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Allan Barber says the sheep industry is facing a crisis, and serious strategic thinking is needed to find a viable industry model. Your view?

Posted in Rural News
With consumers not buying lamb in 2013, the industry needs a new sustainable strategy. Image sourced from Shutterstock.com

By Allan Barber

The key question for the meat industry this year is whether anybody will make any money.

After last season when farmers enjoyed unprecedented procurement prices and the meat companies lost millions of dollars as a result, prices have headed south and look set to remain there for the foreseeable future.

Sheepmeat is the product most under threat with the traditional markets all showing serious signs of indigestion.

As an example a US importer has been reported as saying he has a year’s worth of inventory and can’t buy any more and neither is anyone else.

This signals a major problem for middle cuts like lamb racks, while Europe isn’t exactly rushing to buy any product either.

This explains the amount of cheap sheepmeat available on our domestic market, although unfortunately local consumers have been turned off buying lamb as a standard part of their diet by last year’s high prices.

This is no different from the rest of the world; and expecting New Zealand’s minute population to absorb any significant part of the oversupply is a bit like expecting Fiji to win the World Cup or the Black Caps to win the series in South Africa for that matter.

Beef may resist the worst of the price downturn because US demand remains steady against a backdrop of falling domestic cow numbers and consequently an increased share for imported beef. Asian demand will also remain firm, while New Zealand exporters may be able to pick up some of Australia’s market share, as Australian supply to the USA is anticipated to take the lion’s share of the increase there.

But even beef will continue to struggle under the impact of our dollar which is set obstinately at about 84 US cents with the greenback unlikely to strengthen at all, unless Congress can agree on a fiscal solution to the enormous American debt problem.

In spite of averting the fall over the fiscal cliff, the USA really hasn’t solved its long term problem, merely postponed a decision.

The main difficulty for sheep meat is the amount of inventory held by wholesalers and exporters which is waiting to be sold into a market which doesn’t need it and, even if it did, can’t afford to pay a price for it which will compensate for our exchange rate sitting at 52p and .63 Euro.

This inventory problem will only be exacerbated by another season’s production which will hit its peak in less than three months.

If my pessimistic assessment is even only half correct, 2013 bears all the signs of an extremely difficult season for all participants in the sector.

MPI’s forecast for farm incomes, down on last year, is still reasonably positive at least in historical terms, but it must come under pressure from any further price drops or cost increases. There is most unlikely to be any spare cash around.

After the beating taken last season by the processors, shown factually in the annual accounts of Silver Fern Farms, Alliance and Blue Sky Meats, and by implication in the results of the others, all the meat companies will be under pressure to get back into the black.

The only way they can achieve this is to reduce procurement costs, increase operational efficiencies and sell inventory into the market, preferably with a profit margin on what it cost them.

This last one will be by far the hardest.

There is already plenty of evidence of product being offered at very competitive, or silly, prices in spite of Keith Cooper’s claim before Christmas that working capital tied up in inventory is ‘good’ debt because it restrains companies from dumping product.

Now if that isn’t a case of making a virtue out of necessity, I don’t know what is.

Logically if there is an inventory problem, it makes sense to quit it at the going rate rather than waiting for the market to recover by which time there will be more inventory in the freezer tying up more working capital.

The meat industry is becoming increasingly a division between sheep (very hard to make a consistent profit) and beef (quite or extremely profitable, mostly because of the livestock sourced from the dairy industry).

Those companies which specialise in beef from dairy regions, notably Greenlea and Universal, appear to be very profitable without interference from the volatility of sheepmeat pricing.

Alliance has traditionally been the outstanding performer among the processors with a commitment to the sheep industry.

Silver Fern Farms has reinvented itself as a company with a significant beef business which has reduced its vulnerability.

But as last season’s results showed, the sheepmeat business placed serious pressure on their balance sheets which will inevitably continue throughout this year.

This may be the year when some serious strategic thinking is applied to finding a viable industry model for sheepmeat alone, instead of trying to find a single solution for the meat industry as a whole.

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Current lamb prices from all processors and saleyards are here »

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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he runs a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or read his blog here »

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5 Comments

Apart from the well-known

Apart from the well-known cheaper chicken substitute, time and techiques needed to cook sheep meat or beef well are longer and more sophisticated than ones needed for cooking poultry meat.
NZ's largest sheep meat importers are EU27 (53%), US (10%), China (9%) and OPEC (4%) by value for the year ended June 2012. 
Wonder why the price went south. It was because EU27 and US went south. Also, population that consume imported sheep meat is shrinking!!!
Industry strategy may help to lower the procurement cost but it cannot help to raise commodity price.

xingmowang - I am concerned

xingmowang - I am concerned that you think cooking sheep meat and beef well takes longer. I'm wondering if other people have this same issue as neither beef or lamb are particularly difficult (time and technique) to cook.  Maybe the meat industry needs to educate people on different methods of cooking and techniques in cutting up and boning out different cuts of either product if the issues you have raised are wide spread.
 
 
 
 
 

I like people who think more

I like people who think more than an economist. 
It may take 2 mins each side to cook a steak. But people from emerging markets (for whatever reason) perfer more cooked dish or dish with more efforts in it.
For example, a Hungarian beef Paprika stew (type of dishes) takes about 2 hrs to cook.
Also, western style sheep meat/beef dish tend to be cooked using oven which may be a luxury or non-traditional household item for people from emerging markets.

xingmowang - I hear what you

xingmowang - I hear what you are saying. 
In regards to the emerging markets - I disagree that one needs a Western style oven to cook    good quality food dishes made from beef and lamb. Oven cooking is only a method of perhaps convenience to western societies. You can get the same or better outcomes from using some of those emerging markets cooking techniques on beef and lamb.  
I would also assume many of those likely to purchase lamb and beef would have the income to afford appliances such as ovens but maybe prefer their traditional cooking techniques. 
 
I actually prefer some of the cooking techniques that come from other countries and am always experimenting with their cooking methods.  Oven cooking has a convenience factor in Western lifesyles as they don't have to be so vigilant while cooking. other western options include crockpots which are just a convenience technique.
 
If NZ wants to sell beef and lamb into these emerging markets we need to ensure our product cuts are  tested with the predominate cooking methods used in these markets.  We also need to ensure that the predominate flavours used in these markets marries well with our products.
 
 
 
 

The idea that our meat

The idea that our meat industry is worth bothering is perhaps put to rest by the article below.
The protagonists spend more time worrying about a beauracratic date stamp than the fact that  some how a choice cut of meat that will have left the farm in perfect condition, was turned in to a rotting pathogen laden meal by shear incompetence.
The ones that did this claim maybe  60% of the retail value, yet they simply do not care.
http://www.stuff.co.nz/business/farming/8220861/Rotten-lamb-reveals-how-...