Last week Jeanette Maxwell, Federated Farmers’ Meat & Fibre chair, sent a letter to the chairmen and chief executives of the five major sheep meat processors and exporters. The letter asked them to suggest how the parties could work together for the good of the industry. Allan Barber has been looking at the response to date.

So far one company, AFFCO, has replied formally, but no doubt others will respond in due course. Maxwell sees this as an age of ‘collaborative governance’ in which farmers and meat companies must go forward together instead of fighting each other. She says there’s nothing to be gained by rattling the cage to no purpose and the intention of the letter is to start the conversation between the parties.

The last twelve months have been seriously stressful, if not disastrous for the meat industry. A year ago, the companies were paying an unsustainable $8 a kilo slaughter weight or around $150 per lamb, but the market price and exchange rate combined had already sent this into serious loss making territory for the processors. Just how serious was confirmed by the published annual results from Alliance and Silver Fern Farms, although Blue Sky Meats’ result for the period ended 31 March gave a good indication.

This year, the boot is on the other foot. The lamb schedule is in the mid $4 range, with a 17.5 kilo lamb worth around $80. Whereas last year was unsustainable for the processors, this year is unsustainable for farmers. Hence Feds’ concern, of which this enormous volatility is the main cause, while the climate conditions – drought in many parts of the country – make the situation even worse.

As Maxwell says, price volatility and drought lead to substantial culling of ewes or more drastically to sheep farmers exiting the industry or changing their land use. If there were more price stability, farmers could afford to carry extra ewes in a good year and buy in feed if needed.

One of the solutions I have always recommended to create greater consistency of outcome and cooperation between farmer and processor is contractual commitment at a guaranteed price in exchange for volume and time of supply. But Jeanette Maxwell tells me this isn’t always possible for various reasons.

On the one hand, some meat companies are not willing to offer contracts, preferring to buy as required on the spot market; while a number of farmers like to supply at schedule on the day, either because that’s what they have always done or they like the flexibility it gives them, in case the weather conditions turn against them.

She says the price required for sheep farming to be profitable is hard to estimate, because it will vary between farmers depending on the amount of debt servicing. When Feds waged the campaign for the $150 lamb, that was the price they saw as necessary to cover R&M, fertiliser and debt repayment as well as making a cash profit. It also included a good price for the wool, but unfortunately wool returns have been almost as volatile as meat.

It is a shame that the one time in recent history that the price got up to $150, it was only sustainable for a very short time, if at all, and the market reacted against it at the same time as our exchange rate kept strengthening.

I am sure the meat companies will generally be willing to talk constructively to Feds about the importance of working together to minimise price volatility. But equally it’s difficult to see what they can do to improve things: the exchange rate, market demand and supply are the three main factors affecting the industry.

Apart from careful hedging, the exporters’ tools for coping with the dollar are limited; demand appears to be recovering slowly, but it is too soon to say there’s a strong base to the market, while supply driven by drought may mean there will be too much inventory around. This of course may depress the market price again.

Industry profitability is also a key factor. All the meat companies have to get themselves back into profit this year and, while paying as little as possible will drive more farmers out of sheep, paying more than they have to is not an option.

Therefore, the parties must hope for an improvement in the market, hopefully a stable if not lower exchange rate, and continued commitment to sheep farming to maintain a reasonable national flock size. And some rain in the right regions wouldn’t come amiss.

Allan Barber is a meat industry commentator and has his own blog Barber’s Meaty Issues. This article has also appeared at interest.co.nz.