rewards. Questions to be answered include whether we can grow the pie through a NZ Inc approach, if committed supply will give bankers certainty and allow for a more sustainable model. He would also like to know whether the companies can be transparent and share the marketplace, if there is an advantage and how to gain it.
These are the questions which the summit proposed by MIE would attempt to answer.
I agree wholeheartedly with McCarthy on the need to improve the present red meat sector model, because clearly the present model is not working equally for all participants. The traditional way it works is for meat processors to have control when livestock supply is plentiful, particularly in drought conditions, whereas farmers are in the driving seat when grass is plentiful.
However market demand and the exchange rate determine the final size of the pie, while the way the pie is shared depends on the flow of livestock. From one year to the next farmers make decisions about their farming enterprises and over the last decade this has seen a dramatic reduction in sheep and to a lesser extent prime beef numbers, primarily because of the improved economics of dairy farming in relation to red meat.
There are other factors such as farmers’ age profile and the increased influence of corporate farm ownership, but above all the cause of the change has been the relative discrepancy of earnings from dairy in comparison to sheep and beef.
This discrepancy is not the result of the formation of Fonterra, although the timing is coincidental. But earnings from dairy have been underpinned by a combination of growing global demand for dairy based commodity products and the growth of trade with China, especially whole milk powder and infant formula.
Conversely sheepmeat and prime beef are premium products being sold into high value, lower volume end uses; the red meat sector’s predominant mass market product is lean beef for the fast food trade which is provided ironically by dairy and bull beef.
So the key questions to be answered are how to grow the size of the pie and how it can be shared to all parties’ satisfaction.
I am not convinced there is much more the exporters can do to increase the value of sales apart from applying the principles of continuous improvement, because the industry has made, and continues to make, enormous gains in products and markets in spite of the strength of the exchange rate. Government and industry are working together to conduct research into new and better ways of doing things. The NZ Inc approach is also essential for the negotiation of market access and tariff agreements, but would not necessarily grow sales and profits in more generic ways.
In contrast the processing part of the sector has too much capacity which is capable of processing total throughput in a little over 20 weeks. This would not be possible in drought induced peaks, but nevertheless this overcapacity is a charge on the sector which reduces the amount of profit to be shared. However the location and ownership of the surplus capacity is not evenly spread across either country or companies.
The meat exporters have attempted several times in recent years to find a common solution to this problem without success. I don’t believe a summit would be any more effective because of the conflicting interests of the different companies’ shareholders and bankers.
The Rabobank Agriculture in Focus 2014 report identifies a lack of capital investment in infrastructure and productivity improvement as a serious handicap to the development of the sheepmeat sector, stating that new capital could be either local or international. Chinese investment in Blue Sky Meats may be the first such development.
Therefore it comes back to trying to achieve the achievable. Without wanting to incur John McCarthy’s annoyance again, I don’t believe farmers can make many gains, unless they can unite under a common banner. MIE faces a big challenge to organise a meaningful pan-industry summit with any hope of an agreed and constructive outcome.