Meat Industry Restructuring

Yesterday (18 April 2013) I was a guest speaker at a meeting called by the Meat Industry Excellence Group (MIE) and attended by 300 – 350 Canterbury sheep farmers. This is one of a series of meetings MIE is running throughout the country. The purpose is to get a mandate for industry change within the troubled sheep industry.

The first speaker was Professor Hamish Gow from Massey University.  His key message was that there are many alternative models, and we should not jump too quickly to the belief that the proposed 80/20 model, with 80% of product being processed and marketed by one company, somewhat like the NZ dairy industry, is necessarily the best way forward.

Then John Brakenridge, CEO of the New Zealand Merino Company, talked of the need for downstream investment. His key message was ‘the status quo is not an option’.

I then started by showing some supermarket slides I  took in Canada a couple of years back. I showed some New Zealand lamb in consumer-ready packs and selling for Canadian $17.60 per kg. I then showed local Canadian beef at $12.40 per kg and Canadian pork at $6.37 per kg. The message I wanted to get across is that someone in the industry (in this case the NZ Lamb Company, which is a consortium of most of the big players within the NZ industry), must be doing something right to have lamb positioned in this way relative to other meats. And leading on from that, I wanted to sow the seed that there is actually a great deal of expertise within our meat companies. It is all too easy to bash the meat companies and fail to recognise the complexities of this industry.

I then showed some slides taken several years ago of supposed New Zealand lamb in a Shanghai supermarket. I explained the long journey that the processed lamb roll  would have taken. From New Zealand it would have been exported as frozen lamb flaps and similar, by the Chinese buyers, to the port of Dalian in North China. From there it would have been transported north to Harbin, close to the Siberian border. There it would have been thawed, boned and processed into lamb roll. There may even have been some pork fat added. On that, one would not really know, but it has been a common practice in the past. Then it would have been frozen again and transported across China.  In the supermarkets it was sliced thinly and placed in consumer packs, and sold by the Chinese entrepreneurs in chilled form as New Zealand lamb.  But the real provenance is somewhat of an open question.

China is now New Zealand’s biggest market by volume for sheep meats.  In the main, it is a commodity market. We are doing well from this rapidly growing market but there also have to be questions as to whether we have been getting the best out of this market.

At that point I turned the Powerpoint off and ‘ad libbed’ in terms of laying out a possible path forward.

I used the analogy of a game of chess, where there is an end game, a middle game, and an opening. We are all agreed as to where we want to get to: a profitable and sustainable industry. But that is the end game.  And that is not where we have to start.

Almost certainly the middle game will include some form of industry consolidation.  There is no doubt there is considerable over capacity in the processing side of the industry. And arguably there are too many players, and a lack of scale.   But once again, that is not where we have to start.

In the last few days a number of people have been ringing me to provide their ‘take’ on what the industry needs. One of the most cogent comments was from a director of one of the big companies who said that most of the bad behaviours that we see in the industry stem from the procurement battles, and the associated lack of alignment between farmers and processors.  I agree wholeheartedly with that comment.

So the first step forward has to be getting farmers aligned with a particular processor/marketer on at least an annual basis.

Companies need to know by the end of June as to who will be supplying them in the following year. To get farmers to commit, there has to be a guarantee from the companies that they won’t go out and purchase stock on the spot market at higher prices than what they are paying the committed suppliers. And farmers have to also understand that a legal commitment is a legal commitment.

Of course the above statement is easier to say than to actually implement. The big companies need to commit to working by the above rules, and at that point farmers will recognise that commitment to alignment is indeed the  way to go.

Commitment to a processor does not have to mean fixed price or fixed specification contracts. What it does mean is that farmers and processors communicate as the season progresses to firm up on the specifics as to what they can produce, when they can supply,  and at what specifications. It also means that companies can plan their processing and marketing in advance, knowing the overall productive capacity of each farmer. It is a key step in developing integrated supply chains.

Just as in the dairy industry, it does not mean guaranteed prices in advance. Dairy farmers accept that reality, knowing that their processor cannot afford to ‘dud’ them. Any processor that does not come up to the mark in terms of price, linked to final market realisations, will not have many suppliers the following season!

Some processors are already working according to this system. So it is possible. But it does need a change of culture at the overall industry level to make the system the dominant system.  I am confident that in that new system a lot of industry consolidation will then start to occur.  It won’t solve all of the problems, but it will move things forward.

If farmers and processors cannot agree on this as the first step forward, then what is the alternative?  Essentially it is the status quo.

However, the status quo is actually not stable or sustainable. Farmers can already see that next year there is going to be a further reduction in supply. This will be mainly due to the late summer and autumn drought which is going to knock at least 10% of next season’s lamb numbers. So there will be a real scramble amongst processors for livestock, and the chance of another procurement battle – to the short term benefit of farmers – is on the cards.

In the long term this will be a disaster. Last year the meat companies in aggregate lost about $200 million. Another year of that and the most realistic scenario is that someone is going to crash. That will occur when the banks are no longer prepared to come to the party. At that time there will be assets on the market at fire sale prices with the process managed by a receiver. It will be the ideal time for an overseas buyer to come in. If that buyer has deep pockets then procurement prices may well be offered in the following  two to three years that effectively take out the other major players. So it will be a consolidated industry (the ‘last man standing’) but it certainly will not be farmer-owned.

I thought the overall tone of the meeting was good. All the Silver Fern Farms (SFF)directors were there, having rescheduled a morning Board Meeting to Christchurch so they could attend. SFF Chairman Eion Garden spoke eloquently from the floor as to the issues and challenges from their perspective.  The Alliance Chairman, Owen Poole, could not make it due to an airline cancellation leaving him stranded in Invercargill, but Alliance Director Murray Taggart reinforced the points made by Eion Garden.  AFFCO chose not to attend, and ANZCO said they were given insufficient notice. However, we do know that all of these companies are talking between themselves in the search for a path forward.

I believe the debate has moved on since the somewhat combative Gore meeting of last month. There is now a wider recognition that farmers and processors will indeed need to work together to take this industry forward. But the devil,  as always, will be in the detail.

Keith W
18 April 2013

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Addendum
I have just received an email from an attendee at the meeting who said that after the meeting she was talking to about five young farmers, all of whom said they would chase an extra 20c per kg if they could get it through spot sales. But none of them were prepared to state that publicly. Well, that unwillingness to stand up  publicly is perfectly understandable.  They would have been crucified (metaphorically speaking).   The need these farmers feel to chase that last 20c through spot sales (for their own economic survival), and the inherent distrust so many farmers have of the meat companies, is why nothing will change unless all of the big companies will themselves commit to a transparent procurement system, which gives committed suppliers a legal guarantee that spot suppliers will not get a premium.
KeithW
18 April 2013