By Keith Cooper*
I have had the privilege of being involved in the meat industry for over 34 years and now the luxury of being on the other side of the fence as a farmer and observer.
In that time I also enjoyed being part of the development of China as a market for NZ meat (and other markets ) that were not even on the radar over the 80’s when various subsidies were removed and the instalment of EU quotas occurred.
To give some context and understanding, we should look at how the NZ meat industry developed new markets in the past.
Two markets spring to mind, North America and Japan, both designated as markets of significant potential late in the last millennium. These markets received development and/or protection by the then NZ Meat Producers Board, with the aid of significant farmer levies - Devco - now the NZ Lamb Company owned by various NZ meat companies and ANZCo subsequently sold to private interests and Japanese customers.
In both instances the development was controlled and non-commercially funded, albeit at a significant cost to levy payers which was ultimately to the benefit of subsequent owners who avoided all the start-up and ‘’sunk’’ costs associated with the controlled development of a new market.
The question is, was such a model successful then or subsequently and should such an approach have been used for China?
If so, would such a model have changed or allowed better managed development and avoid the massive surge in demand, impact on markets and the pain we are now suffering as that surge from China recedes?
This debate can quickly get one to the fact we don’t have a co-ordinated approach to any markets as an industry, the meat exporters fiercely value their own initiatives which are packaged as points of difference to attract livestock supply – in theory this should create a ‘’vibrant‘’ meat sector.
Further, as an industry, we don’t really understand the difference between sales and marketing. They are two distinctly different disciplines requiring different skillsets and separation within a business. Marketing creates demand from consumers/customers, sales however, services that demand with product, planning, logistics etc. Then of course we have traders who do just that, trade.
Hence it is a crying shame that Beef+Lamb is considering ending meat promotional funding and thus ensuring the topic doesn’t become a voting issue in the forthcoming Commodities Levy Act referendum for on-going farmer levy support. Leadership should prevail, Beef+Lamb must continue to undertake base case promotional work on a case by case basis with companies who are prepared to co-fund, support their own initiatives in market and rightly have an influence over how their suppliers levies are spent on promotion.
Back to China - in my view and experience, the current China issue is very simple.
The industry had been plodding away for 18 odd years with relatively low value products. The Chinese developed a PSP (Protein Supply Plan) and mandated various organisations, generally state funded and partly state owned (the equivalent to our SOE model) to source food items that had been deemed best sourced offshore, these being products generally requiring high volumes of water, reflecting Chinese challenges with water.
This coincided with the economic boom in China which saw mass migration to old and new cites and an increase in disposal income, at the same time as a crackdown on internal manufacturing standards, both of which created increased demand for imported meat.
This lead to well-funded organisations entering the meat trade with no supply chain or infrastructure distribution networks in China. The result being NZ meat was speculated on with traditional meat companies and distributors being forced to pay artificially high prices. This all cumulated with a significant inventory build in China, speculators quitting inventory and a major increase in the domestic production delivering a material price correction.
Accuracy of detail aside, China purchased significant volumes, tightened supply to traditional markets forcing the global value of NZ sheep meat and beef to new levels. When the tide turns (turned), it all becomes very simple, with global buyers that had delisted product being courted to relist the product at ‘’attractive‘’ price levels.
It begs the question, would a different outcome have been achieved if China was developed under the guidelines of a ‘’development’’ market with a cohesive pan industry approach? Would that have managed the price at the time and meant a more constant global revenue stream? Would that have also meant that other markets would not have been forced to pay more on the back of the shortage caused by Chinese demand?
One can quickly migrate to the dairy industry model with the price discovery mechanism of the Global Dairy Trade platform. That model has not insulated the dairy sector from market forces.
Markets are complex and by definition are what a willing seller is prepared to accept based on what a willing buyer is prepared to offer. No one is bigger than a market.
However, is an integrated market model the answer? By that I mean a vertically integrated model where the producers produce a product to customers specifications and the customer provides a sustainable pricing return for all through the value chain : producer, processor, exporter, logistics, importer, distributor AND deliver a product that consumer can afford and is competitive with other protein or food items. So many questions!
There have been attempts at such models, ANZCo being a good example, however it hasn’t been clear or transparent as to the true success, certainly at the farm gate value, with many such models ultimately to competing in the procurement market rather than allowing the real value from an integrated pricing model to rule.
A key dynamic
Many observers and commentators fail to fully understand the dynamics of the NZ meat industry; in general, as a pastoral based system.
We produce a crop, which gets harvested over circa a 6 month period, farmers rely heavily on that crop’s cash flow to reinvest in the next year’s crop with no clear pricing signals on which to base that next year’s investment.
Equally, meat processors are ‘’required‘’ to process that livestock as it arrives and when farmers want the animals off the farm. Meat companies are required to finance that inventory – and maximise value (at the same time as generate cash flow to fund the seasonal influx). Now there is an oxymoron – maximise value and optimise cash flow - all in the same breath !
Keith Cooper is the ex-CEO of Silver Fern Farms. He has been involved in the meat sector for 35 years spanning sales, marketing, leadership and governance. He is building a professional Director career and primary sector advisory based in Dunedin along with his farming interests in Middlemarch, Otago. You can contact him directly here.