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The two billion dollar lamb

By Rebecca Macfie

Sunday 1st June 2003

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Jeff Grant is a farmer with fingers in many agricultural pies. He's got interests in tulips and lilies, and he runs deer, beef cattle and sheep on his Southland farm. He's dabbled in dairy farming, too. If he had to choose just one of these products of the land as his sole source of income, which would it be? The new economy glamour of cut flowers? The svelte promise of the venison trade? The white gold of the dairy industry?

Nope. Grant would choose sheep. The way he sees it, the lamb trade offers the most secure and prosperous future. The international market for it is stable, there's a worldwide shortage of the stuff, and consumers have come to see New Zealand lamb as a high-priced luxury. Lamb, it seems, is now a nice little earner, and Grant expects that with continued innovation on the farm, in the processing plants and in the markets, it's going to stay that way.

Of course, it's his job to be optimistic. He's chairman of Meat New Zealand, the levy-funded organisation charged with increasing the value of New Zealand's sheep, beef and goat meat exports. Can we take him seriously? After all, didn't Fortex, that glamorous flag bearer of meat industry progress, fail spectacularly back in 1994, taking with it the promise of further processing and smart marketing? And didn't that whole sad experiment prove that the meat industry is just too tough to be fussing around with fancy notions like entrepreneurship and innovation?

No again. It's true that the death of Fortex dealt a blow to the public image of the meat industry, and was depicted at the time as a victory for the sector's commodity-trading dinosaurs. But in the decade since the Fortex brand name was buried by the receivers, the lamb trade has undergone a quiet transformation, resulting in more money in the back pockets of farmers like Grant, and more foreign exchange for the nation.

Take a look at the evidence. Between 1991 and 2002, the price received by farmers for their lambs increased by an average of 6.2% every year (see "Weighted average lamb payment", page 60). That's significantly better than the 3.3% year-on-year gains for dairy farmers and the 1.9% for beef. Overall industry earnings from lamb have also exceeded expectations. In 1994 the then Meat Board made the seemingly optimistic prediction that total returns for lamb would climb from $1.1 billion a year to $1.4 billion by 2001. Back then the sheepmeat trade was being dismissed as a sunset industry, and no one took much notice of these bold claims.

What's actually happened since then has been little short of remarkable. By 2001, returns for lamb had not only hit the target, but exceeded it by a stunning 35%, reaching $1.9 billion. Last year the figure was over $2 billion. That's an increase since 1994 of 82%. And while lamb has been the star performer, mutton has also done well - returns have risen 63% since 1994. This steady increase in earnings has occurred despite a huge decline in sheep numbers. At 39.2 million, New Zealand's sheep population is little more than half its subsidy-induced peak of 70.3 million back in 1982. From this much-reduced sheep population farmers have managed, by lifting fertility rates and growing heavier lambs, to increase lamb production by 8% between 1991 and 2002.

All this has fed directly into higher sheep and beef farm profitability (most sheep farmers also have cattle to diversify their income and control grass growth), which since the late 1990s has reached levels not seen since the Muldoon era when subsidies accounted for 40% of farm income (see "Sheep and beef farm profit", page 60). According to Meat and Wool Innovation's Economic Service, the gross margin per sheep stock unit - a broad measure of profitability taking into account income and direct animal husbandry costs - has lifted 155% since 1991 to $53.40 per sheep unit, compared with a 44% lift to $32 for cattle.

So how has the humble lamb, that old economy icon, become the bright star on New Zealand's agricultural horizon? Put simply, lamb has bucked the commodity price trend. While world prices for pork, chicken and beef drifted downwards throughout the 1990s, lamb prices strengthened. Lamb has gone from a cheap, everyday food for large families, to a specialty product for small, high-income households, says Stewart Barnett, chief executive of Dunedin-based meat co-op PPCS. And, according to recently retired Meat New Zealand chief executive Neil Taylor, New Zealand can take much of the credit for this happy state of affairs. As the dominant player in world lamb trade, accounting for 74% of cross-border trade, New Zealand has led prices up through innovation and productivity. "Even our competitors in Australia say that," says Taylor.

But is it entirely the result of good management, or has luck played a part? Both. To understand the reasons for the reinvention of the New Zealand lamb trade, a brief history lesson is required. First, it's crucial to understand the enormous level of pent-up change in the meat industry from the mid-80s onwards. When agricultural subsidies were stripped away in the Rogernomics era, sheep numbers dived. That meant meat companies were carrying massively more processing capacity than they needed. Much of what they did have was low-tech and inefficient. Before any progress could be made, vast and costly restructuring was needed.

No pain, no gain
Between 1986 and 1991, nine multichain meat works were shut, and 17,000 workers laid off. Since then there's been continued fine-tuning of company processing assets, some sensational company failures (Fortex included), plus some hefty investment in new technology. The Meat Industry Association estimates $60-$70 million has been tipped into plant upgrades in the past four years, and there's more to come. Meat plants are now slick, super-hygienic, high-tech places, and are getting more so all the time. For instance, Southland's Alliance Group is experimenting with scanning technology that enables much better selection of the meat cuts the company wants to market. This information is fed back to the farmer, enabling him to make stock management and breeding decisions that better reflect what the market wants. And PPCS is working on a robotic lamb-boning machine aimed at boosting efficiency and precision.

The result of all this restructuring and reinvestment in processing efficiency has been spectacular. In 1986 the average lamb chain employed up to 58 workers and processed 2500-3000 lambs a day; today the average is 26-28 workers, and 5500 lambs a day.

A second key historical thread in the reinvention of the lamb trade was the development in the early 1990s of a new method of packaging chilled lamb that gave it a shelf life of up to 18 weeks. This meant companies could send top-quality chilled product to consumers on the other side of the world by ship, rather than pricing themselves off the market by having to air freight it.

And the third key factor was trade liberalisation. In the early 1990s the Uruguay round of GATT negotiations delivered greater certainty of access to the European Union for New Zealand sheepmeat, and removed the restriction on the proportion of the total 226,700-tonne sheepmeat quota that could be delivered to the market in chilled form. This gave the meat companies more confidence to invest in new technology and marketing.

All cut up
So, by the early to mid-1990s the sun had begun to shine again on this sunset industry, and the ground was laid for the reinvention of lamb from an unprocessed commodity to a specialist product. Back when Fortex was rattling the industry's cage, around 80% of New Zealand's sheepmeat exports were shipped to export markets as frozen, unprocessed carcasses. Any further value that was added by chopping it into smaller and more appetising portions for the consumer was done far from New Zealand's shores. Today, a mere 6% is shipped in carcass form. The balance undergoes some degree of further processing, whether carved into a delicate frenched rack for the American market, vacuum packed as leg of lamb to be roasted by affluent UK consumers, or packed into cuts suitable for German restaurants. Although the bulk of this is shipped frozen, the premium chilled lamb trade is rising steadily and now accounts for 15% of total volumes.

Alliance Group chief executive Owen Poole says the emphasis has been on giving higher income consumers the type of product they want. "There's been a big focus on markets with the ability to pay, and on developing product forms [such as smaller portions and easy-to-cook cuts] for changing lifestyles. For example, in the UK there's an average of 1.6 people per household, and more women are working, so they need smaller portions that can be cooked quickly and easily."

But luck has played a part in the resurgence of lamb, too. Sheep numbers are declining worldwide as farmers seek more rewarding and lucrative activities. Unlike in New Zealand, shepherds in most countries are seen largely as peasant farmers, often eking out a living on marginal land. This means demand for lamb has now outstripped supply, helping to transform lamb from commodity to niche product. Poole says the European BSE (mad cow disease) and FMD (foot-and-mouth) crises have also had benefits for New Zealand lamb, which remains free of FMD. "While it's put some consumers off meat altogether, for others it's caused them to go for safety. For instance in Germany there was a swing to venison and lamb, especially New Zealand lamb."

Brand the lamb
So that's the story so far: after a decade of restructuring, innovation, investment and good fortune, New Zealand lamb has been repositioned in the market and the farmers are earning good money from it. But can the industry hold the advantage and build on it?

John Loughlin is one who believes there is still much to be done. Loughlin was, until last year, chief executive of Richmond, New Zealand's largest meat company and currently the target of a protracted and hostile takeover bid by PPCS. While progress to date has been impressive, he says there's another layer of opportunity yet to be captured. In the retail market, lamb is generally sold under supermarket house brands, albeit identified as New Zealand lamb, and sits in the red meat counter alongside other meats competing for the consumer's attention. Loughlin believes the next frontier for the industry is in branded consumer products.

Ironically, one the few instances of New Zealand lamb being sold under a strong manufacturer's brand involves not a Kiwi company, but UK poultry conglomerate Bernard Matthews. Matthews puts New Zealand lamb in a number of pre-cooked or ready-to-cook formats, packed within precise weight ranges and backed up by the company's £10 million ($NZ28.7 million) annual advertising spend.

Should New Zealand companies be trying to emulate this? Loughlin thinks so, and it's no coincidence that under his leadership Richmond formed a close relationship with Bernard Matthews as a supplier of carcasses to the conglomerate's Hawkes Bay processing plant. But others are sceptical about whether it is either possible or sensible to go down the branding path.

They say New Zealand companies simply don't have the scale and clout to run the expensive television campaigns needed to back up consumer brands in offshore markets and to convince the powerful supermarket chains they should stock the product. By one estimate, the total marketing spend of the New Zealand meat industry is only around $20 million. Better, they say, to work together to protect the generic status of New Zealand lamb as a quality product from a safe country of origin, and be ready to respond to subtle shifts in market demand in the way the product is packed and presented.

"There's been so much bullshit talked about Fortex brand or Richmond brand. The reality is we're selling New Zealand lamb. That's the brand, and there's been a huge investment put into that by New Zealand over the last 120 years," says one industry insider.

Meat New Zealand market services manager Bill Joyce, says: "There will always be room for niche marketers in smaller supermarkets. But if you want to have New Zealand lamb in the big chains like Tesco's and Marks and Spencers, you have to accept they will want to put their own label on it. But there is value in the sub brand, which is the country of origin brand. All the research in the UK is tending to suggest that consumers will buy the sub brand. Even Bernard Matthews puts the New Zealand lamb rosette on its packaging."

Okay, but what about picking up on Bernard Matthews' cue of pre-cooked lamb dishes? Surely there's an opportunity here for New Zealand companies to tap into the needs of the busy modern consumer who doesn't have time to cook? Napier-based Davmet, for instance, supplies lamb to ready-meal manufacturers offshore, and managing director Colin Francis believes there is an opportunity for New Zealand companies to develop their own manufacturing capability in this market.

But an equally exciting market is being opened up by the so-called "real food" movement, says Joyce. The emergence of celebrity cooks like Nigella Lawson and Jamie Oliver has created opportunities for lamb to be promoted to affluent people for whom cooking fresh ingredients in their trendy kitchens for their fashionable friends is a cool thing to do. Stewart Barnett of PPCS backs up this view: "These people don't want an institutional type meal. They want to go to the supermarket and buy fresh ingredients and then be able to have it cooked and on the table in a short time."

The point is that neither the product nor the market is homogenous, and when it comes to safeguarding the future of lamb there's no silver bullet. Alliance's Owen Poole says: "We need to be sensitive to changing demographics and spending patterns, and reposition the product continually to make it more convenient, easier to sell, handle and prepare. And that's a work in progress."

But product development costs money, and while the farmers have been doing well and the foreign exchange earnings have been rolling in, the meat companies themselves are notoriously unprofitable. Of the four biggest companies - Richmond, Affco, Alliance and PPCS - just two, Alliance and PPCS, produced a profit last year. The combined profit of the four was just $1.4 million, on total turnover of $4.5 billion. And the average rate of return on the $757 million equity tied up in the four was -1.4%.

The main reason for this dismal level of profitability is that industry assets are not yet in sync with the stock numbers available for processing. Although massive over-capacity has been taken out, there's still an overhang from those heady days when 70 million sheep roamed the land. And that means the meat companies must compete fiercely with one another for farmers' livestock to ensure they have enough product to fill their orders and keep their plants running efficiently.

It's tempting to search for quick-fix solutions to this lingering problem. Periodically, the suggestion of a Fonterra-like monopoly structure is floated as the remedy for the industry's ills. But in reality the only answer is to allow the market to do its work, even if it does mean more plant closures, company failures and ugly takeover battles. In an industry that has worked hard to shake off the baggage of central government meddling in recent years, the prospect of a monopolistic artifice being imposed from on high wouldn't get the time of day.

And, although the industry is dominated by the big four, there are plenty of smaller entrepreneurs making their way with niche customers. All up there are 136 processors and exporters operating in the New Zealand meat industry. The best chance of further success for our shining lamb trade is to leave them to it.

"The meat industry has done pretty well in the last decade," says Poole. "Some companies have got bigger, there's been some new technology, a settled industrial environment, we've changed the product forms, we've pushed for higher value. But it's a work in progress. We're on the case."
Good on ya, mate.

Fat lamb, fat profits
How New Zealand research is trying to make lambs grow fatter faster

Ever wondered why you see chicken in the supermarket in a multitude of further processed forms? You can buy it in round shapes and square shapes, coated, casseroled, crumbed, glazed and curried - you name it, it's available. That's because chicken is intensively produced and therefore relatively cheap to grow, leaving plenty of scope for manufacturers to add value without pricing it off the market.

New Zealand sheep, on the other hand, produce just one crop of lambs a year, which then frolic around in big, expensive paddocks eating grass until it's time for them to go to market. And while this is a powerful marketing story for the New Zealand lamb industry, it also means that lambs are expensive and the economics of adding value by further processing is finely balanced.

What happens behind the farm gate to further lower the cost of producing the raw material is therefore crucial to the industry's future. And there are plenty of irons in the fire on this front. Research being carried out by Ovita, a consortium of Meat New Zealand, the Wool Board and AgResearch, aims to discover marker genes that will enable farmers to quickly identify lambs with desirable characteristics, like faster growth rates, higher fertility and resistance to disease. The idea is that when the lambs are weaned the farmer will take a blood sample for analysis, enabling him to decide at that point which animals to retain in his breeding flock, rather than having to wait a year until they produce their first progeny.

Southland's Alliance Group is also experimenting with lambing ewes three times in two years, in a bid to broaden the industry's traditional seasonal peak and make better use of fixed assets.

And there's an industry goal to substantially increase the average daily weight gain of lambs by 100g a day through improved grasses and fodder crops. Meat New Zealand chairman Jeff Grant says by lifting growth rates from the current 180g a day to closer to 300g the industry could shorten the length of time the lamb needs to be kept on the farm by 48 days. "It's all about making better use of the land and capital stock the farmer has tied up."

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