Posts Tagged ‘sheep and beef farmers’

Rural confidence trends remarkably similar across sectors

June 29, 2017

The latest Rabobank Rural Confidence Survey shows the highest level of confidence among all agricultural sectors since the survey started in 2003 which is proof of the remarkable success of New Zealand agriculture and commodity prices. At a time when our dollar is also stronger against almost all, if not all, currencies over the same period, this is a surprising fact that most people would say is at least counterintuitive if not downright impossible. (more…)

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Wool trade still at crossroads

February 8, 2015

Ever since the Korean War over sixty years ago the price of wool has been in decline with a few upturns along the way. Over the period the fortunes of wool growers have suffered from massive lifestyle changes leading to reduced demand for woollen textiles and fibres and the rise of synthetics with properties capable of imitating, if not matching, those of wool at a lower price. Wool is not the only natural fibre to be affected, with cotton being hit even harder.

 

There are a remarkable number of parallels between the red meat and wool industries in the reactions to the situation which is not surprising given the respective price trends and the fact many of the farmers are the same individuals. Sheep and beef farmers’ opinions of the deficiencies of the meat industry are virtually identical to those of the wool trade, while proposed solutions are also remarkably similar.

 

The culprits in both cases are the traditional pantomime villains: privately owned meat companies and wool merchants, brokers and exporters, neither of whom, so the argument goes, have much skin in the game apart from shareholder capital, in many cases held by overseas shareholders. The suggested solution to both problems is farmer ownership of the whole value chain which will supposedly retain financial control and ownership while at the same time ensuring sustainably better returns to farmers.

 

So far evidence paradise will result from farmer control appears to be something of a mirage, although it may be too soon to write off the prospect of success completely. One private wool buyer whose family has been in the business since the 19th century told me he doubted the vertical integration model, saying he wouldn’t think of telling farmers how to farm, but equally wouldn’t expect a farmer to know how to run his business.

 

Wools of New Zealand, established in 2013 with grower capital despite failing to reach its initial equity raising target, is too early in its life to be called a failure. But the signs are not all positive although the PR remains very upbeat. There are plenty of rumours of growers who are unhappy with the contract prices they receive with substantial penalties deducted for colour and vegetable matter, up to 45 cents a kilo compared with 10 cents at auction.

 

A second issue is payment; WNZ’s Camira lambs wool contract payment is in three instalments over 15 months compared with 14 days after sale to a private merchant or at auction. Further the contract price of $6.25 per kilo applies to wool up to 30 micron which ignores the variation of up to 60 cents for wool between 27.5 and 30 micron. At the time of writing the only wool type with a lower spot price than the Camira contract is 30 micron, so growers supplying lower micron wool would lose on the transaction, even before allowance for colour and VM discounts and interest costs as a result of the payment schedule.

 

A third factor is the 15 cents a kilo Wool Market Development Commitment levied by WNZ on a shareholder’s assessed annual wool production which applies whether or not growers supply all or part of their clip to WNZ. At up to $30 a bale this can amount to several thousand dollars a year with little evidence of sizeable new premium markets being reflected in higher prices than can be achieved through the traditional systems.

 

Open criticism of WNZ is not yet frequently heard or expressed, either because shareholders are still prepared to keep an open mind or are unwilling to admit they might have made an expensive mistake or possibly they haven’t yet analysed the comparative returns. But there are definitely instances of growers who have reverted to supplying private merchants, after signing up as shareholders of WNZ. However they will continue to receive six monthly accounts for the 15 cent WMDC which they are contracted to pay. It seems the only exit possibility for disaffected shareholders is to find a buyer for their shares, although these are infrequently traded.

 

The other cooperative option for wool growers is Primary Wool Cooperative which has been in existence for more than 40 years and has a 50% share of Elders Primary Wool, responsible for the Just Shorn brand sold into the United States for high end carpets. PWC has over 1000 members indicating a certain degree of satisfaction with the dividends and rebates paid, as well as the wool prices received. However there is limited evidence the Just Shorn initiative has added substantially to growers’ incomes, but as with Camira this may be a matter of time.

 

The wool merchants and private buyers admit they will be accused of bias, but they say there are no new markets for wool driving any real increase in the wool price, while the rise in the past two seasons is due to demand exceeding supply, as sheep numbers fall.

 

Like the meat industry, the big question for wool growers is what sort of industry they really want. For all the talk of the need for cooperative farmer ownership of the value chain, it still appears a majority of farmers are actually satisfied with their merchant or broker relationship. Otherwise surely they would all vote with their feet and send their clip exclusively to a farmer owned cooperative.

 

But this just doesn’t seem to be happening in sufficiently large numbers to create the desired change claimed by supporters of the new model. The collapse of the milk price may well have taken the wind out of the sails of proponents of a Fonterra like system for meat and wool.

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…)

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.

Why red meat sector needs to reform

May 13, 2014

An analysis of the livestock population over the last 25 years provides compelling evidence of how the ratio of sheep and beef to dairy has changed dramatically. Although we are aware of this change from all the publicity about the growth in dairy farming, it’s a shock to see the bald statistics from B+LNZ’s Economic Service which show a 92% increase in the dairy herd compared with a decline of 47% in the sheep flock and 20% in the beef herd. (more…)

MIE may be sailing into a head wind

June 24, 2013

The Meat Industry Excellence (MIE) group has appointed businessman and former sheep and beef farmer Ross Hyland to set up an establishment team, as it ramps up its campaign to achieve a restructure of the red meat sector.

 

After a series of meetings round the country at which it gained plenty of farmer support for its campaign, as well as backing from Beef & Lamb NZ and Federated Farmers, MIE has decided that it is now time to inject some muscle and structure into its plans. Chairman Richard Young said last week they had made this decision to ensure that they have an agreed solution and plan ready for the start of next season.

 

This is in spite of the confidential discussions between the four largest meat companies which have not yet reached a conclusion, but next season is only three months away on 1 October. MIE has talked to all the main meat companies and appears to have no desire to pre-empt the outcome of those discussions, but wants to try and make sure things don’t drag on well into next season without any progress.

 

MIE has now reduced its goal of having 80% of the meat industry combined in farmer ownership to a more realistic 60%, although it is still very doubtful how this will be achieved. Another major goal to have all livestock supply on contract to one processor has also been replaced by a commitment to supply stock to specification. The goal of transparency and fair treatment for all suppliers remains a key plank of the programme, while the costs of restructuring are to be shared by all industry stakeholders including the Government, except unions.

 

This is still a very optimistic wish list. It is uncertain just what a farmer owned trading entity with 60% market share would achieve, even if the necessary mergers and acquisitions happened. It leaves 40% of the industry in non farmer hands with almost certainly stronger balance sheets and more capacity for innovation and productivity improvement. My impression is that MIE’s original desire was to sort out the state of the sheep meat sector, but the board has now decided beef must be included, if the plan is to work.

 

With a maximum of 40% of sheep and beef farmers attending the meetings, this still means 60% didn’t attend, although some of those may support the objectives. It also ignores dairy farmers who provide around 40% of the industry’s cattle supply. A dairy farmer’s only thoughts with his cull cows are to get them off the farm as soon as possible and to receive a fair price for them.

 

A former livestock manager’s opinion of cull cows was that it’s the only time dairy farmers can behave like capitalists, because everything else is handled by the cooperative. So it’s hard to see how MIE can expect the meat companies, some of which specialise in grinding beef, to change their procurement methods for this part of their business.

 

I sympathise with MIE’s intentions, as well as the efforts to achieve progress before the start of the season. But realistically there will be no industry restructure in three months. There is currently no indication any of the meat processors are yet in serious financial trouble which reduces the likelihood of a Weddel or Fortex type of event in the near future.

 

Nor can I see the Government wanting to get involved in forcing a restructure of an industry, none of it state owned, which is completely exposed to commercial forces including the value of the New Zealand dollar and international commodity prices.

 

MIE says it will seek any required legislation which I presume could mean trying to enforce any of the following measures: merger of the coops, Silver Fern Farms and Alliance, sale into the farmer owned entity of one or more companies to reach the target market share, mandatory livestock supply contracts to specified meat companies, and a moratorium on any new meat plants or additional shift capacity.

 

What on earth would the Commerce Commission say about all that?

 

 

Superb analysis, now hard work begins

May 17, 2011

The Red Meat Sector Strategy released at the Beehive last week is an impressive document, producing an objective assessment of the problems and opportunities that face the sector, as well as pointing the ways forward for the next five to fifteen years. At the end of that period, assuming everything has happened as recommended (it won’t or can’t!), the industry will have grown by $3.4 billion or more than 50% by 2025. (more…)