Silver Fern Farms addresses the case for industry consolidation

Allan BarberEoin Garden, Silver Fern Farms’ chairman, has sent an open letter to farmers on behalf of the co-operative’s board of directors concluding with the challenge “it’s really up to us as farmers.” Meat industry commentator Allan Barber has been taking a look through it.

The letter which appears in the farming press this week tackles the much discussed question of a merger of the two large co-operatives, touted as the panacea for the problems of the meat industry. He makes the very valid point that company mergers, unless they are fully supported by the suppliers, impose substantial cost on the companies being merged which benefits the rest of the companies in the industry.

Furthermore, the letter emphasises that industry aggregation would need to involve most of the meat processors, not just the two co-operatives, which reiterates the premise of the mega-merger a few years ago. But as we found then, the different ownership structures made such a merger impossible and nothing has changed since, except for AFFCO’s complete absorption into Talley’s ownership.

A further change has been the serious battering taken by the balance sheets of most if not all sheepmeat processors. I would hazard a guess that there is no appetite or balance sheet strength necessary for the degree of industry capacity rationalisation required.

Just combining assets with more throughput solves nothing, particularly in the long run, when efficiencies and new entrants quickly replace any capacity reduction that may occur as the result of a merger. The important thing is to create additional value for the product being sold which can only be achieved by addressing the three major strands of the Red Meat Sector Strategy (RMSS) – aligned procurement, in market co-ordination and best farming practice.

According to Garden’s letter, SFF is prepared to participate in any plan for better industry coordination, but cannot do it alone. The letter puts the challenge to farmers that they must support those companies which demonstrate a commitment to value creation strategies, capable of lifting the meat industry’s income by $420 per hectare, or from $6 billion to $14 billion by 2025.

The unspoken message is that SFF is taking the lead in value creation strategies and deserves farmer support, but the letter also acknowledges that farmers may wish to supply other companies. However, they should ensure their processor of choice shares the commitment to increasing the industry’s value, rather than having a narrow focus on throughput.

Farmers will no doubt have their own views on whether the performance of individual companies is consistent with the goal of the RMSS or not. Unfortunately this question will be clouded by the volatility of sheepmeat prices globally which ultimately drive the meat schedule or contract prices.

In the meantime, each meat company will pay what it must to procure sufficient livestock. But I am hopeful that the co-operation implicit in the PGP sustainable growth programme will gradually induce a greater degree of mutual trust and understanding between the companies and the farming sector.

But that may be being unduly optimistic!

Allan Barber is a meat industry commentator. This article has also appeared at www.interest.co.nz and also at Allan’s own blog Barber’s Meaty Issues.

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