The future of sheep farming on Home Services

Jan

The future of sheep farming

posted by admin in Window Cleaning

Keith Cooper does not look like a worried man at the tail end of a meat and greet roadshow. Over the last few weeks the chief executive of large meat processor PPCS has spoken to more than 2000 farmer suppliers in 30 meetings around New Zealand. For someone operating in harrowing times of low lamb returns, the 40-something Cooper has remarkably few grey hairs and an unlined complexion. Only the faintest of smudges around the eyes give a clue to the testing task his company and the rest of the industry face. Lamb suppliers, and not just those from PPCS, are struggling to break even, let alone make a profit. They want a turnaround. Cooper gets straight to the point. “We went through the fact it’s been a poor year and it’s just a reflection of our February position. We said yes, there are profitability issues on the farm, in processing and the export sector, principally because of the currency, but nonetheless we are an ongoing business. Our P and L (profit and loss) may be poor but the other financial indicators at the half-year have been sound if not strong.” By changing its sales profile and holding less meat in an 18-month programme, PPCS, with an annual turnover of about $2 billion and nearly a third of New Zealand’s sheep and beef meat exports, has managed to reduce debt. Its meat stocks and money owed of $553m compares to $488m debt in the accounts to February this year. Cashflow is up $49m on last year and borrowings are down $41m with shareholders’ equity improving. Cooper is not reading too much into a fall in value of bonds initially released in 2004 to raise $75m because few have been traded, and nor are lending agreements with banks, breached this year, considered a cause for concern. According to Cooper, the call by some suppliers for PPCS to merge with Alliance probably ranked number four of hot topics burning on farmers’ lips at the roadshow. High on their list is the need for a better bottom line than last year. The average $53 a lamb, down to $47 during the main selling window, barely covered their costs. Suppliers to many of the processing companies around the country have felt hard done by. Accusations of underperforming, unhealthy competition and of weak selling to tough clients have followed. Cooper says people under-appreciate the influence of currency fluctuations on the rise and fall of lamb returns. “It’s not about the prices in the marketplace. We have had some reasonable stability internationally and it’s the impact of currency. When the currency goes down the price goes up. As the currency goes up the price goes down. You cannot blame marketing and structures of how we do things offshore or consolidate them together. Yes, there have been some price pressures, but relatively modest, and they are on the international scene. People trying to blame us versus the currency is hugely relevant.” He asks, if the marketing models and performance are so poor, then why has venison improved in price and beef maintained its value the last 12 months during a rising currency? “This was a lambcentric problem. Yes, we did have some market problems, but they were just the international scene. Next year it could be beef; it has been venison (before). Many people have been alleging we have been undercutting. Well, we haven’t been undercutting, but there has been resistance from consumers and the supermarkets are highly competitive and they are putting pressure on lamb prices. It just happens to be lamb this time.” To get better prices for its red meat will take time. A New Zealand lamb loin is already 14 euros more than protein alternatives such as turkey or hoki fillets. With the exception of lamb racks in the United States, lamb is almost on par with the good returns of two years ago when the currency was down. This means that customers are paying close to their upper limit. In the meantime, dairying is taking land away from sheep and beef farming for dairy operations and run-offs for replacement stock. The outlook is not all black though. PPCS believes that new markets, more cost reductions and more investment in research and development will help improve returns. Just as currency fluctuations can drive prices down, they can also provide a “quick fix”, says Cooper. “We are trying to give farmers some confidence that potentially there is $20 in revenue in lamb out there if everything lines up right.” Meat %26 Wool’s latest forecast of an average $61 lamb is achievable, he says. “We have to do better, that is the real problem. You have to be realistic $60 to $65 will probably be the interim point with the currency improved. The average is a bit of a distortion. We have to get a reasonable difference between the high and the low. The critical price for farmers is the January, February, March price. If that’s poor it will affect our industry going forward.” The problem is that farmers gained a taste of the good times two years ago and now see dairying farmers enjoying a boom. In late 2005 processors paid too much for heavy lambs. The cooking market didn’t want legs from 21kg lambs and with nowhere else to sell them they went to the United Kingdom. Cooper says the industry crashed the market because it delivered a product its customers did not want. Another crash followed last year when 20% more lamb was killed before Christmas and the market couldn’t absorb the increase, he says. “The industry’s at fault because we had marginally costed and delivered high-price lamb. Farmers chased it and we killed it and we didn’t have a market at that time of the year for that volume of stock. We played with the profile of traditional market demands and put more product on than they could afford. Why did we pay for this? Because we were b….. silly, too, to be fair. We didn’t have a market and we were trying to fill plants to get costs out.” The flat returns after Christmas could have been avoided if everyone had not played with the supply profile, he says. Only now have prices improved. As New Zealand’s largest meat processor, PPCS has taken the lead to deliver some of the big changes demanded by farmers. In its April-launched new procurement plan are forward price signals through to February that farmers can supply to and which are based on market returns. The company has “cleaned the deck” of deals with livestock dealers effectively middle men that have been a big gripe of farmers. Cooper says farmers will have to decide if they want to support other companies that may still be working with a dealer model or a “one-price-for-all” that is the principle of co-operatives. Bigger PPCS suppliers will, however, continue to receive a “modest premium”, averaging less than 6c/kg. PPCS maintains that this will not distort the procurement market or influence the store market. Large suppliers are being recognised for their value to the business in the same way as fertiliser or rural service co-operatives offer incentives. A guaranteed space system has replaced the old preferential space scheme. This means if livestock is for some reason not killed, the agreed price will be held and those that are locked in will get their animals killed first, even if it means stepping up the plants. The backlog will be handled the same way as an airline deals with flight disruptions. In return for committing supplies in advance, farmers receive 50c more a lamb, $6 a head for cattle and $3 a head for deer. This will give PPCS more certainty for marketing and plant planning and prevent farmers pledging stock in a booking system and then reneging for a better price elsewhere. “I suppose we put our hand up,” says Cooper. “It was a bit of a challenge because people were saying, `you are the largest, why don’t you show some leadership’ and so we did. We put a price out and we got rid of the deals with the dealers, so we have responded but it needs support as well.” Supply contracts are focused on livestock quality and gradings lamb between 15.5kg and 18.5kg to qualify for a premium price. The idea is that customers are supplied lamb year-round so no other meat can sneak onto its supermarket shelves. At an industry level PPCS is in a partnership with other processors to market lamb in the United States. The Dunedin-based co-operative favours Meat %26 Wool and deer and meat groups forming an industry-good body. A single group focused on red meat makes sense, says Cooper. “Why shouldn’t we be one? All their (dairying) leadership roles, and political lobbying and marketing access is managed by Fonterra. They don’t have suppliers in one group and Fonterra as the processor and exporter in another group. “The key point is make it red meat. At the moment we have a fragmented model.” Another plan is to have processors drop some of their competitiveness and jointly invest in research and development. Instead of some companies initiating work and others cashing in later, all will chip in so savings can be made in meat processing. PPCS is keen to promote joint ventures targeting new affluent and emerging markets such as India, China and the eastern European blocks. Cooper says there are opportunities to sell lamb and beef to wealthy members of these populations. “If we do it together and jointly fund it, everyone benefits from it and we target non-traditional markets with new products and take some of the pressure off traditional markets. You hear the stories about how many millionaires are created in Russia and even India now.” He says meat cuts would be tailored to their cuisine. In the past PPCS sold low-product meat such as offcuts to these countries. Gaining entry to the nouveau riche may require expensively removing the bone from lamb legs and presenting it in more cuts. English and French buyers remain loyal buyers of lamb legs, but they, too, are harder to find, with price increases putting some off. “In the 1980s we had all sorts of problems with sustainability in the industry and by and large we sold lamb carcasses offshore and that was the extent of our marketing,” says Cooper. “(Now) all our products are sold in retail as ready food, service packaged and portion controlled. You could say, however, the lamb leg is the carcass of the 1980s. We know consumers want a piece of quick-cooked product that they can prepare in 20 minutes all done. If you look at the leg, it’s 2kg with a big bone in it and it doesn’t fit with what the research tells us the modern consumer wants.” Now the co-operative is asking its suppliers to commit to a sustainable business. To break the cycle of a “dutch auction” where processors are traded against each other for the best price and lamb is oversupplied in the shoulder season, PPCS plans to move to regional-based plant operations and closer relationships with suppliers. “To get certainty, companies need commitment,” says Cooper. “If you look at the wheat supply chain or vegetable supply chain it’s all linked up and everyone is comfortable with the outcomes and they are matched to the market and it is facilitated in the middle.” The co-operative argues that it cannot make profits and re-invest in the industry if the market continues to be distorted. Cooper says farmers have a big decision to make. If suppliers commit their stock, processors will be able to commit to the marketplace and “right-size” their facilities. That will force change in the industry to ensure suppliers align their capacity with supplying the market’s needs, he says. “Price should be in the mix and it probably should be in the top quarter, but price is only one part of the value proposition for a sustainable return going forward. It’s a huge mindset change for farmers. Many times we have gone into a room and asked suppliers when do they pass over their production. Half of them will say when you pick it up at the farm gate and the other half will say when the consumer has eaten it.” The second half is right, he says.