By Keith Cooper*
Let’s understand the cause of the current alleged crisis in the red meat industry before we start jumping to emotive conclusions as was displayed by the erroneous header of strategic thinking in Allan Barber’s article dated the 23rd January.
Addressing sheep meat alone with a strategy for its viability, as Allan puts forward is, in my opinion, a piecemeal solution and is emotive reaction to the current sheepmeat based issues.
It ignores the reality that we have a total red meat sector which encompasses sheepmeat, beef and venison.
For the record; there is no doubt the New Zealand red meat industry needs a series of fundamental changes.
We need less industry organisations, all of which are inevitably funded by farmers.
We need to create a single industry body which brings to the table all stakeholders - those involved in on-farm service and support, farmers, meat processors, exporters and marketers.
We need fewer meat processing and exporting companies.
That alone will reduce the fragmentation both within New Zealand and off shore.
However, less meat processing capacity requires farmers to support, with a commitment to supply, those processors who do make the effort and financial commitment to better align and consolidate the industry.
Generating greater commitment of supply is raised in the Red Meat Sector Strategy, but one could legitimately question whether garnering enough commitment from farmers to underpin consolidation at this point in time is achievable.
We need more integrated farmer+processor+exporter+marketer initiatives which not only create more value in the product itself, but also can capture extra value from the marketplace by marketing the brand and product attributes to consumers.
Efficiencies and economies of scale give rise to economic growth.
It is an inevitability that farmers also need to aggregate landholdings to create efficiencies and economies of scale. This is already happening and it is giving those retiring from the industry a way to realise their capital investment and exit with rewards for their hard work. This will allow for farm systems to change at a faster rate than is currently occurring.
So to the analysis.
What happened last year that caused the price spike which is now being used, erroneously, as the benchmark for present lamb prices?
Due to procurement market conditions, the price of lamb in the international marketplace rose to a level that saw consumption drop by 25 percent.
Farmers and others in our industry may have seen this scenario play out before, but many readers may not be overly familiar with the elements which influence supply and demand dynamics in our sector.
A chronology of contributing factors was involved.
Seasonal conditions in spring of 2011 were excellent. Strong grass growth saw farmers withholding lambs to use that grass.
Supply to consumers was restricted and the market became short of product. Companies then lifted schedule prices to procure stock to maintain a flow of product to markets/consumers.
Those increased procurement values were reflected in retail levels and as a result, consumers exercised their choice discretion.
When those lambs came through for processing in January and February 2012 it created a glut of product and the market became overloaded. Demand wasn’t there and the price crashed.
So in reality factors escalated beyond anyone’s control – climatic conditions coupled with farmer behaviour in converting grass to meat caused a series of events that have put us into an overcorrection cycle.
On a positive side this has seen market prices decrease to a level where they are now stimulating consumers’ interest and restoring demand.
In time the true market level will be established between the unsustainable peak of 2012 and the current unsustainable trough we are in. The following chart demonstrates – that over time the farm gate values are trending upwards, yes with some volatility which is now the way of the world.
The overall value returned to farmers continues to increase and based on forecasts for increasing population and decreasing land available for meat production, the outlook must surely be positive.
Much has been made of meat industry debt. In my mind debt is normally associated with core capital requirements, whereas the reality of last season saw the need for significant working capital at the conclusion of the season due to high inventories.
Yes it’s debt. But it’s actually working capital that increases as inventory builds and declines when it is sold. This is much like a farmer’s working capital which fluctuates during the course of the season.
The fact that the New Zealand meat industry saw a lift in exports at the start of this current season is testament to the increasing demand.
Inevitably increasing shipments will not only stimulate further consumer demand, they will also ensure processors will have lower working capital requirements at the conclusion of the 2012/13 season.
The timing around industry consolidation demands is critical. Yes there is tension for change at the moment while we are in a period of unsustainable returns to lamb producers.
Structural change is no substitute for strategy.
It is critical an end-to-end strategy to create value within the red meat sector is developed. Once this strategy is developed the most appropriate structure(s) can then be developed with farmer support.
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Keith Cooper is the chief executive of Silver Fern Farms. You can contact him here »
31 Comments
Keith
My call for a sheepmeat strategy in isolation was possibly a bit tongue in cheek (not emotive), especially as it would entail bringing in the wool industry to find a comprehensive solution, but it suggested at least that a look at sheep and lambs as a separate stock species could throw up some ideas.
I agree that strategy should always precede structure, but now we have the Red Meat Sector Strategy which the industry (B&LNZ and MIA) accepts as being strategically valid, if not quickly achievable. Farmers are probably sceptical of the meat companies' ability or willingness to find a suitable structure, given past experience, but ironically, considering the events of the past two seasons, the industry is probably closer to working together than ever before.
I am still doubtful of your confidence about the effectiveness of fewer processing and exporting companies in ensuring better behaviour. In principle that's correct, but folding small companies into a larger one (Wallace Meats, Frasertown) and reopening or increasing capacity (Waitane, Paeroa) doesn't seem to inspire cooperation or logical procurement behaviour. However I'm aware that Silver Fern Farms isn't the only processor/exporter increasing capacity and you have to make your decisions based on your company's best interests.
Lastly we will probably not agree entirely on the topic of too much debt being better when it is tied up in inventory. I accept the seasonal nature of that debt, but don't believe it is particularly acceptable, except when the inventory can be sold quickly and at a profit on its original costs of procurement, processing, holding and marketing (including exchange variations).
However debate is always good and enjoyable.
Allan
Mr Cooper, you have been around along time, you have had a lot of opportunity to create change, and lead the industry.
When management starts talking about the need to reduce competition as the way forward, Im afraid I lose confidence in them.
Whenever there is a crisis someone always comes up with a new plan.
I do supply stock to SFF and I think its time for fresh management.
Was it not SFF who supported Tagging our animals ( NAIT) thats been one big pain in my butt and the supporting evidence is very weak. You failed to deliver on the improved returns you promised us.
I live in HB and SFF decided to apppoint a director on our behalf, thats a big Fail.
Then SFF started giving large suppliers special pricing that the rest of us get to pay for and can never find how much it is, even though we were a farmer owned co-op, and not a profitable one at that.
I fully agree Andrew. One thing that really irks me is the number of times I have sat on International flights and had to listen to complaints from those who are trying to source NZ red meat. There is obviously serious disconnect between the works and what the international buyer is wanting. When NZ farmers have people wanting our product and the industy not willing to supply we are all losers.
How many offshore buyers are turned away because the meat works refuse to supply to a particular specification that that buyer may have?
The practice of bulk supply and bulk sales doesn't deliver favourable outcomes to farmers or overseas buyers.
As for NAIT there are absolutely no benefits. It does not address the issues that the overseas customers were desiring.
As usual King Keith basically accepts no responsibility for the current woeful prices for lamb (a poor spring and the widespread drought is creating the perfect financial storm for all other than those farming South of Christchurch lets not forget too )
I grow weary of the same old dribble from SFF - farmers with too much grass , no fault of SFF's that they cant communicate with their customers - yawn yawn
If they want lambs then set the price accordingly - having supply contracts for a weight range of 14 - 23 kg is far too broad . But of course thats our fault . Imagine a tighter supply weight of 17- 19 kg and if you are above then you get smacked . At an average liveweight gain of 120 gms per day the differncr between a 14kg and a 22kg lamb is at least 2 months !!!!
Then of course its all about building the SFF brand which is the best in the world and then Whooshka , Alliance have cut SFF out of Marks and Spencer . !! But hey that doesnt matter according to SFF
Oh yeah and then they put out contracts of their own and with Merino NZ for $7 a kilo . But hang on couldnt they do their research of their markets first so that the rest of us arent subsidising that cock up now
Seems to me that SFF wants to be everything - FarmIQ from my observations is nothing more than reinventing the wheel . EID tagging is adding workload with bugger all value , And being actively involved in stock purchasing just adds cost and in my view distracts the company from its core role of processing and marketing !!!
I commend King Keith for his passion and his willingness to front in the media , but I would be much much more impressed if they moved quicker in overseas markets , in my view this big company is slow and not as sharp and nimble as they want us to believe
Jeeza, thats exactly what a large company handling the bulk of NZ production could do but with the competitive throughput model they need to accept whats being produced during the season. I bet your pleased to be keeping all those layers of management employed at SFF though. The top 100+ employess are drawing approx $14.5 mill in wages. Can't speak about the other major players but its a heavy cost farmers are carrying each year to have choice at the farm gate.
No thats what happens when management fails and the board lacks the balls to sack them.
I know a lot of farmers think that Fonterra is a shinning light for suppliers, in fact its heavily indebted, ineficient and makes its money from commodity trading, its very poor at almost every thing else it does.
I don't believe in less competition you end up with a company like Fonterra which guards the information it lets out in a way that is impossible to tell how well things are going until they are not, and then the options are all bad.
The sheep industry has been on a down ward slope for years, we failed to see the implications of the EEC over a longer time frame. Then we failed to see the impact of very powerfull supermarkets with almost monopolistic control over suppliers and we failed to see the move to more convienient foods. just look at bull beef and cow, they have been the only profitable option for many conventional farmers and yet they are just a commodity with a quota to the USA, what would happen if the quota was removed?
Leg of Lamb was a traditional sunday roast in the Uk, and the food shortages lasted a long time after the war finished. Now the UK sheep farmers have got their act together we are getting a hiding.
However the biggest problem facing rural NZ is that costs are out of control, absolute absurd charges for operating businesses. We have a privilaged class in NZ who do very nicely screwing everyone else. The impact of which is making many farms uneconomical.
It where National have failed rural NZ and everyone else for that matter, they are a party representing a small elite in AKL and Wellington trying to fleece us all. They dont stand for anything good just greed and self interest, I used to be active in the party and I no longer recognise it, or vote for it.
The other trhing we need to do mis get rid of beef and lamb or what ever the old meat board is called today. They are totaly in the pocket of the meat industry and do not represent farmers.
As soon as you see claims that something is a centre of excellence you know what it is not, and that it is likely still heading south.
Colin, your timing could not be better.
Earlier this week there was an article posted on interest .co.nz making the very same claim.
Fisher Funds managing director Carmel Fisher said the proven ability of the Fisher Funds team to deliver excellence in the management of funds for New Zealand investors had provided the impetus for undertaking "this significant acquisition in the KiwiSaver sector".
A case of caveat emptor, no?
Colin, I am very wary of the KiwiSaver concept - I believe it is just one of the ever present wealth transfer mechanisms right up to the point the government needs to sequester the remnants of individual's savings for the "greater good", some time in the not too distant future.
I have no doubt theres many like you with the same oponion. You've identified some of the problems but failed to put forward a solution apart from sacking the board and management.
One question. How do you propose counterIng the power of supermarket monopolies which have been consolidating for many decades?.
I dont intend to beat the supermarkets. I would look at several areas
First I would stop large corporations destroying lamb in the market by keeping ram lambs late and killing them in spring, they must taste like crap. What farmer eats them?
I would stop large scale farmers getting premiums, one price for all. I used to be one of the farmers getting premiums for suppling large numbers of cattle to AFFCO. One day Egan came to see me and said they were going to one price for all, I was happy with the decision.
Then I would look at a very competitive processing industry keeping the co-ops. This could require tax incentives to upgrade plant, I would also encourge smaller processing facilities.
Next we would have to confront our horrendous cost structure, from the councils to the prick importing motorbikes, I would give diesel tax back, a lot more pressure on those who supply us. For example a Subaru 700C, 4x4 made in the USA buggy thing, like farmers use a lot with the bench seat sitting 3, in California the most expensive place to buy it, is $6000 with a 5 year warrantee.
Our biggest problem is the compounding effect of %7 inflation our big advantage was low cost production and we no longer enjoy that advantage, if we dont get it back and costs keep compounding and we let those in control blame the market we get no where.
There are thing we can control and things we cannot, leadership is one we need to take back.
Cost structure...do we really know how in-efficient our councils are v others? I'd suggest we have no real data to make that call. Can we simplfy the system? but at the expense of what? ie eco damage by removing the RMA isnt sustainable long term....
"Pricks importing" I think the problem is numbers when you look at anything not bulk. So for instance Im looking at a Savage 12 plama its $3k here. In the US I could get an accurised one with a good barrel for the equiv of $2400NZ (if it wasnt for the export problems the guy would do one for me). Meanwhile there the std one is only one for sale in NZ. So the guys importing have to make a living on low numbers of sales hence the margins we see are "excessive" Im going to buy chisels from the UK, a better 6 set is $90 v a crappy 5 set irwin here at $130....so we can get some deals...
7% inflation?
Look at the energy cost inputs, you already want deisel tax back...maybe consider or look at how other countries are also creaking under those same costs...For me anyway we pay little for food compared to the past, I think thats going to rise, rouble is housing etc is taking so much $s out of the system that its not going to be an easy adjustmant.
regards
I used to have an importing business, sourcing products out of eastern Europe. I can inform you from the inside, retailers charge as much as they can get away with. Often the retailer tried to make more than all the costs up to retail, ie over %100 markup, then thye took six months to pay me.
I dont care how efficient councils are, if I cannot afford my rates or when they become my major cost, more than my fertiliser bill,more than my shepherd, then they are too high, we may have to go back to gravel roads but I suspect it wont get to that.
If we borrow against non productive assets then how do we get to pay the debt back when our productive assets are already heavily indebted.
I dont expect us to compete with Nth Korea and its 60 hour average working week, but maybe that will be a reality, i just don't see the workers supporting the parisites in that situation. Already taxes are too high but I notice tax income is falling every quarter, so things may have to change, so who gets the axe first?
I would like to add that we need to move away from dependence on the UK, its going to be a mess for a long time and not a stable market.
I also believe that trade will become a big deal in the near future, don't forget that the first world war was about trade, then think how many people died and how many more because the UK and the USA wanted to crush Germany and keep them out of the middle east ,even France was pushed to the side. They wouldn't talk terms with Germany and were happy to fight it to the bitter end.
Now if we look at the USA and its privileged position because of Bretton Woods, signed after world war II. It looks like the USA wants to hold onto that privilege at 'any cost'.
Marketing is difficult because of protectionism in our major trading partners but they still would like us as allies and friends. There are opportunities but we don't do it well, the results speak for themselves.
In the USA they pay big money for organic mince and we should be selling all our bull beef into the states as Organic grass feed, it would fly off the shelves. But the farmers over here don't like the sound of that even though we are tiny producers, it's the corporates who would fight us.
David Lange did a lot of damage to out relationship with the USA. They were hurt by our decision re nukes, and bent over backwards to accommodate us, to them we were a friend and Allie and they were paying to protect us, why would we kick them in the nuts?
As hard as it is to believe, I had lunch with Frank Carlucci ( US secretary of defense)in 1989, he was a lovely man and genuinely could not understand our position re Nukes and our military alliance. I also had dinner with Cap Weinberger and met him numerous times.
Lange was playing to the left wing liberal voters, at what expense, another idiot, how many do we have? It seems an endless supply. Politics and trade will always be linked.
I want to reiterate that most of our problems are 'in house', compounding cost increases, as an example, beef is at record highs and lamb at this price would have been good ten years ago, and dairy farmers survived well on a $5 payout not That long ago, it even payed to convert at that price.
National is a big fail and they could be in opposition for a long time because of it. Key has been a very poor Prime minister.
National has pampered the privileged and done nothing for the rest of us. We now have to some how sort out a massive civil service, of overpaid people who produce no value in our economy, what else could they do? We are facing racial problems due to some crazy guilt complex by a few in power.
We desperately need some decent leadership, not more narcissist, megalomaniac personalities
But you didn't get to share the consequences like I did, as a beef exporter to the USA.
I must say you have way with words, have you ever thought about doing a Kiwi Hospitality course. I here they are very good.
Andrewj - well said! Suffering the consequences of decisions made in NZ seems to always be done by the few for the many.
Take the NZ economy in the 1980's when the proverbial hit the fan - It is widely rcognised that farmers were the one's who pulled the country through. All that bloody hardship because they mismanaged the economy in the first place. NZ now has a new breed of spoilt clueless idiots who are besotted with power and grandiosity.
NZ made that decision on nukes and the NZ population today agree with it still.
That may be so Steven, but it was a case of NZ not suffering direct consequence other than trade difficulties which was no picnic for exporting beef farmers.
The U.S. chose not to squeeze N.Z. or to alienate them as the matter was really of little consequence to them in the bigger picture, so there was no mouse that roared here.
Now if Australia had adopted the no nukes policy....well ...now that would have engendered serious consequences with extreme predjudice.
I suspect big brother had a small part to play in the detent' of the matter there and asked Uncle Sam to cut us some slack being backwash billy's n all, further that we are kind of useful to Aus naive though we may be.
Some really good thoughts posted by yourself on this thread A.J. , the application of which would require an elevation in commonsense thinking, sadly lacking among the productive sector.
Yup we have settled for mediocrity on sooooo many levels now , it's hard to tell a genius from somebody with a good idea.
Those that have them, are in for a belting from all those ensconced in the halls of Mediocrity.
Jealousy is the tribute mediocrity pays to genius.
Fulton J. Sheen
Last month the Otago Daily times reported that SFF were moving their head office to new premises. The ODT reported that the current rental of $300,000pa would more than double to $625,000pa as a result. SFF are expecting to spend close to $3m on fit out in the new premises. I understand the new offices include extensive entertainment areas.Having just lost over $30m its another kick in the guts for the farmer !!
The ODT reported SFF shifting their head office location in Dunedin and spending $3m on the new premises. After just anouncing a $31.1m loss (on top of a $30m profit the previous year) so effectively a $60m turnaround. Why are the management not focusing on their core business (trading protein) and making a profit, rather than focusing on shifting premises. The directors of our co-op need to prioritise a return to profits rather than building $3m sand castles. As a member of this co-op, the performance in the last 18 months has been below par!
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