MIE plan stimulates debate but won’t fix the problem

The Pathways to Long-Term Sustainability document launched earlier this month makes some very valid points about the red meat industry’s shortcomings, but its recommendations are almost certainly impossible to implement.

 

Even if the processors are willing to consider capacity rationalisation, it won’t be on the scale envisaged by the GHD consultants and judging by Sir Graeme Harrison’s remarks ANZCO won’t be part of it; nor will AFFCO unless the Talleys undergo a St Paul like conversion on the road to Motueka. This leaves the cooperatives, with Rob Hewett prepared to consider merging with Alliance, although he isn’t holding his breath, while Murray Taggart remains very lukewarm.

 

The common theme evident from all the company chairmen is the fundamental need for any solution to be commercially justifiable from the companies’ perspective. The problem with this particular stance is the conflict with the farmer bias of MIE’s proposals.

 

At issue is the lack of sheep and beef farmer profitability for which the meat processors and exporters alone are held responsible. They are guilty as proved by the MIE document of having too much capacity which dictates their procurement tactics, while simultaneously competing away value in the export market. Unfortunately this verdict is too simplistic.

 

It ignores the potential for farmers to increase their on farm earnings by quite simply doing things better. In 2011 the Red Meat Sector Strategy calculated a $180 million gain if those farmers with profitability between the 50th and 70th percentile were to lift their performance to the 80th percentile. This is substantially greater than either the gains from procurement or the market value chain identified in the MIE document.

 

The RMSS figure doesn’t even include potential gains from improving on farm practice of the lowest performing 50% of farmers. However a lift in performance from 40th to 50th percentile would produce a 72% gain in profitability by the farmers in question. Unfortunately there is no quick fix.

 

Silver Fern Farms’ Hewett argues with GHD’s findings which estimate 53% ovine processing overcapacity, saying 20-30% is more realistic and pointing out the difference between North and South Island livestock flows every season, particularly in a drought. While nobody is disputing the need for some capacity reduction, it will have to be achieved by voluntary closures which take into consideration the interests of shareholders including farmers, bankers and the workforce.

 

As recognised by both the RMSS and MIE’s plan, there are two critical components of sector profitability improvement other than best practice throughout the supply chain: aligned procurement or contracted supply commitment and coordinated in market behaviour. Contracted supply to an agreed minimum level would underpin processors’ plant utilisation and enable them to commit to marketing programmes with certainty. Coordinated in market behaviour, preferably under Brand New Zealand in selected markets, would begin the process of building trust and cooperation between exporters.

 

There are three problems for all New Zealand agricultural exporters which are not readily addressed by any short term strategy – the unavoidably small size of the domestic market, overseas trade barriers and the strength of our dollar. Price volatility and the exchange rate are directly affected by demand in global markets and the relative economic strength of our trading partners, while trade agreements like South Korea take a lot of time. It is simplistic to blame our meat companies for failing to cope with these headwinds.

 

However one question which needs answering is the claim of underselling in comparison with producers from other countries. This accusation is normally levelled against lamb exporters who sell to UK supermarkets at a price often believed to be far lower than those earned by Welsh or English farmers. This may be the fault of the supermarket chains that use New Zealand lamb as a lost leader, not the exporter, but it serves as ammunition for farmers who are convinced they are being cheated of the true value of their product.

 

It is very difficult to obtain firm information which will prove or disprove the claim and it would be impossible to gather price information across all cuts, customers and markets. But as long as New Zealand exporters compete using different brands for key products in the main markets, it will be hard to convince a critical audience how this can possibly be better than collaborating under a single New Zealand brand, at least for certain value added products in key markets, like New Zealand lamb in the UK and EU.

 

While the recommendations in the MIE plan have logic, they are limited in their scope. There are five capacity related recommendations calling for collaboration between companies to find ‘an industry-wide solution that provides long-term and enduring viability’, such as chain licensing and company participation in a rationalisation scheme which would hold redundant assets; there is a recommendation which calls for Government support to introduce enabling legislation and a fifth proposal for reserve capacity to be available in times of need.

 

The final three recommendations, which could more accurately be described as pleas, call for contracted supply of livestock, farmer support for capital raising to fund a consolidated industry and the transition from a production led to a customer focused value added model.

 

As anticipated MIE’s plan is heavy on production cost and efficiency analysis and contains a wish list of what is desirable, but light on strategy for achieving it. MIE deserves credit for starting the discussion about the future of the red meat sector. However the real commitment has to come from both farmers and meat companies to embrace sector best practice in all aspects of their business.

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3 Responses to “MIE plan stimulates debate but won’t fix the problem”

  1. Rural round-up | Homepaddock Says:

    […] MIE plan stimulates debate but won’t fix the problem – Allan Barber: […]

  2. Mr E Says:

    Allan,
    You’ve presented many facts here that I largely agree with.

    However,
    I don’t think MIE have played any blame game. Nor do I think the have suggested “the meat processors and exporters alone are held responsible”.

    I think it would be very silly to conflate this report with “the potential for farmers to increase their on farm earnings by quite simply doing things better”. Especially when the RMSS has already done this.

    I find myself irritated at Meat Companies when they choose to do the same. There has never been any question that farmers can’t improve within their gate. Pointing that out appears as a political side step to me, rather than a progressive solution finding move.

    Is underselling really that hard to prove? Currently the ANZ commodity price index for Meat Skin and Wool is close to an all time high.
    http://www.interest.co.nz/charts/commodities/anz-commodity-price-index (meat skin and wool tab at the top- NZD)

    And the Irish farmer is being paid 7 euro/kgCW ($10.15NZD/kgCW)
    http://www.ifa.ie/market-reports/market-reports-15/

    And the UK farmer is being paid 4.56pound/kgCW ($9.07NZD/kgCW)
    http://pages.fwi.co.uk/pdf/market-prices/FWMP_Markets_AAG.pdf

    All season Britain’s lamb price has climbed while our lamb price has fallen. All season Irish and UK processors have claimed a lamb shortage, whilst our markets have claimed poor demand.

    I tend not to use the term underselling though. It is simply market failure. I think James Parsons Nuffield scholarship describes the issue well. NZ red meat supply has shrunk whilst our consumers have grown in purchase power. It is not a winning trend and if we don’t cease this trend – we will be worse off for it.

    That is not to say the solutions are easy. They are not. They never will be and never have been. Quite frankly I don’t think the MIE report quantifies the cost of change well. But this report does stimulate debate, and promote change to halt the endless contraction of an important economic, environmental and social enterprise in NZ landscape. I encourage that.

    The question I ask myself. Is this report enough to stimulate change for the good? If not what alterations are needed or subsequent information would help?

    • Allan Barber Says:

      Hi Ed
      Many apologies for the late reply, but we are moving house and this has taken all my attention recently! I agree with your interpretations and comment in general, but unfortunately it’s going to need a game changing event to persuade the meat companies they must change. This could be the entry of an overseas buyer for Silver Ferns in full or in part or the receivership of one of the companies.

      I can’t see any easy solutions either.

      Allan

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