By Keith Cooper*
The recent announcement by Fonterra of a sub $4/kg milk solids forecast payment for the coming season - which was generally followed by competing milk processors - has given rise to a broad spectrum of implications across the NZ economy, the latest being to the SOE, Landcorp Farming.
Commenters have identified a variety of implications from the impact to our GDP, interest rates, FX rates, farm sales to foreign owners, on rural communities, on rural goods and service suppliers and of course the impact on farmers and their families.
However to my mind the ramifications will run deeper and across a bulk of the rural sector in some shape or form:
- Land values may well be negatively impacted, with a potential flow on issue for all farmers in terms of their equity position in the own properties,
- The potential of impairment on bank loan books if land values reposition lower,
- There will likely be an influx of productive land being available as dairy farmers reduce their external grazing requirements, leaving dairy grazing operators looking for alternative land use options,
- Same will apply for those who sold forage matter on a standing basis for cut and carry dairy farming operators,
- This additional land/feed availability will undoubtedly put pressure on the store lamb and cattle markets and likely squeeze the margin available to traditional sheep and beef farmers,
- The diversification by dairy farmers into lamb and beef finishing options again more demand for, and pressure on sheep and beef margins.
I would suggest most sheep farmers have had an average time of late with lamb prices having dipped and look settled at below the $5 kg mark (peak season) although many will have enjoyed the surge and forecast sustained increase in beef values.
However for those in the store beef market, many will find some harsh realities of buying replacement cattle within the new found confidence levels and competitive market. So there will be few silver linings for those in the meat sector from the current forecast dairy sector forecast pricing.
Which leads me to lament the long held notion by many a group in the meat sector that the meat industry needs an entity that has at least 80% ownership of NZ meat production/exports.
One can only ask why and where is the value in such a model, when we now have the benefit of observing the realities of the market place on Fonterra who have in excess of 80% of NZ milk exports plus a considerable volume of the internationally sourced and traded milk products.
Yes, there would be cost savings, perhaps $10 a stock unit, but that alone cannot compete with the tidal pressures of supply and demand which is the ultimate definer of the value of any commodity product.
As many commenters have alluded to over the years NZ producers need to focus on creating value from its primary produce as opposed to just relying on producing a quality commodity product.
The debate then becomes, who carries the costly investment in innovation, brand building, value creation and marketing of products that are targeted to avoid the commodity price cycles?
In Fonterra, farmers have been significant investors, however it now appears they have invested in commodity production facilities as opposed to creating value with less commoditised items as evidenced by the reported proportional decrease in added value production, having been diluted by the growth in overall milk production in recent years.
The Silver Fern Farms recapitalisation evaluation process must be nearing a conclusion. It will be interesting to see if the capital will be requested from farmers (so they retain ownership of the value within the value) and what the purpose of that capital will be.
Will it be to enable the company to continue the Plate-to-Pasture strategy central to which is creating value in products outside of the commodity market? Or will it come from an investor?
More importantly, will that investor be just a financial investor (only seeking a dividend stream ) or will they be a vertically integrated business investor who can assist in creating more value by virtue of being part of that value chain.
Regardless, it must be time for the Meat Industry Excellence group (MIE) to take stock of what they are advocating and reflect on what is occurring in the dairy sector and why, the later a point that is often missed in all the vitriol around the outcome of any strategy- the price to the farmer.
Regrettably, challenging times for sheep/beef/venison and dairy farmers alike. After all, they have so much in common on one hand but produce vastly different products on the other. However all are still hugely reliant on commodity markets and the price outcomes of raw supply and demand.
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Keith Cooper is the ex-CEO of Silver Fern Farms. He has been involved in the meat sector for 35 years spanning sales, marketing, leadership and governance. He is building a professional Director career and primary sector advisory based in Dunedin along with his farming interests in Middlemarch, Otago. You can contact him directly here.
29 Comments
The debate then becomes, who carries the costly investment in innovation, brand building, value creation and marketing of products that are targeted to avoid the commodity price cycles?
happy days until one looks to monetise/action some of that brand value and you come across a buyers agent (you suddenly find those customers aren't yours either).
Woolworths is committed to dealing promptly with cost price increase requests. However as buying agents for our customers we reserve the right to discuss with you the likely commercial implications of a request.
12 weeks clear notice of a proposed cost increase is required to enable a fair review and consideration with sufficient time for the parties to discuss.
and
Woolworths uses a number of databases and other sources to track cost inputs [such as commodity cost movements] and cannot accept a cost price increase that is incapable of validation. Databases and sources used to track and validate cost price adjustments include: Mintec; ABS Bureau of Statistics – Freight, Gas, Electricity, Water and Labour; Dairy Australia – Cheese, Butter, Milk Powder indices; industry Cattle prices.
Woolworths will consider any other source of validation provided. However if a cost increase request is made via an incomplete template a supplier is reliant on validation via Woolworths data alone.
https://www.wowlink.com.au/wps/portal/!ut/p/c1/04_SB8K8xLLM9MSSzPy8xBz9…
so value add aside you are in a commodity style market.
You raise a valid issue Henry. Beats me why we aren't developing more direct online marketing to consumers so we can go around the parasitic supermarket chains and capture that margin ourselves.
That aside Keith makes a number of valid points re the need to add value. It makes me laugh how the Steven Joyce and Bill English are now furiously highlighting and claiming credit for the boom in beef prices. The reality being that it is purely commodity cycle driven and they are doing sweet FA to prepare for the inevitable supply response. The PGP programme does nothing but encourage production of more volume as does the efforts of our learned friends at B&L. Zero strategic vision!
Because MPI and MBIE and other certifications/consents cost the Earth and wages in NZ are very high, and employees have every advantage in a start-up environment.
Who is supposed to be doing the direct online marketing? Farmers/share-farmers? They're struggling to make ends meet now, they certainly _DON'T_HAVE_THE_NEEDED_EXCESS_INCOME_ (or time) to put into market or channel development. The local and central governments of New Zealand have got the poverty State they wanted, that they designed. Very few have the big salaries (outside of government payrolls) and most of them have no interest in such things, for they have all the money they need and are head and shoulders above the rest of the community.... what kind of fool would seek to topple that.
seems like labeling is the business to be in...
Aldi shoppers are charged 30 per cent more for prize-winning, "grass-fed" beef cuts. But Fairfax Media has found the claim is potentially misleading and the medals should never have been awarded.
Read more: http://www.smh.com.au/business/retail/aldis-grassfed-beef-claim-mislead…
Follow us: @smh on Twitter | sydneymorningherald on Facebook
and
Conroys - which markets itself as offering traditional premium-quality small-goods - imported more than one tonne of pig meat in February from Denmark. It then repackaged the shipment as "product of Australia" in its 1 kilogram breakfast bacon pack, the Australian Competition and Consumer Commission (ACCC) alleges.
Read more: http://www.smh.com.au/business/retail/foodmaker-conroys-fined-for-selli…
Follow us: @smh on Twitter | sydneymorningherald on Facebook
Keith, you are right to 'lament the long held notion... that the meat industry needs an entity that has at least 80% ownership of NZ meat production/exports.'
Volume commonly has little or no relation to value. (There are exceptions.) Generally an entity responsible for marketing a predominant industry volume will not become a value creator. In New Zealand, Zespri appears to buck this trend, but we don't know what added value opportunities in kiwifruit are foregone.
Producers, growers, farmers are by nature conservative. The drive is towards reliability of income rather than market risk - there are sufficient risks in production. True too, individual producers facing individual risk often seek to aggregate or share this risk within a larger umbrella body. And the producers know production - naturally enough, they don't know marketing. So the calls for single-desk or dominant desk selling are commonly to do with risk aversion.
Our large-scale business models also tend to be commodity based - that is dealing in relatively unimproved, relatively easily replicated product. Value-add models are rare. But there is at least one worth consideration, which is the wine industry. (It's not my industry, so I speak as a businessperson, not a wine-person.)
The call for an entity in the meat sector, to complement that of Fonterra or Zespri, can be compared to the experience of the wine industry. If the wine industry had gone this route, it would either have resulted in some sort of grape-marketing board or a national, bog-standard, wine brand. Instead, we have a vibrant, competitive industry, achieving highly creditable international attention and premium prices. There are individual failures, but these are essential to the maintenance of vibrancy and competitiveness.
One more point, maybe. Excellence in things tends result from relatively free, individual or localised enthusiasm. And an environment that encourages and rewards enthusiasm also encourages and rewards diversity - thus a measure of risk management within a total sector. Within such an environment, small producers can congregrate with others of shared values.
Those that are essentially risk averse can try their luck with others of the same persuasion. Those that have more courage can do the same. The risk averse, though, tend to be price-takers, or commodity focused. Those with more courage will attempt, and often succeed, to create value and thus capture a price premium.
The predominant New Zealand experience, evidenced in Fonterra, is a generalised submergence of individual capability - in both product and market development. It results in little or no innovation, little or no added value, little or no influence on price. There is no reason for the meat industry to follow the same route. New Zealand needs better than this, and is capable of better than this.
i think the current model works fine. If you are happy with the company you are dealing with, they are marketing the product,promoting their brand, an overall NZ brand marketing is a waste of money because it is doubling up what is being done anyway. The idea that a bigger NZ coop will get farmers a better price is nonsense, it would just create a big fat bureaucratic top heavy organisation like fonterra.
Granted AJ, although not all North Islanders are bad, yourself as a shining example. I fear Tim has set the bar pretty low in regard his expectations of the meat companies.
I find myself agreeing with a fair bit of what Keith Cooper has been saying these last few columns which makes me wonder why he didn't execute most of it while he was in charge. To be fair the reality is that it is still all about throughput for the processors so while they can talk a good game re marketing/branding the reality is they are mostly in survival mode. That's why I cant understand why SFF and AGL wont join together and shift the focus to the market end instead of battling each other to the death.
Shags sheep, it's been a problem thats gone on and on since the 70's. I have a friend in France who worked for Weddel in the UK. He talks about the insurmountable problems, how hard it was to get people to see the multi dimensional side of marketing lamb.
I think that what ever we do gets perverted by greed somewhere along the line. I think we should go back to whole carcass lamb sales, boning in NZ is prohibitively expensive. I also think we should be as near as dammit to organic as we can possibly get.
I just purchased 3 lambs of a local farmer here in Cornwall, it was like going back in time to when I was young, lovely fat little lambs, going to be the best eating, all castrated, no rams, £70 a head, for 22kg lambs. He was not a happy sheep farmer at those prices.
The reality is that many of our markets have changed so much that it's a whole new game, however there is plenty of money around here, in fact a lot of it. On the other hand the Uk has $48,000 a head of public debt and demographics are against us. Until this debt burden is sorted I don't think we are going far in the West. I got some lamb in the USA and cooked them whole carcass South American style, most of the ranchers had never ever eaten lamb before, some refused to even try it, most loved it.
Most women buying in the supermarket I talk to, purchased lamb because they believed
it to be the 'cleanest meat' regarding hormones etc.
http://www.bloomberg.com/news/articles/2015-08-11/pigs-using-muscle-dru…
http://econimica.blogspot.co.uk/2015/08/young-vs-debtthe-young-never-ha…
Bill Bonner
Recent sales figures from America’s retailers show how deep the rot has become. Sales have been rising at an alarmingly slow rate – just 0.5% since 2007.
Between 2000 and 2007, they went up four times as fast. In the 1990s recovery, they went up six times as fast.
Especially rotten are sales at America’s four largest mall retailers – Macy’s, Kohl’s, Sears, and JCPenney. Together, their sales are falling at a 10% rate per year… or four times faster than the fall in department store sales generally.
What is interesting about these four companies is that they have been among the most aggressive of the stock market manipulators. Between 2005 and 2014, they earned a combined total of $13 billion. But their top execs spent $34 billion deceiving investors about the true value of their firms, by way of share buybacks, pocketing billions for themselves in the process.'
http://wolfstreet.com/2015/08/19/wall-street-is-running-out-of-time-and…
I can see your rationale about carcases AJ but it would be a disaster for NZ Inc. The red meat sector is a big employer and needs to get its act together for the sake of all.
I think the attached example is the way to go albeit with the addition of cutting out the American importer and getting the co operative as close to the consumer as we can.
https://agrihq.co.nz/article/healthy-kiwi-beef-on-us-menu?p=37
All this crap about innovation and brand building!?! What the World is crying out for is organic, grass fed meat and dairy. Don't spray poison all over the place. Don't pollute the water with faeces. People pay a premium for wild fish over fish raised in sewage ponds. It is a simple concept. If we raise low grade food in "sewage ponds" we will get sewage pond prices.
Just google "milk from grass fed cows " "butter from grass fed cows " "cheese from from grass fed cows".Meat from grass fed animals. Dairy/meat from grass fed cows is considered to be super food and you ordinarily pay though the nose for it.
http://articles.mercola.com/sites/articles/archive/2014/05/21/grass-fed-...
If we simply turned our back on the Walmart/Warehouse side of the food market and became boutique high price, high quality "grass fed/organic" suppliers to the World's luxury "whole food" retailers, we would not have to compete with cheap crap food raised with industrial "feed". in inside cages/crates/stalls. As pharmaceuticals become more unaffordable, smart people (even smart poor people) will happily pay a bit more for food that will support their precious good health.
Learn to Social, there are NZ producers of grass-fed, fully traceable, meat products - no hormones, no antibiotics, no growth promotants. But - they're pet food businesses... Have a look at www.ziwipeak.com.
Yes, these are premium product values, and we should be working with them. The role of brand in these sectors is to tell a complete, authentic story - and, shockingly, that's getting harder and harder for New Zealand to do. Our environmental indifference or willing destruction is catching up with us fast. These are massive policy issues, and frankly this is one of the few forums where the issues are discussed intelligently.
How about animal husbandry? In a meeting today someone casually mentioned that the palm kernel feed used in the dairy industry was leading to radically increased cases of stomach cancer in cows. True? Maybe someone can comment on this? If so, we're poisoning the environment and the animals too.
Not just PK feeds - others - including corn and maize
Read this and watch the video at the 19 minute mark
http://www.interest.co.nz/opinion/76981/jason-young-says-new-zealand-to…
Thanks iconoclast. There gets to be less and less to respect in this industry - not individual farmers, but the industrial idiocy they're trapped in. If there's no change in thinking, the industry is going to run the country into the ground. What national qualities or environmental differentiation to build on then? It's going to be a lesson in failure, in squandering advantages, for the rest of the thinking world to wonder at.
LTS is hot on GMO too
If you have the time watch seeds-of-death
https://www.youtube.com/watch?v=eUd9rRSLY4A
Amen to that! Just think of the recognition we got around the world for declaring ourselves nuclear free.
Had we coupled that with GE free and slowly converted to organic pasture management - we'd have been onto a massive Unique Selling Proposition.
Given our size - we don't need to sell commodities in large number - quality and difference was always where the agri-strategy should have been.
In his very early days, before rising to prominence, David Lange was a store-front lawyer doing pro-bono legal-service for the down-trodden. Very much a man of the people, in touch with and in tune with the every-day man. He knew what people thought.
That is a strong contrast to the current crop of leaders we have now
It won't happen.
Kate in the UK where I am the organic section of the supermarket is still considerably smaller than the non organic section. IMO if all NZ farmers converted to organics we wouldn't have a unique selling position. There is a market for organics but in the total context of those that are willing/able to pay the premium prices required to compensate the farmer for being organic, it is still very much a minority of the market. If the overall market demanded and was willing to pay for organics there would be a larger portion of organics sold internationally now. Almost every Western country has a home grown organic industry - so there is nothing truly unique about it. All that international competition seems to do is create a 'Buy local' or Buy British' etc type of response.
As a farmer I agree with Social Dancing, although there are different definitions of been organic. Relative to our grain feed competitors, grass farming is organic. Provided we are careful with GE and importing stock feeds, we should be able to promote this difference, although Kieth and his contempories in Fonterra seem happy to leave it to someone else.
Although powder is an efficient way for NZ to export milk to the world, despite the incessant call to add value, no one has. It doesn't have to be producer cooperatives. Why hasn't an investment group not directly associated with farmer coops done it? A board comprised of financial commentators, ex politicians and current and recent industry leaders including Keith could direct such an initiative.
Ah, the Swiss way of farming. Your meaning of organic Kate would never get a farm accredited as organic - and perhaps therein lies the problem. Different people have different perceptions of organic.
There are more farmers than you probably realise that farm without urea and/or imported stock food, but aren't classed as organic. They also usually shy away from the limelight. ;-)
organic or Organic(tm).
if you're going Organic, it also means only a very very few herbicides, no penicillin or other medical drugs or worming/lice drenches, replacing tanilised fence posts, regular check ups.
biotech farming (no "TM") is more about soil health and biological processes, and not building drug-resistance by sensible use of medicines.
These are the guys I used to deal with for my soil + fertiliser:
http://kiwifertiliser.co.nz/index.php/more-info/about-us
people _aren't_ paying the premium (eg for wild fish over farmed fish)
And a simple look at what Fonterra is paying **NZ** grass feeding _dairy_farmers_ then you comments about "ordinarily pay through the nose for it" is also completely wide of target.
Oh...you want to say that *you* pay more to the _supermarket_ for "organic" and "grass fed" meat and dairy? Well that's a shame because what _you_ are paying is for "brand building" !
Down on the farm (if you're not driving to your local raw milk dairy farm) they aren't paying for it. It gets the same price as all the rest. And the market has spoken with it's feet (and wallet), volume of specialist milk is still very low, as is things like organic/local pork. Despite what the whole food and green types would have you believe, they're still just a tiny niche and not enough to support a supply business (and are the provenance of the well off)
Good piece. I think behind the call for one organisation is the hope that with an effective monopoly higher prices can be charged (why else do it?) while ignoring the buyers ability to pay. Personally as a consumer I look at a) meat prices over the last 5 or 6 years and cant see much sign there has been any significant increase with no pay increase to speak of in that time frame b) I certainly do not have the ability to fund higher costs across the board as rates etc seem to continue to march upward this leaves less money for other things. I think a) is the symptom of b) ergo the hope of significantly higher prices will go no where IMHO. All the while inputs and overheads get higher and higher, can but mean a crash in the price of property at some time down the track as there is nothing else left to give way.
returns to farmers are ridiculously low and highly volatile. the primary processors are looking at mergers to control cost and their volatility .... so where is the "ignoring buyers ability to pay" on their parts?
compliance costs...hmmm? overtaxation on what little capital assets are being repaid...hmmm?
there can't be a crash in property prices without a driver to sell, otherwise the supply is just withdrawn from the market to hold prices steady.
To increase your ability to pay means that Velocity of Money would have to be increased. Since [commercial] interest rates are currently low [and optional] that points to two things that I point out some two or three years ago. Taxation (removing money [trade] from circulation), and foreign+government businesses pushing aside local economic activity (ie NZ owned and skilled businesses).
Increase local business count, increase local velocity of money, increases wages, increases disposable income. syphon off that economic energy into foreign profits or government and the wheel of commerce slows...
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