Tradable slaughter rights – the Pappas, Carter, Evans and Koop proposal

In recent weeks there have been suggestions that tradable slaughter rights can provide a path forward for the New Zealand sheep meat industry. Mike Petersen from NZ Beef and Lamb has given the notion a ‘leg up’ with his personal endorsement, and apparently at least some of the processors are keen on this idea.

Media reports have been referring to the Pappas, Carter, Evans and Koop report from 1985, commissioned by the Meat Industry Council of New Zealand, as the key document in relation to such a scheme. But nowhere in the media can I find a presentation of what Pappas et al actually said, or an analysis of how these tradable slaughter rights might work. All I can find is repetition of the comment that the Pappas et al proposals met a cool reception from the industry at that time, and a suggestion that now, some 28 years later, it is time to have another look.

In a later post I will analyse tradable slaughter rights in relation to the current challenges we face in the New Zealand red meat industry, and particularly for the sheep meat component. But in this post, I want to look back to why Pappas et al made their recommendation back in 1985. I want to understand their logic, and the reason that they thought it might work in relation to the challenges of those days.

I found a copy of the Pappas et al report in the Lincoln University library, where it appeared to have been gathering dust for many years. It took me down memory lane to the days when we wrote our drafts in longhand, and typists then set to work on them. As I read the report, it also took me down other memory lanes, back to a meat industry world I had almost forgotten about.

The Pappas et al study would have commenced in 1984 as the Muldoon era of Government was coming to a close, but, well prior to publication of the report in March 1985, New Zealand had entered the Lange era. Finance Minister Roger Douglas, of ‘Rogernomics’ fame would not yet have been in full stride, but the tide would already have been starting to turn from regulation to free markets.

According to Pappas et al, red meat and wool earned more than twice as much foreign exchange as dairy in 1983, although this was down from 1979 when they earned four times as much as dairy. In 1983, red meat and wool still made up 44% of New Zealand’s total export income, down from about 54% in 1979. In those days nearly all of our sheep meat went to the United Kingdom and Europe, and most of it would still have been exported as carcasses. The marketing was actually undertaken by the NZ Meat Board who had commandeered the marketing some years previously by Government fiat! It was indeed a different world.

Back in those days the meat processing industry – known by all as the ‘freezing works’ industry – was highly inefficient. At the peak of the season the works operated one eight-hour shift per day for five days per week. They operated in total for 160 days a year. Overall capacity utilisation was estimated at 10% compared to global standards of 30% in sugar mills, 50% in automobile manufacturing, 85% in smelting and 90% in oil refining.

In 1983/84, farmers received 49c per kg for export lamb and nearly half of this was subsidies of various forms. More than half the export value was taken up with slaughter costs, basic processing and transport to dockside. A slaughterman’s hourly wage was more than the farm gate value of two lambs. Farmers received only 33% of the wholesale (Smithfield) value of the carcass. The percentage of the retail value (the measure that we now use) would have been considerably lower than this. Using other data from those times, I estimate it would have been about 22% of the retail price.

Pappas et al said that many of the freezing works needed to close. However, the cash costs of closure and remediation were such that they could not afford to close. Hence the need for a system that put value on killing rights. Strong companies would purchase killing rights to expand, and weak companies could sell those rights to pay the costs of closing down.

Pappas et al suggested that the penalty for exceeding the slaughter right should be set at $5 per sheep. This was intended to be more than the value of the slaughter right (almost as much as the value of the lamb) and this high penalty would encourage a market in slaughter rights.

Well, nothing happened. It may have been the right scheme at the wrong time, or it may have been the wrong scheme at the right time. Regardless, New Zealand sheep numbers, which had reached a peak of 71 million in 1983, began to decline precipitously. The decline has yet to stop, with current numbers of 31 million or thereabouts.

Although nothing happened in relation to the Pappas et al tradable slaughter rights, a great deal did happen in meat processing. Companies did go bankrupt, some new companies did emerge, lots of new technology was introduced, and labour laws changed drastically. The industry changed from one that was extremely inefficient to one that is now very efficient and innovative. Even in a bad year like the current year, farmers are still receiving more than eight times per kg what they received in 1985. However, in the context of an industry which has been in overall decline, there is still more to do.

I have already said that it will be a future post where I analyse how tradable slaughter rights might work in the situation currently faced by the New Zealand red meat industry, and particularly the sheep meat component thereof. But I will finish this post with a brief comparison of then and now.

Back in 1985, the key problem was a processing industry that was highly inefficient. The costs of processing were destroying the industry and there were major impediments to plant closure. The concept of ‘marketing’ was still dominated by a ‘supply chain’ that comprised transport of frozen carcasses to London and wholesale ‘disposal’ at Smithfield. Companies had little incentive to develop the market, and indeed all ‘marketing’ was undertaken by the NZ Meat Board. (Control was handed back to the companies at the end of 1985.)

The problems in 2013 are very different. The key issues relate to a supply chain that is broken between the farmgate and the processing companies. Companies are therefore focused on procurement issues and trying to build their share of livestock. This leads to lack of trust between farmers and companies. It also leads to procurement wars, and pricing behaviours which are destructive. These behaviours derive directly from the high fixed cost and relatively low marginal cost of processing. Although the processing is now technically efficient and sophisticated, the current industry structure does appear to be leading to under-investment in overall value chain development. As in 1985, there are still issues of over-capacity, but they are nothing like the issues of the past. And this year, the North Island processors did indeed work at high and possibly full capacity for about two weeks to deal with all the stock coming from drought affected farms.

A slaughter rights scheme would undoubtedly be complex. It would by definition require regulations and require its own bureaucracy. It may also be impacted by the ‘Law of Unintended Consequences’. Caution is appropriate.

Advertisements

About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
This entry was posted in Agribusiness, Meat Industry. Bookmark the permalink.

One Response to Tradable slaughter rights – the Pappas, Carter, Evans and Koop proposal

  1. Nick Turner says:

    An excellent post! I’m no expert (I’m a journalist, not a farmer), but I do lament the failure of the media these days to remind their audience of the history behind our present-day problems. Without that, there can’t be any real understanding. You mention Muldoon and Douglas but we’re talking more than a generation ago, and I suspect a lot of farmers and the general public weren’t around then or have forgotten what things were like (you forgot to mention freezing works and wharf strikes). As one involved in media coverage of the farm sector at that time I remember how hard it was to justify the SMP scheme and our marketing system to audiences in the EU. How things have changed!
    Nick Turner

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s