Allan Barber is not a frustrated farmer who has to worry about the prospects for the new season or put up with receiving less money than expected for his stock, but for the sake of sanity and balance he believes it to be necessary to examine the factors affecting market returns.
After a very relaxing holiday blessed by good food, wine and weather, I returned to find the north had been hit by almost incessant rain, meaning a late spring, and the meat industry beset by rumours of procurement wars combined with dire livestock predictions.
At least while I was away, I had caught up with the OIO decision in favour of the Shanghai Maling investment in Silver Fern Farms (SFF) which, unless you are rabidly opposed to the deal, is good news. If anything it suggests more not less meat industry stability, although conspiracy theory would indicate a future probability of a newly capitalised SFF swallowing up Alliance, now suddenly the poor relation in the deep south. This depends on several factors, such as Shanghai Maling’s appetite to invest more capital in an industry with mediocre returns and spend money on a war, the success or failure of Alliance’s cost reduction and marketing programmes and its ability to convince suppliers of the advantages of belonging to a pure cooperative.
However, nothing I have heard or read actually convinces me the bad old days of the 1990s, when procurement competition was at its peak, are about to return. Of course, only time will tell, but a lot of things have changed in the industry – it is much more efficient across the board than 20 years ago, the senior executives are driven less by testosterone and more by rational business principles, the companies are all much better capitalised and there is much greater cooperation between the companies and within the total industry.
The main debate is, and will always be, about what makes up the value of the product and how this should ideally be shared between producer, processor, retailer and all intermediaries on the way. Apart from forward contracts, the weekly schedule is the key determinant of the price paid to the producer, the schedule being calculated from a basket of global prices that represent all the different cuts for the species in question less processing costs. There will be seasonal premiums applied when necessary to attract livestock during times of scarcity.
The other part of the debate concerns how much of the product value should be captured by the final seller, normally the retailer. My perspective on this has always been that, for better or worse, the retailer takes the largest amount of risk, unless a sale or return contract has been negotiated, unlikely when a perishable product is shipped from the other side of the world. New Zealand’s meat industry has occasionally dipped its toes in ownership of overseas assets, but generally this is too costly to undertake with any long-term commitment.
SFF’s deal with its Chinese partner appears to have the advantage of overseas investment without the need to come up with any capital, but only time will tell whether this arrangement is beneficial or the equivalent of selling the company’s soul to the devil. The proof of this particular pudding will be in the amount of product sold through the partnership and the impact on livestock prices paid to suppliers.
To get an idea of whether New Zealand farmers are worse off than farmers in other countries is almost impossible, given the variations in government support, regulations, costs of doing business, retail environment and trade agreements. But I have tried to compare this country with Australia which may provide a useful benchmark, although like all comparisons this one is fraught with difficulties and inconsistencies.
The first point concerns labour costs which in Australia have consistently been higher than other countries including New Zealand according to a number of international consultancy studies over the last 25 years. However, this does not seem to be reflected in the respective shares of the domestic retail price in each market. In 2015 an Australian report by the Australian Department of Agriculture showed the 2014 saleyard price of a steer was 36 percent of the retail value of the primal cuts, while a calculation by Beef + Lamb NZ the same year suggested the ex-farm sale price of lamb was 34 percent and prime beef 35 percent of retail. A more recent study by B+LNZ across both species indicates the on-farm component is 49 percent of the total FOB value, while processing and added value make up 30 percent.
These figures do not allow any firm conclusions about trans-Tasman price relativity, but it’s worth noting a comment from Sydney-based Aginfo which says there is currently “a massive transfer of margin to cattle producers which is unsustainable”, caused by a battle between the major Australian retailers which take 30 percent of all beef produced in Australia. Although exports are the main price determinant, the size of the domestic market makes it a more important player than in New Zealand.
If our meat companies were guilty of making exorbitant profits, farmers could be forgiven for feeling badly treated, but on balance New Zealand farmers seem to be quite well served.