Posts Tagged ‘Beef & Lamb NZ’

Climate change report indicates challenges for NZ agriculture

May 13, 2017

GLOBE-NZ, a group of 35 MPs from all the main parties, has released a report by UK firm Vivid Economics which lays out various scenarios for New Zealand to meet the target of zero emissions by 2050. Business New Zealand and the Sustainable Business Council have both welcomed the cross party initiative, saying it gives confidence there will be collective and coordinated action towards meeting the target. It will also help to achieve commitments under the 2030 Paris climate change agreement to reduce emissions to 20% below the 2005 level. (more…)

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MIE launches red meat sector plan

March 18, 2015

Tuesday saw the launch of Meat Industry Excellence’s report Red Meat Sector – Pathways to Long Term Sustainability to a relatively small group of invited attendees in Wellington. (more…)

Behaviour is the root cause of meat industry’s problems

June 29, 2014

I am not completely sure why we spend so much time and effort complaining about the meat industry or which problems we are trying to solve. However in the interests of encouraging progress and stimulating debate, I will try to define the problem: this appears to be that the meat processing and export sector is not profitable enough, whether in absolute terms or in comparison to dairy. Both may be true.

 

It is worth stating the unique challenges of the red meat sector up front. First, there is a market at both ends of the chain, procurement and sale of the products; second, New Zealand exports a higher percentage of its production than any other country which must travel further to reach its markets, not all of them equally buoyant; third, sheep and beef must be disassembled into multiple cuts of meat as well as many co-products, all of which are sold into a wide range of markets for variable returns; fourth the climate dictates when the grass will grow and livestock will be ready for slaughter; and last, but not least, the producer can choose when and where to send the livestock for slaughter except in a drought.

 

Statistics and financial reports show that only a minority of participants in the industry are making much if any consistent profit, whether farmers or processors. So the conclusion must be that everybody, except for a few good farmers or companies with a niche market, would be happier with a more profitable industry.

 

Everybody keeps blaming everybody else, but nothing seems to change, because individually the parties must attempt to survive at the expense of others. That is the fundamental reason for the state of the meat industry. It may seem obvious to outside observers that cooperation is the way to make progress, but the complex nature of the red meat industry poses a difficult dilemma. The answers are extremely hard to find; otherwise some genius would have found them already.

 

MIAG thought they had found the answer – merge the two cooperatives – and MIE, after promising not to make the same mistakes as MIAG, seem to be taking the same path. In 2008 Owen Poole, Alliance Group Chairman at the time, tried to achieve an industry grouping with 80% of processing capacity, as the minimum required to create a robust business model, but this foundered on lack of agreement between the larger processors.

 

When preparing the Red Meat Sector Strategy, Alasdair Macleod of Deloitte started out from the premise that Zespri and Fonterra were the models for the meat industry. But he soon realised that the meat industry’s characteristics and complexity made it different.

 

In the 1980s Pappas Carter proposed the concept of Tradable Slaughter Rights as the best way to bring about industry rationalisation; this was raised again last year as an option by me and with greater publicity by retiring Beef + Lamb NZ chairman Mike Petersen.

 

Three of the major processors, the cooperatives and ANZCO, with just over 60% market share took this idea to government, which rejected it, unless 80% of farmers and processors were in favour. While seductively attractive at first sight, on reflection TSRs only suit some players, because they will reduce farm gate competition, while protecting less efficient processors.

 

In any case it seems to be impossible to achieve the agreement of such a high percentage of either farmers or processors. There are still enough farmers who want to maintain their traditional livestock supply methods and stock agent relationships to make such uniform behaviour unachievable.

 

There are also quite a few highly efficient farmers out there who are profitable, based on high lambing and calving percentages, good pasture management, intelligent use of technology and constructive relationships with their processor of choice. Equally there are several privately owned, efficient and profitable processors who would be seriously disadvantaged by the introduction of tradable rights.

 

Farmer ownership is touted as the answer to the challenge of controlling the value chain, because in good times there should be bigger profits and farmer ownership would mean farmers would keep these higher profits, which is not necessarily true. It is often forgotten that meat companies, like all processing businesses, must invest in modernisation and new technology, or they will become steadily less competitive. Profits must be reinvested in maintenance, new plants, new technology and people, not just paid out to shareholders.

 

It will be interesting to see how the successful MIE backed board candidates find life on the boards of Alliance and Silver Fern Farms. The realities of the meat industry, especially cash flow, balance sheets and banking covenants, will concentrate their minds on these critical aspects at the expense of more idealistic ambitions.

 

Ownership carries risk. Therefore farmer ownership of both ends of the value chain entails double the risk of losses, when world markets collapse, unless payments to suppliers suffer correspondingly. The present exporters, both privately owned and cooperative, have the expertise to move between 85% and 90% of New Zealand produced red meat and co-products which is a far more complicated exercise than exporting 90% of dairy exports in the case of Fonterra.

 

Obviously processing over capacity contributes to loss of value in the industry, while it also affects behaviour – both forcing processors to pay more than is economically sensible for livestock and encouraging cash flow generating sale of inventory at less than optimum prices at certain times.

 

However it is wrong to blame the structure of the industry for lack of farming profitability. If there were a perfect balance between supply and demand (impossible to achieve in a seasonal industry), processors would pay a consistent price at all times, neither too much nor too little. Overall, farmers would still receive a fair, but possibly lower, average price for their livestock than under the present system.

 

It is the companies’ shareholders that lose from the present competitive environment with excess capacity and those shareholders may either be farmers or corporate owners. In the long run those companies losing the most money, which are by definition the least efficient, will have to go out of business.

 

The losers will be the shareholders and the banks, as well as the suppliers who have livestock at risk at the time of receivership. Merging the two cooperatives will involve a huge write-off of surplus assets with no guarantee of long term survival.

 

I am not trying to pretend that all is right with the present industry model with no improvements possible, but, judging by the reaction from the farmers who attended MIE meetings in the first half of 2013, I sense many of them have an unrealistic expectation of the potential improvements.

 

It also seems that farmers think it is all the fault of the processors and exporters and, if somebody waves a magic wand to merge the coops and enforce farmer ownership of the industry, it will all come right. But life isn’t like that!

 

For a start red meat does not have a premium position in global markets that guarantees all New Zealand production a top price. Those markets are there, but they are comparatively small; however meat exporters are adept at shifting all types of product into different markets at a whole range of price points. Occasionally they have too much inventory and prices drop which leads to accusations of weak selling.

 

When one combines that scenario with procurement competition, some farmers do well, but there is an impression of a dysfunctional industry. So the question is what can be done to correct it. The usual solutions proposed are rationalise capacity and move to single desk selling.

 

The first one costs money and is hard to achieve in a free market except through receivership or voluntary plant closure; the second one is naïve and will never work. Ultimately farmers must get on and do what they are best at, except they must use more logic and do it better.

 

Logic dictates that, unless farmers have very deep pockets, they cannot lead and pay for industry restructure; but what they can do is adopt farming practices which will lift them up the curve and bring in higher profits, by using the technology and information available from, among others, Farm IQ, Beef + Lamb NZ and Primary Growth Partnership investments.

 

The next piece of logic could equally be termed common sense. Work with your processor of choice to ensure that you are producing livestock to the required specification and delivery for which you receive a transparently fair price. If you aren’t happy with your relationship, either because your processor isn’t transparent, fails to accept stock when agreed, uses third parties for procurement or doesn’t convince you of their payment security, then change your processor.

 

The way farmers and processors behave in their dealings with each other will have the greatest impact on the future of the meat industry because greater trust will enable both parties to get on with what they are good at. Global market prices will fluctuate as they always have, but there remains solid demand and eventually profitability will improve.

Guy prepared to help, but unwilling to interfere

March 26, 2014

Nathan Guy gave a very positive speech to Beef + Lamb NZ’s AGM on Saturday which covered three major points: what the government is doing for farmers, his vision for the red meat sector and thoughts on the discussions about industry structure.

 

Obviously, given MPI’s bullish view of agricultural exports, the Minister was extremely positive about economic performance. However he was at pains to point out the government’s role as an enabler, citing his focus on biosecurity resources, trade negotiations for market access, and investment in research.

 

He began by referring to his intention to strengthen resources at the border and to establish Government Industry Agreements (GIA) with various sectors which will ultimately involve the private sector in sharing the costs of biosecurity; different sectors are at various stages of negotiation on this issue.

 

Presumably the problem lies in negotiating just how much responsibility an individual sector is willing to accept when the border is the entry point for disease incursions. If the government agency fails to control this adequately, the result could be catastrophic. Foot and Mouth is an obvious example.

 

The PGPs are a major investment focus for this government with up to $700 million being invested in 17 new projects, while $400 million will be directed at irrigation infrastructure for water storage. Guy also drew attention to MPI’s work to improve the productivity of Maori land of which only 20% is in full production; this could lift exports by $8 billion.

 

He then moved to a positive assessment of the red meat sector, gilding the lily somewhat by claiming the same amount of sheepmeat now came from less than half the flock size. My own rough calculations indicate the flock has reduced from 72 million to 31 million (132%) in 30 years while the average lamb weight has increased by no more than 45%. To be fair I haven’t compared export volumes from 30 years ago.

 

He also gave the example of China as an emerging, fast growing market for New Zealand red meat which has dramatically altered the landscape over the last two years.

 

The Minister acknowledged that all isn’t rosy in the red meat sector, but change would be achieved through innovation, collaboration and new market opportunities, not by doing more of the same. He cited innovative PGP projects into which government and industry have committed $326 million which is expected to generate $2 billion benefits from a wide range of activities, including farm management systems and new products.

 

It’s not entirely clear how these benefits are calculated or defined, but presumably MPI as PGP gatekeeper and monitor can provide the basis of calculation.

 

Guy was adamant about the potential for the meat industry to be successful, as opposed to the view we often hear from MIE and others that the industry is doomed. However he also made it very clear it is not government’s role to take a heavy hand and legislate an industry restructure. Instead it is up to the various parties to agree on a solution which represents the views of a substantial proportion of the meat industry across the whole sector.

 

In conclusion he cast doubt on the value of the summit proposed by MIE unless the participants were prepared to engage and collaborate. The last thing anybody would want is another talkfest.

 

Therefore to summarise the Minister’s address to the AGM, agriculture is doing exceptionally well, the red meat sector has its challenges, but is performing well, future potential is good, and the government will be supportive, if a majority of the sector can agree on the change it wants. So in the short term nothing much will change and the participants will continue to operate from their own entrenched positions.

Let’s hope export prices can withstand the strength of our dollar and continue to provide sheep and beef farmers in the meantime with rewards which will avoid the transitional exit to dairy support or a terminal exodus to dairy conversions until the PGP projects come to fruition.

Sheep farmers pushing for retention of Invermay

March 5, 2014

A group of southern sheep breeders and sheep and deer farmers is strongly lobbying the government to attend a meeting in Gore to be held next Wednesday 12th March. The meeting, to be chaired by past chairman of Beef + Lamb NZ Jeff Grant, will be the first time AgResearch has fronted up to breeders and farmers to talk to them about the planned transfer of research scientists from Invermay to Lincoln. (more…)

MIE seeks funds from B+LNZ

March 5, 2014

MIE Chairman John McCarthy put out a press release on Tuesday pressing Beef + Lamb NZ to put its weight behind the remit to the AGM in March which asks “that Beef + Lamb New Zealand provide funding support to the Meat Industry Excellence Group to secure red meat sector reform.” (more…)

Trade deals coming thick and fast

December 5, 2013

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The TPP may not be happening as soon as expected, but free trade agreements with individual markets, Chinese Taipei and Peru, will come into effect, some aspects immediately, and provide more immediate rewards for our exporters. (more…)

MIA gives honest assessment of industry challenges

October 24, 2013

The Meat Industry Association has recently published its 2013 Annual Report which contains an honest assessment of the challenges of the past year and a summary of the positive initiatives under way. (more…)

Meat quality in restaurants constantly improving

October 24, 2013

The quality of domestic red meat supply both to the retail and catering trade has improved out of sight in the last 20 years because of stricter food regulations and the introduction of the Quality Mark. It has moved up another notch over the last five years or so, particularly since the global financial crisis. (more…)

$38 million funding for greenhouse gas research

February 5, 2013

The Pastoral Greenhouse Gas Research Consortium (PGgRc) has just announced that it has secured funding for a further seven years’ research into greenhouse gas (GHG) mitigation. $2.3 million per annum will be contributed by industry partners to be matched by the Ministry of Business, Innovation and Employment with the balance to come from AgResearch in its capacity as leader of the research project. (more…)