Allan Barber wonders what makes most sense for the red meat livestock sector in a future of uninspiring demand and low returns

There are huge question marks over the long term future for sheep and beef farming and all the associated businesses that depend on it. Threats to the sector abound: the persistent fall in sheep numbers, pricing volatility with a mainly downward trend, agricultural land conversion to other uses including urban sprawl, and the increasing age of pastoral farmers all point to a sector that has passed its peak. The chances of it staging a permanent reversal are nil.

The two main exporting countries, New Zealand and Australia, will continue to obtain a certain level of demand for premium product from those consumers who can afford it, but the majority of the carcase must still compete as a commodity against cheaper proteins. Only countries where sheepmeat is preferred and which can produce it at a cost the population can afford or receive government support will have a sustainable, domestic market.

The past few years have been very tough for New Zealand farmers and serve to underline the threats to the sector’s longer term survival. After a period of strong demand from China, leading to unprecedentedly high prices and uncompetitive returns from established markets, the bottom fell out of the lamb and mutton price for which the traditional markets could only partially compensate.

Falling livestock numbers will eventually lead to sheep and beef farming losing its status as one of the country’s main wealth generators. This trend has been accelerated by the threat of climate change, while government policies directed at mitigating its effects have occupied a huge amount of airspace in the last few years, requiring farmers to cope with a host of new regulations. The present government’s changes are welcome, but may be too little too late.

At the moment there is solid demand out of the United States for beef, as well as a general market recovery for sheepmeat, which bodes well for farmers and processors for the immediate future, except for the likely outbreak of a global trade war, as Trump pursues his intention to introduce tariffs on imports from everywhere. In case we thought New Zealand might escape the worst effects, it now seems GST will be considered a tariff to be punished in return.

Volatility will be the defining characteristic which makes it very difficult for farming businesses to plan a sensible strategy for future investments. It will take a substantial risk appetite to plan an expansion in sheep numbers, when the market is so uncertain. Lamb is a niche, expensive product as well as being essentially a commodity for which consumers will only pay so much before it falls off the shopping list or menu.

Attempts to brand lamb, and beef for that matter, only apply to the high value cuts which make up a small proportion of the carcase. Silver Fern Farms and Alliance have invested more in branding than the rest of the industry, but to this point the more profitable processors would appear to be those that accept the largely commodity nature of the product.

As sheep and lamb numbers decline, processing capacity will come under pressure and less efficient plants will close. Short term procurement competition is likely to sustain the price to the farmer, whether or not this is justified by the market return. Evidence would suggest it is better business practice to invest capital in ensuring the efficiency of processing facilities than spending large amounts on marketing a commodity product.

Despite the MIA’s belief it can conduct a successful, targeted marketing campaign for natural, grass-fed red meat with Taste Pure Nature, I remain unconvinced of its potential effectiveness. It makes more sense to be the most efficient processor than to spend money on brand promotion.

Another challenge for the sector is the age and profitability of the average sheep and beef farmer who must inevitably sell up at some point, either within the family or to an outside party who is more likely to convert to an alternative land use. Some farmers are already reducing sheep numbers in favour of cattle which may be more profitable and are certainly less labour intensive. The collapse of the wool price has had a major impact on the profit to be made from sheep and this won’t change barring a miracle.

The processing and trading parts of the sector continue to work hard to maximise revenues globally for the whole carcase, including all the higher and lower value cuts and the co-products. But this is essentially a targeted trading activity based on customer knowledge and relationships, not a high cost marketing exercise.

All parts of the sector must work together to tackle strong and possibly irreversible headwinds to achieve the best future they can. But it is ultimately up to the key participants - farmers and processors – to decide what makes most sense for their individual business survival.

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