What the lamb market is asking producers for

About Gundagai Meat Processors

Will Barton: G'day, everyone. As described, I'm Will Barton from Gundagai Lamb. I'll probably speak for 10 or 15 minutes and then open the floor up to questions, which I think is far more interesting than this stuff, probably because I do a lot of this stuff. I find the Q&A more interesting. One of my challenges as a human being is my inability to keep secrets. So if you've got any questions that you want real answers to, ask me, because I seem to answer them to my detriment sometimes.

What I'll do quickly first is share a bit about Gundagai Meat Processors: who we are, what we do, and what we've done with objective measurement technology over the last five or six years. Then I'll dip into Gundagai Lamb the brand and talk a bit about our journey, which started in late 2020. I'll cover what's happened to feedback over that time, some of the consumer demands, and the market signals that we're giving producers to respond to those consumer demands. Then I'll talk a little bit about what's next for us before jumping into that Q&A.

My grandfather, Fred, started his butcher's apprenticeship in Gundagai in 1919. He then worked his way up to buy a butcher shop in the main street of Gundagai, which is still there now as Smart's Butchery, but was Barton's Butchery in the '50s. Then in '74, my Uncle Tony and my father, Bill, built Gundagai Meat Processors on the site that it's still on today. We processed beef, pork and lamb. Pork lasted about 10 years before we got sick of the pigs, and by the late '90s we'd done our last beef kill. So from 2000 onwards, we were lamb only.

For a period of about 15 years, from 2000 to 2015, we were toll processors only. We just had a toll processing arrangement with Coles Supermarkets, which meant that we weren't buying livestock and we weren't selling meat. In 2015, we took on Hewitt Foods, who some of you might know from the organic world, certainly big in beef but also now big in lamb, as another fee-for-service customer. Then in 2020, we made the decision to get back into livestock procurement and meat sales with the launch of Gundagai Lamb, really because we thought there was a bit of a gap there.

So the business still processes for Coles on a fee-for-service basis. They buy their own livestock, we take delivery of them and give them back in a box a few days later, retail packed and ready for the shelf. We also do their Coles Finest program with our grading technology. We also do Hewitt Foods, which has an Australian brand, Cleavers, that you might see in Coles and Woolies, probably not as much in the bush as you would in the city. Then Roundstone is their high-claims, antibiotic-free product, mainly for the US market. And then we've got Gundagai Lamb, which is split into our standard lamb as well as a premium, GLQ5+. So that's the stable at Gundagai Meat Processors as it is today.

To give you a sense of how big the business is, I say we're the biggest little plant or the littlest big plant. We're in the middle. We don't get invited to the parties where all the big processors hang out together, and I don't play golf with any of those guys, but we're bigger than the really little guys. We can process about a million sheep and lambs a year. That's roughly 3% of the average slaughter in Australia, or about two and a half thousand semi-trailer loads if they were all full.

We employ 350 people. We house 180 of them in various accommodation venues in Gundagai, and my long-suffering wife manages all that, with many nationalities and cultures all living in accommodation together. We pay salaries and wages into the local community of just over $34 million a year. On the output side, that equates to about 1,000 semi-trailers in the domestic market, again if they were all full, which is a fiction, and about 460 shipping containers exported.

On our tech, we were the first plant in Australia to have a hot-side DEXA unit, hot side being on the slaughter floor. Some other plants were before us in the boning rooms, but ours is on the slaughter floor. That means at the same time we're measuring weight and paying over the hooks, we're also X-raying each carcase individually and giving the producer a lean meat yield, fat and bone percentage for each individual carcase.

Another first for us: we were the first plant to have the MEQ probe, which we helped that business develop during COVID when they couldn't get access to a lot of plants. It's still the only device accredited by AUS-MEAT to measure intramuscular fat, or marbling, in carcases, though I think there's one hot on its heels at the moment. We were also the first plant, and I suspect still the only plant, that does individual carcase reporting on animal health and carcase defects. We've done mob-based reporting for a long time, which in feedback looks like "maybe 5% of your lambs had pleurisy". Now we actually do it one by one for all of these animal health conditions and carcase defects.

Building the Gundagai Lamb brand

Which leads us into Gundagai Lamb the brand. From a standing start in November 2020, I think it's fair to say we've now become a globally recognised brand. Financial year '22 was probably our first real year, and we processed 72,000 lambs. This year just gone, we processed 165,000, which is a little bit off our largest number from the year before, but it's a bit over two times where we started. GLQ5+, the premium brand, had sales revenue of $88,000 in our first real year, and last year it was over $10 million. So that's grown dramatically, from a very small base, obviously.

In our first year we just had a small range of domestic restaurants and we didn't really have any distributors. Now we've got thousands of restaurants around the world and established distribution partners in all the markets that we want to be in. This is what our distribution of producers looks like. The average distance travelled is about 160 kilometres. The nearest ones are about 500 metres away, so that's a nice little walk into the plant, and the furthest last year were 740 kilometres. We had a few randoms last year as part of the LambEx showcase, so there were a few loads that came from further afield than we'd probably like. As we grow, we're finding ourselves searching for the right lambs, and location is becoming slightly less important to us, but there's obviously an advantage if you're close to us.

The approach that Gundagai Lamb has always had since we started in late 2020 is to be a brand that always improves via a feedback loop. It was very important to us when we started that we have a really transparent relationship with our producers. The callout was that we wanted to be better, cleaner and fairer.

Better was really a reference to the marbling grading, so that we could guarantee eating quality, because we know marbling is the leading driver of eating quality outcomes. Cleaner is a reference to lean meat yield grading, because we know that excess fat production is quite wasteful. It's wasteful on farm, because it takes an enormous amount of energy to create a kilo of fat versus a kilo of muscle. Then we trim it off in the boning room, and what we don't get, the chef trims off. So everyone in that entire supply chain is upset by excess fat production. We're also cleaner because we're able to reduce the animal health or disease burden over time by providing that feedback.

The fairer element was about building trust through transparency, so paying producers for quality, which we do, and which I'll get into in a minute. That really was our understanding, and still is, of what the consumer wants and what the producer wants, to drive profitability for all players.

The GLQ score is what underpins our 5+ premium brand. It's designed to encourage lambs with above-average marbling, so if you've got something that's better than average, it does well on the score. It's designed to discourage the over-fattening of lambs, so if it's just too fat, you still won't get GLQ5+. And it's designed to reward lambs that are free of animal health conditions and carcase defects.

This is roughly what it looks like. You can see here that once you get to about 5% intramuscular fat, you can get over five, which is worth 80 cents a kilo on our grid. If they're too fat, though, it doesn't matter if they're 9% IMF, you still won't get the bonus, because we don't want to encourage you to over-fatten a carcase to get that level of marbling. And importantly, we're not trying to be Wagyu. I don't need everything to be 11% intramuscular fat. What we want to be is a brand that delivers consistently above-average product in a sustainable way that can be done within normal commercial systems, like you all operate.

Carcase feedback and what the consumer wants

As a bit of a hark back to where we started, and unfortunately to where most of my peers in industry still are, the feedback of the past was a one-page grid report. You had hot standard carcase weight and fat score, and that was it. Our producers now log into an online portal on the same day as slaughter, with individual carcase feedback that's fully linked back to their on-farm ID, so they can marry it up with things like Optiweigh or other on-farm systems.

For every single animal, linked to its ID, they get hot standard carcase weight, lean meat yield percentage, intramuscular fat, animal health reporting on any of those 20 carcase defects, and the GLQ score, which is our proprietary grading system. Now, as of a week or two ago, the MSA index is part of that as well, because we're the first plant to introduce Meat Standards Australia grading. All of that is available on the afternoon of slaughter, along with the value of the lamb against the grid.

So what does the consumer want? Does anybody know?

Audience member: Value for money.

Will Barton: Yep. Anybody else?

Audience member: Taste. Flavour.

Will Barton: Taste, flavour. Everything. They want everything. They want the right cut size, the right cut composition, and they want a good eating experience. So consistency is really what they're after. To be more specific, they want the same experience every time. They don't want to come to the table and have something good and then something bad.

Cut size is really driven by the weight of the carcase, the hot standard carcase weight. As the animal gets bigger, its cuts get bigger. Eating experience is really driven by marbling. And cut composition is about lean meat yield. What I mean by composition is the amount of fat versus muscle.

The way that we transfer that market signal as a brand to our producers is via our pricing grid. This is what our grid looks like right now; this is Monday's grid. You can see that we pay on weight ranges down the left-hand side and lean meat yield percentages across the top. For cut size, the market signal is that we're looking for a 20 to 32 kilo carcase. That's the sweet spot in our grid, and lighter or heavier than that, you start to get paid less.

Eating experience is driven by the GLQ5+ bonus of 80 cents a kilo, so if the carcase grades 5+, you'll get an extra 80 cents. For cut composition, the market signal is that 59 to 66% lean hits the sweet spot. So fairly simply, what we've tried to do is take what our customer is asking from us in terms of cut size, eating experience and cut composition, pay producers accordingly, and then sort that product into a better and best category to make sure that customers are getting a consistent experience.

What a good carcase looks like

Here are some of the things this looks like when it's not done properly, or what good doesn't look like. On the left-hand side is a small eye muscle area. That's someone in our team's thumb over the eye muscle area, and if you had a cutlet the size of your thumb, you'd be pretty upset, I suspect, in most markets.

The one in the middle is too fat. Up the top you can't really see the extent of it, but down here you can clearly see that it's just too much fat. Particularly if you're buying a carcase and then trying to bone it, it slows our boning room down, it creates a lot of low-value waste, and then the chefs are annoyed when they get it, because they've got to go at it again and get rid of the last bit.

On the right-hand side, it's just too lean. There's not enough fat cover to protect the muscle from cold shortening when we chill the product. What good looks like is a larger eye muscle area and balanced fat, with high levels of intramuscular fat. That's really the ideal carcase for us.

Retail programs and changes to the grid

Before I let you ask me any questions, I want to talk about the next horizon for us. We've done a really good job in the last five years of growing GLQ5+, our premium line. That's really been the true north of the brand, pushing that premium high end as a point of difference. But we've realised, particularly over the last 13 months, which have been incredibly difficult in a trade sense for the lamb processing sector, that our mainstay, the product that doesn't quite make GLQ5+, has become a bit of a risk for producers, because they don't get the 80 cents a kilo.

So there's not a lot of value on offer there for that product. If you don't have a high rate of GLQ5+, it might be harder to supply us than it otherwise would be, and we didn't really have good market pathways for that product. So in the last 12 months we've really focused on retail opportunities for Gundagai Lamb graded product, which we're rolling out over the next 12 months.

The first of those is the Global Animal Partnership. Via our connection with Hewitt, we've partnered with them to introduce a 30 cent per kilo bonus for lambs that meet Global Animal Partnership certification. Importantly, that's an annual on-farm audit, and probably the most relevant thing for a room like this is that it's a non-mulesed accreditation. On farm, there are some rules around marking and some rules around the timing of weaning. They're fairly basic things that most people in this room would comply with, and certainly if you're ZQ-type people, you'd walk something like this in. It allows us to reward people who are delivering a great product that's non-mulesed with a 30 cent per kilo bonus, mainly for the US retail space.

The introduction of Meat Standards Australia grading is another avenue we're using, particularly in the US, to push that along. There are obviously a few storm clouds in the US. There's a bloke who's not particularly predictable running the joint at the moment. But the fallback for that is really the EU and the UK, because they're increasingly demanding these things as well. There are a few challenges in terms of quota in places like the EU, but the UK is certainly another big market for us moving forward.

It does mean a couple of different things for us as a supply chain. There'll be an increase in weekly volumes, which I'll run you through quickly, and some adjustments to our grid structure. For those of you who've had anything to do with us since we started, we've changed a fair bit. We created a bit of excitement in late 2020 and early 2021 for people who thought there was going to be this new option, but we were in the grips of COVID, so the volume we were looking for every week was pretty variable. Some weeks we were looking for 1,000, then 4,000. Most of that was around market access, because we didn't have access to places like China and the US when we started. Labour was critically short during COVID, and we were in a brand start-up phase, so we didn't always have the sales.

From '24 to '26, the minimum moved up a bit. We still had variable volumes, 3,000 to 4,000 lambs a week, but most of our challenge has been livestock supply and profitability, or lack thereof. Now, as we look towards the remainder of this year and onwards, we're building that weekly number to about 6,000 lambs a week, as livestock supply becomes a little more abundant, I'm still crossing my fingers, and with the support of these retail programs.

We're not really adding kill space to the plant; we're just reallocating that space. We processed a lot of mutton over the last three years as the flock liquidated. Now that we're in a restocking phase, there's less mutton around, and a better use of our space is focusing on these high-claims lamb programs.

From a grid structure point of view, if we had a $10 sweet spot, it typically ran from 24 to 32 kilos. In the last six months, we've also had the same price for 32 to 34, just because we've been running pretty heavy as an industry and we needed to accommodate those. Effectively, the average price across the sweet spot of six zones, from 20 to 32 kilos and between 55 and 68% lean meat yield, assuming a base price of $10, which is also a fiction because we don't get away with buying lambs at $10, was about $9.74 before the bonuses for GAP or GLQ5+.

From this week, we've changed that. Because of the retail programs, we're now able to accommodate the 20 to 24 kilo lamb, which we weren't really competitive on before, because we were chasing that higher-end food service product. The average price across the 20 to 32 kilo range is now $9.90, so we've effectively put a bit back into the job, as we've been able to drive different market outcomes for the product we're buying.

That's the end of the boring stuff. I'm happy to take any questions if anybody has any.

Questions from the audience

Audience member: What percentage of breeds are you taking? Are you taking Dorsets, or are you taking...

Will Barton: So the question is what percentage of each breed are we taking. It varies through the year. I'd say we're breed agnostic. We're really an outcomes-focused brand, and the reason we're outcomes focused is that all of the science and research tells us that eating quality variation is not explained by breed. It's explained by things like marbling.

This time of year we tend to run pretty Merino heavy, because they're getting to slaughter weights. We start to see the youngest Merino lambs at eight and nine months old, and then they run through to 13 months. That's typically if they've got any sort of carcase about them, because we don't really deal with an old-fashioned Merino. We're not interested in that animal. But the modern Merinos do really well in our grid at this time of year. They've got high marbling, they've got great skin prices at the moment, and the carcases hang up really well. At other times of the year, as we go through Christmas, there'll be fewer Merinos and more crossbreds and different things. But we'll take anything.

The way the grid's designed, we try to make the sweet spot, the best price, slightly under market. The reason we do that is that if people sending us lambs have no GLQ5+, if they don't get the bonus for anything, we want them to come to their own conclusion that they're better off going to the Wagga sale, where no one can see those traits. What we're trying to do is encourage the ones that have got high levels of GLQ5+ to keep coming back, and that's really the design of the 80 cent bonus.

The breed question is a really good one. We see curve benders in every single breed. We see extraordinarily good and extraordinarily bad examples in every breed. The best lambs we've ever processed are probably Merinos, and the worst lambs we've ever processed were also Merinos. So breed on its own is just not a very good descriptor.

Audience member: And on the marketability of the product at the higher range, like restaurant-quality product. What are the differences between a higher-range Australian restaurant and an American export customer?

Will Barton: So the question's about the difference between what a restaurant in the US is looking for compared to a restaurant in Australia, or how they're different. I think scale is the biggest one. There's just more of them. In terms of what they want out of the product itself, they're really looking for the same thing. They want consistency, and consistency is probably more important than super-duper high quality. If they get something really high in quality, but sometimes it's terrible because it's not graded, that's not a good proposition for them at all, because they just want to keep their customers coming back.

So scale is the biggest thing. New York, or the north-east US, is comfortably our biggest market, and it's just so much bigger than Sydney or Melbourne. It's probably 50 times the scale. The other major thing is that Australians are really familiar with lamb and Americans really aren't. They don't eat a lot of it. If you feed them something variable and they happen to get a bad one, they might not revisit it for another five or 10 years. Whereas if an Aussie eats a cutlet and it's a bit plain, they know what a good one tastes like, so they'll keep coming back and trying until they get a good one. The American might just say, "Oh, I tried it once and I didn't like it."

Audience member: Just one question on that. What trends are you seeing, particularly in the US and parts of Asia, in terms of customers gaining that exposure to lamb? Are you seeing that grow?

Will Barton: So the question is whether the number of people trying lamb globally is changing. Certainly in the US it is, and that seems to be generational. The baby boomer generation, which is the largest portion of the population, was brought up, particularly in the US, by a generation where a huge proportion served in World War II. They fed them a lot of tinned mutton, and they literally put an entire generation off sheep meat, because they were giving them the worst example of sheep meat you could find, in probably some of the worst conditions, with all the mental stuff that goes on with that.

I think COVID was a massive helper for lamb, particularly in the US, because people got experimental. They were at home trying to figure out what to do, and they started experimenting with cooking. They cooked some proteins that were maybe a bit left of centre, but the US is a massive red meat eating country, so it wasn't such a stretch to go from beef to lamb.

Around the rest of the world, as markets become more affluent and more sophisticated and eat more protein, they go looking for better stuff, and Australian lamb certainly fits that category. The 5+ product we've got really hits that category. But from a branding point of view, you're still trying to find a very small target in big markets, because we're not selling to the masses. Not everybody is enjoying this product. Very specific high-net-worth people in high-end restaurants are eating our products. So you've got to send a little bit of product to a lot of places to make that work.

Audience member: A fearless forecast on price, and consistency of price?

Will Barton: A fearless forecast on price and consistency. It's a great question. As I was saying to someone earlier, lamb has been running at a $25 to $40 per head loss since June last year without a break. If we were 100% trade exposed and processing a million lambs a year, we would have lost, as a family, between $25 and $40 million in the last 13 months. We're not. We've got contracts, we bring our volume down, and we do a lot of things to try to manage that, but it's still a pretty scary loss.

The industry is used to losing that sort of money per head for maybe four, six or eight weeks of the year and then recovering through the cycle. What's different about this one is that we just hit the bottom and stayed there without any relief. My biggest fear is that we have another September 2023 kind of crash, because a series of things go wrong that lead to that scenario.

I don't think that's likely. The reason I don't think it's likely is that there's strong demand in places like the US that are short of red meat, so we've got strong demand for protein generally, which is supporting that position. And I don't think the flock is anywhere near big enough for processors to get overwhelmed by supply, because there's way too much processing space and way too few stock. So I don't think we're about to go into another crash.

If I could buy lambs at the moment for between $9.50 and $10, I'd be profitable. The challenge is that's with today's sale price. If your sale price, my buy price, drops by say a dollar, from 11 to 10, unfortunately the internet is everywhere in the world. My customers have got the same access to the MLA indicator, and they'll be on the phone to me saying, "When's the price coming down? You've got a relief." Now, I need that dollar to create the margin. At the same time that you have record-high lamb and livestock prices, you're also pushing the meat price to its record point. So everywhere around the world you're seeing a huge amount of fatigue, not because they don't like lamb or it's not a great protein, but just because everything's so expensive.

So I think there's room between $9 and $10 for everything to work. I think we'll be somewhere between $9 and $10 on the way into Christmas, and I don't think it's going to go lower than that. If it goes back to $11 or $12 pretty quickly, you'll see some permanent plant closures, which is bad for everyone, because then you get more consolidation to the big guys and it becomes a bit of a strategic risk. Does that answer your question?

We've got time for one more question.

Audience member: What about carcase size? We see the food service markets want a small carcase, but the export markets are for the bigger ones?

Will Barton: So size of carcase is the question. It's a bit of a mix. Food service restaurants just want it to eat well. They don't care how it looks, because the customer doesn't see it raw. They're not presenting the rack to a customer before they cook it. They just need it to eat really well so their diner is happy. In retail, it's typically a lot more about presentation. How it eats is probably secondary; the primary driver of sale is how it looks. And typically in Australia, that's a smaller animal.

We play comfortably between 20 and 32 kilos. A 20 kilo carcase is not particularly efficient through a plant. It takes the same amount of effort and energy to kill a 20 kilo lamb as a 32 kilo lamb. It's the same one hook space, and the same amount of effort to get the skin off and extract the offal and everything else. So a 30 kilo carcase is much better from an efficiency and recovery point of view in the plant, in dollars per kilo cost and that sort of stuff.

But in the boning room, once you get over about 32, and I was having a conversation on farm with somebody this morning about shearing, it's like shearing. It just gets a bit harder and a bit harder to bone out, because it gets heavier and fatter and harder to move through your belts and your systems. So for us, 32 is the natural top. We can process 36, 38 and 40 kilo carcases; we just can't have too many of them.

The other thing, and we joke about this a bit, is that the US restaurant market wants the biggest rack and the biggest cutlet they can find. There's no such thing as too big. But the same animal has legs that we need to sell to a French retailer who wants the smallest legs we can find. So there's another index for you, Chad.