Bancorp Treasury Services Limited

Make Risk Count.

‘SHORT-TERMISM‘ THREATENS LAMB INDUSTRY VIABILITY

15 October 2009

“The lamb industry is stuck in the past and is putting itself at risk by taking a short-term, fragmented approach. It’s all very well to celebrate the benefits arising from New Zealand’s first frozen meat shipment more than a century ago, but the relative lack of change in our lamb industry since then is little cause for rejoice,� he says.

A strong Kiwi dollar, competition from other meats and the recession’s impact on export markets mean New Zealand’s lamb producers and exporters are likely to experience little seasonal joy from the up and coming Christmas and Easter seasons.

The problem is compounded by local cost and supply pressures on the lamb industry, such as falling sheep numbers and over-capacity problems among meat processors.

Although the lamb industry’s lack of a unified producer, exporter or marketing arm creates problems arising from a fragmented approach, Mr Cavanaugh says individual farmers, meat companies and exporters can be doing more to take a long-term strategic approach to their businesses and reduce their own risk exposures.

Farmers, for example, can better manage their business risks by entering long-term fixed rate contracts with meat exporters. Mr Cavanaugh says many are reluctant to do so, fearing the gamble may not pay off.

Furthermore, processors and exporters can better use currency hedging, something many have not done because they believe they can simply alter the payment schedule in the event of unfavourable currency fluctuations.

“This action suggests that a very short-term view is being taken, which is bad for the entire industry because altering production and processing schedules has a knock-on effect that can create cost and supply problems.

“Everyone needs to realise the value of long-term certainty and understand that if the New Zealand dollar strengthens, reduced lamb prices should be off-set by reduced material costs such as diesel and fertilizer.�

Mr Cavanaugh comments that improving the lamb industry’s viability requires producers to think beyond the farm gate: “Don’t just focus on short-term issues such as today’s lamb prices but think about long-term gains. Accept that it’s sometimes better to take $5 less for a lamb today and realise that co-operatively taking a lower price at one point may have long-term benefits for the industry through better and more efficient capital structures, and more resources available for product development and market research.�

The entire industry needs to better integrate financial risk management with business strategy. Other than in isolated pockets, this does not appear to have happened to date, which has created higher than necessary risk levels for lamb producers, processors and exporters.

Although commodity based products will always be at risk from international currency fluctuations and demand/supply constraints, Mr Cavanaugh says it is good to see attempts to move lamb out of the commodity market by creating value-added product, such as Silver Fern’s chilled consumer-ready product to be sold in French supermarkets.

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