Transcript Rethinking the food and agribusiness supply chain

Winning through the supply chain
Red Meat Sector Conference
8 July 2013
Hayley Moynihan
Food & Agribusiness Research and Advisory
Rabobank
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Looking in the mirror
Supply chain dynamics
Looking forward
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The industry has been here before….
Quotes over the past 20+ years......
“ By the end of this year three year
term, I’m determined to see a meat
industry that knows where it’s going.”
Minister of Agriculture, 1991
“Competition
may force
meat plants to
close” – 1997
“Riding the
rollercoaster of
returns” – 2013
“Call for
consolidation in
industry with
too much
capacity” –
2012
Source: Rabobank, 2013
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“Meat
industry
failures
tipped” –
1997
“A year of
promise
that didn’t
deliver” –
2008
“Lamb kill in nosedive” – 2010
Sheep flock has been in a constant decline
Likely to get below 30 million head for the first time in over 50 years……
Flock numbers
75
70
65
million head
60
55
50
45
40
35
30
25
Source: Beef and Lamb NZ, Rabobank, 2013
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Over 30 years
35 million head
less (down
50%), but
processing
capacity not
adjusted to the
same extent
Easily viable and Viable minus Just
viable and Unviable
6
-10%
-30%
Source: Rabobank, 2013
Dairy
-20%
Sheep/Beef
May-13
Mar-13
Jan-13
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
May-09
Mar-09
Viability within the sector falling
Particularly in relation to dairy
70%
60%
50%
40%
30%
20%
10%
0%
Margin volatility drives prices
800
750
325
700
650
275
600
550
225
500
450
175
400
350
125
300
Spread (SI) (LHS)
Source: NZ Agrifax, Statistics NZ, Rabobank, 2013
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Farmgate Price (SI) (RHS)
NZD c/kg cwt
NZ c/kg (FOB average export
price minus SI farmgate 17.5/kg
cwt)
Volatility in returns unprecedented – market signals distorted by procurement pricing
Pressuring margins for processors too
Small or negative margins across the supply chain
EBIT/operating profit margin
8%
6%
4%
2%
0%
2008
-2%
-4%
Source: Annual reports, 2013
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2009
2010
2011
2012
Looking in the mirror
Supply chain dynamics
Looking forward
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Déjà vu – supply chain tough to manage
Global food and agri markets have changed
Red meat sector needs to evolve too, with greater coordination
Source: Rabobank, 2013
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The ultimate dilemma for both parties
Which risks can you afford to live with and which can be managed?
Sellers’
dilemma
Source: Rabobank, 2013
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Buyers’
dilemma
Drivers of change will vary for everyone
Chasing value, rather than price, is the common feature but with different motivators
Reduce risk
•Reduce exposure to market price volatility
•Improve resilience to market shocks
Improve
productivity
•Optimise production
•Improve process innovation
•Optimise resource flows and valorise waste flows
Improve
access to
capital
Access new
markets
Enhance
brand and
reputation
Source: Rabobank, 2013
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•Improve investment opportunities
•Access new models that provide leverage from chain
partners
•Improve product innovation
•Work on other product attributes, such as quality and
sustainability
Example: UK dairy industry
Focus on price may come at the expense of efficient supply chains
Over the last decade; production down 8%,
farm numbers down 44% (10,000), average
herd size doubled
Initial strategy to drive costs out of the
business due to price pressure and industry
shrinking
Processors have since consolidated, been
acquired by multinational brand players and
diversified their product range
New processing capacity and lower milk
supply resulted in procurement competition
heating up
“Voluntary code of best practice on contracts”
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Example - MSA program Australia
Premiums obtained in all segments across the supply chain
• MSA is a beef and
sheepmeat eating quality
programme
MSA yearling cattle price differential
2012
60
• Designed to assure
buying, eating and
cooking quality for
consumers
50
c/kg cwt
40
30
20
NSW
10
QLD
0
Steers
260 - 280kg
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220 - 260kg
Source: MLA’s NLRS Rabobank, 2013
180 - 220kg
260 - 280kg
220 - 260kg
180 - 220kg
Heifers
• Extensive research
involving farm practices,
processing, cuts, ageing
periods and cooking
methods
• MSA requires standards
to be maintained from
paddock to plate
Looking in the mirror
Déjà vu – supply chain tough to manage
Supply chain dynamics
Adding value rather than chasing price
Looking forward
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Status quo + less scale = unsustainable
35
30
25
20
15
10
5
-
2014f
2013f
2012
16
2011
2010
2009
2008
Source: Rabobank, 2013
Millions
But increases the necessity for addressing overcapacity - larger scale operators feel heat first
All other companies
(excl Alliance, Affco
& SFF)
AFFCO
Silver Fern Farms
Limited
Alliance Group
Limited
* based on extrapolation of
quota allocations in each year
Key considerations for the meat sector
Which risks can you afford to live with and which can be managed?
Source: Rabobank, 2013
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Farmers’
dilemma
Processors’
dilemma
Why commit to a
processor?
How much margin
or certainty to offer
suppliers?
Will returns be
better if I play the
open market?
Need to secure
share of limited
supply
Should I invest
further capital in the
supply chain?
Need to manage
efficiency, higher
prices and volatility
A different path needs to be trodden carefully
Supply chain behaviour needs to align with ambition
The red meat sector fundamentally has a positive market outlook BUT a
shrinking industry is the greatest risk and reduces options
The status quo is not sustainable for all participants – efficiencies lost
will hinder competitiveness
Change is needed – but must be based on greater value for consumers
and a more efficient supply chain
Change also carries risks in execution; transactional costs and
maintaining market share
Capital will be needed to support restructuring of the supply chain
Supply chain relationships and commitment will be key to extracting
value
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Looking in the mirror
Déjà vu – supply chain tough to manage
Supply chain dynamics
Adding value rather than chasing price
Looking forward
Change is inevitable - scale needed for success
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Rabobank contact details
Rabobank International
“The financial link in the
global food chain”™
Hayley Moynihan
Food & Agribusiness Research and Advisory
t. +64 3 341 4218
e. [email protected]
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Food & Agribusiness Research and Advisory