Mike Petersen - Slicing Lamb to the Bone seminar

Friday 4 May 2007

Speech to the Slicing Lamb to the Bone seminar by Mike Petersen Chairman, Meat and Wool New Zealand

Friday 4 May 2007 Christchurch

For sheep and beef farmers, beef has performed comparatively strongly even given the high value of the New Zealand dollar, but the same cannot be said for sheep meat and wool. With two years of poor pricing for lamb, and wool at a record low, confidence in sheep farming has been undermined.

The sustainability of the industry depends on understanding what has caused this, and influencing those things within our control to make sure they don’t happen again.

The fundamentals for our meat products are strong. Global trends indicate that the future is bright for natural grass-fed products and the associated New Zealand story.

We must do all we can to speed up the recovery of sheep meat prices and I can assure you that Meat & Wool New Zealand is working to redirect funding to achieve improved short term results with processing companies.

For example, today we have committed to redirect a significant amount of levy funding to the North American lamb rack market to be used in joint venture promotional activity alongside meat companies. There will however need to be some rules of engagement, and that detail is being worked through over the next few weeks.

Industry leaders are not sitting back unaware of the plight farmers and meat companies face. There have been wide ranging talks at all levels of the industry to find ways to make the industry stronger. These talks are ongoing and in some cases there has been a complete rethink on how parts of the industry operate.

Much has been talked about the need to restructure the meat industry. Is this the root of the problem? Probably not – in my opinion. The issues facing the industry are more complex and the fundamentals of procurement and profitability will still remain under a restructured industry.

The current situation

Farm profitability reached a record high in 2002-2003, due to the combination of a low exchange rate and very strong world demand for our meat products following the BSE and Foot and Mouth Disease outbreaks in the Northern Hemisphere. Four years on, sheep and beef farmers are struggling with lower prices and increased costs resulting in unsustainable returns.

It’s not surprising that farmers are asking why lamb returns are so low given the positive outlook for lamb only a few years ago.

The Australian drought has seen large numbers of capital stock killed as farmers struggle to retain what they have left of the flocks they have spent a lifetime building.

Australian lamb slaughter increased by 7.1% from 2001-02 to 2005-06. The drought this year has increased their lamb slaughter in one year a further 7.2 %, to an estimated 20 million slaughter. While 60% of their production is eaten domestically, for the first six months of this meat export year to March 2007, Australia shipped an extra 5,190 tonnes (+7.3%) on to world markets, compared with the same period last year.

Australian middle cuts to America have competed strongly against New Zealand lamb and US prices have decreased over 30% in the last two years. In the last seven months the NZ:US exchange rate has appreciated 10.9 % so that in New Zealand dollar terms prices have decreased 17%.

Co-products have continued to struggle due to weak demand. Casings are down 33%, pelts down 19%, and slipe wool down 14%.

These price decreases per lamb are before considering the effects of increased lamb meat supply from New Zealand to other markets.

However, it is important to note that high lamb supplies in the first half of the year now mean there will be lower supplies in the second half of this meat export year. New Zealand lamb supplies from April to September are expected to fall 16%.

Returns from lamb in the UK for the 12 months up until 31 December 2006 have remained stable with TNS survey data showing both volume and value of product shipped into Europe up by 12%. This was a good result with increased chilled shipments from New Zealand companies returning better prices than the traditional frozen market, however in New Zealand dollar terms these prices have not been reflected at the farm gate. In recent months chilled prices have slipped by 4.3%, but there are clear signs that Easter has cleared good stocks and renewed interest is happening at better pricing levels.

For beef, returns have remained stable. The closing of Asian markets to American beef following BSE in North America opened the door for our grass-fed beef to feature especially in Japan, Korea and Taiwan. Volumes nearly doubled into those markets as a result, and while American beef is starting to re-enter these markets, we are confident of holding many of those gains that have been achieved.

American imported beef prices are at record highs, but unfortunately the high value of the New Zealand dollar is negating substantially higher farm gate prices for beef.

On a whole of farm level, we have seen increased costs, both on farm and beyond the farm gate, which have eaten into already slim profit margins. Increased prices for fuel, transportation, electricity, and interest rates have reduced farm profits by 4%. Beyond the farm gate, increased costs in transportation, local government rates, and employment legislation have also contributed to lower net farm incomes.

The combination of lower returns and increased costs has hit hard in a year where climatically the season has also been challenging.

So what are the fundamentals that will determine the success of the industry in the future?

World trends

In a world that is becoming increasingly concerned about climate change and the environment, our natural grass-fed systems have a great story to tell. We are seeing increasing acceptance by consumers that they will pay more for products that have sustainable production systems, and it is important that we continue to move in this direction.

The move towards bio fuels is having a major impact on land use, particularly in the US and South America. The amount of land available for feed production is declining as a result and increased feed costs are being forced on the feedlot cattle sector. This is also impacting on pork and poultry and higher meat prices are starting to become evident. Europe is heading down this path too, and we believe this may lead to higher cost animal production in these economies and higher meat prices.

World trade reform and particularly the WTO Doha round has stuttered in recent times leading to a proliferation of bilateral trade agreements between both like-minded countries and others. Many of these agreements are based on political grounds only, and often have the effect of distorting rather than helping freer multilateral trade. In the bilateral area it is important for us to focus on Japan and Korea, to open up these markets for beef where real opportunities exist.

New Zealand has always advocated for a successful conclusion to the multilateral Doha round and we continue to push in this direction. There is a renewed resolve amongst WTO member countries to conclude the round by the end of the year, and this will lead to agricultural trade reform that will be meaningful for New Zealand. I am confident of a successful outcome to these talks, and we are working with the Government to assess the impacts of any movement on the sheep and beef sector.

Common Agricultural Policy (CAP) reform in Europe is continuing, and we are seeing declining domestic sheep meat and beef production as a result. The outlook for Europe is for strong demand from discerning and affluent consumers, and we are well-placed to supply that market sheep meat in particular.

The growth that is occurring in Asia is impacting both positively and negatively on world markets. While there are increased costs associated with that growth, in the areas of building materials and shipping, there is no doubt that as those consumers become more affluent, they will increasingly move to higher value protein diets, including beef and lamb. We are well situated on the doorstep of Asia to cement ourselves as a key supplier of high value natural grass-fed products to these markets.

The fundamentals for our meat products are strong. The challenge is bridging the gap between now and then.

Industry restructuring

There has been a lot of talk about the structure of the industry, and the influence that may have on the behaviour of companies in the market place.

It is important to note that the number of New Zealand companies supplying world markets has not materially changed since 2002/2003 when farmers were receiving very high prices particularly for sheep meat. What has changed is the world market situation, particularly relating to the Australian drought, and the squeeze associated with higher costs and a higher dollar.

The important question for farmers to ask is whether industry restructuring will help address these issues, and if so how to go about it.

Farmers collectively hold all the tools to bring about restructuring of the co-operatives as shareholders and as suppliers of livestock. However it is important to remember that while the co-operatives make up around 60% of the sheep meat market and 35% of beef, there are a number of other privately owned and significant companies that control the balance of New Zealand production. There is no doubt that the high prices paid to farmers for sheep meat in the last quarter of 2006 have impacted negatively on the market, and have contributed to the resulting poor prices farmers are receiving in 2007. Prices paid to farmers have to more closely reflect market prices, so that we do not repeat the mistakes of 2006.

Increasing chilled production, requires greater commitment from farmers around supply and an acceptance that we need profitable companies that invest in the market place for a sustainable future.

The role of Meat & Wool New Zealand

There is a large amount of misunderstanding about the role of Meat & Wool New Zealand in the debate that is currently underway.

Meat & Wool New Zealand was established in 2003 and started operations on 1 July 2004. During the consultation phase in 2003 farmers told us they did not want the new organisation meddling in the relationships and commercial affairs that farmers have with their companies.

Meat & Wool New Zealand was therefore set up as a Company with no supporting legislation, with the shares held in trust on behalf of livestock farmers.

The only piece of legislation associated with Meat & Wool New Zealand is the Commodity Levies Act 1990 (CLA) that sets out the rules for applying a levy for funding industry good activities. A referendum was held in August 2003 under the CLA, which supported the range of industry good activities that we carry out on behalf of farmers today.

In 2003, farmers asked Meat & Wool New Zealand to focus on medium and long-term issues in the following key areas: o Market Access and Trade Policy to ensure New Zealand has access to the world’s markets. o Advocate for the pastoral sector in areas like bio security and disease preparedness to secure New Zealand’s pastoral future. o Research to underpin the productivity gains that will be required to ensure the pastoral industry is competitive. o Market development in conjunction with meat companies. o Facilitate the flow of information transfer on research outcomes and worldwide trends that can influence farmer decision making. o Promote the pastoral industry to attract and retain the skills and talent necessary for the future.

Meat & Wool New Zealand is constantly reviewing these activities to ensure that we are funding issues that are relevant for farmers given the challenging times we are facing.

It has been suggested, that Meat & Wool New Zealand has the ability to act as a referee or yellow card companies for poor behaviour in the market. This was not a priority in 2003, and we do not have supporting legislation for this purpose. We can facilitate like-minded companies into activities that we collectively agree on, and we are keen to progress more of these initiatives.

The role of the New Zealand Meat Board

Under the restructuring that occurred in 2003, the role of what was then known as Meat New Zealand was often debated. Meat New Zealand operated under the Meat Board Act 1994, and had a wide range of statutory powers to support its existence. Among these was the power to levy, and this power was moved under the more transparent and accountable Commodity Levies Act. Meat & Wool New Zealand is the new combined organisation for meat and wool industry good activities, and the levying responsibility was passed to it.

However, in order for the New Zealand Meat Board to retain the ability to administer the three New Zealand country-specific quotas on behalf of the Crown, there needed to be some supporting legislation. The Meat Board Act was slimmed down with reduced statutory powers, so the new organisation could carry out this function in a less obtrusive way.

The role of the New Zealand Meat Board is to administer the EU Sheep meat quota, EU High Quality Beef Quota and the USA Beef Quota, and to protect and administer the reserves that came out of the old Meat Board. Commercial activities undertaken in quota and non quota markets are the domain of individual exporters. It is important that we retain this role, and ensure that we have the ability to market product in an orderly manner.

Where to now?

It is easy to sit back and try and apportion blame for what has happened over the past two seasons. However it is more important to learn from these challenges and ensure they are not repeated.

I have outlined a number of factors that have contributed to the low prices, and many of these will be non-recurring. The fundamentals for our natural grass-fed products are strong in a world full of consumers that recognise the attributes we have to offer in what is a rapidly changing international environment.

For sheep and beef farming and its associated industries to prosper, we need to be able to supply safe food with integrity right through to the end consumer. Companies need a committed supply of livestock with profitable businesses that enable them to invest in new products, technologies and the market. There also needs to be a co-ordinated approach from farmers and industry to addressing medium to long term issues that affect all industry players. Even with these attributes there will be times of hardship due to factors beyond our control.

Meat & Wool New Zealand and the New Zealand Meat Board invest in medium to long-term industry good issues that will help farmers remain competitive. We help create the framework for companies and farmers to build commercial relationships to supply the market with product that consumers want.

We will emerge from this cycle stronger, but for many that is a leap of faith from where we are now.

Taking that leap will require resolve, and drawing down on the strength and resilience that New Zealand farmers are renowned for. Industry unity and a sense of purpose will make that leap easier.

ENDS

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