Meat exports sold to more than 100 countries

New Zealand’s meat exporters come in for a lot of criticism, either for selling too cheaply or for not adding value, and certainly because they can’t (or don’t) pay farmers enough for their livestock. This final criticism is presumably a direct result of the first two – the prosecution’s case argues if they sold product at a higher price or added more value, they would automatically be able to pay more for livestock.

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Come on John, give them a break!

The last time I dared to question MIE’s desired reform of the meat industry, John McCarthy accused me of bias and warned me to watch out, if we are unlucky enough to run into each other. So this column will almost certainly result in another attack on my character and more threats to my personal safety!

Conditions not structures cause of red meat price drop

The pre Christmas surge of optimism, boosted by high beef and sheepmeat prices when export volumes were low, has largely disappeared. The impact of the drought in the lower North and South Islands has seen slaughter numbers increase dramatically at the same time as a series of negative events have reared their head in world markets.

Two exciting years in a row

2014 and 2015 promise to be two of the most exciting years the red meat industry has seen for a long time and for a change the news is not all bad. There are some clouds around, but also silver linings like better beef and lamb prices, improved profitability and the possibility of positive developments in the industry’s structure.

 

At long last, after a slow start, there are plenty of signs the industry as a whole has recognised the need for change to address the main challenges of inadequate prices, declining sheep and beef numbers and excess capacity which have inexorably brought about land use conversions to more profitable activities.

 

The launch of the Red Meat Sector Strategy three years ago signalled the beginning of the change process which B+LNZ and the meat companies have adopted with support from the government funded Primary Growth Partnership projects. MIE has also gained traction during the past two years, having succeeded in gaining representation on the boards of Silver Fern Farms and Alliance as well as obtaining funding to develop its own industry reform strategy.

 

All these events and programmes have been happening against the background of an improving domestic economy and uneven global economic performance with Asia and North America doing better than Europe where political unrest has hindered the recovery. China has been the success story of the past year for the New Zealand red meat sector, providing an alternative export market for beef and particularly sheepmeat.

 

From the perspective of sector morale, it isn’t doing any harm to see sheep and beef returns outperforming the dairy industry for once. In spite of some retreat from the price peaks in the spring when product volumes were low, it is almost inevitable these returns will be better than the dairy payout during 2015 and quite possibly 2016 as well. The lower New Zealand dollar will be a help too.

 

But for all these encouraging signs, it won’t be all plain sailing for the red meat industry next year. There is already the strong possibility of drought conditions on the East Coast and some other regions, while trading conditions in major markets are uncertain. China has slowed, while many EU countries remain in recession and the Russian economy is in dire straits.

 

Meat processors and exporters all returned to profit during the 2014 year, although procurement prices will have to regain a greater sense of reality than has been the case in recent weeks, if 2015 is to allow a repeat performance. While lamb slaughter volumes are forecast to be about 20 million, not as low as 2011-12, but fewer than last season, the low milk payout will mean plenty of cull cows to process. If the US price holds up, the beef processors should be able to make hay to offset excessive lamb procurement costs.

 

Intriguingly both Silver Fern Farms and Alliance begin the year with new Chief Executives who will oversee some significant industry developments which will undoubtedly affect the companies they manage.

 

There are at least three big questions for the red meat sector in 2015:

1. What will be the findings of MIE’s meat sector reform paper when it is published in February;
2. Will farmers be prepared or financially able to invest further in ownership of the value chain; and
3. What will be the outcome of Goldman Sachs’ investment recommendations to SFF’s board?

 

My suspicion is the key to the future shape and structure of the sector lies in strategic developments in the country’s largest red meat processor and exporter. The announcement has already been made about dividing SFF into product based business units which provides the opportunity to sell them individually, quite possibly to an overseas investor.

 

CEO Dean Hamilton has been very open about the company’s need for $100 million capital to reduce debt and allow further investment in its value added business. He also admitted in last week’s Farmers Weekly it was unlikely farmers would be able to stump up much of this capital in spite of a supportive response from supplier meetings. Five years ago the company succeeded in obtaining $22 million from suppliers invested in $1 shares which are now worth 40 cents, so there isn’t much chance of getting nearly five times the investment from existing shareholders, many of whom will already have lost 60% of their initial investment.

 

Unless Alliance or another local investor is willing to buy all or part of the SFF business which is unlikely, the alternative options appear inevitably to be from overseas. An external entrant to the sector would not welcome any constraints on its right to expand capacity. This would effectively derail any industry reform involving farmer investment in owning the value chain that MIE may envisage or that might be agreed as a result of the moratorium proposal.

 

Therefore 2015 will be exciting for participants and fascinating for observers with a strong probability we will all be much clearer about the future by this time next year.

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.

Global animal protein trends become more complex

At the Red Meat Sector Conference Luke Chandler, General Manager of Rabobank’s Food and Agribusiness Research Advisory group in Australasia, presented an interesting perspective on global protein trends and the increasing complexity required to feed the world’s growing population.

India’s massive buffalo exports reflect different approach to food safety

India has exported well over 500,000 tonnes of buffalo to Vietnam in 10 months of the latest July to June year. This figure easily exceeds the total of New Zealand’s beef exports to all countries.

Thoughts from the UK

While in the UK briefly last week I spent a couple of nights with an old university friend who actually got a First in Agriculture at Cambridge which was the best degree achieved by any of my friends or, not surprisingly, me. He farms near the M4 in Berkshire less than 100 kilometres from London.

 

As usual when I see him, we were chatting about the state of agriculture in our respective countries. He asked me whether I needed a ‘pommie farmer whinge’ to provide some material for a column, so not unnaturally I told him to go ahead. His first complaint was about the amount of New Zealand lamb competing with British lamb in the supermarkets. I suggested the view back home was the natural seasonal fit of New Zealand product didn’t really cut across, but rather complemented, the seasonal availability of British lamb.

 

He partly agreed with me on this, but said the British sheep farmer would still prefer it if the competition from our lamb didn’t exist. I was able to provide some reassurance here by telling him how China had come from nowhere to be the biggest market by volume, if not value, for New Zealand lamb which meant there was progressively less being exported to the UK than was the case even 12 months ago.

 

An aside here which I discovered soon after getting back at the weekend: apparently sales of stockinette are back up to levels last seen in the 1980s when most New Zealand lamb exports were shipped in carcase form. This is clearly a direct consequence of the increase in sales to China, so while we can be pleased with the diversification from our traditional markets, we should be less excited by the return to a product form from the 1980s.

 

As a crop farmer who has a contract with a contractor on a similar profit share basis to our share milking model, my friend is frustrated by the delay in setting the basis for the current season’s EU subsidy. While we may think he’s lucky to be receiving a subsidy at all, as I told him, his frustration is understandable, because until he gets this information, he can’t confirm the profit share with his contractor.

 

Interestingly his calculations indicate that this year’s profits will be higher than last year, in spite of a lower price. This is because the yield this year is so much better than last. After a very wet start to 2014, the weather has been much more favourable and this year’s crop is in much better condition.

 

My friend confirmed the continuing problems being experienced by British dairy farmers who are still losing money on every litre of milk they produce. The supermarkets still dominate the price of milk, while it appears farmers don’t have the ability to supply milk at a higher price for the manufacture of cheese and other value added products.

 

A final impression from my brief visit was the lack of sheep, at least in the parts of England I drove through. In the Cotswolds where I grew up sheep appear to be almost a forgotten species with only the impressive wool churches, built in the middle ages, to serve as a reminder of where the region’s wealth originally came from.

 

But I suspect that has probably been the case for the last thirty years or more. Land use change isn’t restricted to dairy farm conversions in Canterbury and Southland.

Challenge of creating a strong red meat sector

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.

Guy prepared to help, but unwilling to interfere

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.