Comment: Plenty of hope, but no solutions yet, says Barber

Allan BarberThe Red Meat Sector Conference, held in Auckland on Monday, was very well attended by 320 people from all parts of the industry.

There were interesting presentations from overseas and local speakers. The former spoke eloquently about the outstanding global prospects for the red meat sector, while the latter had plenty of statistics to illustrate their concerns about sheep and beef farming debt and shrinking livestock numbers.

The Prime Minister opened the Conference with an upbeat talk about an $8 billion industry of great importance to the country. While acknowledging farmer dissatisfaction with the status quo, he said it was up to the industry to drive change, but the government was sympathetic and supportive.

He played up the positive effect of Asia’s growing wealth compared with a weaker Europe, alluding to Chinese forecast that its demand for soft commodities would remain buoyant, while hard commodities would plateau. However, it is important to grasp this opportunity in the face of competition from other countries.

He was wise not to step into the hornets’ nest of meat industry politics with bright ideas on how to fix the internal problems, both real and perceived.

There was plenty of farmer representation at the Conference from Beef + Lamb NZ’s directors and council members, Federated Farmers and the Meat Industry Excellence Group. Nothing the public speakers said will have persuaded the farmers that a solution to the industry’s difficulties was just round the corner, but at least they will have gained some hope about world prospects for the sector.

Richard Brown, UK based director of global food research consultancy GIRA, gave an entertaining presentation which underlined global increases in meat consumption and prices, notably in red meat. In particular, he noted how UK prices for beef and sheepmeat have strengthened since the global financial crisis, while world prices have been strong, assisted by the increase in China’s consumption.

Farmers have increased their share of the total price paid for beef, but sheepmeat tells a different story with producers’ share of the price paid by consumers declining. China has been the real good news story for New Zealand sheep farmers with higher volumes and prices compared with static local production. This trend will continue sharply, as Chinese sheepmeat consumption broadens from ethnic minorities to the fast growing middle class.

The sheep and beef industry needs a robust business case, says ANZ rural economist Con Williams. Photo, B+LNZ.ANZ rural economist, Con Williams, painted a more downbeat picture based on a 92 percent increase in farm debt over the last 10 years, increased liquidity risk and an average of 0.7 percent profit compared with six percent for government bonds.

He drew attention to some key facts, including 20 percent of sheep and beef farms have 60 percent of the debt, while the top 20 percent of farms are way more profitable than the 65 percent in the middle of the ruck. The profitability of the top farms is based on productivity, economies of scale, investment strategies and timing as well as greater lambing profit. The challenge remains to get the rest of the farmers up to this level of performance, as identified in the Red Meat Sector Strategy launched in 2011.

Williams was not afraid to venture into red meat industry politics. He gave his view that a company controlling 80 percent of processing and marketing was the ideal; and, although restructuring costs would be up to $1.6 billion to achieve this, avoiding annual processor losses of $150-$200 million like last year would provide a reasonably good return on the investment.

I’m not sure he has thought through all the ramifications of this, particularly since the processors don’t lose that amount every year and the losses were effectively paid to farmers in procurement costs. It would be the banks, not the farmers, that would wear the bulk of the restructuring costs.

Rabobank's Hayley Moynihan - There is no magic bullet. Photo, B+LNZHayley Moynihan, senior analyst with Rabobank, talked about the changing nature of supply chain dynamics and emphasised the risk the red meat industry faces from the shrinking production base which was not a sustainable model. In contrast to Williams’ leaping to a solution, she was careful not to prescribe what should happen, but made the point that any change must be based on delivering greater value to the consumer.

A continued focus on price may come at the expense of an efficient supply chain. This was more in keeping with the old model of spot procurement and selling, whereas the present model was more about contractual relationships. This may change in the future to what Moynihan termed a circular economy. The message here was that the industry definitely has to change to a more collaborative way of operating because the present system is not sustainable.

It will be interesting to see whether the different parts of the industry recognise what they were being advised and just how it might be translated into reality.

Allan Barber is a meat industry commentator. He has his own blog Barber’s Meaty Issues and can be contacted by emailing him at allan@barberstrategic.co.nz. This item has also appeared at www.interest.co.nz.

 

 

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