Swift change urged to reverse red meat decline

Gains conservatively estimated at $360 million over five years have been identified from the first phase of a two-phase strategy aimed at making the red-meat sector more profitable and sustainable.

An author of the red-meat sector strategy, Alasdair MacLeod, of Deloitte, told about 100 farmers and sector participants in Gore yesterday his research showed immediate change was needed to reverse declining profits and confidence.

"For this first phase, we need changes implemented now," Mr MacLeod said.

Phase one of the strategy identified three areas of beneficial change: exporters competing for market share; animal procurement systems which gave farmers accurate market signals and removed stock agents and third-party traders; and farmers adopting best-practice management.

The estimated $360 million gain was in today's dollars, based on earnings before interest and tax (ebit) and would be spread over the whole sector.

The sector needed to determine if something was adding value, he said.

Stock agents and third-party traders, who bought stock from farmers, consolidated numbers and on-sold to meat works, added cost without adding value.

"They are not an integral part of the business and there is no way I can find how they add value to the sector that exceeds their cost," Mr MacLeod said.

The audience was in almost total agreement over the need for change, and there was much discussion about the merits of Deloitte's suggestions and the cost and failings of the current system.

One farmer commented there was a certain irony to the discussion on procurement, given in the South farmers owned the two largest meat processors, co-operatives Alliance Group and Silver Fern Farms.

Mr MacLeod said the New Zealand red-meat sector could no longer compete for markets based on price alone.

New Zealand would never be a low-cost producer of protein and fighting for market share based on cost was not a sustainable strategy, he said.

Instead, exporters needed to find ways to collaborate which would deliver price premiums or higher margins, he said.

Deloitte had devised a similar strategy for the horticulture industry.

In one case, 69 exporters were selling a single product.

However, those exporters had since found ways to collaborate to achieve scale, increase returns and become sustainable.

Farmers also had to accept the current system where processors competed for supply and market share had to end, Mr MacLeod said.

Farmers had benefited from fierce competition for livestock, but this was not sustainable, he said, a view many farmers in the meeting supported.

"If we can't sort out the procurement piece and the need to get an alignment in behaviour in-market, it is going to be hard work," Mr MacLeod said.

His research showed processors wanted certainty of supply and farmers wanted leadership, but procurement competition prevented those issues being addressed.

Technology was already available to lift the performance of farmers whose performance was below the top 20%, and no more needed to be spent on new research and development for them to benefit, Mr MacLeod said.

Farmers needed to make better use of discussion groups, learn from top performers, pilot new technology and use benchmarking, he said.

His survey group had interviewed 100 people, about half of them farmers, and he said he was disappointed many were discouraged despite the red-meat sector being economically a crucial industry and its improvement in productivity on a par with dairying.

Dairying had done a much better job of projecting a positive image, he said.

The answer to reversing the fortunes of the red-meat sector was to embrace change, he said, and he believed there was an appetite for such change right across the sector, as evidenced by the co-operation his group had had.

The second phase of the study will look at areas such as the development of new products

Phase 1

Expected annual savings from first phase of meat industry strategy:

• $80 to $100 million in year 1 by shortening the supply chain by removing stock agents and third-party traders.
• $80 to $85 million in year 3 from exporter co-operation in markets and processing automation.
• $130 to $170 million in year 5 from improved market access and farm productivity, reduced compliance costs and market co-ordination.

Report prepared for Beef and Lamb NZ, Meat Industry Association, Ministry of Agriculture and Forestry and Ministry Foreign Affairs and Trade. Source: Deloitte.




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