MEAT FACTORIES – A PART OF THE PROBLEM OR AN EXCUSE

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

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COULD SUCKLER BEEF FARMING EVER BE A GRAVY TRAIN?

This post first appeared online at http://www.thatsfarming.com in January 2018

Is there is an unwritten policy to replace sucklers with dairy cows? Beyond ‘policy’ there seems no limit to how often the press will tell us that dairy farming is a gravy train that makes a good deal more money than sucklers. Also, is it driven by the belief that profit per GHG unit from a dairy cow is greater than that from a suckler? But are we really being fair to the suckler cow and her keeper?

Most will be aware that I have a simple position when it comes to farming on a small-scale; it must be about value rather than quantity. If your production base is small, do not try to produce commodities. There are exceptions and one I know well is the Thai rubber industry, by far the World’s largest supplier of natural rubber but an industry dominated by hundreds of thousands of smallholder-producers. It is possible to be small and supply commodities, but it yields only a few dollars a day.

So, I do not get over-excited about the international competitiveness of the Irish dairy sector. Its scale is against it when it comes to commodity production. 2017 was a better year for milk prices, but it is a short memory that forgets about the poor prices of the two proceeding years. And we are told 2018 is not going to be great either. If one ignores the costs of family labour, land and debt, Irish milk is low cost, but nobody can survive being paid below the full cost of production for long. Ultimately, the Irish dairy sector is hamstrung by its seasonality and product mix; it cannot add the value its small-scale farmers need. And it has not invested to focus on high-value.

Meanwhile, we are being regaled with stories about the demise of the suckler beef sector. Get out and start milking. Land and location suitability anyone? Capital availability? Labour requirements? True, the dairy industry has invested a billion Euro or so in processing capacity, but is this massive investment now delivering World-leading farm-gate price? Or an EU leading price? But still, if you highlight farm incomes based upon partial costings and do not dwell too long on loan repayments, yes it can look an awful lot like gravy but it is not.

But back to sucklers. One should always ask why are farmers keeping suckler cows. The reason is that they often fit in well with the land, the farmer’s time and/or the capital available. All are valid reasons for keeping suckler cows and, frustrating as it may be for advisers and discussion-group facilitators, they may be more important factors than profit, production levels or minimising GHG emissions per unit of beef produced. The likelihood is that suckler beef farmers will be around for a while yet, there will be a lot of them and they will be operating at the scale that suits them.

The question is, accepting this, how do we improve the returns to farmers who are not willing to jump on the dairy gravy train or scale-up their beef enterprise, should the land be available? It must be about creating value. It is fine asking for more headage payments, but we need a far more holistic solution that encompasses market-delivered returns and payments for, for example, environmental and landscape ‘public goods’. We also need to know about suckler beefs NET GHG emissions.

Instead of encouraging emigration from the suckler beef sector, maybe we should be asking ourselves what the suckler beef sector could be like if one billon Euro had been invested in its processing sector by entities that were within the control of the farmer? Or realistically, one hundred, or maybe ten million? After all the last is only 1% of that invested in milk processing over the last three or four years. Would we now be talking about the demise of suckler beef farming? When we compare sucklers with dairy cows, we are not comparing like with like, one of them is being treated like Cinderella, the other pampered like one of her step-siblings.

The future of suckler beef is in the premium markets. Elsewhere, others have realized the merits of differentiating beef and suckler-reared offers a means of so doing.  Another is 100% pasture-reared. Specific breeds are coming to the fore. The environmental management of traditional landscapes and/or high-nature-value land can add to the backstory. In addition, some farmers are working out how to balance carbon sequestration [by using specific grazing practices] with GHG emissions with the goal of producing zero emission beef. It is ALL about differentiation.

An absolute fundamental in all of this is having the routes to markets. Premiums must come from the consumer. If the supply-chain operates a high-throughput, low-margin model does it have the excess profits per head to pay a premium price if it does not receive such from the final consumer [via the retailer]? Farmers need to have some control beyond the farm gate. It has gone with the collapse of the small abattoir sector as they had the operational flexibility to provide small-volume service-killing to farmer-producers. It is becoming evident that they must be reinstated or, at least, protected where they remain. With such flexibility will come the capability to develop niche-market, premium-beef products based upon location, landscape, heritage breeds and ecological farming.

This is not about alarming a beef processing industry that has evolved to handle the multitude of heads. It is about giving a few, sucker-beef farmers the option to develop their own products and to market them to premium-paying consumers. One cannot realistically expect those operating a volume-based business model to accommodate a few. Maybe a funding line of €10-20 million would deliver vibrancy to the suckler farming sector? Such an investment in small-scale processing, product development and marketing would give the sector a fighting chance; and certainly, a greater ability to provide a ‘return’ to the taxpayer on a suckler-cow headage payment, should such be granted.

One should add that this is not about volume, that is the 90% plus market segment belonging to generic, quality-assured ‘Irish beef’ whereas a key to success for premium suckler-reared beef will be to limit volume. It will be about creating origin schemes linked to location, landscape, heritage breeds and ecological farming that control supply volume.  One cannot under-estimate the importance of such. Just what breed premium schemes return a significant price bonus to the farmer where they are 50% sire-only? If the suckler cow is at least 50% pure-bred, supply volumes will be limited. It is something the French no well with their 100% Charolais and Limousin schemes.

So maybe before we write off the Irish suckler herd, we should be seeking funds to support the development of premium beef products and their routes to markets. The opportunities are there, not to mention the farming skills and land base. If anything is missing it is the leadership to challenge the status quo and to demand that change happens. As welcome as a new headage payment would be to sucker farmers, if it is to be given, it needs to be provided alongside funds to develop the suckler beef farming as the specialist, niche, flagship sector that it should be.

THE NEW NORTHERN FOREST IRISH STYLE

This post first appeared online at http://www.thatsfarming.com in January 2018

To quote the Woodland Trust on the 7th January 2018, “We’re thrilled to announce that… we plan to create an exciting new Northern Forest”. No, despite some local communities thinking otherwise, this does not relate to any unofficial plans for Counties Leitrim, Cavan, Mayo, Roscommon and Sligo but a project that “will embrace the major cities of Liverpool, Manchester, Sheffield, Leeds, Chester and Hull as well as major towns across the north [of England]”.

One assumes that as the Northern Forest will “deliver major environmental, social and economic benefits that complement the significant growth, investment and new infrastructure that is planned for the north of England” that it will be broadly welcomed by the region’s communities. The Trust goes on to say that “It will deliver a better environment for all by: improving air quality in our towns and cities; mitigating flood risk in key catchments; supporting the rural economy through tourism, recreation and timber production; connecting people with nature; and helping to deliver improvements to health and wellbeing through welcoming and accessible local green spaces”.

In contrast, two Irish MEPs, Marian Harkin and Mairead McGuinness have been visiting localities in the north of the Republic who are seriously concerned that their communities are disappearing into newly planted tracts of commercial softwood forestry. It is a situation that is only likely to get worse as more planting is encouraged to help meet GHG emission targets. And that planting will happen where economic values of land are lowest and where alternative land uses cannot compete.

One would imagine that the environmental lobby would be happy to see more tree planting but no they are fickler than that. Apparently, they like monocultured conifer plantations only a tad less than Ireland’s failure to halt rising GHG emissions. Frankly, conifer plantings are a pretty blunt instrument to address GHG emissions with, but they are indicative of Ireland’s response to climate change.

Extensive, typically suckler beef, has been identified as the sacrificial cow with respect to land use change. She is an easy target when you do not account for the carbon sequestration side of her grazing. As we move into an era of fines linked to GHG emissions, the economic output of land using activities will become an increasingly important factor [and one that over-rides the ‘we have low GHG per unit of food’ argument] and that will focus more attention onto extensive beef production. Complicating the scenario is, nonetheless, how do you value the role of cattle in managing our landscapes and preserving/enhancing the biodiversity that they encapsulated within them?

Simply, conifer plantations are a poor-quality, knee-jerk reaction to Ireland’s GHG situation. It is one that avoids looking too closely at the sacred cow. One has also heard the plantings being justified on the basis that Ireland has a natural advantage when it comes to producing softwoods, because they grow fast. That high-quality softwoods come from much higher northern latitudes where land values are low, and thus where trees can be grown very slowly, is a fact that seems to have slipped under the radar. Unless cheap is a primary motive, you buy Scandinavian or Siberian.

A common complaint from those in the way of the New Irish Northern Forest is that commercial plantings are competing for agricultural land with local farmers who are trying to grow their businesses. The blunt response is, of course, to say that it is simple economics, if they cannot pay the asking price they cannot access the land. It is a line that is not going down well with local communities who see farming as the fundamental centre of their existence. As that is the case and with such at stake, this debate needs to move up a level or two.

As an aside, are we fully exploring the agroforestry options? Although most land will not be well suited, should we be planting fruit and nuts, either as orchards or integrated with livestock systems? If GHG mitigation is crucial, maybe we should again be planting fruit on the best land, rather than keeping cows to produce milk for milk powder for export to whoever can be found to buy it. Maybe Irish folk would appreciate the chance to buy a more diversified range of local produce? And then we should be looking at how we can integrate forestry with extensive meat production.

There is, of course, a fundamental weakness when it comes to producing more specialized food products either on valuable landscapes or within agro-forestry systems, and that is the lack of routes to markets for such produce. If all farm produce is reduced to a commodity by the supply-chains, whether it exits the farm gate as premium or not, what chance is there to obtain a market-derived, premium price? The fact that food processing seems to be excluded from rural development funding programmes, only makes this serious shortfall situation worse.

Irish farmers on tough terrain need to be producing valuable produce, period. Their local communities need to be able to process, enhance and add value to that produce. It is the systemic extraction of the very raw materials that local communities need to be processing that is destroying rural Ireland, albeit that those communities on the marginal lands are going first. It is nothing new and it is happening in upland and marginal regions everywhere. Whether one chooses to address the problem head on or not is another matter.

There is an on-going, probably deepening, rural crisis that can only be addressed through highly coherent, economic and environmentally-focused rural development planning that has farming and food at its centre. It is not happening. It is a policy failure that needs to be called out. Instead we are choosing to sweep many Irish communities under a carpet of conifers. There must be room for more trees, for more woodlands, even forests, but they must coexist with thriving rural communities.