Agribusiness: Consumer-ready meat on rise

John McCarthy says farmers have lifted production but cannot go on "propping up the companies".

Industry leaders are at loggerheads about whether processors are doing enough to add value to meat exports, but there are signs of progress, reports Nigel Stirling.

Frozen carcases being dropped into the holds of ships bound for London's Smithfield markets has been the staple image of the New Zealand meat industry for much of its history.

Listening to the industry's critics, one could be forgiven for thinking not much has changed since the first shipment of frozen sheep meat left Port Chalmers in 1882.

In reality the frozen carcase trade is a relic.

Today's meat companies sell as many cuts as there are in markets of Asia, Europe and North America, and just 6 per cent of New Zealand's meat exports are still in frozen carcase form.

But is it enough? The recent freefall in dairy prices can only be increasing the pressure on the meat industry to play a bigger part in the Government's goal for a doubling of New Zealand's agricultural exports by 2025.

More pressingly for those running the meat companies is renewed agitation among farmers for a shake-up of the industry after years of middling returns and declining sheep numbers, which have heaped further stress on processors' bottom lines.

Leading the angry mob is Ohakune sheep and beef farmer John McCarthy who heads Meat Industry Excellence, the latest in a long line of farmer-led industry reform groups.

McCarthy says farmers have played their part in lifting the sector's productivity through genetic improvements to breeding stock which have boosted lambing percentages 20 per cent since 1990 and lamb weights by 25 per cent.

"Farmers have basically kept up production, but we are like a mouse on a wheel and we cannot keep propping up the companies."

McCarthy says for returns to get on a sustainable footing, it is up to exporters to add more value to the animals sent to them for processing.

The country's largest meat exporter, Dunedin-based Silver Fern Farms, has developed consumer-ready meat packs featuring the cooperative's distinctive black and white livery.

First trialled on New Zealand supermarket shelves, these are now being rolled out in a range of overseas markets.

Silver Fern trumpeted its success in New Zealand's biggest sheep meat market, China, by using social media giant Alibaba's TMall online store to sell to smart phone users in Shanghai eager for English-labelled and imported meat in place of potentially tainted local alternatives.

Silver Fern's chairman, Rob Hewett -- a South Otago sheep and beef farmer -- says this new set of customers is the beginning of a valuable counterweight to the main trade with China in relatively unprocessed or manufacturing-grade meat, has produced respectable returns for the New Zealand meat industry in recent years.

"That is a good example of transitioning from commodity to consumer-led - it is a challenge when it is very cost effective to export a carcase.

"We are currently sitting at 5 per cent of revenue generated by value-added product. We have a goal of 10 per cent by 2017/18 and ultimately 25 per cent, but that will be more long term because you need more markets to put it into," says Hewett.

Around $3-$4 million annually -- out of total annual revenue of more than $2 billion -- is being invested in developing the brands.

Hewett says low profitability has hampered more spending, although the hand-brake is also being applied deliberately. "If we go and market something that actually doesn't turn the consumer on, all they will see is an expensive piece of meat sitting in the chiller that they are never going to buy and are probably turned off the brand as well. That is why it is really important to take the time to understand the market," he says.

McCarthy, however, believes the "destructively competitive" New Zealand meat industry is undermining companies' ability to fund more substantial value-added strategies.

"Because company A, B or C put less into the branding, they can go along to the end user -- whether it be the wholesaler or the supermarket -- and say 'here is the same product, it just hasn't got the package but we will give it to you cheaper'."

Only by consolidating the meat industry's major players -- starting with the two South Island co-operatives Silver Fern and Invercargill-based Alliance -- will such behaviour be brought to heel.

Those who have been in the simple keep costs down model... it hasn't been too bad. They have survived.

Graham Harrison

Graham Harrison.

On top of that, the closure of under-utilised meat plants, and McCarthy -- backed by findings from global business consultants GHD and presented in a March report Pathways to Long- term Sustainability -- says the industry would reap a $400 million gain within five years -- either to be paid to farmers in higher prices or retained by the companies to boost investment.

At the other end of the scale, Sir Graeme Harrison, founder and chairman of the industry's third-largest player, ANZCO, believes the primary sector is often unfairly maligned by those who say it does not do enough to add value to the raw materials.

Commodities like milk powder or grinding beef are intermediate goods and by definition have value added to them by processing companies prior to export.

"There is actually quite a lot of value that is added. There are a lot of myths about this," he says.

Another useful truism to keep in mind when talking about adding value is that in further processing a raw material cost is also being added, says Harrison.

He says adding cost in the face of a persistently over-valued exchange rate, and with trade barriers remaining in place was not necessarily smart business. China has paid good prices for basic carcase cuts.

"Those who have been in the simple keep costs down model... it hasn't been too bad. They have survived."

Harrison says with the exchange rate falling, and the potential for tariff and non-tariff barriers to come down as a result of trade agreements like the Trans Pacific Partnership, the balance again could be tilted to adding more value in the meat industry.

Industry sources estimate as much as 30 per cent of ANZCO's $1.3 billion turnover could be classed as coming from value-added activities, ranging from its 30,000-head Five Star feedlot near Ashburton to restaurants in Singapore and Tokyo selling its own branded meat cuts.

It would be easy to attribute ANZCO's success since being bought out of New Zealand Meat Board ownership in the mid-1980s to the financial backing of Japanese food conglomerates Itoham, and until recently Nissui.

Harrison says of more importance was dedication to building relationships over a long period at all levels of the offshore meat supply chain -- something he says has been neglected by New Zealand rivals' more "transactional" approach to relationships with importers and distributors.

Unusually, ANZCO in some cases owned its overseas distributors to maintain good quality relationships with customers -- the next step in the supply chain.

"Too often in New Zealand people judge things on a retail relationship. That is the visible bit but in reality most of the country's products are intermediate products that have to be processed into a final form," says Harrison.

Nigel Stirling is a farmer, and agribusiness and trade journalist based in South Otago.