A continuing decline in sheep and beef farming profitability, inadequate industry returns and fierce competition from alternative land uses are forcing more and more farmers out of the sector.
Notwithstanding farmers' profound display of increased productivity over the past 15 years, profitability has been erratic and inadequate.
The periods when sheep and beef producers enjoyed good returns have been characterised by events beyond their influence.
Extreme droughts in Australia or the United States, BSE (mad cow disease) or foot-and-mouth disease outbreaks, third country political intervention or global conflicts, have all been predominant causes for New Zealand sheep and beef farmers' short periods of good fortune.
Yet, by any assessment, the market outlook for quality red meat is good.
The growing affluence in Third World countries coupled with continuing decline in developed countries' sheep flocks will create unprecedented demand.
But the current mood of sheep and beef farmers is one of frustration and desperation.
Calls for a greater display of leadership in the industry, reduced competition in the marketplace, and company amalgamations are common.
The time has passed for talking - the farmers want results.
The challenges to be addressed, as I see them, are:
- An industry which is throughput driven and not market led.
- Processing overcapacity.
- Proliferation of third-party livestock procurement activity.
- Little investment in technology, innovation and product development.
- Farmer preference for spot market over contracted supply.
- Serious competition from alternative land uses.
Sadly, the challenges confronting the industry today are little different from what they were in the 1980s to mid-1990s.
In 1992, the export lamb kill fell by 4.5 million and the procurement heat was turned up.
Farmers benefited as prices rose about 40% but crisis hit again in 1994.
In July 1991, Prof David Hughes and Dr John Morris visited New Zealand and held a series of seminars, "Marketing New Zealand Meats Profitably".
They observed:
- Commodity orientation rather than market orientation.
- Endemic mistrust between producers and meat companies.
- The practice of averaging prices to obfuscate market signals.
- The concentration on throughput at the expense of developing higher added-value markets.
Their advice was to focus research and marketing into key markets.
Prof Hughes visited recently, and implored New Zealand producers to understand the need for high quality, differentiated food products.
In the past, many reports have been commissioned and task forces set up, but overcapacity, procurement wars and lack of sector profitability prevailed.
By 1990, 70% of processing capacity in New Zealand was in the control of producers, but between 1990 and 1992, seven new sheep processing plants were built.
Notwithstanding the failure of Waitaki NZR, Weddel and Fortex, the industry which had consisted of 11 companies and 45 processing plants in 1986, had expanded to 29 companies and 64 plants by 1994.
Businessman Rick Bettle observed that cut-throat competition was destroying the industry, and that many lessons could be learned from the dairy industry where suppliers were committed to one company for 12 months.
What lessons from the past can we apply today?Changed ownership from dramatic and painful rationalisation does not necessarily deliver sustainable profitability.
Despite all the planned plant closures, a proliferation of new processing capacity is likely to occur.
Producers gained 70% ownership of the industry, but gave much of it away.
We are now witnessing that phenomenon in the dairy industry.
The rationalisation and expansion cycle was about production and throughput, and little to do with developing new markets and differentiated products.
Today, the industry is still very much throughput driven.
Returns to producers this year reflect the processing contribution much more than the market reward.
We now see a serious decline in lamb numbers - 5 million in one year - but as one company closes capacity, another expands.
We understand this to be the competitive market working, but farmers should understand that investors require an adequate return on their capital, and the costs of closures and new builds will be carried on the sheep's back.
So, will rationalisation and mergers resolve the underlying problems facing the industry?
If a larger co-operative is created, will it end up with more suppliers, or fewer?
Past experience in both the meat and dairy industries suggest fewer.
Will supplier behaviour change to become focused on the consumer?
Finally, will the meat industry adopt a strategy based on innovation and investment, or a structure which simply rearranges the deck chairs on the Titanic?
I take heart that these questions are being asked, and answered, as a compilation of wider views and opinion is found in two independent reports, albeit from outside the industry.
Maf's report, "Meat: The Future" prepared four scenarios of what the industry would look like in 15 years.
The "Do Nothing" scenario looks ugly, with the industry on a slippery slope into freefall.
Scenario two places less dependence on traditional markets, with processors investing in new markets and distribution channels.
It assumes some consolidation of larger processors.
Scenario three is "Shrink to Fit", but scenario four identifies an industry which is innovative, invests heavily in research, market development and differentiated products.
There prevails a culture of partnering with international clients in emerging markets.
The rationale for an industry-wide merger has lessened.
KPMG has just released its report, "The Big Opportunities and Challenges Facing New Zealand Agriculture".
The executive summary highlights the huge opportunities ahead for New Zealand food production.
"New Zealand agriculture needs to discard the low-cost production position once and for all, and to adopt a universal focus on efficient and sustainable production ..."
It highlights the need to invest in on-farm production techniques to match market demand.
An industry initiative is being developed under the Primary Growth Partnership which proposes this very model to develop the supply chain and optimise returns to producers.
The report concentrates on market development, branding 100% of New Zealand, innovation, traceability, animal welfare, industry leadership and governance.
Both reports conclude in identifying the need to change industry strategy away from throughput and on to customer needs and investment.
I conclude that our ability to secure long-term sector profitability will depend on adopting strategies which are a step change from current thinking but will provide different opportunities and challenges for suppliers.
Structural changes will become much less relevant.
New Zealand farmers must make that change, be prepared to invest in and commit to their company of choice if we are to secure our long-term future.
• Eoin Garden is chairman of Silver Fern Farms.
