Opinion: The meat industry must change or 'face oblivion' says the head of ANZ rural banking. The Collaboration for Sustainable Growth is the change needed

By Graham Turley

Since the first shipment of frozen meat to Great Britain in 1882, the meat industry has played a major role in the New Zealand economy.

But today the industry finds itself in a position where it must make some hard decisions.

It can change the way it operates to restore its traditional place as a pillar of the economy, or it can carry on the way it is going and face oblivion.

For many years now, the meat industry has been performing well below its potential and its problems are largely structural.

The sector suffers from a troubling misalignment between farmers, processors, and markets, and the result is a cycle of declining profitability across farmers, processors and exporters.

Weakness - a series of competing interests

The sector needs to function as one industry rather than a series of competing interests.

Farmers, processors and marketers are all in it together and success in the future will be achieved by meeting the needs of consumers more effectively than competitors, not in-fighting.

New Zealand primary industries such as dairy, kiwifruit and wine have been successful because of co-ordination of in-market behaviour and an efficient and aligned supply from farm-gate through to processing and packaging. In short, they have a value chain which is aligned to meeting market needs.

The prize is large.

The recent Greener Pastures report by ANZ found that New Zealand has the potential to capture $1.3 trillion more in agricultural exports between now and 2050. The red meat sector can play a major part in realising this potential – but not in its current form. (See a video interview with Turley on Greener Pastures here.)

New Zealand has had steady growth in agriculture exports. Dairy increased its gross output value by more than 9% per annum over the past decade and contributed to almost half of the nation’s farm output in 2011.

Growth in smaller sectors, such as kiwifruit and wine, has offset declines in other areas, particularly the red meat sector, which has seen its share of total farm output decline from 37% in 2000 to 27% in 2011. 

Despite some price-driven growth in output value, the production of lamb, prime beef, deer and live animals have all declined in volume. This shift has followed sustained profitability declines in red meat farming, driving land conversions to other uses such as dairy and forestry.

Weakness - inadequate profitability

Profits are inadequate both on farm and for processors and marketers, which leads to insufficient investment in production, processing and marketing.

Some are calling for company consolidation and a reduction in processing overcapacity as a means to reduce costs and restore profit.

While this may provide efficiencies short term, it doesn’t address the fundamental issue: the meat processor consolidations and closures of the 1980s and 1990s did not provide a platform for long-term success.

What is required is much better alignment and integration of the industry value chain. Consolidation of processor ownership does not automatically ensure that.

Threat - worldwide competition

Significant competition is emerging, and we can expect new players and traditional competitors to exploit a growing international market for red meat.

The world will demand at least 60 per cent more agricultural output by 2050, compared with 2005-07. Rising incomes – particularly in the growth markets of Asia – are driving up per-capita calorie consumption and shifting individual diets from carbohydrate-based to protein-based.

Over the same period the world’s population will grow from 7 billion in 2011 to 9.3 billion in 2050 and increasing use of biofuels will account for up to 7% of agricultural demand.

Eastern Europe, South America and the US will all seek to capture the opportunity.

If they are nimble and unencumbered by the structural baggage that we currently have in New Zealand, they will erode our position in a matter of a few years.

So what is the basic issue we need to address?

Currently processors and exporters have to compete aggressively in two markets – to sell product offshore while competing for livestock to supply sales onshore.

They have to win export market share and price premiums with no certainty of supply of stock. In this environment, it is very difficult to invest in either marketing, product differentiation or processing efficiency. The uncertainty of supply reduces the marketers’ ability to enter into long-term contracts to supply markets.

As a result there are wild swings in price and profit for both producers and processors, and often antagonism where there should be co-operation.

Uncertain incomes reduce on-farm investment and as a consequence livestock volumes are declining, exacerbating processing overcapacity and marketer uncertainty of livestock supply.

Solution - the Collaboration for Sustainable Growth

ANZ is one of the major private sector partners in the red meat sector’s new Collaboration for Sustainable Growth.

In Greener Pastures the most significant barriers to Australia and New Zealand achieving the potential of their agriculture industries were identified as sourcing capital to fund growth and support farm turnover, attracting skilled labour and enhancing agriculture education, intensified focus on national agricultural R&D, closing performance gaps and improving productivity of farms, improving supply chains and targeting key markets.

ANZ supports the Collaboration for Sustainable Growth because it addresses all of these issues.

Under the programme the red meat industry will support the adoption of best practices and provide new resources to improve farm efficiency, and increase livestock production and farmer profits. It will also support the development of new livestock supply arrangements to provide greater certainty to both farmers and exporters. 

Committed supply, stabilised livestock volume and better profits will provide a platform for investment, both on farm and in processing and marketing. 

Realising our agriculture opportunity requires leadership and commitment from across the agriculture sector, from policy makers, investors, farmers, agri-businesses and industry bodies.

This is particularly true for the sheep and beef sectors if it is to provide a secure and profitable future to attract the energy and skills of the next generations.

-----------------------------------------------------

Graham Turley is Managing Director Commercial & Agri at ANZ Bank New Zealand. ANZ is New Zealand’s largest rural lender.

Here is a link to the ANZ report: Greener Pastures: The Global Soft Commodity Opportunity for Australia and New Zealand (.pdf 13MB)