Chairman’s address to the Meat & Wool NZ AGM

Chairman’s address to the Meat & Wool NZ AGM
11 March 2009

Firstly can I say thank you to the Roy Family for hosting us here at Glen Islay for the Meat & Wool NZ AGM. We are privileged to be here to see first hand an example of a progressive farming business.

James and the team here at Glen Islay have continued to develop this property in recent years to be able to realise its full potential, in spite of the challenging times for the industry. Today you have seen a number of on farm examples of levy funded activities being applied to improve the Roy’s farming business. The adoption of technologies like SIL for ram selection, and management changes including the mating of hoggets and yearling heifers, has lifted their productivity and positioned them better for the future. A number of the farm staff are utilising AgITO training to up skill themselves which is also a Meat & Wool NZ levy funded activity. These on farm examples are typical of the day-to-day application of Meat & Wool NZ levy investments that have ensured that the New Zealand sheep and beef sector remains at the forefront of the industry worldwide.

At last years AGM in Palmerston North I broke with tradition and did not read the Annual Report speech that is circulated to all farmers. Instead, I answered a number of questions that farmers were asking about the future of the industry and offered our views as to how the industry could reorganise itself to deliver better returns in the future.

I talked about the reasons for poor pricing of sheep meat, and the need for industry reorganisation alongside stronger commitments by farmers.

I talked about the positives for beef pricing, with demand forecast to be strong on the back of the biofuel boom and growing demand from Asia.

I talked about the seemingly never-ending issues in the wool industry, with fragmentation and an entrenched attitude to change, being significant hurdles to overcome.

I also talked about the role of Meat & Wool New Zealand within the industry. In particular the role we play as a facilitator and representative body, acting on behalf of farmers and providing some “glue” to bring industry and government together, alongside farmers to ensure successful investment of levies.

But most importantly I talked about the opportunities for New Zealand farmers in a world seeking greater amounts of what we produce, which is the finest, naturally produced meat and wool products in the world. The challenge I issued in finishing last year, was that we needed to act courageously and reorganise ourselves to ensure that the opportunities were captured for generations of farmers to come.

Ladies and gentlemen, 12 months later and we can now look back and say that the opportunities I talked about last year are real, but questions remain about our ability to capture these in the long term.

So where are we now, 12 months on as an industry?

Today I want to answer this question by breaking it into four parts.

Firstly, a quick reflection of the last 12 months.

Secondly, what is the opportunity for the sector?

Third, how do we capture the opportunity?

And finally what is the role of Meat & Wool NZ in realising this.

The past 12 months.

It’s likely we will remember 2008 as one of the most turbulent in our history with the financial crisis that has hit the world, and also the extremes in earnings from the sheep, beef and dairy sector. Few could have predicted the extreme swings we have seen particularly during the last six months of 2008, and there is little doubt now that food pricing will be far more volatile in the future than it has in the past.

The good news for sheep farmers is that lamb prices have staged a remarkable recovery, with returns today double those of the same time last year. Demand at retail has more than compensated for the big drop in the food service sector and the Meat & Wool NZ Economic Service season forecast of an $80 lamb looks like being exceeded. Our industry should be congratulated, for ensuring that better prices have been delivered back to the farm gate where they are sorely needed.

Meat & Wool NZ has worked hard during the past 12 months with our fellow farmers offshore to give them a better understanding of the importance of New Zealand lamb to meet year round consumer demand. I am pleased to say that this work has paid dividends, and reciprocal visits to New Zealand have been very successful in strengthening relationships with these farmer groups.

Beef farmers have also seen improvements in farm gate returns, although the past year has been one of the most volatile on record. Soaring in-market prices in the middle of 2008 on the back of the biofuel and commodity boom have now reverted to a more normal trading range International trade in beef was under real pressure during the last few months of 2008 with some of the oil economies like Russia exiting the market. The next 6 months for beef look challenging as we see a large cull of dairy cows both here in New Zealand and in the USA in response to the sharp drop in milk pricing for dairy farmers. However, the third and fourth quarters of 2009 should see better pricing for farmers on the back of lower supplies and a lower New Zealand dollar.

Wool returns for crossbred farmers have hit new lows this past year. 12 months ago we were seeing market prices for NZ wool in $US steadily climbing, although the high $NZ meant that these gains did not come back to New Zealand farmers. Staggeringly today, even with the $NZ dollar down over 30%, the buyers of New Zealand wool offshore have never been able to buy New Zealand wool cheaper.

Higher priced contracts from buyers offshore have not been honoured, and these same buyers have negotiated lower priced contracts with our exporters with the currency gains lost to New Zealand farmers. The President of the Council of Wool Exporters recently responded to this by claiming, that they had no other option and have to continue to trade.

This is completely unacceptable in our search for better returns from wool. Ask your buyer if they were aligned to one of the companies who agreed to a lower priced contract with a purchaser who defaulted on a previous agreement. Consider their response when you next send wool for sale from your farm.

The past 12 months have been characterised by much debate about the structure and behaviour of the sheep meat and wool industry in particular. Returns from both of these products have simply been unsustainable, and it is not surprising that farmers have been seeking solutions.

Our view is that the debate around industry structure and behaviour is just as relevant today as it was 12 months ago and reorganisation still needs to occur. The reduction in excess capacity last year has not matched the reduced supply of livestock, and while farmers will benefit this year with the increased procurement pressure, and a lower New Zealand dollar this is not a model that will deliver value for farmers in the long term.

Though progress in a range of proposals did not occur, it focused attention on the issues of importance for the industry. As a result of the strategic work from the Meat Industry Taskforce and the Wool Industry Network, Meat & Wool NZ has refocused its direction on areas where we can play a role to assist with industry reorganisation.

The opportunity.

Incredibly, even with global recession as the dominant theme today, the future for our industries has arguably never been brighter. Population and income growth in our more traditional, developing and near by emerging markets continues. In spite of the global financial crisis, food security is the new phenomenon, and New Zealand is ideally placed to supply the world with our high quality, naturally produced meat and wool products.

The smart companies and people in the world today are using this recessionary period to reorganise their business, redefine their strategy and reposition themselves to take full advantage of the opportunities that will be abundant when the recession turns.

New Zealand as a country is not doing this as strongly as it should.

The Job Summit held recently in Auckland was a positive initiative for mobilising some thinking about how to protect us as a nation from the financial crisis hitting the world. For a moment in time we felt good about a group of our top business people coming together to look at how New Zealand can weather the storm. However given the horsepower assembled in the room that day the outcomes were very modest indeed.

Where is the strategic thinking about New Zealand’s place in the world?

How can we address the constraints that stop us from extracting more value out of our industries where we have natural comparative advantage?

It is time for us to stand up and talk about the opportunities for New Zealand globally, in spite of the recession and chart a path forward on that basis.

Rather than try and protect everything beneath the bar ask how we can raise it higher.

If we did this we would clearly identify that New Zealand’s opportunity is food production, it’s supporting industries, and the sustainable conversion of forage to protein. We would strengthen our economy around smart food production systems and technologies, with highly skilled people, which are well connected with market trends and the demands of consumers, and who can respond accordingly. And importantly we would address some of the constraints that are stopping us from advancing our efforts in this area for the betterment of New Zealand as a nation.

Addressing these constraints in the big industries where we have comparative advantage, would deliver massive gains to the New Zealand economy. Let me suggest just three as examples of this approach.

1. The lack of access to broadband is a serious impediment to many sheep and beef farmers in particular. Our analysis has shown that for sheep and beef farming alone, lifting of gross returns of 40% of farmers to that of the top 10%, so that 50% of farms were performing at that level would deliver an extra $585 million dollars per annum to New Zealand. However one of the constraints to making this happen is the lack of broadband in sheep and beef regions and it must be addressed.
2. There has been much talk about water in recent months. It is estimated that over 95% of Canterbury’s water goes straight to the sea without any economic activity derived along the way. Water harvesting and irrigation for another 1000 farmers nationwide could deliver another $220 million dollars per annum, as well as the internal economic activity alongside it with the ensuing wealth that will flow from the better productivity and aesthetics that will be created.
3. Meat & Wool NZ invests significant resources into trade policy and market access. Recent announcements regarding free trade discussions with India and Korea are very positive alongside the completed agreements with China and the ASEAN group of countries. However elimination of all tariffs paid by sheep and beef farmers alone would deliver another $225 million to New Zealand farmers and the wider economy.

These are big chunky returns that would be identified with some good strategic thinking about the future of New Zealand. Remember the “Knowledge Economy” and how New Zealand was going to be the “Ireland of the South Pacific”. Last time I looked things weren’t going too well in Ireland, and I know that addressing the constraints around food production in New Zealand would be far more enduring.

Our sheep and beef products are sought after in a wide range of traditional and developing markets. The opportunities are real, however there are some constraints to overcome if we are to ensure that we capture these, and add value not just for the sheep and beef industry, but the New Zealand economy as well.

We will do our part, but it is crucial that New Zealand as a nation addresses the big issues alongside us.

Capturing the opportunity.

In addressing the question about how to capture the opportunity I will refer solely to the sheep and beef industry, rather than the New Zealand Inc. view that I have just spoken about.

However the New Zealand sheep and beef industry is no different to the wider economy, and like the smart players we should be reorganising, reassessing strategy and repositioning ourselves. While pricing for our meat products hasn’t suffered the dramatic falls of other commodities, we should also be ensuring that we are better prepared to capture the opportunities on the other side.

Let me first address the structural debate that has dominated the industry over the past 12 months.

During the past 12 months in the meat industry we have had a number of industry restructuring proposals. While none of these efforts came to fruition, we remain convinced that change is essential if we are to have a successful, growing and profitable land use option for sheep and beef farming.

Let me look at the meat industry first.

Last year meat companies had a very profitable year even though farmers had the lowest farm profit before tax in over 50 years. This year better farm gate prices for beef and particularly sheep meat have quietened debate on industry reorganisation. Reduced supply and a lower New Zealand dollar has contributed significantly to the better sheep meat pricing in particular, and nothing has fundamentally changed here in New Zealand with regards to industry structure.

Better pricing for sheep meat and beef has enabled our forecast farm profit before tax to recover from last year’s historic low to reach approximately $45000 per farm. However this will only get us back to the average for the decade of the 90’s which clearly demonstrates that more is required.

Industry consolidation is not the answer in isolation, but our view remains that in the absence of strong differentiation, consolidation and greater collaboration is essential for our industry to be successful in the future. As I have continued to state over the past 12 months, this change must also include behavioural change by farmers, to enable our companies to make long term commitments and investments in the market and in their processing companies here in New Zealand.

Our efforts for wool over the past 12 months have focussed on funding the Wool Industry Network to continue to implement the strategy to turn the fortunes of the wool industry around. That strategy is now complete, with the focus on innovation and partnership in the market, alongside consolidation of the clip and industry here in New Zealand.

The strategy has clearly identified that to achieve better prices from the market, New Zealand companies need to build better partnerships with strong retailers and manufacturers. The strategy also determined that for farmers to receive true market related returns and achieve real transparency, it was preferable for farmers to have ownership in downstream marketing companies.

The vehicles to achieve this are now in place, and farmers have a key decision to make. If you are happy with the price you are receiving for your wool, stay trading with your current buyer. If you are not happy with your wool returns look at the other options that are now available to you.

This year is the United Nations Year of the Natural Fibre. The time is right for wool however the current structure is not an option that will deliver success. There needs to be some behavioural and structural change within the industry in order for the potential to be realised.

Alongside the commercial reorganisation that we are advocating for both meat and wool, is the need for more collaboration between industry organisations and like-minded companies. The Emerging Markets Project, which is a joint venture between Meat & Wool NZ, Alliance, ANZCO and Silver Fern Farms, is one example of this approach and we are looking to replicate this in other areas.

We have also been in discussions with the Meat Industry Association about a proposal to combine our two organisations to enable a truly sector approach to industry issues. Unfortunately MIA members recently voted down this concept, however we are continuing to look at alternative models to achieve the same aim of a whole of sector approach to priority setting. These will be further developed and brought to farmers in the upcoming round of consultation meetings.

I have discussed at length the commercial reorganisation that still needs to occur. This, alongside greater commitments by farmers, will enable stronger marketing and investment in innovation, which is sorely needed.

There are other issues that focus on protecting the opportunities for future generations that also need to be addressed. We will be discussing later the need for enhanced traceability for cattle, but it is an important example of work being done today to protect tomorrow’s future.

Meat & Wool NZ has been a supporter of the NAIT proposal since its inception, after our former Chairman Jeff Grant saw the estimated $7.0 billion of damage that one BSE cow caused the Canadian Beef Industry in 2003. We are now one of the only major beef trading nations in the world that does not yet have an electronic scheme in place. It is crucial that we continue to put in place a nationwide, cost effective electronic system for cattle that has the integrity to ensure that we can retain our presence in our major beef markets.

We are very conscious of concerns among farmers regarding NAIT, and we continue to advocate for a scheme that is low cost and provides security of farmer information. We also continue to emphasise that there are no international drivers for sheep to be included. However those who argue against this proposal are ignoring the regulatory risk and the long term security of the beef sector.

Now to answer the final question of what is the role of Meat & Wool NZ in capturing the opportunity.

During the past 12 months we have received a lot of feedback from farmers, asking us to be more directly involved in the industry debate for both meat and wool. Our view has been consistent for both industries, in that we need commercial solutions to address the issues, with supporting information from Meat & Wool New Zealand to enable farmers to make more informed decisions.

In spite of claims made to the contrary, we have not used levies to fund the establishment of any commercial companies in the meat or wool industries. Our work has been solely directed towards analysis and strategy development and bringing like minded companies together to ensure more effective investment of levies.

In the lead up to the farmer referendum to be held in August this year we have reviewed the past 5 years of Meat & Wool NZ activity. Independent review by Nimmo Bell has assisted with cost benefit analysis for a selection of projects.

Later today we will discuss the proposed activity areas in more detail, but our view remains that there are areas that benefit from collective industry investment by farmers, and some areas that are absolutely critical.

Particular themes that have emerged include responding to the calls for better industry leadership and playing a greater role in bringing companies together in collaborative programs alongside government agencies to progress the sector. In the past 12 months we have made greater use of the information resource that resides in the Meat & Wool NZ Economic Service and we are proposing to increase our efforts in this area.

Research and technology transfer remains vital to ensure we remain world leaders at the forefront of the meat and wool industry globally. We are currently exploring new ideas that focus on better application of existing research to lift performance levels up to that currently being achieved by the top 10% of farmers.

In 2003, the most contentious area was farmer investment in market development both offshore and onshore with our support of Beef + Lamb New Zealand. At the many meetings we hold with farmers each year it is now one of the most supported activities. Consolidation of the industry would reduce the need for farmer investment in this area, however our work with the Emerging Markets programme is a template that we want to extend across our market development portfolio.

The past 12 months has seen very public attempts to reorganise the industry fail. Meat & Wool NZ does not intend to lead a public debate about reorganisation of the industry, but will continue to work alongside like minded companies to bring more cohesion to the sector. There is no doubt that our ability to bring farmer and government co investment to the table is valued by companies, and we will continue to work quietly but actively to encourage more collaboration in the sector.

The activity areas and weighting that we have proposed may not look dramatically different from our activity today but there are significant changes from the activity that was supported in 2003.

I will discuss in more detail the proposal for Meat & Wool NZ activities for the next five years in our session this afternoon.

Conclusion.

The global financial crisis is dominating the news every day. However our industry has weathered the storm well and in spite of this crisis the future for our industries has arguably never been brighter.

New Zealand must do more as a nation to reorganise itself, reassess the big strategic issues and reposition itself for the recovery to be able to fully capture the opportunities. Addressing the constraints that are limiting our industries where we have comparative advantage has to be the priority.

Returns for meat products have lifted considerably for farmers over the past 12 months, and our companies should be congratulated for ensuring those returns are being translated back to the farm gate. However the structure of both the meat and wool industries needs to be addressed for us to have a viable industry in the long term.

Meat & Wool NZ has responded to the challenges over the past 5 years by redirecting its investments to areas that have more influence over pricing than productivity. These programs have delivered returns to farmers for these investments alongside greater collaboration of like minded companies.

Ladies and gentlemen, I finished last year by reinforcing that the opportunities are real, but some challenges need to be overcome. We have certainly progressed in the past 12 months but I urge everyone in the industry to continue to push for more.

Now is the time to reorganise ourselves, reassess the real strategic issues and reposition ourselves to turn this industry from a good industry to a truly great one.

ENDS

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