The status quo leads to peasantry

By Conor English

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About 1000 South Island meat farmers met in Gore last month to discuss the real problems the industry is facing around farming profitabily and sustainabily.

Big questions were raised about the ability of current supply chain arrangements to deliver appropriate returns so farmers and their families can get ahead and New Zealand as a country can take advantage of the increasing market opportunities in a world of more people, wealth and protien consumption.

As a speaker, I said the status quo leads to peasantry. About three years ago Federated Farmers launched a T150 campaign, which set the aspiration of farmers receiving $150 for a mid-season lamb. It is a simple idea, which right now seems a pipe dream. It is actually critical to New Zealand that this target is reached sooner rather than later.

In recent correspondence with my counterpart at the National Farmers Union in Britain, concern has been expressed that New Zealand lamb apparently sells at half the price of their domestically-produced lamb. If this is indeed the case, on an apples with apples basis, it is not good for farmers in either country. There are many anecdotal stories of New Zealand companies undercutting each other in the market.

Change needs to happen now and no-one is exempt. Too often both farmers and companies have talked past each other, suggesting it is the others' responsibility to change. The reality of a dynamic marketplace is everyone needs to be prepared to make some changes.

The trick is to get sentiment translated into real action that will actually make a difference. So, what should be changed and how? The 2011 Red Meat Strategy promoted action in three key areas:

  • In-market coordination

  • Efficient and aligned procurement

  • Sector best practice.

While this strategy specifically, and perhaps unhelpfully, ruled out recommendations on industry structure, it does provide the industry with a useful framework. However, it is all about incentives and many of these in the meat sector are around volume, rather than value.

Some meat-producing farmers suggest a meat sector "Fonterra model" would be the silver bullet, but we need to start unpacking what this model actually is.

It has to be acknowledged that meat and milk are different products, with meat carcasses disaggregating into over a hundred different components, while milk essentially gets the water sucked out of it. However, it is still possible to run a Fonterra style procurement model. In this procurement model all farmers would sell their produce at the farm gate to one processor/marketer with every farmer receiving the same price per kilo for their product, irrespective of when it was supplied.

It is essentially a nationwide, year-long pool system, giving out advance cash payments and an end of season adjustment. Any extra revenue earned at peak times or from high-value customers is simply tipped into the pool and everyone benefits or otherwise from it.

It is a pretty straight-forward system and dairy farmers seem to like it.

For the meat sector to do this would essentially mean running a nationwide pool for each grade of meat. This would mean farmers receive the same price whether they sold in December, February, May or September.

As with Fonterra, a kilo price per grade would be announced at the beginning of the season, for example $6.50. This would be reviewed a couple of times during the season, an advance payment of, say, $3.50 per kilo would be made and extra earned at peak times or from high value customers would go into the pool. At the end of the season there would be an under and over wash-up. I believe this could work. It would, however, be a dramatic change for the meat industry and needs to be more thought through before being put into practice.

For some farmers, the Fonterra model means one company doing most of the processing and marketing. For meat, this means consolidation of the farmer-owned co-operatives and perhaps others.

A suggested alternative is similar to the old Dairy Board model, where there are a few processors who toll process and focus on processing efficiency, while a separate organisation undertakes much of the marketing. This would split out the volume incentives to maximise processing assets from the incentive to maximise value in the market.

That there needs to be change by all, there is no doubt. However, just what those changes should be is still a work in progress. Watch this space.

- Hamilton News

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