Monday, April 10, 2006

Allan Barber: Suspicion rife as farmers go to market

In commodity markets the relationship between supplier and buyer is tense, with one party always thinking evil thoughts about the other.

Normally, it's the producer who's unhappy with the price received from the buyer, whether at auction or by negotiation.

Nowhere is this state of affairs more evident than in the meat industry. There are so many variables - seasonal factors, climate, exchange rates and market demand for all the different components of the livestock - it's a miracle the laws of supply and demand work as well as they do.

Naturally, farmers and processors want to buy and sell at the best price and this is where it gets difficult.

The buying decision for cattle between three and 24 months of age often happens more than once, with the price paid reflecting the slaughter price at the time, which may well have changed for the worse.

Last spring, the lamb price was roaring ahead, farmers were receiving high prices for overweight lambs and market forecasts were firm. Then the market hit a bit of a brick wall and decisions made in September didn't look all that good. Suddenly unhappy suppliers are earning up to $20 a lamb less than they did last year; but, even worse in the South Island, they can't get lambs killed when they want.

Stories abound of blackmail tactics from processors, like: "We'll only take your deer, if you send us your lambs. This is the price - take it or leave it."

At times like this, farmers always think the processors are screwing them, paying less than their stock is worth. But the schedule over a two-year period shows the price paid to suppliers is higher than the market indicator in both islands for three months at least and, in the case of two major species in the North Island, for 11 months.

If this is accurate, this means processors almost always pay their suppliers more than they can afford to, simply to secure throughput.

The logical result of this apparently irrational behaviour is a repeat of the Weddel and Fortex disasters of the 1990s. So no wonder meat companies view a drought as a chance to gain some margins by paying farmers less than the market says they deserve.

This season has become a game of two halves, with all meat processors signalling to the market the first half has been an unmitigated disaster, with better things expected from the second six months. And then the rains came.

Farmers have shut the gates while stock gained weight and are now trying to apply leverage to get the price up.

However, this means the season will be later and the works will be packed to bursting in May and June, so expect the meat companies to ram the price down hard.

PPCS has forecast a $7.4 million loss to the end of February, Affco has flagged an interim result well down on last year and there are at least three meat companies up for sale in the North Island.

Oamaru-based Abco is in receivership. Alliance has just reached a two-year pay agreement with its workers that will flow through to PPCS and the others who have just started negotiations. The impact of four weeks' holiday will hit the industry hard.

There's no winner in these circumstances. The falling dollar will help returns, but farmers shouldn't expect to see too much benefit until next season.

If they get too smart, they may find they can't get their stock processed, or worse, there could be another company collapse. Both parties need the other.

* Allan Barber is a freelance writer, business consultant and former chief operating officer at Affco.

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