Thursday, 5 December 2013

Economics for meat farmers

The red meat industry in NZ has been examining its navel for some time over how to cope with a single basic problem: excess processing capacity. That problem has become worse as farmers have converted sheep & beef farms to dairy. 

It is now dominating the rural press, and the MIE has been formed as a ginger group to push things along. It says:
MIE was formed in response to the crisis facing our industry.

Sheep and beef farming is under pressure with earnings and stock numbers declining. The processing sector is also in crisis. Dairy conversions continue at a rapid rate.
You’ll see from much of the analysis presented here that there is quite a lot of consensus about what needs to happen in the red meat sector– but no one is taking the lead.

That’s why MIE was formed – to help farmers step up to lead change and reform in our industry. We’re the ones with most at stake, and no one’s going to do it for us. (emphasis added)
The consensus referred to basically involves copying the dairy industry by seeking mergers. That is why we now see dairy guys like Henry Van Der Heyden, Andrew Ferrier and John Monaghan putting their hands up to help out their meat farming whanau. They can spot a new gig when they see one!

But here's the thing: the current situation is bad for processors, but not for farmers. On the contrary, farmers are beneficiaries of excess capacity because competition for stock is increased, which bids up the price of stock.

This is probably hard to see when (a) there is constant pressure is to push for mergers and (b) returns are lower and more volatile than farmers would like. But the crucial question for farmers is: what would change following a merger? How exactly would reduced competition for stock lead to higher and more stable prices for farmers? 

Unless this can be answered satisfactorily, the MIE is heading in completely the wrong direction. Farmers should not be "stepping up to lead change", they should be standing back and letting the processors sort out their own mess, and enjoying the benefits of intense competition along the way.

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