Allan Barber: Lamb producers, exporters facing a long, cold winter

A year ago lamb was riding an apparently irresistible wave, with European demand for New Zealand chilled and frozen product hitting an all-time high.

Now the market has turned soft and prices have dropped by an average of 17 per cent, and the currency is responsible for only part of that.

So what's gone wrong and when will the market recover are questions that many would love to be able to answer, as it looks like another case of the meat industry going from boom to bust.

Coming into the new season, processors were briefing their suppliers, saying that demand for product was still good, despite the strength of the dollar, and while prices wouldn't be as good as last year, they would only be down by about $3 a lamb.

Unfortunately the schedule price for a 17.5kg lamb is closer to $13 lower than last year and, in the North Island at least, $20 less than three months ago.

There's no doubt that farmers have contributed to this state of affairs themselves, although exporters haven't been blameless. Last season delivered particularly good growing conditions and as a result there were far too many heavy lambs for which processors paid too much and everybody - processors, exporters, importers - got severe indigestion. At the same time the bottom fell out of prices for by-products, such as wool and pelts.

A further consequence of high prices for lambs to slaughter is an inflated price for replacement or store stock. This then locks in the farmers' expectation that prices will remain high and will bail them out for paying too much in the first place.

Inventories in the overseas markets were too high at the end of last year and, once the chilled Christmas sale period was over, there was nothing left to prop the price up.

Economic conditions in the United Kingdom and Europe are less buoyant than before, meaning the pound and euro have hardly strengthened at all against our dollar. Too much inventory was, and still is, in the heavy grades, which the market simply doesn't want and can't absorb.

If you have more inventory than you can afford to hold, the first and most obvious solution is to encourage somebody to take it and to do that, you have to drop your price. Exporters have been guilty of trying to push too much of this stock onto the market.

The general view round the meat industry is that it's too soon to panic, although it's always the other company that's been guilty of putting downward pressure on the market.

Chilled product remains sought after, particularly during the lead-up to Easter, but frozen lamb demand is erratic.

After Easter there is the prospect of a long six months, during which another big kill, estimated to be one million more than last season, will have been processed. A large proportion of this will be sitting in inventory in New Zealand and in overseas markets.

Although overseas demand for our lamb will still be good, we must recognise that the price must remain affordable and the product must meet market specifications.

In the past year New Zealand producers and exporters may have got too cocky, believing the market would continue to pay top dollar for a product which wasn't exactly what it wanted.

We have to remember that the customer is always right, otherwise it will be a long, cold winter.

* Allan Barber is a freelance writer, business consultant and past chief operating officer at Affco.