Allan Barber shows there is no easy route to higher levels of farm profitability as the dark outlook for EU and UK farmers shows. NZ farmers will find it hard to duck global trends

By Allan Barber*

When sheep and beef farmers in New Zealand grumpily ponder their forecast returns for 2016-17, they may be able to take some comfort from the precarious state of farmers in Europe, particularly the UK where they are facing even more uncertainty of income.

Private Eye’s Bio-Waste Spreader column contrasts the rhetoric of the Environment Minister saying farm subsidies must be abolished post Brexit with a report by her own Ministry, Defra, which finds British farmers would be unable to keep going without them. In the 2014/15 year dairy farms were the most profitable averaging GB Pounds 12,700, whereas cropping farms made GBP 100, lowland livestock farms (most like our sheep and beef) lost GBP 10,900 and grain growers did even worse. These profits or losses came before farmers paid themselves any wages or drawings.

The only thing keeping them afloat is the average EU subsidy of GBP 25,000 which Andrea Leadsom, Environment Secretary, would like to get rid of. Apparently one solution suggested by Farms Minister George Eustace would be to pay something that looks remarkably like the Single Farm Payment which applies across the EU and which anti EU Tories like Leadsom and Eustace have been rubbishing for years.

Subsidies make up an average of 25% of farm revenue across the EU, while in Norway and Switzerland farmers receive government assistance of more than twice that amount. In Canada farmers receive almost 20% of their revenue from subsidies and even in the United States they make up 10%. In contrast it appears New Zealand farmers going cold turkey over 30 years ago have done something all other agricultural producing nations have found impossible.

This may be cold comfort for sheep and beef farmers tired of seeing their profits decline year on year, but the fact remains they have been profitable every year, even marginally in 2007/8 which was at a 50 year low. Conversely in 2011/12 average farm profit was $131,100, similar to 2001/2, but 10 years between such highs is clearly unsatisfactory. This sort of trend produces land use changes, as landowners try to find the option producing the best returns. But there don’t seem to be any clues in the rest of the world about how to avoid the commodity trap and achieve consistently high returns.

A London based market intelligence firm Euromonitor International reports global meat consumption rose 2% in 2015 because of increased consumption in emerging markets, but the main area of growth was in chicken and pork with the Middle East and Africa and Asia Pacific being the only regions to post an increase in beef and veal consumption. Consumption in North America declined 3.1% and in Latin America by 3.7%. All meat consumption in Western Europe declined with beef and veal coming down by 1%, while in the USA pork rose by 8% and chicken by 5% as consumers chased leaner meats driven by dietary concerns.

It is difficult to fathom how New Zealand agricultural producers in general, and more specifically red meat producers, will be able to buck global trends which are driven by many factors including regional population growth, health and diet, growth of convenience foods, relative economic prosperity and future technological developments in protein production. As an exporting country New Zealand needs to be acutely aware of what global consumers actually want their food to deliver, how this is changing and how quickly.

What is certain is the increasing importance of maintaining or improving our environmental performance as a means of underpinning our brand reputation. Food provenance has become a critical success factor, particularly in traditional developed markets. It is no longer enough to rely on New Zealand’s slightly ragged claim to be 100% pure, but we must actually demonstrate the truth of such a claim and build a brand story around it. In a world which may be retreating from the removal of trade barriers, it will be essential to improve our reputation for product quality at every stage of the value chain.

With all due respect to the dairy industry’s efforts to introduce stringent environmental standards, it doesn’t appear to be winning the PR battle with some commentators increasingly gaining air time to criticise water quality. This battle must be won, if New Zealand is to build a brand story based on quality of production, environmental performance and provenance.

In a world where synthetic proteins will be able to simulate the taste and texture of meat, it won’t be enough to supply undifferentiated beef and lamb and expect to receive a premium price for it. In order to satisfy the demands of the wealthiest 1% of the world’s population, it will be essential to provide a differentiated food experience targeted at the precise needs of particular market segments.

However these markets must be carefully developed before farmers can expect to be rewarded with a premium for what they produce, unless they meet a tightly defined specification for a product which can be marketed directly to an end consumer who is willing to pay more than usual for it.

As is evident from the incomes earned by UK farmers before subsidies, there is no easy route to higher levels of profitability.

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*Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at allan@barberstrategic.co.nz or read his blog here ». This article was first published in Farmers Weekly. It is here with permission.