Will issues of trust and the environment hold us back from getting our share of international sales? Your view?

Will issues of trust and the environment hold us back from getting our share of international sales? Your view?

By Allan Barber

There are some major challenges confronting our agricultural sector at the moment which demand an intelligent response from the participants, whether farmers, processors or industry leaders.

These challenges can be broadly classified under three headings: the environmental issues which confront all sectors, particularly dairy and meat, there are matters of trust and transparency which affect relationships between processor and supplier, and then there is the challenge of global competition.

Environmental issues

Mike Petersen, Chairman of Beef & Lamb New Zealand, emphasised the environmental issue at that organisation’s recent AGM, stating his belief that the meat industry hadn’t yet woken up to the impending threat from within New Zealand.

Because over 90% of production is exported and the main pressure from overseas customers relates to animal welfare, the environmental challenge hasn’t yet been fully recognised.

But he makes the point the Land and Water Forum has completed its report which is before Cabinet at this moment with recommendations about maximum desirable levels of nutrients finding their way into waterways.

Regional councils have been increasingly strict with effluent runoff for some time now, with the ability to impose penalties for exceeding defined levels (this was probably the first issue with the Crafar farms that the general public became aware of). Only this week, the Southland Regional Council has declared its intention of imposing stricter standards on consent applications for dairy farm conversions.

The probability is that the findings of the Land and Water Forum will set a new, and lower, acceptable standard for effluent runoff which all councils will be required to apply. Fonterra’s voluntary Clean Streams Accord will become both compulsory and harder to achieve, while beef and lamb farmers will be required to comply with more rigorous standards.

Transparency issues

Trust and transparency are concepts that the meat industry has struggled with forever.

The price paid for a farmer’s livestock, otherwise known as the schedule, has long been shrouded in mystery.

I tried to explain this process a couple of weeks ago, but regardless this is essentially a guessing game where the meat company tries to set a price which reflects market factors and is both profitable to the processor and acceptable to the farmer.

However the exercise is not exactly known for its high level of trust and transparency.

Another area which has long been an annoyance for farmers is the question of trimming the carcase and a suspicion the meat processor has been paying for a lower weight than that actually processed. Figures of 200g for lambs and several kilos for beef have been mentioned.

There is now a campaign to introduce a carcase trimming standard, Suretrim, which was initiated by B&LNZ, pushed at various meetings by Craig Hickson, a meat company representative on the board of B&LNZ, and discussed last week at the Meat Industry Association Council.

If MIA members all decide to use Suretrim with standards to be audited by AsureQuality, this will remove an area which reduces trust and transparency between processor and supplier.

But it’s an initiative which requires all companies to participate for it to be successful, otherwise it won’t work, unless farmers unite in their determination not to sell their livestock to any of the non-participants.

In the dairy industry, the question of Trading among farmers (TAF) risks causing a loss of trust between Fonterra and its shareholders. Despite the overwhelming majority in favour of TAF at the original vote in 2009, there are now serious concerns bubbling up, expressed by the Shareholders’ Council and Federated Farmers Dairy Section, that, in its proposed format, TAF may lead to the corporatisation of New Zealand’s biggest co-operative.

The situation is further confused by the inclusion of TAF with milk price monitoring in the Dairy Industry Restructuring Amendment (DIRA) bill which passed its first reading in Parliament this week and goes before a shortened select committee programme before it is passed in time for Fonterra to introduce it in November. Chairman Henry van der Heyden is adamant members will get the chance to vote on TAF again before it is introduced, but by that time it will already be enshrined in law unless the government fails to get a majority at its second and third readings.

If dairy farmers believe their cooperative is in danger of moving out of their control at the expense of corporate and overseas shareholders, Fonterra will have lost an essential factor which has led to the strength of this country’s dairy sector.

Although Fonterra needs capital to be able to compete with other global food companies like Kraft and Nestle, it must continue to take enormous care to ensure that its cooperative ownership is retained.

Global competition

The third big challenge is that of global competition which Fonterra is trying to address through a strengthening of its capital structure.

To compete successfully Fonterra must expand its control of milk production in the growing overseas markets, notably China. It has already come a cropper in China through its Sanlu investment, but this shouldn’t deter it from continuing with the strategy; it just has to make sure it can control the value chain.

Fonterra needs to ring-fence its brand while expanding its production capability, but it must also find an acceptable way of expanding its overseas and value added production without threatening domestic ownership of the company by its shareholder farmers.

That remains its biggest challenge, because international growth in lower cost milk production is inevitable and Fonterra needs to be part of this growth. However the New Zealand dairy farmer won’t necessarily want to fund this aspect of the growth strategy and must allow Fonterra to identify a practical way of doing so.

Another option identified by Fonterra in its Strategy Refresh is to form international partnerships which will enable it to achieve its growth aspirations without having to fund them all on its own.

The meat industry faces a much bigger hurdle in competing internationally because it lacks scale in any area of global consumption growth and domestic markets are often quota controlled. The only products in which New Zealand controls a significant proportion of international trade are lamb and venison, which are both at the expensive end of the market and neither has a large global profile.

The beef industry is dominated by producers in North and South America, while grain fed beef is more popular than grass fed, particularly in the USA and North Asia. New Zealand’s greatest area of demand is for lean bull and cull dairy cow beef, essentially a commodity used in making hamburgers.

Therefore the meat industry is largely a price taker and must compete with all the other beef producing countries of the world, mainly on price. The bright spot for beef and lamb is relatively certain demand growth, especially for beef, and lack of sufficient product to satisfy the growing global population.

In summary dairy and meat both have a positive growth outlook, but they must resolve the various challenges posed by having to comply with increasingly rigorous environmental standards domestically, needing to build and retain trust between processors and suppliers, and being profitable enough to take the steps required to compete on the international stage.

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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he run a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or through his blog at http://allan.barber.wordpress.com

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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Definitely – I think the agriculture sector needs to be far more aggressive and legislate for better outcomes - so competitiveness on international markets is secured and farmers have enough money to clean up the country and  taxpayers pay for the clean up.
 
 
http://www.youtube.com/watch?v=gdhJL5yp7wk

Misses the elephant in the room.
 
Big Ag is entirely reliant on fossil fuels.
 
So too is the ability to purchase produce.
 
The challenge will be to morph from a system which - in the case of meat - uses 27 calories of fossil (finite) fuel to supply one consumed calorie of food. We're simply eating oil. This won't 'grow', it'll dwindle; physics says so. 
 
What we will see, will be a trend to smaller and smaller farms, a breakdown in the global just-in-time system, and a return to 'local'. A mortgage-owing meat farmer I would not be, they're on borrowed :) time now.

Maybe the headline to this article should be:
 
'Will we get our share of international sales while trust is abused and our environment gets stuffed up, more?'
 
See Neville Bennett's recent article on Int.co:
 
http://www.interest.co.nz/opinion/58754/neville-bennett-distainful-way-john-key-administration-governing-he-right

"To compete successfully Fonterra must expand its control of milk production in the growing overseas markets, notably China. "
This has always been Fonterra's stratergy. since its formation. 
How successful has this stratergy been? Did the move into Australia work? Have we lost money doing this in the past? 
 
Do we really need to control milk production in other Countries?
What added value does fonterra bring to factory farms in China?
NZ doesn't do factory farms, we do pasture farming. 
What would we gain by controlling milk production in China? What is the mechanism by which profits would grow?
 
Air New Zealand almost came a cropper because they thought they had no option but to grow in Australia. They bought Ansett which ended up becoming  a disaster for the NZ taxpayer when .Air NZ had to be bailed out.
We don't have any large NZ owned banks left because in the 80's they all decided they had to grow their market share.
 
Growing market share, attempting to expand control of markets has been a common stratergy for large business in the past, but it often does not work.
 
Maybe Fonterra should concentrate on building innovative Milk factories in NZ.
The Chinese like milk originating in NZ because they know its safe.
 
 
 
 
 

Incidently does anyone remember the reasons why Fonterra was founded?
Is the single Fonterra company structure really more successful than the old Dairy Marketing Board/Many Cooperatives structure?
 
 
 
 
 

According to John Storey in an opinion in the latest Dairy News (April 10 Issue 266, p5) an ex politician and more worringly NZ dairy group director, it was because the government was threatening to deregulate the dairy board, which the co-operative industry had invested in over generations. Is this structure mmore successful,? I don't know, on paper it probably should be, but in reality it isn't as can be judged by performance relative to stated expectations, and performance of other dairy farm co-operatives in NZ and around the world.
 
I was unimpressed with John Storey's opinion piece, he seems to think we voted overwhelmingly for TAF and should let the board 'just get on with it'. Well the wasn't robust debate prior to TAF, I'd bet most suppliers didn't fully understand what they were voting on, particularly since relevations around a trading fund and milk price regulation that have arisen since. You'd have to be mindless to take John Storeys' effort to back up the Fonterra Board seriously. What sort of an industry leader would encourage deregulation of dairy board integration of co-operatives, and admit they knew capital structure was going to be a major issue, which threatens to scuttle the co-operative structure, and the security honest hard working farmers have in the industry; and yet claim the opposite. A political twit and poor example of effective leadership I'd say.

I remember reading in the news a few years back that Fonterra had too much debt and was trying to reduce it.
A question I have is where did all the money go? Who spent it and what did they spend it on.
 
I don't know why they wanted to deregulate the Dairy Board. Maybe our trading partners didn't like it because it was too successful and their large corporates wanted to buy some shares so they could get in on the money stream.
Maybe Fonterra was supposed to be just a halfway step to a full listing on the share market.
 
I don't think the reasons for deregulation were fully spelt out.

Good points thanks Kiwi. I'm a Fonterra supplying shareholder, soon to be one of multiple shareholders in what was once a successful co-operative industry that generated value for NZ by following co-operative principles. Chao Chao to that it seems. We are told by our leaders that to stay relevent in the market Fonterra needs to secure milk overseas (volume they call it, the corporate jargon is cringworthy), and the best way to do this is reject the undisputably successful co-operative model for the undisputably unsuccessful corporate model, as evidenced in your post. It's based on economic assumptions that have proven to be flawed and are yet championed by our politicians. We desperately need some innovative and strong leadership to guide us out of this quagmire.

Why Fonterra? Because NZ dairy and Kiwi were set to beat the  c$&p out of each other and drag the DairyBoard down with them, while farmers in general still believed in co-ops and the gvt didn't then need to defend the "state owned DairyBoard" to trading partners.
While by n large those involved at the top in dairying have been on the level there has always been some sneaky sods with their own agenda.