Farmer support key to managed procurement

KONICA MINOLTA DIGITAL CAMERAIn his latest blog post, meat industry veteran Mick Calder says the key to managed procurement is farmer support.

If I had any say in the matter, which I don’t, I would say to those farmers proposing the introduction of dairy industry style supply contracts, or any other form of managed procurement, that the issue will be getting farmer support, and keeping it.

There have been numerous attempts in the last thirty odd years to devise a system to stabilise the supply side of the industry that would be fair, equitable and acceptable to all suppliers, and processors. Despite inputs from farmers, farmer politicians, industry stalwarts, labour union economists, high-flying consultants, bankers, public servants and Uncle Tom Cobley and all, no scheme has been devised that fulfills all the requirements set out above.

Even if such a system is devised, there will always be some suppliers, and some processors, who do not want a bar of such restrictive and/or managed arrangements.

In the 1980s, when it had significantly more powers than its modern day equivalent, the NZ Meat Producers Board assumed control of the export of sheepmeats and devised a national schedule (admittedly complicated by a Supplementary Minimum Price scheme); and later there was a proposal for a National Pool scheme. But Rogernomics, the swing to the free market economy and deregulation of the industry put paid to those ideas.

In the mid 1990s, the decline in stock numbers led to another overcapacity crisis with attendant procurement wars. Higher than justifiable schedule prices put a strain on company balance sheets and caused bankers to query the wisdom of lending to such an unstable industry. This led to the deliberations of the ‘Secret Seven’ to try to resolve the industry problems – something similar to the Meat Industry Excellence Committee today.

This group analysed the ills of the industry at the time, flirted with the ‘empty core market theory’ and concluded there was a need for co-operation to overcome the problems. One of the issues they focused on was procurement competition and the uncertainty of supplies of livestock. They concluded the problem was unlikely to resolve itself under the existing free market conditions.

Various suggestions were put forward aiming to resolve the issue; there was a proposal for Tradeable Killing Rights which had been first mooted in a consultant’s report in 1985. Then a pooling system was proposed whereby farmers would receive an initial price at the farm gate and a further payout once the product was sold. As might be expected, the devil was in the detail.

Then came the dairy industry solution; farmers should be committed to a supply contract to a company to give certainty of throughput, with a mandatory requirement for a year’s notice of withdrawal of supply.

But it all came to nought. Farmers decided that the industry problems should be resolved commercially, rather than by regulation or external intervention.

Bill Garland, chairman of the Meat and Wool Section of Federated Farmers, expressed the commonly held view; “Any industry-wide solution that forces farmers to commit stock for a full season or go back to a national schedule will simply shift the problem of indebtedness and overcapacity back on to the farmer”.

So, any solution involving managed procurement was bound to fail for lack of support; the commercial solution resulted in the collapse of a couple of companies, with the inevitable financial pain. The procurement war was temporarily resolved – until new capacity was built.

That is the issue that will probably arise in this current round of talks of restructuring and changing the industry’s business model. The diversity of farm sizes and types, and the differing economic and political aspirations of sheep and beef farmers, will probably mean that universal support for a managed solution is unlikely to eventuate. There will always be some farmers who want to play the market – the Sunday night ring-around.

In the dairy industry, the virtually constant flow of milk necessitates an arrangement for the supplier and the processor to establish and maintain a mutually dependent relationship, so supply contracts are a no brainer.

With pastoral farming, such mutual dependency is not quite so vital. Producers can and do hold stock in the hope of a better price, they can occasionally sell to livestock traders and sometimes they under pressure to sell when the weather or the bank turns against them. Similarly, processors can scout around for supplies, offer incentives if necessary, and claim lack of space when they are under pressure. So supply contracts might be a boon in some circumstances but a burden in other situations.

If farmers can see that some of their neighbours are getting a better deal, or they think they need some flexibility, then the prospect of wholesale support for supply contracts is unlikely.

Unfortunately, the idea of having one big industry player and a bunch of small operators ‘to keep them honest’ will only exacerbate the problem as the small operators could undermine any supply contracts. There is the view that it would take only one competitor to cause a breakdown in the system.

The resolution of the industry problems will unfortunately require more innovative and complete strategies than piecemeal proposals.

P.S. A more detailed description of the ongoing saga of the recurring crises in the meat industry is contained in “Meat Acts – the New Zealand Meat Industry 1972-1997″ by Mick Calder and Janet Tyson.

Mick Calder says he’s a ‘generalist’ having started in agricultural science then marketing economics and trade policy, and finished in business management and administration, with elements of bookkeeping and legal drafting thrown in. His professional roles include former board secretary for the New Zealand Meat Board and later the NZ Lamb Company. He was co-author, with Janet Tyson, of Meat Acts – The New Zealand Meat Industry 1972-1997, which makes fascinating reading (Published 1999: ISBN: 0-9582052-2-1). He has written countless other reports, newsletters and articles for magazines and newspapers. He also maintains his own blog, Agriphile, at which this article has appeared.

 

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