A brief comparison of sheepmeat and milk solids prices since 1991 throws up some interesting facts. These give the lie to the belief that the dairy industry is consistently more profitable than the sheep sector, writes meat industry commentator Allan Barber.
The statement that there are three kinds of lie – lies, damned lies and statistics – is often attributed to Benjamin Disraeli, 19th century British Prime Minister, but it was popularised by Mark Twain. Students of two of this country’s best known (and generally most profitable) agricultural commodities may find it hard to believe, but you can’t really argue with the facts.
In 1991, soon after I started my agricultural career in the stock and station industry before moving to the meat industry two years later, the price of lamb hit a low point of $14 a lamb; mutton was even worse, being down around $4 a ewe at the meat plant. In contrast the 1991 dairy payout was $3.40 per kilo of milk solids.
For the last three years, the price of lamb has averaged $105, 7.5 times the low point of 1991, while in contrast the dairy payout has averaged $6.43 per kilo, less than twice the price 22 years ago. Now of course you can argue with some of the conclusions which this comparison allows – for example you could take a different base year when the lamb price was higher – but it is still true that lamb and mutton have been more profitable on average than dairy.
There are other factors to consider in a sheep-farming enterprise like the price of wool, returns from lamb pelts and by products, and the premium positioning of most of the products from sheep and lambs (for example high priced meat cuts, woollen carpets and clothing, high quality leather goods).
Much more than dairy and beef, at least for the fast food trade, lamb is a premium product which is dependent on consumer spending patterns. Prime beef and venison are the two other meat products which have a similar profile to lamb. Nobody can argue that the global markets for high priced commodities have been unaffected by the recession of the last few years.
The price comparisons all reflect the exchange rate which has strengthened dramatically against our main trading partners which makes it even more difficult to achieve price increases. For instance in 1991, the US$ was 60 cents to NZ$1 (84.5 today) and the pound was about 30p (55 p today), so the NZ dollar costs 41 percent more in US dollars and 83 percent more in sterling terms.
None of this will necessarily change farmers’ views that the meat industry is a cot case which can only be rescued by some yet to be determined intervention that may actually be worse than the illness it is attempting to cure. But I am somewhat puzzled by the bad rap the meat industry always seems to get when it has actually done a good job of producing products that the market is, as a rule, willing to pay a premium price for.
I think the answer to this conundrum is a combination of several factors – communication, behaviour, expectations, and volatility.
The meat processors and exporters have not been good at communicating what they need the farmer to supply, when they need it and to what specifications. Yes, there are contracts available which specify certain weights, grades, supply schedules and timing. But their reluctant uptake by suppliers suggests suspicion that they may be ripped off, unless the price is uneconomically high. Companies must get better at communicating and living up to what they promise.
Behaviour must improve on both sides of the fence. Meat companies must honour contractual arrangements and not pay a premium above the contract price for spot market supply; they should also stop using third parties and traders. Equally farmers have to honour their commitments, once they have made them.
Farmers’ expectations have a tendency to be unrealistic. When the Federated Farmers target of $150 a lamb was reached, there was an assumption this was a sustainable price which farmers fully deserved. Yet when, as was inevitable, our main markets put the shutters up and refused to pay the price, meat exporters get caned for dropping the price at the farm gate and shifting inventory at reduced price levels to get cash flow.
This year’s drought has also pushed stock into the plants earlier than usual and farmers get upset that the price drops, even though the livestock is worth a whole lot less. It also seems to me that the meat industry gets the blame when farmers pay more than they should for store stock and can’t make their margin on it.
The final factor is volatility which is a well known feature of commodity markets. If farmers can’t cope with volatility from one year to another, they shouldn’t be in the agricultural sector. They should get into something safe like local government.
So some people may argue with the facts, although not with much success because it’s hard to argue with statistics, and others may argue even more with some of my conclusions. But I shall look forward to the debate.