Allan Barber highlights the drivers for a sustainable meat industry have nothing to do with social aspirational 'values', but all to do with either accepting, or trying to change consumer perceptions the product is a commodity

A negative swing of nearly $500 mln in revenue and $300 mln in pre-tax profit in consecutive financial years confirms the extreme potential for volatility of the meat industry between good and bad seasons. It also raises a question mark over Silver Fern Farms’ plate to pasture strategy and the inevitable costs associated with trying to buck the trend associated with a commodity industry.

There will be two diametrically opposing views of the correct answer to this conundrum. Either it is the only course of action which offers hope of eventually escaping the commodity trap or it is pure indulgence when the marketplace is more concerned with price than costly ‘nice to haves’ like carbon zero beef. As with all such black and white issues, only time will tell which strategy is correct and, long term, only one will be the winner. In the short term the winners appear to be those meat companies that focus on efficiency and control of overheads, particularly in respect of livestock procurement prices and staffing costs.

The word is all the main companies with the exception of Alliance and SFF were profitable during their most recent trading year. Beef was clearly less badly hit than sheepmeat which goes some way towards explaining why Alliance was so badly affected, although there were other contributing factors to its pre-tax loss of -$97.9 million, including the impact of the timing of its September year end on inventory valuation, overstaffing for a drought that never arrived, and the cost of its new computer system.

Rob Hewitt, SFF chair, also cites mitigating factors for the disappointing turnaround from the previous year’s record profit. These factors were to a great extent the loss of production facilities as a result of Cyclone Gabrielle, with the main North Island beef plants Pacific and Dargaville being closed for several weeks, and the large investment in IT. Insurance receipts for the cyclone production losses will compensate to some extent in the 2024 accounts, while a number of IT contractors will no longer be required, saving staff costs.

Time will show whether these factors will be enough to achieve the necessary performance improvement, although Hewitt says the company intends to be back in the black this year. Every cost in the business is under scrutiny and some staff have already been let go with more to follow, not only in IT, but also in operations, support areas and in marketing. In answer to a query about the number of people employed in various offices, both overseas and in New Zealand, Hewitt defended the essential nature of these overheads in delivering the company’s market-focused strategy. He is adamant this is ultimately the only possible way to capture value in competition with global giants like JBS.

‘Plate to pasture’ does not appeal to some processors as a guaranteed path to profitability, as they point to a lack of tangible reward for the majority of the carcase, even in cases where there is a premium for some cuts. Hewitt maintains SFF can obtain a higher price for half the prime beef carcase meeting certain defined specifications which justifies the payment of a procurement premium to suppliers who can meet these specifications. He believes P2P casts a halo over the whole product offering, resulting in a slightly better price for commodity product than would otherwise be achieved. I suspect sceptics would not agree.

Unfortunately this year has not started well for meat companies and suppliers with January prompting farmers to hold on to stock to add weight before sending them for processing. Now the dry has arrived in many regions, there is a queue at the works, but in the South Island lambs in particular will either have to be sold store in the face of limited demand or killed at lower weights. Meat processors traditionally do well during a drought, but this year the markets for sheepmeat are depressed. Hewitt says the volumes through the plant by May substantially determine how good the year is which means the bad start doesn’t bode particularly well for 2024, although a good June would also help.

SFF’s recapitalisation in 2016 which saw Shanghai Maling’s purchase of 50% of the company effectively wipe out its core debt and reduce interest charges has encouraged it to pursue its long term vision of persuading retailers and restaurants to convince consumers to experience New Zealand grass fed beef and lamb as a superior eating experience. This mirrors the work of B+LNZ in the development of the Taste Pure Nature programme in key markets in California and China.

This strategy is totally at variance with the traditional view of the meat industry as a predominantly business to business transaction based on price, relationships and quality of product and service with the final retailer or food service outlet being responsible for the product sale to the end customer. To follow the longer term visionary approach requires patience, unwavering faith in the strategy and deep pockets to be in the position to cope with the inevitable volatility of what is still a commodity industry.

As we have seen from both Alliance and SFF, one or two good years are no guarantee the good times can continue for ever. The jury is out on whether being entirely market led is an achievable vision or a pipe dream.

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