Allan Barber finds the meat industry needing to adapt to unexpected changes in it export market prospects, yet still convert grass to payments to farmers fast. He sees increased challenges

By Allan Barber*

As if Brexit wasn’t a big enough shock, the US presidential election has really set the cat amongst the pigeons.

Commentators of all nationalities and political inclinations have literally no idea how a Trump presidency will affect the world order, from trade agreements and global interest rates to immigration or deportation, let alone internal security issues and relationships with other nations.

After predictions of imminent disaster, share markets have been cautiously positive and interest rates have started to rise, while there has been an initial fall in the New Zealand dollar. This has nothing to do with our dollar, but merely reflects its relative global importance; however, it provides a small but welcome relief.

The first definite result of the Trump victory is the ditching of the TPPA in its present form with no possibility it will be signed between now and January before Obama’s term ends. This may be unfortunate, although there is enough concern about the dispute resolution provisions in the agreement that mean it may not be an unmitigated disaster. The main disappointment will be the loss of the opportunity to achieve parity with Australia for beef access to Japan.

The end of TPP provides impetus for the RCEP agreement to be negotiated as a priority. RCEP involves 16 countries including 10 ASEAN members and the six states with which ASEAN has FTAs - Australia, China, India, Japan, New Zealand and South Korea. Negotiations were kicked off in 2012, but despite regular meetings, have not yet resulted in an agreement. But the two largest members of RCEP aren’t part of the TPP negotiations. China will now see a great chance of taking the geopolitical lead in the Pacific from the United States, while India also appears much more enthusiastic about free trade under its present government.

Trade agreements alone will not enable New Zealand to achieve the Government’s goal of doubling exports by 2025. Two recent reports, Westpac’s Industry Insights – Meat and Wool and KPMG’s Agribusiness Agenda – have drawn attention to the urgent need to lift the game considerably to have any hope of lifting exports to the point where these will improve the country’s standard of living.

The Westpac report focuses specifically on the sheep and beef sector and makes the interesting point productivity gains have mainly come from improvements to the sheep flock, whereas recent increases in value have almost exclusively come from beef exports. The industry suffers from commoditisation which results in products being sold because they are cheaper, not because they are of better quality than the rest of the world’s.

This is the curse of being a farming country with plentiful grass at the bottom of the world which has to export between 80 and 90% of its output. The main role of meat exporters is to process farmers’ livestock and achieve the quickest and best price available, so they can pay a competitive price for it within fourteen days. This isn’t consistent with achieving a premium for a high quality, luxury product. Under present circumstances consistent annual gains in export returns just won’t happen.

The report suggests further productivity gains will be hard to come by, so increased value must come from improving returns or cutting costs. It highlights the lack of a credible and coherent story to promote the New Zealand brand as a major impediment. The first action proposed is to tell the story that proves our grass is greener and produces better animals. The cross-industry work in Ireland under Bord Bia is a ready-made example of what can be achieved when government, processors, farmers and food manufacturers pool resources and commit to a common goal.

Other suggested actions include better market selection, particularly for lower value parts of the animal (exporters have been doing this for years and markets fluctuate considerably), increasing chilled and pharmaceutical exports, and vertical integration by cutting out middlemen. Efficiency gains proposed include increasing farm size, rationalising processing plants, livestock transport and stock agent involvement, and reducing MPI’s inspection costs. Unfortunately none of these will result in the quantum leap needed to change the industry’s economics to the benefit of all participants.

KPMG’s Agenda is more visionary, but probably with less relationship to reality. It proposes three alternative scenarios: ‘complacency reigns’ which implies continuation of the status quo, ‘change adopted by some’ participants and ‘being on the leading edge of change’. The first scenario implies an inability or unwillingness to adopt new technology, a reliance on the occasional good year usually when the dollar falls out of bed, and a gradual disconnection with markets and consumers. The third scenario requires compound annual growth of 4.85% if agribusiness exports are to reach $100 billion of exports within 20 years.

The truth will almost certainly be somewhere between scenarios one and two which foresees some parts of agribusiness adopting principles of leadership, collaboration, value creation from foreign investment and a number of global brand successes. For this to occur New Zealand agriculture must gain the support of the whole community through universally excellent farming practices and the community must adopt realistic expectations of the country’s most important source of wealth.


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*Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at allan@barberstrategic.co.nz or read his blog here ». This article was first published in Farmers Weekly. It is here with permission.

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24 Comments

We all getting on the same tired old bandwagon

http://www.world-grain.com/articles/news_home/World_Grain_News/2016/11/B...{45BF19F4-4BA1-4C7E-8FFF-76DAF7A6BF87}

and grinding beef in USA
http://www.beefcentral.com/trade/big-nz-kills-help-keep-a-cap-on-export-...

Who is on the same tired old bandwagon? Me, Westpac, KPMG or all of the above? As you may realise, if you read what I have written over the years, I don't believe there is any real solution to the problem, because NZ is too small to influence markets, there are no NZ based companies big enough to invest the capital needed to capture the value chain, and farmers can have no influence outside the farm gate unless they cough up enough capital to invest in the international value chain or stop supplying livestock which would result in a short-lived price increase.

There aren't any other choices apart from taking in outside investment like Shanghai Maling or Itoham etc or being a perennial price taker. 

Sorry Allan, I wasn't talking about you but the Aussie thinking he can differentiate Aussie Wheat from the rest of the world.

And I am sorry to admit that I think you are right there is no 'real solution'. The only time we started to make some money farmers instantly capitalised it into farm prices and we ended up with a property bubble with god knows what consequences still to play out.

I watch logs go past my gate every few minutes from a Malaysian owned forest, and they are ripping up the roads with trucks probably paying very little or no tax in NZ. When they were planted it was all about jobs and better lives and better communities.http://www.ernslaw.co.nz/ I asked a worker how many workers were felling and he said hardly any all self levelling machines working old sheep farms. The logs are all going to Napier.

I was in a Supermarket in Vancouver and a woman was asking about Lamb, I asked her why she was so keen on buying lamb, she told me she had heard that NZ lamb is some of the only meat you can buy that is hormone free, antibiotic free and grass fed. A marketing gem but not on the label.

I think the big mergers in the corporate world are working against producers like NZ farmers.

Look at Alberta Pool http://www.thecanadianencyclopedia.ca/en/article/alberta-wheat-pool/

https://www.ft.com/content/1cc31633-b8cc-376a-8472-ad8bc9363880

https://www.bloomberg.com/features/2016-glencore-ivan-glasenberg/

We are drying up fast, these late seasons that turn into droughts that end mid-winter are getting tough to take.
Andrew

Andrew

I agree we should be making much more song and dance about the quality of our livestock farming practices as a key marketing message, but that would be where the Irsih Origin Green approach would come in. Unfortunately there's no sign of that happening.

I sympathise with your comment about the droughts.

Allan

 

Hi Allan, Droughts we just have to learn to live with, like the old Chinese proverb ' a strong tree bends with the wind', we have to learn to farm around the unpredictability of the weather, it just feels like it's getting worse.
How would you like to be up against this

https://secure.attenbabler.com/wordpress/wp-content/uploads/2016/11/US-F...

or this

http://www.independent.ie/business/farming/dairy/eu-may-start-to-sell-it...

Hi Aj, thanks for the links. We are having a wet november...very unusual, after a wet sept aug july june and may, march feb and jan, so has the weather had a reset or will mother nature redress the wet situation soon? The beef schedule is hanging on for dear life, will it hold up as more finished stock come forward or collapse? In the meantime store cattle are red hot items. Blistering actually. Lamb is hanging in there with Brexit promising to collapse things as soon as numbers ramp up. Ex dairy grazers competing with meat processors for stock. What an odd season we have before us.

And just to confuse further....dairy getting a huge lift, so will they be in a position to send their heifers to grazing soon?

The south is getting a good soaking. Lambs are pretty washed out. Cant see big weaning drafts this year so lots of lambs coming on stream late summer onto a depressed market.

As per the report highlighted above, how many of these reports do we have to suffer before any meaningful change takes place. Returns for this year are simply dire, the latest Baker Ag newsletter estimates its model 850ha hill country farm with a cash deficit of $67,000 with costs cut to the bone (fert at 50% maintenance). The dairy industry has gone through a severe dip and seemingly coming out the other side all the while the red meat sector is just in a continual trough. I recall Allan was harsh on the MIE group when they were agitating for reform but now he seems to be ironically calling for many of the same measures.

Very hard to break existing models and vested interests with the ear of government. One day it's going to happen
As more and more cheap grain floods the world and a bigger share is used to convert to cheap proteins it's going to get to a stage where our existing systems can no longer function. Giving the customer what they want was perverted by the profit motive and taken over by large corporations along time ago.

Was taking to a friend farming on the coast and another farmer, one was telling us that the fertility levels were back to crisis levels in the hill country and something needed to be done. My answer was not what he wanted to hear. Why spend up to 200k on fert when the neighbours farm is for sale for 1.2 mill, every 6 years you could just add more land for the price of the Fert bill and more assets should win over fert, so I suggested less fert except for crops and purchasing more land would be a better option in the long run. He told me the only money he made was from forestry and he looked at sheep as a way to pay the bills between harvests.
If we want to make money from farming we need to grow less, not more, food needs to get harder to find, at present the profits are mostly skimmed of the top at the retail end and marketing end. Our trade ambassadors are a bloody joke. Middle classes are struggling to keep spending power and vote accordingly.
Gone from cold wet to hot dry winds here local town had to restrict water due to rush to keep gardens green. Sprinklers all sold out at Miter10.

Yes, produce less not more. The greater the global bulk of the commodity, the lower the return down on the farm;
http://www.radionz.co.nz/national/programmes/checkpoint/audio/201808688/...'s-most-popular-fruit

So many examples show us the way of dairy, I suspect.

and we all know not to mess with the 'United fruit company' or as it's now Known Chiquita.

https://vimeo.com/81230547

Gee, no I didn't know. Have you seen the doco?

No but I have read about the company, enough to know not to mess with them, just enjoy your banana and shut up.

Farm debt had been growing at 240-250 mill a month roughly, suddenly it's more like 50 mill a month so something has changed.
http://www.rbnz.govt.nz/statistics/s7

Sheepshagger

My reason for being anti MIE is my belief the group's solutions didn't have a hope in hell of succeeding, although there was plenty of logic in their analysis of the situation. 

What I recall is you being a cheerleader for the status quo, which you are now suggesting is unsustainable and needs an overhaul.

I think MIE lost their way badly in the end but initially they were on the right track. They recognised that the solutions you are now advocating needed some structural reform to achieve( farmers controlled 55% of the industry when they kicked off). Without that we are now a zombie industry reduced to flogging ourselves off to the highest foreign bidder to survive. In the short term that's all very well but down the track those investors don't have any motivation lift returns to farmers.

Shaggers I see the problem as %5-10 of the population are dependent on agriculture, the other %85 want the cheapest food possible and another %5 are prepared to pay more but they mostly buy local. So we are at a hiding to nothing at a government level, cheap food has won and will continue to do so.

That's a fair summary Aj, however we haven't really fired a serious shot at targeting high end consumers. We simply haven't had enough money or coordination to do it properly. Thinking that foreign owners have anything but there own interests at heart is naive in my view.

There were high quality organic outlets in California for those less worried about the pennies. All local food all as organic as possible, all processed locally and bloody expensive. Breaking into that market is going to be hard because a lot of the meat is sold as shares when the animal is still alive, then you get to eat your 1/4, 1/8th share or whatever.
I have a friend who has been suppling one of those outlets but found it too hard so gave up but still kills his own meat. I shore 20 sheep for a local and they all went to the organic shop.
Another major hurdle, is that corporate America has destroyed trust, so people want to see the animal or know the grower rather than trust the label.
Also most of my friends are struggling with Obama care, one was paying $1600 a month and was looking at an increase to 4k which he was struggLing with and looking at his options. The health care conglomerate is sucking the USA dry and and many middle class families are struggling to survive so they get to buy cheap.
fighting a trend

https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detai...

https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detai...

Hi Andrew

Off topic but you may be interested in some of my comments on the current HRBC debacle:

http://roadsratsrates.blogspot.co.nz/2016/11/hbrc-leader-cut-out-of-pros...
http://roadsratsrates.blogspot.co.nz/2016/11/hawkes-bay-regional-council...

I caught your comment in the Herald and didn't realise there was so much local feeling

I plan to follow this one to its gory conclusion

Thanks Donald. There was an article in whaleoil yesterday, probably by Simon Lusk. Things are going to get ugly and expect a clean out. Hastings has stood up and taken control and they have no intention of going ahead with the dam or allowing water quality to deteriorate.

http://www.whaleoil.co.nz/2016/11/dickhead-council-staff-piss-off-new-co...

The cleanout has started with Pearce's departure. LG CEO's are all on fixed-term 5 year contracts. Dunno when Newman's is coming up for renewal but if he even makes it that far I would be surprised if he were re-appointed.

Anyone else you know of who should be reading the Sits Vac?

The CEO went over to the investment company and then hopped back to the council a week before the election.
http://www.nzherald.co.nz/hawkes-bay-today/news/article.cfm?c_id=1503462...

Interesting. On the wild assumption HBRC have some kind of CEO Committee then all they have to do, as Newman's employer, is declare they no longer have confidence in him and he is gone. And the stunt of prosecuting HDC is pretty much all the ammo they need. It doesn't matter that Newman had a delegation to prosecute without requiring a resolution from Council. It shows poor judgement and every court in the land would agree.