Will issues of trust and the environment hold us back from getting our share of international sales? Your view?

By Allan Barber

There are some major challenges confronting our agricultural sector at the moment which demand an intelligent response from the participants, whether farmers, processors or industry leaders.

These challenges can be broadly classified under three headings: the environmental issues which confront all sectors, particularly dairy and meat, there are matters of trust and transparency which affect relationships between processor and supplier, and then there is the challenge of global competition.

Environmental issues

Mike Petersen, Chairman of Beef & Lamb New Zealand, emphasised the environmental issue at that organisation’s recent AGM, stating his belief that the meat industry hadn’t yet woken up to the impending threat from within New Zealand.

Because over 90% of production is exported and the main pressure from overseas customers relates to animal welfare, the environmental challenge hasn’t yet been fully recognised.

But he makes the point the Land and Water Forum has completed its report which is before Cabinet at this moment with recommendations about maximum desirable levels of nutrients finding their way into waterways.

Regional councils have been increasingly strict with effluent runoff for some time now, with the ability to impose penalties for exceeding defined levels (this was probably the first issue with the Crafar farms that the general public became aware of). Only this week, the Southland Regional Council has declared its intention of imposing stricter standards on consent applications for dairy farm conversions.

The probability is that the findings of the Land and Water Forum will set a new, and lower, acceptable standard for effluent runoff which all councils will be required to apply. Fonterra’s voluntary Clean Streams Accord will become both compulsory and harder to achieve, while beef and lamb farmers will be required to comply with more rigorous standards.

Transparency issues

Trust and transparency are concepts that the meat industry has struggled with forever.

The price paid for a farmer’s livestock, otherwise known as the schedule, has long been shrouded in mystery.

I tried to explain this process a couple of weeks ago, but regardless this is essentially a guessing game where the meat company tries to set a price which reflects market factors and is both profitable to the processor and acceptable to the farmer.

However the exercise is not exactly known for its high level of trust and transparency.

Another area which has long been an annoyance for farmers is the question of trimming the carcase and a suspicion the meat processor has been paying for a lower weight than that actually processed. Figures of 200g for lambs and several kilos for beef have been mentioned.

There is now a campaign to introduce a carcase trimming standard, Suretrim, which was initiated by B&LNZ, pushed at various meetings by Craig Hickson, a meat company representative on the board of B&LNZ, and discussed last week at the Meat Industry Association Council.

If MIA members all decide to use Suretrim with standards to be audited by AsureQuality, this will remove an area which reduces trust and transparency between processor and supplier.

But it’s an initiative which requires all companies to participate for it to be successful, otherwise it won’t work, unless farmers unite in their determination not to sell their livestock to any of the non-participants.

In the dairy industry, the question of Trading among farmers (TAF) risks causing a loss of trust between Fonterra and its shareholders. Despite the overwhelming majority in favour of TAF at the original vote in 2009, there are now serious concerns bubbling up, expressed by the Shareholders’ Council and Federated Farmers Dairy Section, that, in its proposed format, TAF may lead to the corporatisation of New Zealand’s biggest co-operative.

The situation is further confused by the inclusion of TAF with milk price monitoring in the Dairy Industry Restructuring Amendment (DIRA) bill which passed its first reading in Parliament this week and goes before a shortened select committee programme before it is passed in time for Fonterra to introduce it in November. Chairman Henry van der Heyden is adamant members will get the chance to vote on TAF again before it is introduced, but by that time it will already be enshrined in law unless the government fails to get a majority at its second and third readings.

If dairy farmers believe their cooperative is in danger of moving out of their control at the expense of corporate and overseas shareholders, Fonterra will have lost an essential factor which has led to the strength of this country’s dairy sector.

Although Fonterra needs capital to be able to compete with other global food companies like Kraft and Nestle, it must continue to take enormous care to ensure that its cooperative ownership is retained.

Global competition

The third big challenge is that of global competition which Fonterra is trying to address through a strengthening of its capital structure.

To compete successfully Fonterra must expand its control of milk production in the growing overseas markets, notably China. It has already come a cropper in China through its Sanlu investment, but this shouldn’t deter it from continuing with the strategy; it just has to make sure it can control the value chain.

Fonterra needs to ring-fence its brand while expanding its production capability, but it must also find an acceptable way of expanding its overseas and value added production without threatening domestic ownership of the company by its shareholder farmers.

That remains its biggest challenge, because international growth in lower cost milk production is inevitable and Fonterra needs to be part of this growth. However the New Zealand dairy farmer won’t necessarily want to fund this aspect of the growth strategy and must allow Fonterra to identify a practical way of doing so.

Another option identified by Fonterra in its Strategy Refresh is to form international partnerships which will enable it to achieve its growth aspirations without having to fund them all on its own.

The meat industry faces a much bigger hurdle in competing internationally because it lacks scale in any area of global consumption growth and domestic markets are often quota controlled. The only products in which New Zealand controls a significant proportion of international trade are lamb and venison, which are both at the expensive end of the market and neither has a large global profile.

The beef industry is dominated by producers in North and South America, while grain fed beef is more popular than grass fed, particularly in the USA and North Asia. New Zealand’s greatest area of demand is for lean bull and cull dairy cow beef, essentially a commodity used in making hamburgers.

Therefore the meat industry is largely a price taker and must compete with all the other beef producing countries of the world, mainly on price. The bright spot for beef and lamb is relatively certain demand growth, especially for beef, and lack of sufficient product to satisfy the growing global population.

In summary dairy and meat both have a positive growth outlook, but they must resolve the various challenges posed by having to comply with increasingly rigorous environmental standards domestically, needing to build and retain trust between processors and suppliers, and being profitable enough to take the steps required to compete on the international stage.

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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he run a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or through his blog at http://allan.barber.wordpress.com.