Posts Tagged ‘Primary Growth Partnership’

Steady progress with Primary Growth projects

June 14, 2017

It is eight years since the Primary Growth Partnership programme was announced by the then recently elected National Government. At the end of 2016 there were 20 projects under way and just two completed, but 30th June sees the completion of FarmIQ, the largest of the red meat sector programmes. This seems to be an appropriate point to evaluate the success of PGP, in particular the six meat and two wool programmes which have been allocated total Crown and industry funding of $342 million. (more…)

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Red meat sector confidence high, but lifting the average would seriously enhance earnings

December 20, 2014

The Rabobank Rural Confidence Survey conducted in November found confidence among sheep and beef farmers had risen from just under 50% to 75% since the previous survey the previous quarter. However the overall confidence level remained low because of pessimism among dairy farmers, although this was slightly better than the two year low in the previous survey. (more…)

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.

Science and bees essential for prosperity

September 15, 2014

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.

Red Meat Profit Partnership tries to answer crucial question

July 3, 2014

Analysis of the objectives and methodology of the RMPP suggests the programme has highlighted the most important issue facing the red meat sector. Briefly stated, it is to work out why there is still such a significant gap between the top farmers and those in the middle of the pack and to lift the average closer to the top performers.

 

When the Red Meat Sector Strategy identified behind the farm gate specifically as a major area of potential improvement, there was much mumbling about why the industry structure wasn’t being more usefully exposed as the area most in need of improvement. But figures released by the B+LNZ Economic Service show this isn’t the case.

 

The most graphic demonstration of this appeared in the RMPP brochure sent out last year. Sheep and beef farmers were grouped in 20% quintiles for comparison and in this table the second to bottom quintile was compared to the top 20%: there was a 3% gap in lamb price achieved, but a staggering difference of 135% between the groups when measured on dollars per lamb and dollars per hectare regardless of the class of farm. To put it simply the top 20% are nearly two and a half times as profitable on a pre tax basis.

 

Obviously the bottom 20% lags even further behind. However this position has improved markedly over the last 20 years with a much greater percentage of farmers moving up the performance scale into a higher quintile. It is tempting to ask how much smaller the national flock would be today, if the level of performance was still stuck at 1991 levels.

 

A great deal of work has already gone into the RMPP, first in preparation for obtaining Primary Growth Partnership funding and second in getting to the stage of signing up the parties to the limited partnership of industry contributors achieved a couple of weeks ago. There is a good cross section of participants including B+LNZ, six meat processors, two banks and Deloitte which have committed to $32.15 million which matches a similar contribution from PGP programme funding.

 

These are not small sums of money which the partners are willing to invest which should hopefully convince sheep and beef farmers that their future prosperity is considered really important. The target is to increase on farm revenue by $880 million and profit by $194 million per year by 2025.

 

The funding programme is designed to be spread over seven years, although Chairman Malcolm Bailey has said he wants to achieve the outcomes faster than that. There are five distinct projects, the first of which – to understand farmer behaviour – is already well under way towards completion before the end of this year.

 

This project is essential for setting a firm platform for the programme as a whole with one set of integrated information. This research seeks to establish across all farming groups barriers to change, what works and doesn’t work in farm extension, and what distinguishes the high performing farmer from the lower performing tiers.

 

The second project focuses on enhancing sector capability, using the banks’ expertise in governance and financial planning, alongside in excess of 80 pilot schemes to be carried out by farm advisors to achieve best practice in breeding, pasture, forage, technical innovation and the development of integrated applied farm systems. An important aspect of this work stream is to attract bright new talent to the meat industry.

 

The third project will concentrate on providing linkage and integration between farm reporting systems which at present are often not properly integrated. This will enable better farm management decision making through benchmarking against regional and national information. Another priority would appear to be teaching sheep and beef farmers the importance of budgeting, because a recent study found that 65% don’t budget, while a further 30% don’t budget effectively which only leaves 5% who do it properly.

 

While the other two projects certainly involve farmers, they also require significant input from other parts of the industry. AsureQuality has the task of ensuring consistency between processors’ QA systems which will make a common set of standards clear to all farmers. This will also enable the achievement of product consistency to meet the expectations of all customers.

 

The final project is one which farmers will no doubt welcome because it is designed to achieve efficiency in the chain linking farmer and processor. Knowing how much unnecessary transport happens at the moment, some of it driven by farmers and some by processors, this area touches on the need for capacity rationalisation which is not the responsibility of the RMPP. Deloitte has accepted responsibility for this piece of work.

 

I am encouraged by the amount of detail and careful planning which underpin this programme because it is of crucial importance to the future of the red meat sector. It demands a great deal of commitment from all the partners, including tax payers, farmers and commercial operators.

 

It won’t happen quickly, but far better to do it properly. Farmers stand to gain a lot from the programme’s successful implementation, but so do the meat companies, banks, all businesses that service or supply the sector, and ultimately New Zealand as a whole.

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.

Silver Fern Farms addresses the case for industry consolidation

February 26, 2013

EoinGarden, SFF’s chairman, has sent an open letter to farmers on behalf of the cooperative’s board of directors concluding with the challenge “it’s really up to us as farmers.” (more…)

PGP project suggests meat industry ready to cooperate

January 30, 2013

Yesterday’s announcement of the Red Meat PGP Collaboration Programme for Greater Farmer Profitability at a total investment of $65 million is fantastic news for the whole industry. The key words are ‘collaboration’ and ‘farmer profitability’. The first of these has usually been notable by its absence, while the second combination of words has only been evident at irregular intervals. (more…)

Boot camp to inspire development of New Zealand Inc

August 15, 2012

This week a high powered Boot Camp, attended by a group of key New Zealand agribusiness executives, will take place at Stanford University, California, with facilitation by Professor of Marketing Baba Shiv whose research expertise is in neuroeconomics. (more…)