Fran O'Sullivan: NZ a good bet in red meat supply chain

As China's middle-class grows so, too, does its appetite for New Zealand-grown meat.

Current controversy over the pending Silver Fern Farms recapitalisation is taking attention away from the reality that China presents a good market for New Zealand agribusiness producers.

Already there is significant Chinese investment in the red meat industry. The critical question is why Chinese companies see value in investment here and NZ investors are not similarly taking a long-term view - a challenge that will work its way through as Kiwi farmers become more focused on retention in New Zealand hands of a sector which still has a long way to go to realise its potential.

One reason for the higher value Chinese companies place on such assets is that China is busy shoring up food supply lines for a future in which importers from other emerging markets with growing middle-classes will provide competitive pressure.

The other reason is that anyone taking a close look at international demographic projections - 2 billion people in subSaharan Africa by mid-century - can easily imagine a future where productive land and products produced from that land become increasingly valuable.

Throw in a third factor: that offshore acquirers frequently are better capitalised and can afford to price in long-term value for agribusiness assets and it is no surprise a good deal of controversy is building up.

Right now China is a major market for NZ's lamb exports, second only to the UK. But much of the lamb is low value and based on volume with the price achieved per tonne considerably less than the UK.

Australia exports more sheep meat internationally than New Zealand. But figures released by Beef and Lamb NZ show NZ exporters are achieving a better price for frozen lamb exports than Australian competitors getting US$5641 per tonne in the UK compared with US$5283 for Australian-sourced product. Comparable figures are: rest of EU: US$7946 (NZ vs US$5957 Australia; China: US$4226 NZ vs US$3418 Australia; US: US$9606 NZ vs US$8641 Australia.

This suggests the strategy companies like Silver Fern Farms are using to develop premium products for the China market - on top of its existing export profile - is the correct one.

In beef and veal exports, NZ lags behind India, Australia, Brazil and the US. NZ is achieving US$5175 per tonne on an average basis across all markets, which is ahead of Australia with US$4785 per tonne but behind the US on US$6874 per tonne. The challenge is to move higher up the value chain to produce premium cuts and products for China's rapidly growing middle-class consumer market.

A recent presentation to the Red Meat Sector conference 2015 in Nelson spelled out that the industry's strategy is based on a co-ordinated approach to in-market behaviour; improving how and what NZ sells overseas; ensuring efficient aligned procurement; aligning procurement between farmers and processors; ensuring sector best practice and adopting best practice production and processing.

NZ's international market strategy is also helping. Recent free-trade deals with South Korea and Taiwan have brought better market access for our red meat. If the Trans-Pacific Partnership can be successfully concluded, it is expected to result in greater access to major markets such as Japan.

Other negotiations in the wings include Russia/Belarus/Kazakhstan, which was halted when John Key called Trade Minister Tim Groser home from Moscow, in protest at Russia's military incursion in Crimea. The Indian negotiations are proceeding at a snail's pace.

The Prime Minister is expected to announce the next steps towards free trade negotiations with the European Union when he visits in late October.

With all these tail winds, the industry should surely be able to come up with a strong solution.