Comment: Changes afoot in red meat sector

Allan BarberThe much maligned red meat sector may at last be about to undergo a structural change if a majority of processors and farmers can reach agreement on a proposed capacity moratorium, suspects meat industry commentator Allan Barber.

Past history suggests that is a big IF, but a document being circulated among processors, Meat Industry Association (MIA), Beef + Lamb NZ, Federated Farmers and the Meat Industry Excellence (MIE) group contains a realistic basis for agreement on a solution to the capacity problem which has dogged the industry for years.

The concept proposes to issue plant and chain licences which would effectively freeze (excuse the pun) the number of sheep and beef processing plants and chains at the current level from the start of next season. The document suggests a 12 year moratorium on any new licences being issued as a means of protecting existing owners’ investment in the industry.

However, what the moratorium quite deliberately avoids is the prevention of innovation, capacity increases and productivity improvements on existing chains for which processors hold a licence. It also specifies the extent of foreign ownership which would have to comply with Overseas Investment Office (OIO) restrictions, while allowing existing shareholdings to be retained.

The proposal clearly states that it would facilitate meat industry reform through capacity rationalisation by providing a start point, not an end point. It would protect existing ownership rights, ensuring any transactions are between a willing buyer and willing seller, and it would preserve farmgate competition.

There is plenty of debate, particularly among farmers, about whether there really is excess capacity, because at certain times of the season there is invariably a delay in getting stock slaughtered. However, average utilisation indicates total livestock could be processed in around 26 weeks, if the animals were all available at the right time.

In a grass-driven climate stable production throughout the year is just not possible, but every new plant or chain further exacerbates the capacity problem and damages the profitability of the rest. The logical response is to close inefficient capacity, but this is painful and costly, therefore avoided until all other avenues have been explored. This is what leads inevitably to procurement competition where the only beneficiaries are the farmers with stock to sell at off-peak times of the season.

So any solution to the problem of ever expanding capacity would be welcome. The only problem is nobody has ever managed to find an answer that satisfies all the objections, the main ones being removal of farm gate competition and financial sustainability. The suggestion of tradeable slaughter rights (TSR), originally made in the 1980s, appeared to make sense, but this would have required the meat processors to agree on a seasonal production quota, based on a formula such as moving three year average livestock market share.

It was difficult to get the processors to agree the basis of calculating their individual entitlement and, in any case, it would have lessened competition for livestock at the farm gate. But, in principle, the idea of a moratorium on new plants or chains is not that far away from the TSR concept, except that it uses capacity instead of livestock market share as the crucial factor.

There are several key players to agreeing and implementing an agreed position, if the moratorium is to be the solution everyone has been waiting for. Ideally a majority of the processors should be in favour and here Bill Falconer, chairman of the MIA, must use all his powers of persuasion to achieve consensus in the face of continued vested interests. Farmer groups, B+LNZ, Federated Farmers and MIE must work hard to mobilise farmer opinion; MIE must also get sympathetic directors on the boards of Alliance and Silver Fern Farms to argue their corner at board meetings.

Government approval is essential. If the industry can agree on a solution and present a united face, it will be in a position to take a proposal to the government to ask for the requisite legislation to enable a moratorium to be introduced. The Minister for Primary Industries, Nathan Guy, has been at pains to remain hands off, giving the impression he doesn’t think there’s a problem. But surely he will be prepared to jump at the chance to accept an industry proposal that does not contravene the Commerce Act.

The moratorium document argues cogently that capacity is the problem in need of solving. Therefore, limiting plants to the present number of chains and preventing any transfer of chain licences from an existing plant ensures no increase in overall capacity other than through productivity gains. This provides certainty of asset value which will increase over time with consolidation and closures.

The next few weeks will show whether this proposal has any prospect of success, but it’s certainly got more chance than any other to date.

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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