Rural Delivery: Too soon to pop the corks on currency bonanza

By BRIAN LYNCH*

Only those with long memories can recall a meat-processing season with the head-start this one has had.

A benign spring encouraged good growing. Lambing percentages have been near record levels, as carcass weights promise to be.

In our main meat markets of Europe and North America, demand for New Zealand product is steady. The reputation for quality and consistency remains untarnished.

Then there is the dollar's slide against one of the industry's three main trading currencies, the greenback. A 10c depreciation in the first 10 months of the year has helped lift export returns.

Producers are reaping the benefits. Export farmgate bull prices have risen 15 per cent compared with prices late last year, and cow and lamb prices are up 30 per cent.

Overseas revenue from meat and co-products should exceed $4 billion.

This will be a record. It is nearly twice the amount meat exports earned in 1990 and debunks the claim of those who would have us believe that the old New Zealand economy, that has always drawn its strength from agriculture, has had its day.

Better market performance by meat companies is only partly the result of dollar depreciation.

More significant have been cost and efficiency gains, livestock improvements, development of new markets and repositioning product further up the value chain.

The medium-term production and market outlook holds no fears. Higher lambing percentages will help offset the decline in the breeding flock, which in some regions has already stabilised. The growing dairy herd will maintain the supply of quality beef product.

We can expect a modest ebb and flow in European lamb returns and US beef price levels.

The details are still confidential but the World Trade Organisation has upheld New Zealand's complaint against US lamb tariffs. It seems certain that over 20 per cent of external receipts will continue to come from export meat returns.

But it is too soon to uncork the champagne. Just as author Mark Twain reacted to rumours of his early demise, reports of the meat industry being on the brink of a foreign exchange bonanza are bound to prove an exaggeration.

It is clear that progress towards the promised land of long-term industry profitability cannot be faked on the back of a feeble dollar.

The downside of a weak currency will soon start to be felt on operating budgets. The industry's $400 million freight bill is exposed to escalating fuel costs and charges for imported equipment and packaging materials are climbing.

The flow-on effects will make it hard to hold domestic inflation. Wage and salary bids need to be tempered when the operating environment is this fragile.

Meat exporters know about the uncertain side-effects of a capricious currency.

A few years ago the industry was reeling under the impact of a rapidly appreciating dollar. The lessons learned when our currency has been over-strength are just as relevant when it is taking a beating.

The only sure buffer against cyclical swings is to be internationally cost-competitive and to deliver quality items that command the best available prices.

Having access to sell into big meat markets loses its glamour if the industry is not well-placed to see off the competition. That means keeping in tune with customer expectations.

That explains the big emphasis in the past decade on phasing out the traditional frozen carcass trade.

Ninety per cent of this year's lamb exports are being sent as added-value products that target the top end of the market. Catering to the consumer-led swing to fresh food has driven the volume of our chilled meat exports above the carcass trade.

NZ meat processors and exporters are a pragmatic lot best pleased by a barely visible Government. But they have the tolerable expectation that the task of political leaders is to appreciate the factors that contribute to a cost-competitive environment - and to understand that certain policy measures could make that environment hard to achieve or hold on to.

Has the Labour-Alliance Coalition grasped the point of difference?

It will have the chance in coming months to display its grip on compliance costs and commercial realities in fields as diverse as ACC, genetically modified foods, greenhouse gases, shipping, superannuation and tax structures. The industry waits.

* Brian Lynch is executive director of the Meat Industry Association.