Comment: Waiting on tenterhooks for meat companies to announce decision

 

Allan BarberRumours are rife, but as yet there has been no announcement of an outcome to the debate among the big four meat processors. At the Red Meat Sector Conference more than two weeks ago, Allan Barber kept being asked whether there would be an announcement at the Conference itself. “Of course, not being privy to the company discussions, I had to admit to being in a state of ignorance,” he writes.

At this point we are still in a state of ignorance, although surely a decision must be closer than it was. But perhaps not! I have previously predicted that getting agreement from the big four, let alone the whole industry, would be difficult, if not downright impossible.

There can be only two types of decision involved: one involves capacity and procurement, the other is about the international market.

There is no way of controlling procurement competition – the Commerce Commission got upset about industry collusion in the early 1990s – except by limiting the available capacity. There are only three ways capacity will be removed which are receivership, voluntary closure or a mechanism like tradeable slaughter rights (TSR). As the first two of these are unlikely in the immediate future, I presume the last alternative is the option under discussion.

The TSR concept would take the average exports for each company, probably over a three year period, and restrict livestock purchases to match that average figure. If a company wishes to close a plant, it can sell its kill share or tradeable rights for that plant and earn a contribution towards the costs of closure.

The big problem with this is that it suits the large companies, especially those with too much capacity in the wrong place for forecast livestock volumes, but it doesn’t suit smaller, more modern operators with one or two plants. I imagine these will be asking why they should agree to limit their livestock purchases when they have no need to close a plant and can compete in the field for livestock.

I can see this debate heading down the same track as the Single Industry Good Organisation idea which appealed to the bigger companies, but failed to achieve the support of the smaller ones.

There may or may not have been discussion about combining forces in international markets, but past history is not encouraging. The best example of joint marketing is the North-American based NZ Lamb Company which has operated successfully for 25 years with occasional changes of shareholding, but there aren’t any others. Each meat exporter has its own sales and distribution arrangements in other markets and is reluctant to lose these. Even the more recent attempt to set up a joint marketing operation in China failed to fire.

The major retailers in the UK and Europe, still the most important customers for New Zealand lamb in spite of China’s fast rise, have their contracted suppliers and would find it hard to deal with a single company. Although farmers are convinced this would be the best solution, it will be extremely difficult to make it happen.

The Meat Industry Excellence (MIE) group is waiting patiently for the meat companies to announce their proposed solution to the woes of the industry. But I fear the answer they get may not be the one they want.

The TRS concept may give some initial hope for the future, but a lot of farmers, if not MIE supporters, probably like procurement competition the way it is. Even if that is the outcome, legislation will have to be passed and there will need to be a sunset clause. The industry cannot stifle new investment indefinitely.

Reducing processing capacity as a way to fix procurement wars might provide a short term solution, but it won’t necessarily sort out farmers’ concerns about the international market.

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.nzThis item has also appeared at www.interest.co.nz.

 

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