The last time I dared to question Meat Industry Excellence (MIE)’s desired reform of the meat industry, John McCarthy accused me of bias and warned me to watch out, if we are unlucky enough to run into each other. So this column will almost certainly result in another attack on my character and more threats to my personal safety! Allan Barber writes …
But after reading his Pulpit diatribe (Farmers Weekly 26 January), I can’t resist the chance to express surprise at some of the logic expressed there. He clearly believes the two cooperatives, Silver Fern Farms (SFF) and Alliance, are guilty of driving the market for sheepmeat down to the bottom solely because of their incompetence. The only way he says this will change is to vote more MIE endorsed candidates onto the boards.
McCarthy accuses media commentators and company executives of myopia in their industry predictions last year which have now turned out to be too optimistic. Climatic and political circumstances have changed considerably since those forecasts were made which largely explains the downward trend. Possibly we should all have forecast the closing of the Russian market to other Western exporters, the slowdown in China, deflation in the EU, port clearance delays in the USA and the drought in much of this country. But when those forecasts were made, none of these factors were as clear as they are in hindsight.
Meat exporters must trade in a dynamic market in which demand and prices change by the day and even by the hour. If they pay more for livestock than the market return justifies, they are in effect subsidising the farmer at the company’s expense. In the case of a cooperative this would mean paying more to some suppliers at the expense of those who are not compelled to sell when capacity is short. So logic demands companies pay a market related price, neither excessively above nor below that level.
This becomes tricky when supply is short and premiums have to be paid to attract enough to fill the available capacity. There is a temptation to drop the price in times of plenty to compensate for losses during the rest of the year, but this is where supply contracts are an important tool for farmers.
I accept farmers have a right to feel disadvantaged if they are forced to sell most of their draft at a time of peak supply when prices are at their lowest. But if this happens more than very occasionally, surely it must be time to look at ways to mitigate the problem: change your methods of breeding, feeding or stocking, and sign a contract you believe you can supply.
Meat processors I have spoken to are adamant they honour contracts, contrary to views expressed which suggest companies renege on contractual commitments as soon as supply exceeds capacity. Dean Hamilton, chief executive of SFF, told me the company could have saved $30 million over three years if it hadn’t honoured its Lamb Backbone Contracts at a high fixed price. It was the biggest contract SFF had ever written, but it turned into an own goal when the market fell.
The grey area is when, in times of drought, suppliers want to shift much bigger volumes than their contracted volume. There is no obligation for a processor to accept the extra volume and certainly not at the contract price, if the schedule has dropped below it. Generally, the companies say they will treat over and under supply cases on their merits; contracts can be renegotiated in case of need, but they don’t let suppliers simply walk away from a contractual commitment.
If livestock supplied under contract does not meet the agreed specifications, the normal rule is to pay that week’s schedule price for the grade supplied.
When trying to read and understand the market fluctuations, it isn’t easy to keep up with the price trends unless you are trading every day. I can hear the protests about daily trading which should not be necessary, if all orders were placed against a predetermined buying programme. Unfortunately, the meat trade is such a complex matrix of products and markets, it is impossible to sell everything forward at a guaranteed price.
The processors, particularly SFF, were badly bitten three years ago by being caught with too much inventory in the freezers which they couldn’t sell as quickly as they would have liked. This season I am assured exporters are clearing product by meeting the market at current prices which in the case of lamb are not as good as a year ago, whereas the beef price is still better.
Hamilton says in contrast to last year when China was paying good money for large volumes of carcases to be further processed, SFF is now cutting everything at a higher cost but this is able to be sold into all markets, including the US despite the port problem.
So is McCarthy justified in his accusation the cooperatives are driving down the lamb price because of their last man standing mindset while ignoring the solution of industry consolidation and collaboration staring them in the face? The problem is this year’s drought has given a timely reminder all available capacity is sometimes needed, while market forces have been very challenging.
It’s good to seek ways of reforming the meat industry and MIE’s strategy paper may have the answers when it comes out in March. Until then the companies will have to box on as best they can and hope for a recovery in the market.
Allan Barber is a meat industry commentator. He has his own blog Barber’s Meaty Issues and can be contacted by emailing him at email@example.com.