This was written by meat industry commentator Allan Barber in July of this year when there was still some prospect of an agreement between meat processors in response to the campaign by the Meat Industry Excellence Group (MIE). Since then nothing has happened apart from the release of Alliance’s annual result (a reasonable profit before restructuring costs) and an anticipated loss for Silver Fern Farms, he notes.
These thoughts reflect my considered view of the potential ways MIE could make a difference, none of them easy and all requiring commitment to change from farmers.
To reform the New Zealand meat industry to become the world’s premium supplier of red meat through a united processing and marketing structure controlled by suppliers.
- This statement presupposes that a united supplier controlled processing and marketing entity will be able to procure livestock to specification, process it and market the end products profitably;
- It also presupposes that it will perform better than the other companies already operating, including the farmer cooperatives;
- It is questionable whether such an organisation will be able to return a satisfactory margin to all farmer suppliers;
- It is possible that it would end up being seen as no more farmer-friendly than Alliance and Silver Fern Farms;
- It is also probable that any proposal by the big three or four will hinge around Tradeable Slaughter Rights which, if implemented, would make the processors more secure, but would also mean less procurement competition; it will not necessarily lead to a restructuring of the industry of the type envisaged by MIE.
The first and most essential step will be to develop a strategy which will gain the support and commitment of at least 50 percent of all farmers. There is no evidence from the meetings held across the country that this is remotely possible, nor is there any evidence that the strategic thinking carried out so far has the potential to develop a compelling strategy.
If it is to succeed, any strategy must be both visionary and realistically capable of being realised. It requires support from the banking sector and at least the two cooperatives, if not other privately owned processors. Therefore it is essential that MIE is able to gain a commitment from a significant percentage of farmers before trying to convince the boards of the processors.
The strategy must not result in value destruction, since this would gain support neither from banks, boards nor existing shareholders.
My assessment of this option is that it will not happen because MIE has no power over the cooperatives, unless it can bring about a shareholder revolt; this would spook the banks which would be most unwilling to fund an alternative without a cast-iron guarantee to preserve the value of the assets. MIE cannot provide this.
MIE has no international marketing infrastructure or experience which resides entirely with the existing exporters. Without this there is no income.
Finally MIE has no access to the amount of capital required to take over a significant part of the meat industry.
In my opinion there are only three remotely feasible alternatives, none of which actually meets MIE’s primary objective of forming a farmer owned company that will own 60 percent of the sheep and beef sector.
- Focus on the sheepmeat part of the sector and try to convince the major sheep and lamb processors/exporters to combine operations under farmer ownership.
- Form a farmer owned sales and marketing company and arrange toll processing contracts for the livestock which will be committed by the shareholders in the company.
- Farmers who wish to guarantee added value for livestock supplied to specification to establish and own shares in a single processing company which would also negotiate export contracts for shareholders’ production; livestock must be supplied regularly to an agreed schedule and to agreed specifications. This would be the best way of controlling product quality and earning a premium from the market which would demonstrate the success of this approach to sceptics.
I am sorry to be pessimistic, but I firmly believe farmers must work with their processors and exporters to obtain better results for themselves. This will entail adopting best practice in many ways so that the farm output matches what exporters need to guarantee their customers consistent quality supply.
All the studies of farming practice indicate that only a small number of farmers are very profitable with the majority being stuck firmly either side of the median. The surest way to improve profitability is to improve the farming practice of those in the middle.
I do not claim that the companies are all adopting best practice at all times, but if farmers as a group improve their performance, they can choose the partner that consistently delivers best value.
Those farmers who are determined to be the best will do better by concentrating on ensuring the excellence of their own performance instead of trying to drag the lower performing majority into a supply relationship with a farmer owned company.
Unless it has access to consistently above average livestock, there is no guarantee a new farmer-owned company will be as good as some of the existing companies, whether cooperatively or privately owned. Therefore, it would be counterproductive to include production from average suppliers, since this is what meat companies must process and sell at the moment.
Meaty food for thought … your comments?