[This post was first published in the Fairfax NZ Sunday Star Times on October 26 2014.]
I have previously described the challenges that seasonality creates for the dairy industry. For New Zealand’s red meat industries, those issues are even more constraining. It is a key part of the reason why restructuring the meat industry is so challenging.
Sheep are designed by nature to give birth in the spring, and their fertility is much reduced at all other times of the year. Given that the market predominantly wants carcasses of 17 – 20 kg, this means that most lambs are ready for slaughter between December and April, with the peak slaughter in a shorter period from January to March.
In practical terms, this makes impossible the development of a mainstream consumer products industry based on a 12 month supply of chilled lamb. Trying to configure the national industry in this way would lead to exorbitant production costs.
Over the last 20 years, the shelf life of chilled lamb has been extended considerably. Chilled lamb can now be reliably kept for about three months under commercial refrigeration. This gives a sufficient window for shipment by sea to Europe, with another four to six weeks of shelf life in store.
This means that the early season lambs, as long as they are slaughtered by the first week of November, can just make it to Britain in time for Christmas. Late November lambs can also get there, but only if sent by air.
With beef cattle, nature is somewhat more flexible than it is with sheep, and calves can be born at any time of the year. But for low cost pasture-based production, spring calving is still, in most situations, the way to go. It is the spring calving cycle combined with autumn slaughter at 18-20 months of age that best fits the pasture curve. Similarly, when cows are culled from the dairy industry, it is autumn culling that fits both the pasture curve and the lactation cycle.
These are the reasons why our meat industry has traditionally focused on seasonal production and frozen product. Fortunately, the food service industry understands how to use frozen product. Accordingly, most export lamb, when served in a restaurant, comes from frozen product.
For many years I have listened to consumer marketing specialists berating our meat industry for its supposed lack of consumer focus. Yes, the industry has indeed been production focused. However, the challenges of working within the constraints of seasonality should never be under-estimated.
The seasonality of production impacts at least as much on processing as it does on marketing. It results in very low plant utilisation and a requirement for seasonal labour. It is these issues that lead to the destructive competition that has existed for many years in our red meat industries.
Drought years create another issue. In these years farmers become desperate to quit their stock in a hurry. What is normally considered surplus slaughter capacity can suddenly become highly valued.
Each company makes careful calculations each year as to when to open a particular slaughter chain. The fixed costs of opening and operating are considerable. Thereafter the additional marginal costs associated with each extra lamb processed are modest. This then leads to competitive behaviour between the companies. For each company, it makes sense to keep bidding for livestock as long as the gross margin from processing an animal exceeds the variable costs of processing.
At times this also means animals are trucked large distances to fill a shortage. But if all animals are purchased on these marginal costing criteria, then at the end of the year all processors have made a loss due to fixed costs not being met.
The key point is that these behaviours are logical from the perspective of each business, but they do not optimise resource use across the industry.
Before being too critical of the meat industry, we need to note that the same behaviours exist elsewhere. For example, airlines provide cheap seats, not out of kindness, but as part of normal business behaviour. History tells us that most airlines, both in New Zealand and overseas, end up going bankrupt through destructive competition.
Back in May, I wrote how the meat industry was going through a quiet phase. On the surface there was calm but underneath the companies were positioning to survive the next competitive war. The big question now is whether or not this war will break out in this coming season.
As a backdrop, the two big co-operatives, Alliance and Silver Fern Farms, will be releasing their annual financial results in the next few weeks. Also, the Meat Industry Excellence (MIE) Group will be releasing their farmer-led strategy for change. The MIE Chair, John McCarthy, has recently made the call ‘Let the battle begin’.
From the sidelines, I will be watching with great interest. If the solutions were simple they would already have been implemented.