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Allan Barber wonders if sheep & beef farmers and processors could actually work together for sustainable growth even if they think it would be a good idea. Your view?

Posted in Rural News
Last year s&b farmers were on top, this year it is the processors. Could they learn to work together for mutual benefit?

By Allan Barber

Last week Jeanette Maxwell, Federated Farmers’ Meat & Fibre chair, sent a letter to the chairmen and CEOs of the five major sheep meat processors and exporters.

The letter asked them to suggest how the parties could work together for the good of the industry.

So far one company, AFFCO, has replied formally, but no doubt others will respond in due course.

Maxwell sees this as an age of ‘collaborative governance’ in which farmers and meat companies must go forward together instead of fighting each other.

She says there’s nothing to be gained by rattling the cage to no purpose and the intention of the letter is to start the conversation between the parties.

The last twelve months have been seriously stressful, if not disastrous for the meat industry. A year ago the companies were paying an unsustainable $8 a kilo slaughter weight or around $150 per lamb, but the market price and exchange rate combined had already sent this into serious loss making territory for the processors.

Just how serious was confirmed by the published annual results from Alliance and Silver Fern Farms, although Blue Sky Meats’ result for the period ended 31 March gave a good indication.

This year the boot is on the other foot. The lamb schedule is in the mid $4 range, with a 17.5 kilo lamb worth around $80. Whereas last year was unsustainable for the processors, this year is unsustainable for farmers. Hence Feds’ concern, of which this enormous volatility is the main cause, while the climate conditions, drought in many parts of the country, make the situation even worse.

As Maxwell says, price volatility and drought lead to substantial culling of ewes or more drastically to sheep farmers exiting the industry or changing their land use.

If there were more price stability, farmers could afford to carry extra ewes in a good year and buy in feed if needed.

One of the solutions I have always recommended to create greater consistency of outcome and cooperation between farmer and processor is contractual commitment at a guaranteed price in exchange for volume and time of supply.

But Jeanette Maxwell tells me this isn’t always possible for various reasons.

On the one hand some meat companies are not willing to offer contracts, preferring to buy as required on the spot market; while a number of farmers like to supply at schedule on the day, either because that’s what they have always done or they like the flexibility it gives them, in case the weather conditions turn against them.

She says the price required for sheep farming to be profitable is hard to estimate, because it will vary between farmers depending on the amount of debt servicing.

When Feds waged the campaign for the $150 lamb, that was the price they saw as necessary to cover R&M, fertiliser and debt repayment as well as making a cash profit. It also included a good price for the wool, but unfortunately wool returns have been almost as volatile as meat.

It is a shame that the one time in recent history that the price got up to $150, it was only sustainable for a very short time, if at all, and the market reacted against it at the same time as our exchange rate kept strengthening.

I am sure the meat companies will generally be willing to talk constructively to Feds about the importance of working together to minimise price volatility. But equally it’s difficult to see what they can do to improve things: the exchange rate, market demand and supply are the three main factors affecting the industry.

Apart from careful hedging, the exporters’ tools for coping with the dollar are limited; demand appears to be recovering slowly, but it is too soon to say there’s a strong base to the market, while supply driven by drought may mean there will be too much inventory around. This of course may depress the market price again.

Industry profitability is also a key factor. All the meat companies have to get themselves back into profit this year and, while paying as little as possible will drive more farmers out of sheep, paying more than they have to is not an option.

Therefore the parties must hope for an improvement in the market, hopefully a stable if not lower exchange rate, and continued commitment to sheep farming to maintain a reasonable national flock size.

And some rain in the right regions wouldn’t come amiss.

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Here are some links for updated prices for
- lamb
- beef
- deer
- wool

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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 »

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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11 Comments

Could this letter be

Could this letter be described as being naive. What was the intention of it other than being seen to be doing something on behalf of farmers. Why don't Feds just pluck up the courage and say what needs to happen and that is a Fonterra. Tell farmers the amount of money thats being left on the table with our divided approach.

Dont worry Stevie, matters

Dont worry Stevie, matters are in hand. Watch this space!

Not so sure SS but hope your

Not so sure SS but hope your right. Meat companies are good at saying the right thing at the right time to quiten the rebels.

Does anybody know what

Does anybody know what proportion of farmers does Fed Farmers represent?

care to elaborate SS?

care to elaborate SS?

Sorry JI, cant eleborate.Im

Sorry JI, cant eleborate.Im aware of moves afoot from credible people.Its not my place to divulge but strap in for the ride!

Mist, a large company

Mist, a large company processing and marketing the lions share of meat, similar to Fonterra. Hope this helps.

Not this time Stevie, this is

Not this time Stevie, this is a peasants revolt. No amount of weasle words will be suffice this time. Their way hasnt worked, time too back a new horse.

You probably won't enjoy the

You probably won't enjoy the open letter from SFF in this weeks FW SS. Remember the field is full of old hacks and you may need to shoot some and pack them off to Italy or somewhere for consumption. They may be a bit sour though.