Tag Archives: Europe

Is this the year for a sheepmeat strategy, asks Barber?

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Allan BarberIs this the year for a sheepmeat strategy, asks meat industry commentator Allan Barber in his latest column. The key question for the meat industry this year is whether anybody will make any money, he writes.

After last season when farmers enjoyed unprecedented procurement prices and the meat companies lost millions of dollars as a result, prices have headed south and look set to remain there for the foreseeable future.

Sheepmeat is the product most under threat with the traditional markets all showing serious signs of indigestion. As an example, a US importer has been reported as saying he has a year’s worth of inventory and can’t buy any more and neither is anyone else. This signals a major problem for middle cuts like lamb racks, while Europe isn’t exactly rushing to buy any product either.

This explains the amount of cheap sheepmeat available on our domestic market, although unfortunately local consumers have been turned off buying lamb as a standard part of their diet by last year’s high prices – no different from the rest of the world; and expecting New Zealand’s minute population to absorb any significant part of the oversupply is a bit like expecting Fiji to win the World Cup or the Black Caps to win the series in South Africa for that matter.

Beef may resist the worst of the price downturn because US demand remains steady against a backdrop of falling domestic cow numbers and consequently an increased share for imported beef. Asian demand will also remain firm, while New Zealand exporters may be able to pick up some of Australia’s market share, as Australian supply to the USA is anticipated to take the lion’s share of the increase there.

But even beef will continue to struggle under the impact of our dollar which is set obstinately at about 84 US cents with the greenback unlikely to strengthen at all, unless Congress can agree on a fiscal solution to the enormous American debt problem. In spite of averting the fall over the fiscal cliff, the US really hasn’t solved its long-term problem, merely postponed a decision.

The main difficulty for sheepmeat is the amount of inventory held by wholesalers and exporters which is waiting to be sold into a market which doesn’t need it and, even if it did, can’t afford to pay a price for it which will compensate for our exchange rate sitting at 52p and 0.63 Euro. This inventory problem will only be exacerbated by another season’s production which will hit its peak in less than three months.

If my pessimistic assessment is even only half correct, 2013 bears all the signs of an extremely difficult season for all participants in the sector. MPI’s forecast for farm incomes, down on last year, is still reasonably positive at least in historical terms, but it must come under pressure from any further price drops or cost increases. There is most unlikely to be any spare cash around.

After the beating taken last season by the processors, shown factually in the annual accounts of Silver Fern Farms, Alliance and Blue Sky Meats, and by implication in the results of the others, all the meat companies will be under pressure to get back into the black. The only way they can achieve this is to reduce procurement costs, increase operational efficiencies and sell inventory into the market, preferably with a profit margin on what it cost them.

This last one will be by far the hardest. There is already plenty of evidence of product being offered at very competitive, or silly, prices in spite of Keith Cooper’s claim before Christmas that working capital tied up in inventory is ‘good’ debt because it restrains companies from dumping product. Now if that isn’t a case of making a virtue out of necessity, I don’t know what is.

Logically if there is an inventory problem, it makes sense to quit it at the going rate rather than waiting for the market to recover by which time there will be more inventory in the freezer tying up more working capital.

The meat industry is becoming increasingly a division between sheep (very hard to make a consistent profit) and beef (quite or extremely profitable, mostly because of the livestock sourced from the dairy industry). Those companies which specialise in beef from dairy regions, notably Greenlea and Universal, appear to be very profitable without interference from the volatility of sheepmeat pricing.

Alliance has traditionally been the outstanding performer among the processors with a commitment to the sheep industry. Silver Fern Farms has reinvented itself as a company with a significant beef business which has reduced its vulnerability. But as last season’s results showed, the sheepmeat business placed serious pressure on their balance sheets which will inevitably continue throughout this year.

This may be the year when some serious strategic thinking is applied to finding a viable industry model for sheepmeat alone, instead of trying to find a single solution for the meat industry as a whole.

This column has appeared in NZ Farmers Weekly and interest.co.nz and is reproduced here with permission. Allan also has his own blog Barber’s Meaty Issues.

 

Outlook cloudy for 2013

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Allan BarberHappy New Year to you all. Meat industry commentator Allan Barber has already had his head down thinking about what’s likely to pan out for the industry later in 2013.

His latest blog, which also appears at www.interest.co.nz, talks of a weak US dollar, weak export demand and low prices for Kiwi producers. However, Allan’s picking that there will be less effect on New Zealand beef than on sheepmeat and he foresees more pressure on lamb this year.

Looking globally, he sees aversion of the fiscal cliff in the US, will allow US economic recovery to emerge, will also allow recovery in China and for Europe to “move further back from its own economic disaster”. In turn, both New Zealand and Australia should avoid the worst impact of an extended downturn in main markets, he says.

His “big questions” for 2013 are whether all meat companies will survive the year and whether the increasing use of farm data will assist the co-operation between farmer and meat processor. Read more …

Debt is good under some circumstances, says Barber

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Allan BarberAfter Allan Barber’s column last week about meat industry debt levels, Keith Cooper, chief executive of Silver Fern Farms, took him to task for incorrectly reporting the situation with Silver Fern Farms’ debt facility, he writes in his latest guest blog.

I stated that these expired in September 2012 and therefore the company was operating on a temporary extension. The correct position was that the debt facility was originally negotiated for two years from September 2010 and consequently due to expire in September 2012. This remained the position at balance date in September 2011. However in the 2012 annual report, the facility was stated as expiring on 31 December 2012.

Clearly, the company had arranged a three month extension at some point before the original two year facility expired and this was not a temporary facility, as I implied. Nevertheless, it was no more than a three month extension, while the next longer term arrangement was being negotiated.

I apologise for any incorrect interpretation, but still maintain the company’s current debt level at balance date was higher than could be considered comfortable.

However, in an interview with Jamie Mackay on the Farming Show last week, when asked to comment on the industry’s debt level, Cooper gave his opinion that the debt was a good thing. Because it was tied up in inventories, it would ensure the industry acted responsibly. This is almost exactly what I wrote last week, although I saw the discipline on the companies as a necessity, not a virtue.

In Cooper’s radio interview, he stated after record prices last year, meat companies are reining things in.

“It’s a damn good thing we do have stock in store and we do have high debt because that means meat companies are acting responsibly, and are feeding the product to market to create stability of price. I’m quite happy that us and other companies have debt because that means they’ve got stock in store and that means we’re managing markets well.”

I must give Keith credit for being unreservedly a ‘glass half full’ kind of guy which you have to be to survive in what I believe is New Zealand’s toughest industry. He promises farmers that things will improve.

“We are living in volatile times. There will be volatility, but through the volatility we will see a steady increase in the price we will receive from offshore,” and he expects meat companies will pay farmers around 90 dollars per lamb this year.

I’m not sure the glass is quite as half full as Keith Cooper suggests, especially in the sheep meat market. Although lamb leg prices in the UK are holding fairly well, especially for chilled product, prices for middle cuts, like racks, loins and tenderloins, in North America and Europe are under pressure.

The price of loins and tenderloins have dropped by as much as 30 percent in the last couple of months, while there are fears of another collapse in lamb rack prices because of competition from low priced Australian product. As a result, importers are not placing orders for New Zealand lamb, because they remember the last time prices collapsed.

The Middle East has gone quiet on lamb shoulders because of cheaper Australian product, although China is still firm. Here, it appears New Zealand exporters benefit from less Australian competition with fewer China licensed plants in Australia.

All this explains why the New Zealand consumer is able to buy plenty of well priced lamb available on the domestic market. But this won’t provide more than a minimal contribution to managing the existing inventory levels and it certainly won’t cope with next year’s peak production. The industry will be keeping its fingers and toes crossed for an early economic uplift in our main markets, UK, Europe and North America, because otherwise the glass won’t have much in it at all.

Allan Barber is an agribusiness commentator, with particular interest in the meat industry. He has his own blog Barber’s Meaty Issues. This item has also appeared at www.interest.co.nz.

Optimistic signs for coming season’s red meat trade

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After some harrowing experiences last season for the meat industry, both processors and farmers, 12 months on things are looking up. This sense of optimism hasn’t yet been reflected in prices from the meat companies, but statements from those in the know strike a perceptibly more positive note, writes industry commentator Allan Barber.

Last year, the lamb kill was down by a million, there was drought in significant livestock areas, the dollar was too high and so was the procurement price for lamb. While beef remained relatively unaffected by the hype, the price really not changing much in a year, sheepmeat was a completely different story. Driven by the unholy combination of scarcity and tight shipping deadlines for the Christmas trade, the procurement price hit $8 a kilo and struggled to get down from that level.

The net result was too many buyers chasing too few lambs which were also allowed to put on too much weight. The export markets got a severe dose of indigestion and inevitably inventories built up fast on both sides of the world. All this time, the New Zealand dollar stayed obstinately high.

We will find out in November how badly this set of circumstances affected the profit and balance sheet performance of the meat exporters, although Blue Sky’s result to the end of March gave a pretty good indication of the effect of the first six months of the season.

Farmers won’t be as unhappy as the processors and exporters because they received more for their stock than it was worth and, although the lamb price has now dropped from $150 to below $100, this is still better than in many previous years. According to Keith Cooper in Silver Fern Farms’ (SFF) news release last week, he predicts the price will bottom out at about $4.80 per kilo after Christmas, equivalent to $90 for an 18.75 kg lamb. It will then rebuild to $5.80 or $109 by this time next year. Cooper has also said last year’s pricing got way out of kilter and won’t happen again this year.

Cooper’s optimism is based on favourable European buyer response in the last couple of weeks, culminating in the European food fair at SIAL in Paris last weekend. UK supermarket chains also seem to be positive about the forthcoming chilled New Zealand lamb season which starts with Christmas and continues until British lamb starts to appear in the chillers after Easter.

SFF’s news release provided an interesting, if slightly puzzling, piece of information which stated that Marks & Spencer had awarded their new contract for chilled lamb to Alliance, having dealt exclusively with SFF for five years, because “we could not offer Organic lamb to M&S.” As far as I can understand, and from memory, M&S have always insisted on knowing where their lamb came from, eventually insisting on identifying the lambs’ farms of origin and traceability, but organics have never been a requirement in the past.

Cooper subsequently confirmed to me that the M&S tender specified a proportion of organic supply as part of the supply which SFF couldn’t guarantee to fulfil.

Alliance suggested that it was not required to supply certified organic lamb under its new contract, although all suppliers involved belong to the company’s Hoofprint programme which measures their carbon footprint. In fact, it’s hard to see how enough organic lamb could be available, especially in the pre-Christmas period, while there is little evidence the UK supermarkets are willing to pay a sufficient premium for organic supply.

In contrast, beef prices appear set to continue stable, underpinned by drought conditions which have affected feed supply and cost in the USA; however, any weakness in the New Zealand dollar would inevitably flow through to better livestock prices, much as meat companies might want to hang onto any bonus they receive.

I imagine meat exporters will be keen to put what was reasonably torrid 2011/12 season behind them and bed in the capacity changes they have decided on, so their new season’s performance can benefit. Sheep farmers can’t aspire to the $150 lamb, but they can expect more certainty and consistency on which to base their farm business.

This article has also appeared at www.interest.co.nz.

Deer industry about to do “hard yards’

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The time for talking is over and the deer industry is about “to do the hard yards”, says Deer Industry New Zealand (DINZ) chairman, Andy Macfarlane.

Writing in the latest Deer Industry News, Macfarlane says the “industry prize of profitability should be enough to keep us focused on the job.”

The goalpost presented at the 2012 conference has been “determined, reviewed and confirmed as $1.27 per kg venison increase in EBIT by 2022″, achieved from productivity gains alone, Macfarlane explains.

“We also believe we can increase venison tonnage by 50 percent in that time, while simultaneously improving the market return from venison, hence adding to that $1.27 per kg.”

The 50 percent increase in tonnage takes venison output back to a little less than 2007 and 2008 levels, he says, but from an organised stable herd rather than from a reduction of capital stock. The Europe venison marketing strategy and formal access into China and Korea for venison co-products and velvet underpin the on-farm market return. Member processors are now putting together their three-year marketing plans for submission to access increased DINZ funds.

In addition, after consultation with farmers, AgResearch scientists, vets, farm management consultants, processors and educationalists, Primary Growth Partnership funding is being sought from government for on-farm productivity initiatives to deliver an integrated initiative “that we are confident will deliver the additional $1.27 per kg of venison sold,” says Macfarlane, adding that by his calculations it should generate additional industry EBIT of $42 million a year.

To show commitment “by purchasing some of our own ‘training gear’”, industry is being asked to contribute 4 cents per kg of venison fro seven years (initially $900,000 a year).

“The cost is temporary but the return – over $30 per $1 of levy money initially invested – is permanent.”

The title of the PGP bid is ‘The next generation – premium by nature and design’, which he says is significant.

“We have a premium product sold in premium markets. Our animals are pasture-fed and raised in a natural environment. We are poised for our third generation of deer products, produced by our third generation of deer farmers.”

The latest Deer Industry News magazine (Issue 56, October/November 2012),  is out now. 

 

 

Positive signs in Europe

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There are positive signs in Europe for New Zealand lamb, beef and venison meats and co-products according to Silver Fern Farms which has finalised its plans for Christmas chilled lamb sales and completed its overall sales plan for 2012/2013 with positive outcomes, it says.

The company’s sales teams have been active in Europe over the past two weeks, culminating in the European food fair SIAL in Paris last weekend.

“Working with our Aalst office team in Belgium, we have met and concluded business with many European customers who appear to have regained confidence based on supply and stability of value, which is underpinning the overall market sentiment from European customers,” says chief executive Keith Cooper.

For general manager sales and marketing Glenn Tyrrell, this early confidence is a healthy sign. “It will likely lead to sustained demand and relising on food service delivery cards, something which has been lacking lately due to the price hike in 2011,” he says.

In the UK, Marks and Spencer (M&S) recently put up their annual six month supply of chilled NZ lamb for sole tender. “As we could not offer organic lamb to M&S, the Alliance Group picked up this tender. While unfortunate, given the effort from both Silver Fern Farms and suppliers who have supported M&S for the last five years, our priority is to maximise organic and overall chilled supply to Tesco which has fully supported development of our branded retail packs in their store,” says Tyrrell.

Silver Fern Farms continues to be optimistic on beef with a prediction for schedule prices to farmers of $3.60 a kg during the season heading to $4.20 per kg, according to Cooper. “Venison is forecast to track up from a low of $6.70-8.00 per kg next October and lamb is likely to bottom out at peak season post-Christmas at $4.80 per kg and will progressively build to $5.80 per kg this time next year,” he says.

“It is clear the European market cannot be taken for granted,” comments Cooper. “Market forces over 2011/2012 saw a downturn in sales and a major price correction, in market and at farm gate. Now this has passed, many customers are looking to relist products but they are also looking for marketing support and price stability. These opportunities fit particularly well with Silver Fern Farms’ strategy of creating value in the way of a truly integrated value chain – linking consumers to farmer suppliers.”

 

Offshore worries persist, says Alexander

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Some weekend reading for you. In his latest BNZ Weekly Overview (18 October 2012), written during a trip to Europe, Bank of New Zealand economist Tony Alexander says offshore worries persist.

In Europe, the tipping point at which the need to maintain social cohesion outweighs seemingly sensible and necessary economic policies “is the closest it has been since this crisis started.”

He notes various central banks around the world printing money (he doesn’t advocate it for NZ), the increasing media discussion of alternative economic models and rising support in the UK for leaving the EU. He points to soaring global food prices, social tension and international divisiveness resulting from weather-induced crop failures as “very concerning” and go a long way toward explaining why his view on prospects for NZ growth is relatively sanguine.

“We are not going to boom given that people are sensibly concentrating in keeping debt ratios down, there is restraint on some price-based companies from the high NZ dollar (which will remain high), we look fundamentally good to investors as they compare economies and falling food production overseas means higher demand for our commodities and the systems we use to produce them,” he writes.

According to Alexander, challenges include: to facilitate the adjustment of some sectors to a permanently high exchange rate which they cannot live with in the long-term; “get off our butts to take advantage of the demand for our agricultural expertise”; upgrading infrastructure; improving connections between NZ businesses and those overseas; addressing the Auckland housing crisis; and building up public financial reserves to assist during the next crisis.

In addition, Alexander has set up a Facebook page, specifically for discussing the NZ-China relationship and as a tool for disseminating information and “furthering my own still inadequate knowledge,” he says.

The Weekly Overview will be available at the BNZ website in due course, where you can also subscribe by email to receive regular copies.

 

Distributing in Europe

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Those distributing New Zealand meat in Europe might find the latest video in New Zealand Trade & Enterprise’s ‘Succeeding in Europe’ Beachead Programme video series helpful.

‘Distribution into Europe‘ outlines the distribution models available in the European market. The ‘Succeeding in Europe’ series is aimed at providing valuable insights and highlighting key considerations for New Zealand companies to succeed in Europe.

To watch previous videos in the series or clips visit NZTE’s YouTube channel at www.youtube.com/nztevideo

New meat inspection programme gets thumbs up

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Successful trials of a new meat inspection programme have resulted in the thumbs up from major overseas regulators, reducing costs for meat exporters, but not at the expense of food safety.

The Ministry for Primary Industries (MPI) has received advice from regulatory authorities in Europe and the United States, two of the industry’s major export destinations, that the proposed new meat inspection programme meets their requirements and can be used for products exported to these markets.

The proposed programme is based on successful trial work (profiled in Food NZ, Dec 2010/Jan 2011) and would allow for fully trained meat company staff to carry out some non-food safety aspects of meat inspections, known in the industry as ‘suitability’ or quality aspects.

Official government inspectors will continue to carry out food safety-related functions.

MPI, the Meat Industry Association (MIA) and AsureQuality have formed a team to develop a plan to implement the new inspection programme. This will require some changes to MPI standards, on which MPI will be consulting.

This article appeared in Food NZ magazine (August/September 2012).