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Allan Barber says that significant progress may soon be possible if a moratorium on new licences can underpin capacity rationalisation without stifling innovation or competition

Rural News
Allan Barber says that significant progress may soon be possible if a moratorium on new licences can underpin capacity rationalisation without stifling innovation or competition

By Allan Barber

The 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.

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 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 farm gate 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 tradable 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, 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.

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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he runs a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or read his blog here ». This article was first publsihed in the Farmers Weekly. It is here with permission.

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21 Comments

The industry's vested interests put up a proposal to defend the status quo that R. D. Muldoon would have been proud to call his own - and Alan Barber writes in support of it?

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[Unnecessary cheap smear deleted. Ed]

regards

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let new smaller more efficient companies start up. Why protect the dinosaurs?

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Absolutely. You know who I think epitomises what the future should start to look more like - the older lady in Eketahuna making a living from milking 7 cows and making cheese and a living from them. She about covers all the bases, working past 65, farming sustainably and value adding without having to rely on more and more production with smaller and smaller margins to compete in the ever descending spiral that we have caught ourselves in today. 

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Well the 'think big'  dairy farming that we have chosen faces  strong headwinds. read on

Milk prices in ‘free fall’ across Europe as further price collapse predicted “The current price situation is drastic. The milk price is in free fall in every European country.”   http://www.agriland.ie/news/emb-milk-prices/  
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We should really be looking seriously at what Lewis Rd Creamery is doing. I am by no means wealthy but I just do not buy milk now if there is none available. I am happy to pay what looks like a crazy price, but I just use a bit less of it, you can get away with it on your muesli as it just tastes so divine. The other reasons I choose it is because it contains no permeate and there is no PKE content in it. They have done spectacularly well in a very short time and quite frankly if they can do that well in lil ol NZ then maybe there is our true point of difference giving us a great return for far less damage to our country's environment. Produce something people really want not just need, instead of just producing something that, frankly, is just more and more rubbishy all the time and I think we would be on to something fantastic.

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I asked at our local New World why they don't sell Fonterra milk.  The reason was that our small town is predominately families and due to the quantities they consume, customers buy on price.  So not everyone wants organic milk, nor are willing/able to pay for it like you do. We all make choices and that's why it is good to have choices.  

Lewis Road is not the only organic milk on the market but rather a small niche player who has a slick marketing campaign - and well done to them.  They don't sell their product across New Zealand - they are north island only.

 

Fonterra sells organic ingredients in to Asia Our focus on Asia has also paid off with higher premiums for organic ingredients and increasing demand, mostly out of China,"  http://www.stuff.co.nz/business/farming/dairy/8552647/Fonterra-renews-o…

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Not everybody does, indeed, but it sure looks like a whole lot more than what is being produced now.

One of the reasons I purchase Lewis Rd Creamery milk is because it is in small enough containers for me for it not to be wasteful. My family members and friends of theirs have a group together and take turns to buy milk directly from the farm gate. Even yummier and even less required to get the same value from as the "pretend" stuff.

Another reason is when I turn milk containers over and find Goodman Fielder on the label it goes straight back on the shelf, being as they are owned by Wilmar who is the world's largest processor of palm oils and the loss of rain forests to palm oil production is a huge concern and there seems to be devil in the detail of the no more destruction agreement that Wilmar and other giant palm oil corpoartions have signed. My choice.

And big is looking pretty ghastly now that the possiblity of milk prices dipping below $4kg looms large. Bet it won't affect either Lewis Rd or the lady in Eketahuna.

Small is fantastic

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With payouts that low, must be hard to pay the dividends on all that production machinery, let alone pay for fancy feeds and fuels, and expert cutting edge agricultural skills.

Shame there isn't anyone able to produce a low cost, healthy alternative. Perhaps not as perfectly traced and without ten certifiers sayinig it's ok.  But just something made with cost of sale in mind, decent quality and attention paid through the process*, and at modest profit margin shipped to a subscribers door (or a nearby bulk bstore).  You know, without all the hidden costs, and expensive tricks added in.  Just good stable food, like our ancestors actually survived eating.   Shame there isn't a producer or company in the world with the mindset able to produce that, just because they're fair dinkum decent folks who give a crap about people instead of corporate greed and size...

* not machine operated by totally bored operators past mega huge (but on average, ok) quality systems.

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As has been reported in other places, the number of Organic(tm) suppliers to Fonterra has dropped off, as Fonterra (and the Organic(tm) certifiers) keep inventing new things for them to have to do to be certified.  The farmers involved realised it was no longer about making healthy quality product, but just milking the farmer for more money,

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"Production out of sync with milk"  and Europe unable to sell their milk....

Fonterra better be looking after it's shareholder's interests and getting some good solid long-term decent premium contracts out of the Russians while the deals are good  !!

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If you do some more research you will find that she's on hard times.  The Government and MPI were trying to put her out of business because she didn't have all the certifications etc and equipment they demand for minimum food levels.   Just because she produced cottage food for years of extremely high quality, didn't make the grade for them - she had to have all the expensive certifications and paperwork to make the food safe   (...you know all the stuff that makes big corporate food so good for you )

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So here is my voice saying to those with the power to - "sort it out so that the small player has a fair go". If enough make enough noise, eventually someone should listen. 

Me not holding me breath

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sad thing is, all that tax and adminstrative money pouring into the headquarters and government departments isolates the people involved from the problem - they have no skin involved, it's not their loss, no-one around them is losing anything (and if anything getting more wealthy, bigger houses, newer cars), how can those employees be expected to understand what keeps their palaces feed and moving.   That's why nations are cyclic.

They won't understand, and the few that will, have to fear losing power to the other self-interested ones who aren't interested in what they consider "small things" and "small minds".

If it were easy to ride out, empires would stand the test of time.
the reasons the big empires last so long is _purely_ one of area.  The better their reach to draw in resources the longer they last, but since their dominant people won't let the resources return back out, it's only a matter of time before the plant drains the "nutrients" out of it's environment.   You want healthy growth you need fertiliser to return the nutrients, not expensive loans to suck out more resources.

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"does not contravene the Commerce Act" ? We will see about that - more likely you will want Statute to circumvent existing law, in order to operate a cartel, a la fontera.

Ergophobia

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I think what the meat companies are afraid of is that the chinese will move into the meat industry. Exporting to china only. Buying farms and shrinking New Zealands meat industry further.

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That's already happening with a smaller meat company in Southland being taken over by a Chinese one.

We should be looking ahead like them and considering what sort of food security we might or might not have in a decade or two

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I know they have bought a small beef plant, exporting only to china. Correct me if i am wrong i think it's in Eltham? The bank of China  is moving into NZ.The NZ ceo was on the news saying it's not a Chinese takeover. I beg to differ NZs economy is small and could easily be taken over.

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Yes, and we should fix that by stopping foreign interests in their tracks, NOT by creating a beefy, wooly fontera monopoly.

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This is the company thats keeps our meat industry up at night in a cold sweat.

 

http://en.wikipedia.org/wiki/JBS_S.A.

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Holy moley, 51,400 head of cattle slaughtered every day. That's a lot of Big Macs.

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