Red meat farmers call for industry consolidation

Allan BarberNot for the first time, sheep and beef farmers have called for a single processing and marketing company representing 80 percent of the red meat industry, reports meat industry commentator Allan Barber.

At a meeting in Gore on Monday up to 1,000 farmers from Southland and Otago, and as far away as Hawke’s Bay, voted overwhelmingly for a consolidated structure. The organisers now intend to promote the concept to other farmer groups throughout the country. But the industry has been down this route before without reaching a satisfactory conclusion. So what is different this time?

In 2006, a group of South Island famers formed the Meat Industry Restructuring Group (MIAG) which called for a merger of the two big co-operatives: Alliance and Silver Fern Farms (SFF), or PPCS as it then was. In 2008, Alliance Group led an attempt to reach agreement with those companies that made up approximately 80 percent of the industry which was seen as the minimum level required to achieve critical mass.

Neither initiative was successful. Alliance has always been reluctant to merge with SFF because of the relative strength of their respective balance sheets; and, as has become clear in recent weeks, neither company believes a merger of the two co-operatives would achieve anything constructive. They say the inevitable result would be a substantial loss of their combined market share while they address the issues of excess capacity, integrating management structures and resolving cultural differences, including some very large egos.

It is believed the 80 percent solution fell over because SFF was seen as unwilling to compromise on matters that Alliance, ANZCO and AFFCO considered essential prerequisites for a successful single company on the lines of Fonterra and the dairy industry.

It is not immediately clear what has changed since then among the processors, but a significant factor is the drought which will inevitably cause a further reduction in sheep flock and beef herd numbers. When this season’s high slaughter volumes have been processed, this reduction will put pressure on the economics of operating meat companies, including plant cost recovery and disposing of inventories profitably. Consequently, all processors must have concerns for their future long term profitability.

The biggest change is in the apparent willingness of farmers to speak with one voice, if the meeting in Gore is an accurate guide. Tapanui farmer Fiona Hancox said three key factors – stability, viability and transparency – were essential to the future prosperity of the sector, supporting commitment of supply on long term contracts in preference to best price on the day. There was plenty of approval of ANZ chief economist Cameron Bagrie’s view that one big company with four or five small buggers to keep the big one honest was the ideal model.

Radio commentary since the meeting has been notable for the view, outlined by Gerry Eckhoff, Central Otago farmer and former ACT MP, that farmers must not approach the current situation with pre-conceived ideas of the ideal structure and process for getting there. In contrast, it was important to draw all the players into the debate from farmers to processors, exporters and importers (I presume this means the overseas customers who have a vested interest in the survival New Zealand’s red meat industry).

Eckhoff stated “we cannot control the climate or the currency, but having the right industry structure will shelter us to some degree.” Asked on Morning Report how long the restructure process might take, he replied that there was a lot to do, but he was optimistic it could be in place by the start of next season which means only six months away.

The outcome of this promising beginning will become clear over the next few weeks. Two massive questions are the attitude of the large processors to the ‘Fonterra’ single processor and exporter concept and how many farmers will actually be prepared to support a major restructure with commitment to long term contracts.

Allan Barber is a meat industry commentator. He has his own blog Barber’s Meaty Issues and can be contacted by emailing him at allan@barberstrategic.co.nz.

 

 

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