WHAT ARE THE MEAT FACTORIES PROFIT MARGINS?
Ever since I started investigating the beef sector I started hearing complaints about the meat factories. Typically, they were about profits being made at the farmers expense. I have, of course, done my own research and evaluation but it has been unpublishable as it relied too little solid evidence. It was good to read this week in the farming press an attempt to assess what is really happening; albeit it has come rather late in the day. Further factual based disclosures in Ireland will, at least, reduce the need to speculate by ‘extrapolating’ from British and Northern Irish information.
Personally, I suspect that the profit margins per head of the factories are low. Maybe they are two to three percent of sales turnover. Is that excessive? It could be that it is the cloak of secrecy created by unveiled accounts that is the root cause of suspicion. Are those private entities who control the factories their own worst enemies when it comes to the poor public relations that emanates from a lack of transparency? It is probable that eventual disclosure, when it happens, will lay to rest some of the hoary old chestnuts that circulate in the beef industry, to the benefit of everyone.
My conclusion has long been that the Irish factories operate a high-volume/low margin model. They need supply to make it work. I once knew someone whose business was exporting lambs; he made only $1 per head but traded 500,000 a year. He was happy and wealthy. He could see little reason to seek more for what he sold so he could pay more for what he bought. His high-volume/low margin model worked for him. So, if your business generates the profits that you need for your own needs, why change it? It is quite plausible that such is the state of play in the Irish meat processing sector; protect your margin and keep the throughput-volume flowing.
CAN SUPPLY-CHAIN MARGINS BE PASSED ON TO FARMERS?
If it transpires that the processing profit margin on cattle is €50/head or less; is it realistic for beef producers to expect a part of this to be passed onto the farmer? Any profit proportion passed on would pale in comparison with, for example, a €200/head support payment for suckler cows.
A similar point can be raised by comparing retail prices with farm-gate prices, albeit using data from the AHDB in the UK. For the reported years of 2014 to 2016, the average farm-gate price was around 49% of the retail price of beef. I suspect that if one asks around the wider food industry, that is high. It compares to 35-40% for pig meat. Again, it begs the question, how much profit margin is there existing within the supply-chain to pass back to the farmer?
One can argue that retailers are keeping retail prices low and using beef as a loss leader, thus squeezing everyone further down the chain. Of course, the same can be said for, say, milk. More likely it is a consequence of the food retailing model that has evolved over the last thirty years. Food is very cheap in terms of total household expenditure. Food retailing is under pressure, competitive and returns to shareholders are not what they were. It will be a brave retailer who will start to price basic foods higher in a competitive market place where consumer loyalty has long since gone.
AGAIN, IT COMES BACK TO SELLING A PREMIUM PRODUCT
To come full circle, how are beef farmers to gain a greater reward for what they sell? It is comforting to accept the idea that we are all just little guys being squashed by the big players. It is easy to accept the idea that beef and, especially, suckler beef is a low-margin business; and as such it must be supported by the tax payer; for which we can conjure up endless justifications.
The alternative is to focus upon quality products, more so when they emanate from the suckler herd, and getting that product into the market place in a way that the consumer can reward the farmer for the quality. Not forgetting that for some consumers quality is about much more than the taste and texture of what is on their dinner plate. For the greater part it will have to be the factories that deliver for beef farmers, as awkward as that may be given that all cattle entering the factory gate are not equal. It is the factories who maintain the baseline Irish beef standard.
I would argue that the beef factories’ margins, or even the wider supply-chain margins, are not as large a problem as they are often given out to be. The factories could be a problem if they choose to abuse their market position by stopping others entering the business to create new route-to-market options. If they operate volume-focused business models, they should not try to inhibit others providing a low-volume service to farmers wishing to develop niche markets.
Supporting the creation of route-to-market options is where the European Commission and Irish Government must be proactive. It will probably have to happen through farmer-controlled producer groups, as small as they may be in the beginning. Farmers need these options if the present processing system is unable to provide them with the services they need. And this is not just an Irish problem, it is one that is also cited in the UK farming press as holding back the development of premium British beef products. The survival of both the Irish and British premium-beef producer needs these options and it is imperative that the powers-that-be ensure that they are there.
Hence, we can worry all we like about the profits made by meat factories but, in all likelihood, we will find such to be a red herring that deflects us away from the real issues.
This post first appeared on http://www.thatsfarming.com in February 2018