Future of red meat promotion under threat

Next year’s Commodity Levy Act referendum is one of the factors concentrating meat industry minds on the question of red meat promotional investment. B+LNZ is currently conducting a consultation round with individual meat companies to find out how this critically important, if contentious, topic should be agreed for the benefit of all industry participants.

 

B+LNZ Chief Executive Scott Champion told me it’s too early to make any predictions about the outcome, at least until after completion of the consultation round at the end of September. With the referendum about 12 months away, the process is geared to providing time to gather enough detail for promotional strategy development before taking this out to farmers to test it in advance of the vote.

 

The purpose of the discussions with meat companies is to ensure market expenditure is aligned with what the meat industry wants while enabling B+LNZ to fund its essential activities which must now confront new pressures such as environmental constraints. Any new proposal will also have to satisfy levy payers or risk derailing the success of the referendum, although improved sheep and beef returns if maintained should make a Yes vote more certain.

 

The present mix of promotion funded by the farmer levy includes two main strands – the first is country of origin marketing for lamb in the UK, Europe and North America and for beef in China, Japan, Taiwan and Korea, supplemented by some jointly funded variations that support individual exporter programmes; the second comprises campaigns with matching contributions from participating exporter groups across a range of markets and products.

 

For example since 2011 exporting companies have put $1 million a year into sheepmeat promotion in UK and Europe to supplement B+LNZ’s budgeted expenditure. Equally a group of exporters has shared in a campaign to promote New Zealand grass fed beef in China.

 

This strategy has resulted in a move away from generic mass marketing and advertising to more tightly focused campaigns based on research and analysis. This has reinforced the importance of educating consumers on how to cook beef and lamb. In addition to the website, social media is becoming an increasingly important weapon in reaching the target market.

 

While many years’ brand development investment in the UK has resulted in 90% top of mind consumer recall of New Zealand lamb, research has identified the need for exporters to target consumers closer to the point of purchase because of lamb’s premium price position. A large part of the promotional work in Asia to support New Zealand beef has focused initially on the benefits of grass fed beef – low calorie, low cholesterol and low fat – for the premium restaurant trade as the most effective way to reach consumers.

 

Spending limited funds wisely, whether contributed by farmers or meat exporters, is a crucial issue for New Zealand’s red meat sector, both internationally and domestically. Withdrawal of promotional support as a result of failure to get agreement between meat companies and B+LNZ would effectively mean the industry has chosen to shoot itself in the foot.

 

An immediate issue is whether it will be remotely possible to obtain agreement of all MIA members to contribute funds for the purpose of country of origin promotion and, if so, how much. Of the larger meat companies, Silver Fern Farms’ CEO Keith Cooper has indicated a strong preference for company brand promotion as opposed to the generic alternative. Instead of glossy marketing in traditional markets, he would be prepared to consider some funding for educational promotion in emerging markets. Other companies are still in favour of country of origin New Zealand promotion in specific markets.

 

Since it often seems there’s as much chance of getting an agreed meat industry position as there is of formulating an agreed United Nations resolution on Syria, I suggested to Champion this might be a challenge. However he said he was ‘reasonably optimistic’ of getting an industry agreement.

 

The big question farmers and companies alike must consider is what the long term impact of ceasing all country of origin promotion would be. There will obviously be some changes to the current promotional mix to make better use of available money, otherwise B+LNZ would not be in discussion with the meat companies on developing a promotional strategy that better matches its objectives.

 

The unanswered questions are how much B+LNZ is willing to spend on country of origin promotion as against jointly funded activities and what the companies are willing to contribute to the general rather than individual good.

 

In my opinion the New Zealand brand is an umbrella under which individual company brand activity should function, but it isn’t realistic for any one company to achieve consumer recognition for its brand in one, let alone several, markets without that support.

 

It is obviously important for meat exporters to support their own branded programmes in selected markets, while the New Zealand industry maintains its competitive nature.

 

But levy paying farmers have both an obligation and a right to support their product both in New Zealand and overseas. B+LNZ is farmers’ vehicle for coordinating their investment by investing their levy funds to the best effect. The meat companies have an obligation to reach an agreement which will support this investment constructively. If not the red meat sector will be in danger of completely losing its way.

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Science and bees essential for prosperity

Among the vast array of press releases I receive from Federated Farmers, two in particular struck me as very relevant to our future, possibly more than the interminable pre-Election debates between politicians. After all this second category bidding for our attention and our votes is either trying hard to avoid rocking the boat by stating any new vision (the government) or making promises they don’t have to worry about keeping (most of the rest).

 

The first press release concerned the importance of bees and the second was a plea by Feds’ president William Rolleston for an increase in science investment of $600 million over three years. These topics may be seen as at opposite ends of the spectrum from the perspective of impact and importance.

 

But just looking at bees for a moment, the humble bee is responsible for pollinating the plants and crops which allow the growth of all agricultural production. Two thirds of our food sources would disappear without pollination, leaving a diet of fish, starch, grains and seaweed. We probably all know in vague terms what would happen without bees without actually envisaging the reality.

 

Federated Farmers Bee Chair John Hartnell lists several ways we can contribute to the continued life and health of bees which are worth stating because they are common sense – avoid spraying and irrigating during the day when bees are flying, locate hives away from irrigation and in a sunny spot, and plant bee friendly plants in urban areas.

 

The decline in the bee population in recent years suggests these practices, especially agricultural sprays and irrigation, are not being observed as rigorously as they need to be if bees’ survival is to be assured.

 

Rolleston’s speech was the focus of the launch of Federated Farmers’ Election Manifesto at Lincoln University on Wednesday. He cites the importance of science in underpinning agricultural production which contributed nearly three quarters of New Zealand’s merchandise exports last year.

 

While there are many initiatives in agricultural research, $100 million of it estimated to be invested by farmers through the PGP programme and through individual industry sector organisations, New Zealand only invests 1.2% of GDP in R&D, significantly less than other first world countries..

 

According to the speech, “The formation of the Centres of Research Excellence (CoREs) have also increased collaboration between institutions and in some areas are contributing to vital strategic capability for the primary sector.

 

That is why the potential loss of funding for the three CoREs targeting biosecurity, food innovation and reproduction, would be a strategic blow to New Zealand……Institutions like the Bioprotection Centre, Gravida and the Riddett Institute are fundamental to the success and advancement of our primary industries as well as our economy.” Loss of research funding by these institutions is the reason for the additional investment Feds are calling for.

 

Rolleston concluded by drawing attention to the disproportionately small number of students graduating with a degree, diploma or certificate in the primary industries disciplines compared with such disciplines as sports and recreation, journalism and communication. But by 2025 it is estimated two thirds of primary industry roles will require a tertiary qualification.

 

Federated Farmers deserve credit for highlighting these topics for public awareness. I wish them success in getting politicians and the public to recognise their importance to our future prosperity.

Thorny question of wool levy benefits

Sheep farmers have the chance to vote for or against a compulsory levy under the Commodity Levies Act (CLA) in October. The Wool Levy Group’s proposal indicates a levy of 3 cents a kilo which would raise $4.7 million to be spent on a combination of education, communication, advocacy, R&D and administration. This is either too much, far too little or a worthwhile beginning which depends on your point of view.

 

In this week’s Farmers Weekly Ruth Richardson argues very strongly against wasting any more farmer money on a compulsory levy, citing quite justifiably the enormous waste of funds both by the Wool Board and on its subsequent disestablishment. On the opposite side of the fence sit the Wool Levy Group and its supporters.

 

Of course Richardson speaks from the perspective of being Chair of the NZ Merino Company which broke away from the Wool Board after successfully arguing for the separation of merino farmers’ levies from the confusing morass of overhead and expenditure on wool, both beneficial and useless.

 

She maintains what the wool industry needs is more market, not more levy and highlights the success of NZ Merino in ‘facing and making markets from consumer to grower’ as the best way of moving up the value chain.

 

Of course she is probably correct because you can’t argue with the profitable performance and success of NZ Merino since it went solo. But my feeling is this point of view may be a bit too simplistic for the rest of the wool industry which covers a much wider spectrum of wool types, microns and end uses. Merino has the advantage of being a more easily promoted fibre with its predominant application for high quality and high fashion woollen clothing.

 

In last week’s Farmers Weekly Steven Fookes argued the necessity of the industry investing funds wisely in promoting the unique characteristics of wool to bring wool back to the attention of retailers, designers and architects who are looking for just such a fibre.

 

There are two examples of industry initiatives which are doing just what Richardson and Fookes say should happen, both achieved without the imposition of a commodity levy and both concentrating on strong carpet wools at the opposite end of the spectrum from merino..

 

Wools of New Zealand has 700 shareholders representing 14.5 million kilos of strong wool and with the Laneve brand has a number of carpet yarn and carpet manufacturers as partners in North America and the UK.

 

Elders Primary Wool’s efforts and progress with Just Shorn in the USA are a prime example both of what can be achieved with selective distribution and targeted promotion as well as the time it takes to achieve the objective. Just Shorn is specifically focused on promoting wool’s qualities for carpets to top end flooring retailers in the retail group which are franchisees of CCA Global Partners.

 

Therefore the big question is whether a levy is likely to produce better or quicker results than the industry has achieved of its own accord. The main benefit of a levy would be to capture all wool growers, not just those that have been willing to invest in one or other of the initiatives.

 

But then one must ask if the small amount of funds raised in a levy would be better spent on the existing initiatives rather than being applied to a new organisation with another overhead structure. Richardson’s point the amount available for R&D will go nowhere is undoubtedly correct, while even $3.2 million for advocacy and education to raise demand is unlikely to go very far or achieve any measurable improvement.

 

Fookes’ comment about the importance of industry investment is also quite right, but it is already happening without a levy. A better solution would be to try to build on the moves towards industry rationalisation which have started to happen with the Primary Wool Cooperative’s offer for a 5% share in Wool Equities and chairman Bay de Lautour’s stated desire to merge PWC with Wools of New Zealand to form a single farmer owned organisation.

None of this will happen in a hurry, but it seems to me to be a tidier solution than to set up a new organisation which harks back to the days of the Wool Board.

 

As with the meat industry the challenge will be to get all growers to agree what they want and are willing to pay for, but the focus on strong carpet wools would be a clear goal which all strong wool growers should be prepared to support.

Unravelling the schedule gap between North and South Islands

Every year when livestock numbers pass their peak in the North Island, there is a constant stream of trucks carting stock across the Cook Strait to plants for slaughter. There are two obvious reasons for this – either there isn’t enough South Island capacity at the time or the cost of procurement plus transport is less than the price in the North Island.

 

These two explanations are two sides of the same coin, because there is no need for South Island processors to pay more than they have to when their plants are full. This is even more evident from the species with the largest price gap which is cull cows, possibly wider than it has ever been. However there is absolutely no point in paying dairy farmers over the odds for what is a fully depreciated asset they have to get rid of.

 

But the price gap isn’t restricted to cull cows, because the same applies at the moment to bulls and prime. Admittedly there aren’t very many of these species being slaughtered at this time in the South Island, but the current NZX Agrifax Farm Gate report shows a gap of 48 cpk on prime and 68 cpk on bull, $144 and $214 per head respectively at 300 kg.

 

So I decided to do some research into the variation between the two islands to find out if there was a more fundamental reason for the difference. All the companies spoken to were very willing to discuss the issue and provided plenty of logical explanations.

 

Alliance’s Livestock General Manager Murray Behrent reckoned the gap is almost entirely procurement driven, although he added the South Island pays lower levies than the North.

However there is plenty of evidence South Island farmers get lower rewards than their North Island counterparts, especially at certain times of the season.

 

There was general agreement from Silver Fern Farms, ANZCO and AFFCO on the importance of procurement competition in determining the main reason for the divergence between the two islands. But other factors mentioned include the seasonality of the South Island, a flatter kill profile in the North, relative plant operating and processing costs, differing union agreements and cartage costs, and a higher proportion of chilled production in the North Island.

 

Plants in the North have more ability to recover fixed overheads because of the kill profile which allows better utilisation of plant and employment of labour. Keith Cooper highlighted the respective scale and efficiency of Silver Fern Farms plants across the country: three times as many cattle processed in the North Island, but the same number of slaughter facilities, while two ovine slaughter plants process the same volume as four southern plants.

 

Conversely the shorter killing season in the South Island means higher labour costs and larger facilities capable of handling the peaks. Nor at this stage do sheepmeat operations in the South have the benefit of an extended bobby calf kill when lambs are not so readily available.

 

The lamb kill has changed markedly in recent years with both islands having a similar number of lambs to slaughter, compared with 20 years ago when the South Island had up to 50% more. Over the same period, but especially since the formation of Fonterra, the land use profile has changed dramatically to dairy, boosted by the increased dairy payout and rise in the amount of irrigation.

 

In spite of plant rationalisation, notably at Belfast and Mataura, carried out by both SFF and Alliance, they have found it a challenge to handle the change of processing configuration dictated by today’s land use. There is less opportunity to dedicate South Island plants to specific types of production and certain customers, while it is also harder to justify installation of machinery to save co-products which are an important source of revenue.

 

SFF operates on a regional basis within each island rather than on a North and South Island pricing structure, although the company continues to publish only two separate schedules which Cooper reckons are ‘pretty close to the mark.’

 

Another factor mentioned to me is the fact there is more contracting in the South Island, with the contract price generally being quite a lot better than spot prices. But North Island procurement prices are more volatile and are adjusted up or down faster than in the South.

 

The inevitable conclusion is South Island farmers suffer a price disadvantage because of a shorter season leading to the need to recover overheads over a shorter period and the resulting peak kills which cause backlogs at the very time farmers must get livestock slaughtered. They also suffer from being serviced by plants which are generally older than the North Island plants and which were originally built to handle a different mix of species. This must adversely affect the processing margin and procurement price.

 

Even taking all these factors into account, suppliers must question the justice of companies with operations in both islands paying more, in some cases substantially more, to their North Island suppliers. But judging by the reasons given to me, South Island procurement prices are unlikely to improve to the point where they match those across the Cook Strait. In that case raids by North Island processors are unlikely to stop any time soon.