High spot prices likely to deter contract takers

01-11-2008 | Hugh Stringleman

The last time New Zealand had a 20 million export lamb kill, all of the meat company executives and most of the sheep farmers weren't even born.

The NZ sheepmeats sector is going into uncharted territory where behaviour from some participants may become weird.

Faced with the Meat & Wool NZ Economic Service estimate of 20 million in 2008-09, down six million from last year and the year before, meat companies will have no option but to fight tooth and claw for throughput.

They will staunchly maintain that this is the year for farmers to prove their loyalty by using some of the numerous procurement options all companies are offering. But farmers are not convinced by contracts when spot prices are high and rising.

Lamb producers are not going to let the big prices pass them by, stemming from strong demand around the world for protein and the falling NZ dollar. The meat companies are geared up for the fight, having banked excellent profits from large kills and rising world meat and by-product prices in 2007-08.

"We have all got customers we need to service, so there is real potential for a procurement war," said Stuart Weston, AFFCO chief executive.

His company won't be putting out any forward fixed prices for lambs in a bid to emulate Silver Fern Farms.

"Schedule setting this year will be a short-term game, and re-negotiating market prices frequently," he said.

Weston takes heart that the North Island sheep flock is expected to bounce back after the 2007 drought, whereas the South Island's reduction in ewe numbers is an "enduring change".

However, tailing results from the North Island's east coast are 15% to 30% down on last spring, leading the analyst Market Update to suggest that the Economic Service forecast of a 20 million kill may be optimistic.

The Economic Service said that as the drought recovery continues, lambing percentages will be better in 2009 and this will see a 10% lift in export lamb production to 22.3 million in 2009-10.

"With lower milk prices forecast, the pressure is coming off land use change, and so our lamb and beef tonnages will rise again after next season," Weston said.

AFFCO intends to push on with the food group approach, supplying meat and by-products to consignments which include dairy products, fish and vegetables from other companies in the Talleys Foods group.

South Pacific Meats at Awarua, Southland, and Malvern, Canterbury are part of the group.

"That food group approach has got real breadth and scale with Open Country Cheese and Dairy Trust as part of Talleys.

"It means we are a major primary export earner for NZ, using the model of many international food companies," he said.

Although AFFCO withdrew from the NZ Lamb Company effort in North America, it hasn't turned down all industry collaborative efforts, Weston said.

"Collaboration comes in many forms and we have to participate."

However in the US and Canada, where NZ Lamb Company is dominant, there will always be a smaller group of customers who want a choice. It is better that they stay with NZ lamb from AFFCO than switch to Australia, he said.

The new relationship between Silver Fern Farms
and PGG Wrightson, whether the $220 million is raised and paid or not, means that AFFCO farmer-suppliers will be talking to agents of a rival company on a regular basis, given PGG Wrightson's dominance in rural servicing.

"We'd be surprised to lose business given the positive farmer response so far to our new marketing model, but if there is any hint of us losing business, we'll be swift to react."

Meat companies will also have to factor in a mutton kill chopped in half. Last year six million sheep were killed, two million more than usual, because of drought and dairy conversions.

This year the Economic Service predicts that only three million cull ewes and rams will be slaughtered. The national sheep flock fell 11% or four million to 34.2 million on July 1, in percentage terms twice the previous large decrease, also drought-related, in 1988-89.

In-lamb ewe numbers were 23.63 million on July 1, the smallest national flock since 1952. Some 1.3 million sheep and beef stock units were displaced by 330 dairy farm conversions, plus dairy grazing commitments.

Unfortunately many of those redundant ewes went to the works, because saleyard values were low and sheep farmers couldn't feed any extra mouths.

Also unfortunately, ewe hogget numbers fell by 16% to 9.4 million, with all regions having decreases except the East Coast.

Large numbers of replacement ewe lambs were slaughtered at light weights because of the drought and the negative sentiment in the sheep industry. Therefore the sheep industry's capacity to respond to much higher returns this season will be restricted and all regions must get a good summer to be able to lift lambing percentages next year.

Meat companies are staring at the looming shortage of lambs, and mutton, while watching the market prices rise and the NZ dollar fall.

It is like knowing a car crash is about to happen but not being able to do much about it.

They will have to compete for livestock supplies, trim operating costs wherever possible and encourage customers to hang on through the shortage until the supply pattern improves.

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