KEY POINTS:
Melbourne-based Rabobank senior analyst Wendy Voss was in New Zealand last week talking to farmers about the big picture for meat producers - and it's a mixed bag depending on where you set your outlook.
"In the very short-term, the next few months could be a bit of a challenging time because you've had a drop-off in demand, particularly for premium-type items in export markets as people who are concerned about the economic forecast start to look to more budget products," Voss says.
For global crisis-watching, belt-tightening shoppers who are increasingly nervous about job security, this can mean mince not steak, chicken not lamb.
Rabobank's European analyst was really noticing a shift in buying away from lamb to poultry in particular.
At the moment there is good Christmas demand in Europe for lamb, Voss says.
"After Christmas I think there could be a bit more of an impact of the slowdown in demand in Europe."
Meanwhile, there has been a build-up of products in the United States, where exports of pork and poultry to Russia and China have suffered from the global economic crisis and an exchange rate making them more expensive.
US feed-lot farmers are not making money, hog producers have been losing money and the poultry industry is struggling, Voss says.
"I think it's almost a war of attrition at the moment, so many people have been getting out [of meat production] that supply is tightening up.
"I do believe that at the moment there are a lot of people around the world in the livestock sector ... who are feeling pain, so to me that means there needs to be a shift in prices that livestock producers receive because they're basically talking with their feet at the moment, saying if you don't pay us well enough we'll move into other sectors."
Drought in 2006 and last year reduced the Australian sheep flock - down from 120 million in 1997 to 79 million this year - and increased production, which is expected to fall in the next couple of years, mainly because of reduced mutton production.
Reform of the Common Agricultural Policy in Europe also reduced sheep numbers, pushing supplies into the market, while in New Zealand low returns, drought and dairy expansion have seen numbers drop - down 11 per cent in the year ended June 30 to 34.2 million.
Tighter supplies can help those who survive by counter-balancing pressures on demand.
"I think over the next 12 weeks once you work some of these stocks through the system that have accumulated at the moment you fundamentally will have tighter meat supply in a few of our important markets, one being the US."
But while sheep flocks declined, the human population continues to grow.
"After this economic downturn, and there will be a recovery, we've found that people, when their incomes increase and they're feeling confident, do want to eat more meat," Voss says.
In its market update for last week meat processor co-operative Silver Fern Farms says negotiations for lamb arrivals early next year are under way, with customer volume requests matching previous years, indicating confidence in future sales.
But the previous week's update warned of an air of uncertainty in lamb markets, with buyers hesitant to commit to frozen volumes and price levels that, although being held, could change as more effects from the economic situation filter through to consumers.
Overall it's a mixed picture that perhaps explains the sense of cautious optimism Rabobank's Voss says she found among meat farmers here.
The mood is different from the one she found when she visited in June, she says.
"They're so much more optimistic and I think the feeling does seem to be that if they hang on the tighter supply is going to have an effect because that's what happened this year."
Rabobank's November Agribusiness Review says farm gate prices for lamb are up 25 to 30 per cent on last year, while beef is up 20 to 25 per cent.
It's a brighter position but a falling exchange rate is playing a part.
The ANZ Commodity Price Index for meat, skins and wool dropped 8.2 per cent last month, although it was still up 6.3 per cent on last year.
However, the New Zealand dollar price index for the sector dropped only 0.9 per cent last month and was up 25.3 per cent on last year.
Recent history has taught all export sectors not to bank on the exchange rate behaving as expected.
The most basic economic equation is simple - supply and demand - but the drivers behind the meat industry are many and complex, including weather, production, stock build or decline, wealth, fashion, alternative product choices with all their own drivers, exchange rates and competing land use.
This season's price lift will be a much needed drink for sheep farmers, who will hope that tighter supply can offset tightening consumer belts and help set up the industry for a consistently prosperous future.
Meat & Wool New Zealand said in August that sheep and beef farm profit was expected to improve from an average of $19,400 in the 2007-08 year to $53,000 this season - a big percentage increase, but considering the effort put into farming it's a shift from almost pointless to ho-hum.
More than 300 new dairy farms starting this season tells its own story.
Farmers may have a love of the land but they are businessmen and nobody works for free.
A push for higher farm gate prices could mean more margin being passed back to farmers but the other links in the supply chain will defend their own needs.
The need for consistent higher returns could in the end mean consumers accepting a higher price for the long-term viability of the industry.
But we've become acclimatised to cheaper, more plentiful food and a global recession is probably not the easiest time to sell a step-change in attitude and expectation.
FONTERRA MEETING
Fonterra will hold its annual meeting in Palmerston North on Wednesday with plenty for the farmers to chew over with their company leaders - a poisoning tragedy in China, falling commodity prices and payout, emissions trading, global strategy, capital restructure and director elections.
It's enough to keep most companies' annual meetings ticking over for years.
Fonterra's 43 per cent-owned Chinese dairy company San Lu was one of 22 firms caught up in a scandal, in which the industrial chemical melamine was added to watered-down milk to boost protein levels - tens of thousands of infants were ill and at least four died.
It was a tragedy chairman Henry van der Heyden says overshadowed the year but Fonterra remains committed to China.
So where to now?
In September the company wrote down its 43 per cent stake in San Lu - which it bought for US$107 million in 2006 - by $139 million, leaving a book value at that time of about $62 million.
Fonterra chief executive Andrew Ferrier says while no agreement had been settled on the sale of San Lu assets, it seems more likely that the proceeds of assets will go to San Lu's liabilities.
"As a result, it is increasingly likely that Fonterra will have to write off the balance of its investment and this had been taken into account in the latest payout forecast," Ferrier says.
On Friday Fonterra cut this season's forecast payout to farmers by 60c to $6 which, based on last season's collection of 1.19 billion kg of milksolids, could cost farmers $714 million.
Although down on last year's record $7.90 payout, of which 24c was held back by the company, it is still higher than $4.46 the previous year.
Booming dairy prices couldn't last forever, but the speed of the fall is taking people by surprise.
Fonterra says international milk powder prices have fallen back to about US$2600 a tonne, having peaked at about US$5000 a tonne late last year.
The ANZ Commodity Price Index for dairy is down 9.9 per cent in October and 34.7 per cent from its peak, with historical trends suggesting a 50 per cent drop could be the target.
"While the medium to long-term outlook for dairy remains positive the financial crisis has driven commodity prices down further and, with consumer confidence deteriorating, it is likely that prices will remain weak, rather than recover, through our fiscal year," Ferrier says.
Last November Fonterra launched a capital restructure plan to ensure funds for global growth, with the preferred model to give up some ownership and set up a new asset-holding company listed on the stock market.
But the process stalled in February after it appeared farmers were unlikely to support the board's preferred option.
Capital restructure is something Ferrier still wants to sort out but he has not given a timetable.
"There's a lot of work going on inside the gear box here and we're just making sure that when we engage with farmers again we've anticipated all the questions and so on," Ferrier says. "The company's still working through options and intends to continue to discuss with farmers into the New Year."
Running across all these issues is Fonterra's global growth strategy, including investing behind borders.
Federated Farmers Dairy chairman Lachlan McKenzie says: "The biggest thing is that farmers are still saying that it [the strategy] has not been clearly articulated to them.
"I'm sure that if I went down the street and asked 10 dairy farmers you'd possibly get 10 different answers."
Fonterra will go through its three-year business plan with farmers at the annual meeting this week, providing another opportunity for the co-operative to get its strategy across to its owners. There's plenty to explain. It could be a long meeting.
