Friday, March 29, 2024

MEATY MATTERS: Not all blame on meat companies

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I’m not a frustrated farmer who has to worry about the prospects for the new season or put up with receiving less money than expected for my stock but for the sake of sanity and balance I believe it to be necessary to examine the factors affecting market returns.
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After a very relaxing holiday blessed by good food, wine and weather, I returned to find the north had been hit by almost incessant rain, meaning a late spring, and the meat industry beset by rumours of procurement wars combined with dire livestock predictions.

At least while I was away, I had caught up with the Overseas Investment Office decision in favour of the Shanghai Maling investment in Silver Fern Farms, which, unless you are rabidly opposed to the deal, is good news.

If anything, it suggests more not less meat industry stability though conspiracy theory would indicate a future probability of a newly capitalised SFF swallowing up Alliance, now suddenly the poor relation in the deep south.

This depends on several factors, such as SM’s appetite to invest more capital in an industry with mediocre returns and spend money on a war, the success or failure of Alliance’s cost-reduction and marketing programmes and its ability to convince suppliers of the advantages of belonging to a pure co-operative.

However, nothing I have heard or read actually convinces me the bad old days of the 1990s, when procurement competition was at its peak, are about to return.

Of course, only time will tell but a lot of things have changed in the industry – it is much more efficient across the board than 20 years ago, the senior executives are driven less by testosterone and more by rational business principles, the companies are all much better capitalised and there is much greater co-operation between the companies and within the total industry.

The main debate is and will always be about what makes up the value of the product and how this should ideally be shared between producer, processor, retailer and all intermediaries on the way.

Apart from forward contracts, the weekly schedule is the key determinant of the price paid to the producer, the schedule being calculated from a basket of global prices that represent all the different cuts for the species in question less processing costs.

There will be seasonal premiums applied when necessary to attract livestock during times of scarcity.

The other part of the debate concerns how much of the product’s value should be captured by the final seller, normally the retailer.

My perspective on this has always been that, for better or worse, the retailer takes the largest amount of risk, unless a sale or return contract has been negotiated, unlikely when a perishable product is shipped from the other side of the world.

New Zealand’s meat industry has occasionally dipped its toes in ownership of overseas assets but generally that is too costly to do with any long-term commitment.

If our meat companies were guilty of making exorbitant profits, farmers could be forgiven for feeling badly treated but on balance NZ farmers seem to be quite well served.

SFF’s deal with its Chinese partner appears to have the advantage of overseas investment without the need to come up with any capital but only time will tell whether the arrangement is beneficial or the equivalent of selling the company’s soul to the devil.

The proof of that particular pudding will be in the amount of product sold through the partnership and the impact on livestock prices paid to suppliers.

To get an idea of whether NZ farmers are worse off than farmers in other countries is almost impossible, given the variations in government support, regulations, costs of doing business, retail environment and trade agreements.

But I have tried to compare this country with Australia, which migh provide a useful benchmark, though, like all comparisons, this one is fraught with difficulties and inconsistencies.

The first point concerns labour costs, which in Australia have consistently been higher than other countries including NZ, according to a number of international consultancy studies over the last 25 years.

However, this does not seem to be reflected in the respective shares of the domestic retail price in each market.

In 2015 a report by the Australian Department of Agriculture showed the 2014 sale yard price of a steer was 36% of the retail value of the primal cuts while a calculation by Beef + Lamb NZ the same year suggested the ex-farm sale price of lamb was 34% and prime beef 35% of retail.

A more recent study by B+LNZ across both species indicates the onfarm component is 49% of the total FOB value while processing and added-value make up 30%.

These figures do not allow any firm conclusions about trans-Tasman price relativity but it’s worth noting a comment from Sydney-based Aginfo that says there is “a massive transfer of margin to cattle producers which is unsustainable”, caused by a battle between the major Australian retailers which take 30% of all beef produced in Australia.

Although exports are the main price determinant, the size of the domestic market makes it a more important player than in NZ.

If our meat companies were guilty of making exorbitant profits, farmers could be forgiven for feeling badly treated but on balance NZ farmers seem to be quite well served. 

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