The long path back from lamb price crash on Home Services

Jan

The long path back from lamb price crash

posted by admin in Window Cleaning

Over the past few weeks the chief executive of meat processor PPCS has spoken to more than 2000 farmer suppliers in 30 meetings throughout New Zealand. Lamb suppliers, and not just those from PPCS, are struggling to break even, let alone make a profit. They want a turnaround. Keith Cooper gets straight to the point. “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 (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 sheep and beef meat exports, has reduced debt. Cashflow is up $49 million on last year and borrowings are down $41 million, with shareholders’ equity improving. Mr Cooper is not reading too much into a fall in the value of bonds initially released in 2004 to raise $75 million because few have been traded. And nor are lending agreements with banks, breached this year, considered a cause for concern. According to Mr Cooper, the call by some suppliers for PPCS to merge with Alliance probably ranked No 4 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. Mr Cooper says people under- appreciate the influence of currency fluctuations on the rise and fall of lamb returns. “When the currency goes down the price goes up. As the currency goes up the price goes down. “Yes, there have been some price pressures, but relatively modest, and they are on the international scene. He asks, if the marketing models and performance are so poor, then why has venison improved in price and beef maintained its value the past 12 months during a rising currency? “This was a lambcentric problem. Next year it could be beef; it has been venison (before). “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.” 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 a 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. PPCS believes that new markets, more cost reductions and more investment in research and development will improve returns. Meat %26amp; Wool’s latest forecast of an average $61 lamb is achievable, Mr Cooper says. “The critical price for farmers is the January, February, March price. “If that’s poor it will affect our industry going forward.” 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 Britain. Mr Cooper says the industry crashed the market because it delivered a product its customers did not want. Another crash followed last year when 20 per cent 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.” 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. Its procurement plan launched in April has forward price signals through to February. The company has “cleaned the deck” of deals with livestock dealers effectively middle men that have been a big gripe of farmers. Mr 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 cooperatives. 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 cooperatives 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. In return for committing supplies in advance, farmers receive 50c more a lamb, $6 a head for cattle and $3 a head for deer. The idea is that customers are supplied lamb year-round so no other meat can sneak on to its supermarket shelves. At an industry level, PPCS is in a partnership with other processors to market lamb in the United States. A single group focused on red meat makes sense, Mr Cooper says. At present the model is fragmented. PPCS is keen to promote joint ventures targeting new affluent and emerging markets such as India, China and the eastern European blocs. Mr Cooper says there are opportunities to sell lamb and beef to wealthy members of these populations. Meat cuts would be tailored to their cuisine. This may mean presenting lamb 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. “(Now) all our products are sold in retail as ready food, service- packaged and portion-controlled. “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.” To break the cycle of a “dutch auction” in which processors are traded against each other for the best price and lamb is oversupplied in the shoulder season, PPCS plans to move to regionally based plant operations and closer relationships with suppliers. “To get certainty, companies need commitment,” Mr Cooper says. “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.” Farmers have a big decision to make, he says. If suppliers commit their stock, processors will be able to commit to the marketplace and “right-size” their facilities. “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.