Farmers need to agree what they want

Allan BarberFarmers need to agree what they want, writes meat industry commentator Allan Barber in his latest column.

The recent meeting in Gore, organised by the Meat Industry Excellence Committee and attended by about 1,000 farmers, gave an overwhelming mandate for change to the present condition of the meat industry.

Key aspects of the Excellence Committee’s plan are one company controlling 80 percent of processing and marketing, a change in farmer supply culture, procurement equality and transparency, farmers to fund the restructure with assistance from the banks, and government backing.

This wish list may sound completely logical and comparatively simple, but it contains a number of assumptions, all of them very hard to achieve and some pretty unrealistic. In the first flush of optimism after the meeting Gerry Eckhoff suggested the new structure could be in place by the start of next season in October. That is patently ridiculous because a wish list doesn’t equate to a workable strategy and business plan.

All components of the plan will have to be rigorously debated and tested in the next few weeks, while the Committee conducts its road show across the country. Only when there is a national mandate for a plan which has the full support of farmers as well as meat companies will it be worth asking the government to give its backing for regulatory change. This will all take time.

There is an urgent need to take advantage of the groundswell of farmer opinion, as well as capitalising on the discussions behind the scenes by the meat companies which Owen Poole referred to at the Gore meeting. But any plan must pass the sanity test and I can see plenty of reasons why this one doesn’t do that.

The concept of one company with 80 percent of processing capacity and marketing sounds like a desire for the Fonterra model. But, as ANZCO Chairman Graeme Harrison says, there is one big difference – the Dairy Board handled virtually all dairy product marketing, so it was just a matter of achieving a merger of processing facilities in which only Kiwi and NZDG were involved after the spate of mergers and takeovers during the previous decade.

The meat industry which consists of co-operatives, privately-owned large companies and single plant operators, all with their own sales and marketing arms, is not such an easy candidate for rationalisation. The thought farmers should fund the restructure with help from the banks is not realistic. They would have to compensate the shareholders of the privately owned companies for their assets, as well as carrying the costs of rationalising their cooperatives. Owen Poole has estimated the cost at around $600 million.

The banks won’t leap at that proposal with any alacrity, especially as it would imply willingness to write down the overvalued assets in the industry. It is a truism to say a meat plant when closed is only worth the salvage value of the assets and the land minus the cost of remediation. Valuation as a going concern is all that supports current plant valuations on the companies’ books.

A sea change in farmer culture, combined with transparency of procurement prices, won’t occur automatically. This will only happen, if plant capacity and industry structure have been rationalised to the point where all companies are efficient with their own points of differentiation.

This leaves government backing. Apart from needing to see a plan which has the demonstrable support of the industry’s participants, the government will have to make sure it does not contravene any inter-governmental agreements or world trade negotiations concerning market access, free trade agreements and monopoly legislation. This will be time-consuming, especially if legislative change is required which will have to get through parliament.

Farmers will say there must be a solution to the present situation. However, one must realise this is almost entirely sheepmeat related and the direct consequence of the strong NZ dollar, coupled with price resistance in our main markets in straitened economic times to the highest value parts of the animal.

Interestingly, a viable solution was proposed in 1985 by Pappas Carter in a report on Meat Industry Cost Competitiveness commissioned by the Meat Industry Council. This was the concept of tradable killing rights which would encourage less efficient plants or companies to exit the industry. It would remain in place for a fixed period, minimum five and maximum ten years. There would presumably have to be a moratorium on new plant capacity for the duration of the scheme.

Closure would be compensated by payment for killing rights, the cost of which would be set below the penalty applied for killing more than the purchaser’s entitlement. Any plant or company which elected to close and sell its tradable rights would be required to close permanently. However, the penalties would not be so high as to prevent companies from exceeding their entitlement, therefore ensuring continued competition for livestock.

Unfortunately, there is one remaining factor to consider. If the national and regional plant configuration is efficient, there won’t be enough capacity to cope with a drought like this year.

It is up to farmers to decide what they want!

Allan Barber is a meat industry commentator. This article has appeared at NZ Farmers Weekly, www.interest.co.nz and at Allan’s own blog Barber’s Meaty Issues and can be contacted by emailing him at allan@barberstrategic.co.nz.

 

 

Comment: What goes around comes around?

Mick CalderWhat goes around, comes around, writes Mick Calder in his latest blog post.

After the extensive reporting on the meeting in Gore called by the Meat Industry Excellence Committee (MIEC), I was prompted to review the origins of the New Zealand Meat Producers Board (NZMPB) almost 100 years ago. The factors causing farmer concerns were different but the reactions in terms of farmer meetings and the various shades of support or opposition are incredibly similar to those being reported today.

The first few chapters of Golden Jubilee – The story of the first fifty years of the New Zealand Meat Producers Board by Dai Hayward, set out the factors (mainly an overhang of stocks in cold stores and rising costs of processing and shipping, exacerbated by the onset of the economic recession) which led to a serious decline in prices for lamb in 1920/21.

Farmers began agitating for changes to the existing business model in the meat industry to alleviate the plight of the producers. They had discussed a scheme for the co-operative handling and marketing of primary produce, but they went one step further than the MIEC and called for government assistance or intervention. Perhaps fortuitously, Prime Minister William Massey favoured setting up a Meat Pool Scheme and the establishment of marketing board involving farmers, businessmen and government representatives, with ‘any power they want’.

As could be expected stock and station agents, meat exporters and processing companies, as well as some farmers, were adamantly opposed to these ideas; some cynics would suggest they were just protecting their patch.

The issue came to a head with a meeting in Wellington on January 10, 1922, with a farmers’ conference in Wellington attended by selected delegates from around the country, with views either for or against the proposals.

There was some vigorous debate, with suggestions that the proposed scheme was socialistic. Massey countered that “there is nothing socialistic about what we are proposing. It is co-operation.” The main opposition concern was that the proposed board would take over all meat and market it, known brands of lamb would lose their identity, and/or that there were plans to wipe out all the meat operators. Some of these views had been promulgated by the meat companies.

In the end, after a day of debate, the vote was in favour of change, and subsequently a Board was established with extensive powers “to control the export meat trade”. But in its first 50 years the Board did not exercise its powers to assume complete control; that came later.

It would be disingenuous to suggest the MIEC are aiming to resurrect the NZMPB and all of its powers, let alone contemplate any government intervention, but the issues being discussed and proposals for change are remarkably similar to those of the 1920s; the economic and political climate is quite different. However, the calls for a Fonterra style structure suggests that the farming community are seeking a complete rethink of the business model with an overhaul of the meat supply and marketing chain.

The proposals particularly for marketing reform may be a reaction to the PGP proposal to use farmer-controlled reserve funds to encourage them, once again, to improve productivity, when they have been doing that almost continuously for the last fifty years. Experience has shown that farmers will respond to consistent price signals, so maybe the current agitation is a call for a better system to deliver those consistent price signals.

Even so, proposals to emulate the dairy industry could be a tad optimistic. Fonterra arose from a long established single desk marketing organisation (the Dairy Board) and mergers of a number of co-operative dairy processing companies, before they were pushed together, and the business model was cemented in place via legislation.

Setting up such a structure for the meat industry would require a significant change in thinking, not only among farmers who would have to adjust to the idea of long-term supply contracts, but also among processing and exporting companies, especially if the idea went so far as one major marketing enterprise. It may even require some government intervention in the form of legislation.

An arrangement like that for the meat industry is likely to be a bridge too far for all the parties. Some form of incremental commercial arrangement with more modest goals may be possible, if there was a willingness to co-operate. The reported discussions between Alliance and Silver Fern Farms (and maybe others) would appear to be a good start.

Mick Calder says he’s a ‘generalist’ having started in agricultural science then marketing economics and trade policy, and finished in business management and administration, with elements of bookkeeping and legal drafting thrown in. His professional roles include former board secretary for the New Zealand Meat Board and later the NZ Lamb Company. He was co-author, with Janet Tyson, of Meat Acts, a history of the New Zealand meat industry from 1972 to 1997, which makes fascinating reading (Published 1999: ISBN: 0-9582052-2-1). He has written countless other reports, newsletters and articles for magazines and newspapers. He also maintains his own blog, Agriphile, at which this item has appeared.