Trying to unpick the reasons for the differential is complicated by a number of factors like traditional meat company secrecy, schedule prices as distinct from premiums paid for volume supply, co-operative pool payments and loyalty rewards, shorter seasons, cartage, labour agreements and relative plant efficiencies.
Schedules for the last week of April show as much as a 60 cents a kilo difference between the islands for lamb and 20c/kg for mutton while there are also pronounced variations in pricing from one processor to another. which can be partly explained by respective processing requirements and available capacity.
However, it must be a minefield for the poor suppliers who must balance loyalty and anticipated pool payments to be paid several months later against a higher price on the day while deciphering the various factors that affect the final price received.
For example, although Silver Fern Farms states clearly its policy of paying all cartage its price indicator includes a whole series of extra benefits – wool pull, pelt and presentation premium – as well as a cartage cost it doesn’t charge. Admittedly, the company used to charge for cartage but surely it’s a bit rich to include it in the total value of the lamb when no other processor charges it either.
One livestock manager graphically describes the South Island schedules as “irrelevant bullshit” because they bear no relation to reality.
In spite of the co-operatives’ schedule for lambs in the main weight range sitting at $6.30 and $6.50 a kilo respectively, I am assured there is no hope of buying at the moment for less than $7.20 in the South Island while greater procurement pressure in the North Island is pushing the price as high as $7.40.
The flow of lamb to the southern plants is running late this year so it’s still possible capacity will be stretched, which is, of course, when meat companies try to pull the price down.
Cows, whether prime or manufacturing, now fetch $4/kg in the North Island compared with $3.55-3.70/kg in the South though South Pacific Meats offers more than that.
Prime steers and bulls are the only species for which South Island processors are willing to offer higher schedules than their North Island counterparts though the difference is marginal and might well be eliminated or reversed after premiums are taken into account.
But this situation bears out the reality of procurement competition – regardless of what the schedule claims is the market price, processors pay what they must to fill up the capacity they have available at any one time.
Despite all the talk of loyalty between processors and producers that has dominated the meat industry for as long as I can remember, the mentality still appears to be the same as it has always been.
Farmers often feel compelled to shop around to find the best deal because they don’t trust any single company to pay them the best price, especially when they hear a neighbour has been paid more.
There might be any number of reasons for that, some genuine, but it doesn’t lead to good faith between the parties who ought to have the closest relationship based on complete trust.
Because the gap between schedule and actual price paid is greater in the South Island it is hard to avoid the conclusion it has something to do with the co-operative model, which is the dominant company structure in that part of the country.
I have already referred to the complexity of co-operative supply arrangements based on pool payments, loyalty bonuses and volume incentives but there is a gradual but unmistakable trend, evident in the dairy industry as well as the sheep and beef sector, towards supplying a processor prepared to offer a simple price structure without having to join a co-operative.
There are thousands of sheep and beef farmers, especially those in the far south, who have supplied one of the co-operatives for decades for historical reasons or because they want to guarantee killing space at peak times.
But times have changed with the advent of non-co-operative processors like Anzco and SPM and the huge land use change from sheep to dairy.
Sheep and beef farming is under enormous pressure from alternative land uses quite simply because of higher returns.
AgFirst consultant Bob Thompson has argued recently the main problem for the red meat sector is the low price.
While lamb prices have risen to $7/kg beef is still languishing around the $5 mark and he argues it also has to rise to $7 before the industry is sustainable and competitive with the alternatives, combined with more efficient wintering systems.
Thompson argues a beef price of $7 will incentivise a change from dairy if the dairy payout drops below $6/kg of milksolids but until beef reaches that crossover farmers will not respond.
Meat companies have a duty to themselves and their suppliers to try to lift the returns for red meat.
Lamb and venison appear to have reached a competitive level though the prices are yet to prove sustainable but beef is still lagging behind what can be considered an acceptable return to the producers.
All meat companies should take this challenge on board but the South Island co-operatives in particular need to take a hard look at the message they communicate to their suppliers by continually pitching their schedules so far below the real market value.
