Part two (The Present) of Allan Barber's series of three articles examining the evolution of the NZ meat industry.
Today’s NZ meat industry has many of the same characteristics as the mid 1980s, but a number of things have changed, mostly for the better, writes Allan Barber.
In my opinion, all parts of the meat industry (farmers, processors and exporters) have done a very good job of producing, processing and selling a vast range of products into a big range of markets. Since deregulation and subsidy removal, the sector has had to cope with a significant change in market demand while modernising farming methods and processing plants, achieving functional industrial relations and employment policies, developing more sophisticated products, improving packaging and coping with ever more stringent health and safety, hygiene and biosecurity compliance requirements.
New Zealand has had to do a number of things over the years to meet the demands of export consumers and what worked last century is no longer remotely satisfactory. The industry has come a very long way, particularly in the last 30 years since the removal of farm subsidies exposed our commodities to the cold winds of international competition.
Key developments have occurred in:
- Farm management systems and environmental compliance.
- Better genetics leading to more commercially successful animal breeding.
- Technology transfer and productivity improvements on farm.
- Trade access negotiations and free trade agreements.
- Food safety regulations, including equivalence agreements with major trading partners.
- Animal ID and traceability.
- Diversification of products and markets.
- Improved levels of plant automation (reduction in production costs from ca. 50% of costs to 30%).
- Improved working conditions and industrial relations.
- Plant upgrades and improvements to comply with trading partners’ customs regulations.
- Electronic processing aids such as stunning, immobilisation, accelerated bleeders, back stiffeners and stimulators.
- Electrical stimulation, chilling rates and ageing time for improved eating quality.
- Sophistication of meat packaging and shelf life.
Farming has become more productive (producing more from less), in spite of complaints about prices paid for livestock, especially lambs; farmer incomes are significantly higher than they were in the late 80s, and many farmers have developed additional income streams to supplement their incomes. Farming is now more flexible than it used to be. Some examples:
- Sheep and beef farming has become more integrated than it was, compared with the previous strict demarcation between breeding and finishing properties,
- There is more focus on producing the best lambs for their meat yield instead of dual purpose animals,
- Contract grazing has been a strong recent feature of beef income (although this will obviously take a hit until the milk payout improves),
- Pasture quality is seen as critical and while fertiliser application may vary with profitability, it is regarded as an essential input.
But there are still opportunities for improvement with the best farmers outperforming the average by a wide margin. Bringing the next 30 percent of farmers’ performance up to match the top 20 percent would add hundreds of millions of dollars to GDP every year.
The Red Meat Profit Partnership, incorporating B+LNZ Ltd, six meat companies, two banks and an accounting firm, is in the process of investing $65 million to provide farmers with tools and technology to measure and monitor on-farm performance. The Farm IQ programme with an investment of $124 million is also designed to improve farm performance and measurement, while tracking the genetics which contribute to optimum eating quality.
In my view, the meat processing part of the industry has come light years in the last 30 years, although to listen to Meat Industry Excellence’s complaints you wouldn’t think so. Plant configuration, efficiency and employment relations have improved dramatically since the days of single shift operations and union stranglehold on workplace agreements. In the bad old days Talley’s battle to put all staff on individual contracts against Union wishes would have resulted in months of lockouts, while now there are enough employees on individual employment agreements to keep the plants working.
The industry is still committed to the concept of the weekly schedule which provides a weekly snapshot of the value of the average carcase, based on purchase prices, direct and indirect plant costs, and a basket of currency adjusted exchange rates. The price is then modified according to the relative scarcity or availability of livestock, usually in the form of a premium.
I have long argued for more contractual supply, although to a great extent it appears to be farmer preference to continue selling at schedule, either to the same company or to the highest bidder. It will always be impossible for companies to guarantee a firm price for all livestock for a season, but now there are far more fixed price contracts available for stock that meets defined specifications of weight, grade, supply numbers and time of delivery. There remains work to be done to ensure farmers are rewarded for actual yield and eating quality, but work is in hand both in New Zealand and Australia to make this a reality.
However not all product, even when it meets certain criteria, can always be sold to the highest paying markets whether for reasons of seasonality, lack of a contractual order programme, or insufficient availability of product to meet the specification required by a market programme. A successful example is the chilled lamb programme pre-Christmas and Easter which must be processed and shipped within a tight time-frame, hence the need for contracts to guarantee supply. However after Easter, when our lamb kill normally reaches its peak at the same time domestic lamb comes on stream in the UK and Europe, prices inevitably drop and there is no premium for a product, however good, which must be frozen and held in inventory.
A great deal of work has gone into promoting the health and taste benefits of our grass fed prime beef to markets like Japan which traditionally prefer grain-fed, marbled beef. It’s been a slow process, but there are definitely signs of our grass-fed beef gaining market acceptance and, in some markets, preference.
Co-products, often called the fifth quarter, are essential to farmer and processor profitability and the end uses for these have expanded enormously with the costs and methods of capture improving over a similar period. While standard co-product revenues are included in the schedule calculation, the most sophisticated products, for example for medical end uses, must ultimately go towards company profitability to compensate for the cost of recovery. Wool used to make up as much as 50 percent of sheep farming revenue, but those days are long gone.
The meat industry is also constrained by market access which may be affected by quota, tariff rates and non tariff regulations – for instance China which has fast become the second highest market for our beef and lamb does not yet permit any chilled meat from New Zealand (Australia has 10 plants licensed) and several of our meat plants have passed the audit for China supply, but the CNCA (the Certification and Accreditation Administration of the People’s Republic of China) has not listed them, so they are excluded from one of the best paying markets for meat and co-products. However, it looks as though John Key’s China visit has achieved what is expected.
One area in which the meat companies come in for criticism, particularly from farmers who believe they are missing out on a contribution to their earnings, is that of added value production. While the list of products that can be called value added is relatively short, it is an expensive process to research, develop and promote high value consumer products. It must also be questioned whether farmers can lay claim to a share of any profits, unless they have also shared in the costs of investment in value-adding production, R&D, packaging and marketing.
Just putting two meat cooperatives together and expecting them suddenly and miraculously to become a producer and marketer of fast moving consumer food products is naïve and ridiculous. This is why I have consistently defended meat company performance and questioned the logic of merging them, although I admit meat companies are guilty of irrational procurement competition, paying some suppliers more than others and using third party agents.
At least the dairy downturn has put a stop to the pressure to get the meat industry to imitate dairy, because Fonterra, previously held up as the ideal, has now proved to have feet of clay. Far too many executives paid a fortune, too much milk converted to commodity production, steadily declining share of total dairy farmers, and a number of PR disasters, all against the background of low payouts, none of which paints a picture of a company in control of its destiny and certainly not one to emulate.