KEY POINTS:
Rural services business PGG Wrightson is having another go at shaking up the deer velvet sector by setting up a company with Christchurch-based firm Tasman Velvet Processors to focus on international marketing.
New Zealand produces about half the world's velvet, which comes from a male deer's antlers, grows up to 2cm a day, regrows annually and before hardening is a soft tissue covered in fine hairs - giving the product its name.
Velvet is popular in oriental medicine and is a valuable niche market for New Zealand, with production of about 470 frozen tonnes in the year ending September with an export value of $27 million, down from $29 million the previous year.
PGG Wrightson's velvet division general manager Conrad Wilkshire says returns last year averaged about $73.50 per kg, which farmers said was unsustainable.
On the current outlook the returns are going to struggle to achieve last year's average price, Wilkshire says.
"Velvet volumes are contracting at the moment because people are seeing the venison price and they're looking at the uncertainty with velvet and a lot of people are actually killing stags.
"So what we're trying to do is put some strategy and some confidence back into the market to say that there is no reason with the right relationships and the right approach to velvet, and I suppose the rebalancing of supply and demand as those kill numbers start to take effect, that we shouldn't see velvet returns in excess of $100 a kilo."
PGG Wrightson provides collection, grading and sales services for producers, while Tasman Velvet has experience in the international market, a strong presence in China and a niche processing capability. China is a growth market, while about 75 per cent of exports go to South Korea.
The New Zealand Velvet Marketing Company was registered effective from Friday, with operations to commence before the New Year and the early priority being communication with producers.
PGG Wrightson says through the commitment of producers the new venture will become responsible for marketing two-thirds of sales.
Last year PGG Wrightson agreed to form a joint venture with Velconz Holdings to jointly market velvet but Wilkshire says this had been set aside in about June with not enough in commercial terms to take it forward.
But Wilkshire says the Velconz plan had been a catalyst for the change now underway and PGG Wrightson had learnt from last season and consulted with farmers before the new season started about valuable contracts that need protecting.
The Velconz initiative was a precursor for driving contracts in the sector, before which the company used a tender and auction system, he says.
PGG Wrightson is strongly recommending farmers supply velvet into a strategy that provides an average price for the season, rather than a spot price on the day.
"We've had very good support for that, every second stick of velvet is going into that strategy now," he says.
"What we're trying to suggest is that if we can supply the market product when they need it and more in line with their business requirements the underlying average price will be better."
Importantly farmers did not have to put their hands in their pockets to make the company work from day one, with working capital provided by PGG Wrightson and Tasman Velvet.
However, ownership will be split three ways, with an expected one third each for PGG Wrightson and Tasman Velvet, and another third open to producers.
"We don't want to be the king maker here, Wilkshire says. "We would like farmers to figure out how they actually want to be represented on this company."
The initial board will have two directors from each company and three seats for farmers.
Tasman Velvet director Chris Taylor says the new company will focus on relationships.
"There is an interdependence between sellers and buyers which has been underestimated in the past, and this has led to missed opportunities for mutual benefit," Taylor says.
"Producers have been galvanised by low velvet prices in recent years to create structures to drive industry reform, but the key element missing has been a link to a proven marketing company.
"[New Zealand Velvet Marketing Company] will fill this void."
The two companies aim to demonstrate the value of the new enterprise in the coming months as a prerequisite to building producer support, he says.
Deer Industry New Zealand chief executive Mark O'Connor says conditions for producers during the past five years had been very difficult, often receiving uneconomic returns. Anything that took the industry away from an auction-based system to something that better reflected the market would be positive.
"I think most [producers] would agree something needs to change," O'Connor says.
"The good thing about this PGG Wrightson, Tasman Velvet Processors tie up is that they're two experienced players, they understand the industries and they're stepping up and making some change so that's a good thing."
The velvet sector is small relative to many of its agricultural cousins and it will never set headline-grabbing targets like $1 billion of exports, but that's the reality of niche markets - small but valuable.
Not every sector will be as big as dairy or sheep but a variety of niche markets will give the agricultural sector more global opportunities to target.
We are a big player in the velvet world so what we do can make a difference.
If we shrink away from this market someone else will undoubtedly pick up the challenge, fill the void and take the money.
