"The dairy boom is impacting the sheep and beef sector in ways that could never have been envisaged, but most significantly, it is destroying farmers’ self esteem"

Content supplied by KPMG*

The last year has not seen the radical reform of the red meat sector that many commentators have been calling for.

The debate that has taken place over the last year, driven by the Meat Industry Excellence Group, has increased awareness of the sector’s opportunities and challenges.

However the year has also seen more land change use to dairy, and dairy support, in the hope of delivering better financial returns.

The issue facing the red meat sector was summarised in a single, eloquent comment: the dairy boom is impacting the sheep and beef sector in ways that could never have been envisaged, but most significantly, it is destroying farmers’ self esteem.

The impact of low farm profitability on confidence in the industry was a recurring theme in many of our conversations.

There is no quick fix to rebuild belief among farmers.

This requires a shift in culture that needs to be driven by all in the industry.

It was noted that some progress is being made to facilitate cultural change – with initiatives like FarmIQ and the Red Meat Profit Partnership being identified as important steps in the right direction.

It was highlighted by a number of our contributors that the industry situation is not uniform.

There are many farmers and processors that are delivering exceptional results from their businesses.

Successful farmers are improving their pasture, adopting analytical tools and nurturing long term partnerships with the company they supply.

Likewise, successful processors are committed to changing from a transactional relationship with farmers to increase transparency, reduce commoditisation, and grow the overall pie for all industry participants.

They are also innovating across the supply chain to deliver innovative, sustainable and traceable products that meet the needs of the end consumer. term partnerships with the company they supply. **

Likewise, successful processors are committed to changing from a transactional relationship with farmers to increase transparency, reduce commoditisation, and grow the overall pie for all industry participants.

They are also innovating across the supply chain to deliver innovative, sustainable and traceable products that meet the needs of the end consumer.

In our case study, we profile Greenlea Premier Meats, an innovative family-owned company that is successfully growing export markets for premium beef products.

While the concept of a ‘red meat Fonterra’ met with little support during our discussions, the majority of leaders recognised that the industry needs to continue to evolve.

If sector participants are prepared to take a long- term perspective, some of the potential options could include:

› Consolidating processing assets to create an open access toll processing entity was floated as way of securing overhead cost reductions (which are estimated to be between $300 and $500 million per annum), while enabling the industry to cement the efficiency benefits of scale. There are many challenges to implementing consolidation, not least the cost associated with rationalising existing capacity. However there appears to be reasonable consensus around the cost benefits that could be realised and returned to processing companies and the farm gate.

› Some leaders expressed the view that the industry was unlikely to progress without one or more international partners being attracted to invest in the sector. It was suggested that well-capitalised offshore investors can strengthen the balance sheet, as well as bringing market connections and new perspectives. (Though it should be noted an offshore investor does not deliver a guaranteed fix; KPMG analysis suggests less than one in four Mergers & Aquistion transactions actually deliver the expected uplift in value).

› Our beef and sheep meat products have totally different characteristics, yet more often than not they are lumped together as a single sector. Lamb has a dominant position in a high-value, niche sector; while our grass fed beef industry supplies a differentiated niche beef product that represents a small fraction of the global beef supply. The view was expressed that the unique features of each product require a more tailored focus and branding to grow value in each sector, rather than continuing to take a one-size-fits-all approach to red meat products.

› A number of leaders recognised that a key challenge to the financial viability of sheep farmers is the parlous state of the wool sector. They noted that rebuilding farmer confidence is heavily dependent on recovering wool profitability. However with the crash in wool volumes seen over the last six months, achieving a turnaround becomes increasingly challenging, as supply shortages are driving short-term market behaviours.

The continued success of New Zealand’s primary sector is dependent on having strong and viable beef and sheep farming sectors.

A long-term perspective will enable the industry to move beyond survival mode and focus on maximising its potential, rather than looking jealousy over the fence at dairy.

There should be no room for infighting or talking down the industry.

Strong leadership will therefore be critical to establish a new era of engagement, collaboration and trust-based relationships; to enable the industry to succeed through a variety of different routes to market.

-------------------------------------------------------------

This content is from the KPMG publication "Facilitating Growth in an Uncertain World" volume 1.