Archive for October, 2014

Farmers in favour of meat industry restructuring

October 4, 2014

Preliminary results of research conducted by Meat Industry Excellence group (MIE) have shown, not surprisingly, that farmers are strongly in favour of industry reform around a cooperative model. This is the first part of the new industry plan being prepared with the assistance of funds advanced by B+LNZ.

 

The research showed farmers believe overwhelmingly that the cooperative model has the potential to deliver more control of the total value chain and a greater share of revenue back to farmers, while at the same time preserving the industry in New Zealand ownership. Chairman John McCarthy is certain farmers would be willing to invest their own money to help fund a restructure, possibly via a per capita fee on stock processed.

 

The results are based on 491 responses from an initial sample of 800 sheep and beef farmers selected from across the country in geographically representative numbers. While the findings appear to be convincing, it is a comparatively small response base in answer to a set of pretty leading questions.

 

The heads up press release issued late last week claims to have more than 80% farmer backing for industry reform as outlined which should prove to the Minister for Primary Industries that consensus does exist among stakeholders; this being a prerequisite for the government to get involved.

 

Unfortunately agreement from one side of the industry does not constitute a consensus. It’s hard to imagine the near 50% of the processing side of the industry in corporate ownership being in agreement to move towards a greater degree of cooperative ownership. That is without even beginning to convince the coops they would like to combine, although that would be a start.

 

McCarthy offered the tempting notion that minimum savings of $400-450 million would be achievable from restructuring processing and procurement which would of course have to be funded in order to get things happening. That probably doesn’t include the cost of buying out those companies in corporate ownership that don’t necessarily want to exit the industry. I can think of at least four medium to large sized processors which would not be willingly up for grabs except at a very advantageous price.

 

Everybody has a fairly good idea of what needs to happen to reform the meat industry, but how to do it remains the problem. Key things that need to be addressed are capacity rationalisation to cope with reduced livestock numbers and regional land use changes, livestock procurement methods, supply contracts, competition between exporters in the market place and volatility of market returns.

 

I hope MIE’s industry plan, when finalised, can point to a constructive way of solving all these issues, as well as achieving the type of industry ownership farmers say they want. I am sceptical whether the envisaged benefits of greater farmer ownership and control of the value chain will actually be achievable. I am also suspicious of the projected savings from the restructure of processing and procurement.

 

In an ideal world both are possible, but the world is not ideal, especially without a substantial amount of new capital and full bank support. For me the jury is out, at least until I see some compelling financial analysis and, more important, evidence that major players are willing to consider a proposed solution.

 

There is a lot of water yet to pass under this particular bridge.

Tatua result and forecast cast doubt on Fonterra’s strategy

October 1, 2014

Tatua’s amazing final payout of $9 a kilo of milk solids, trumping Fonterra’s $8.40 (admittedly after adjusting the milk price calculation) is just one element of an impressive performance by one of New Zealand’s most consistent performers.

 

The forecast of $6.50 for the current season compares with the recently adjusted $5.30 announced by Fonterra. It may not survive the vagaries of the season, but then neither may Fonterra’s significantly lower number.

 

Tatua also announced an increase of 10 in supplying dairy farms, rising from 109. Presumably the company won’t have any trouble filling this new requirement, because being selected as a Tatua supplier must be a bit like being picked as a permanent member of the All Blacks. The only problem is to qualify the farm has to be in a very small part of the Waikato within reach of the plant.

 

At a time when Fonterra’s sheer size casts doubts on its ability to add value to its product range, not least because its cooperative members expect maximum payouts, Tatua is a great example of a small niche company which has built its business on value added products.

 

It is not easy to be in Fonterra’s shoes: it must collect, convert into product and market the output of more than 10,000 dairy farms. Tatua in contrast has only a fraction of this number of farms and, if it needs more milk at any time, it can apply for an allocation under the provisions of DIRA. Synlait is an example of a well structured niche player in the South Island which has been successful because, not in spite of, its size.

 

But the suspicion remains, Fonterra’s scale may be both an advantage and a curse. It is very difficult to convince members they should be willing to forego payout in exchange for investment in brand building, but that may be just what the company should do, if it wants to compete with the big consumer goods companies like Danone and Nestle.

 

In the interest of ensuring above board milk pricing and the preservation of fair competition between dairy companies, Fonterra must calculate its milk price based on the milk price manual. This involves using a basket of commodity reference products such as whole milk powder and skim milk powder and their by-products, but excludes lower value products such as cheese. These price calculations are closely linked to Fonterra’s monthly global dairy trade auctions which have incidentally been dropping like a stone in recent months, since unrest in the Ukraine, resulting Russian trade embargos on European product, and a slowdown in China purchasing.

 

However the fact remains, Fonterra is heavily bound and constrained by commodity markets and their price structures. Fonterra claims with justification that it is a major world supplier of ingredients, not so much a branded goods marketer. But a report just released shows Fonterra to be lagging way behind its major consumer goods competitors in spite of its production capacity.

 

It has become axiomatic for the dairy industry to be held up as a model of how an agricultural industry should be in contrast to the meat industry. The cooperative nature of dairy, purely because a dairy farmer’s milk must be collected every day, has compared very favourably with the competitive nature of the meat industry. Higher payouts have merely served to confirm this viewpoint.

 

But it looks as if the dairy industry has its own particular problem which is how best to convert what it produces into something worth more than just a commodity.

Election result should be good for agriculture

October 1, 2014

Beef+Lamb NZ’s Manifesto which was issued before the Election contains a very concise summary of the red meat sector’s wish list for the next three years, although it doesn’t necessarily include the big elephant in the room of meat industry restructure. But the National government’s attitude on that one is well known and unlikely to change until the industry can present an agreed solution favoured by a majority of industry participants.

 

I contacted Nathan Guy, at present acting Minister of Agriculture, to find out the government’s priorities for the next term and how they dovetailed with the B+LNZ and Federated Farmers manifestos. He responded in some detail, stating satisfaction with the strong support received from rural New Zealand which gave confidence the last government was very much on the right track.

 

Major initiatives would be RMA reform, a strong policy requirement of the Prime Minister, continuing focus on strengthening biosecurity protection, investment in science and innovation which has increased 70% since 2007/8, attracting more young people into careers in agriculture, more free trade deals, an increase in water storage and developing the potential of Maori agriculture.

 

This all seems pretty consistent with the two manifestos, although there will never be enough money to go round all the priorities listed. Feds’ push for $600 million additional investment in science over the next three years with specific reference to the three Centres of Research Excellence which missed out on the last funding round may be a leap too far. $1.5 billion is already committed for next year with a large proportion going towards the primary industries through universities, the Callaghan Institute, the Sustainable Farming Fund, AgResearch and Scion.

 

PGP funding of $708 million has been allocated across 18 different projects with matching industry investment with an assessed potential to generate returns of up to $11 billion by 2025. My impression from Guy was very much the intention to proceed with present policies which all appear to be on track to deliver the desired outcomes.

 

My first question to B+LNZ’s chairman James Parsons was whether he saw any change to current policy settings following National’s re-election as well as whether there were any specific areas where more action and investment were needed.

 

He is very committed to the success of the PGP programme, citing the Red Meat Profit Partnership as a prime example of the benefits from providing a platform from which nine partners – six processors, two banks and B+LNZ – could combine forces; there was no way this would have happened without government funding.

 

One of Parsons’ main concerns is to achieve the goal of the People Powered report produced in July to attract an average of 5000 people a year into the industry. However as the report shows over the next 10 years, the most important factor will not be the absolute number of entrants, but the change in the make up of the workforce. In 2012 44% of the workforce had a tertiary qualification, but this will rise to 62% by 2025.

 

Government response has been to raise subsidies for agricultural degrees at tertiary level or higher, as well as looking to improve information and material available to careers advisers. I suspect this will not be nearly enough on its own to achieve the required rate of increase. It remains a mystery why a career in agriculture, New Zealand’s largest export sector by a country mile, continues to be less attractive than a whole range of other less exciting and productive choices.

 

Other priorities for B+LNZ include environmental policy with a sensible discussion about nutrient allocation, reduced regulation where appropriate, and negotiation of improved trade access agreements with important trading partners where New Zealand is at a disadvantage. Specific examples of priority agreements on tariffs which must be pursued vigorously are Korea and Japan, particularly on beef access, where progress has been slow.

Japan’s commitment to the TPP has stalled over dairy access, while Australia has a sub optimal FTA which provides for reducing beef tariffs, while New Zealand beef tariffs into Korea will be higher than those enjoyed by Canada and Australia from 2015. Non tariff barriers on Chinese imports of beef and green runners and beef to Indonesia are also an issue in need of urgent resolution.

 

Parsons corrected me when I raised the necessity of introducing NAIT for sheep if we are serious about controlling disease outbreaks such as Foot and Mouth. This would impose a conservatively estimated cost of $80 million on sheep farmers to track stock in the event of an incursion of what is a wind borne disease. NAIT is more relevant to food safety than biosecurity problems. An infinitely preferable mechanism for tracking livestock would be the mandated introduction of electronic Animal Status Declarations to avoid the use of paper records, impossible to trace quickly and comprehensively.

 

One topic notable by its absence from the manifesto is a Government Industry Agreement with the meat industry, already signed with the kiwifruit and bee industries. B+LNZ suggests road testing a GIA document for an outbreak of FMD before the industry would be willing to make a commitment.

 

On balance the new government’s agricultural policies appear to correspond to the wishes of the red meat sector which is a good start, built on the solid foundation of the last three years’. At a time when global demand for beef and sheepmeat is robust, this is a good time to emphasise the sector’s importance to our economy.