Are forestry conversions and land use change really the cause of struggling productivity of the meat industry? The livestock volume decline will have the greatest impact on the processors with the least efficient plants.
The combined losses of -$137 mln recently reported for those meat exporters required to publish annual reports from turnovers of $6.26 bln, which implies serious doubt on continued viability of at least part of the meat processing and exporting sector.
This follows a disappointing season of 2023 when Alliance lost -$97.9 mln and SFF -$36.4 mln, partly offset by ANZCO’s standout profit of +$60.9 mln. These two financial years are in stark contrast to Covid-influenced 2022, when the three companies posted combined pre-tax profits of +$515.1 mln, while 2021 was also profitable across the board.
All three have commented on the difficult trading and climate conditions that adversely affected their performance, but the obvious question is whether the two loss-making companies can return to their previous profitability without a reduction in overheads
Other exporters spoken to agree last year was harder, but maintain there were satisfactory margins there for both farmers and processors. A clear focus on cost control was essential for an acceptable performance.
This highlights the point that not all the industry’s assets are getting older, but some companies have done a better job than others of investing in upgrades. The combined effect of ageing plant and declining volumes is starkly illustrated by the over $50 mln cost of closing Alliance's Timaru Smithfield plant.
The published results cast serious doubt on the need for all the industry’s processing capacity, as a combination of greater plant efficiency, more shifts and lower peak kills suggests some plants are, quite simply, no longer required.
I have seen an analysis which indicates the North Island lamb and mutton kill could easily be handled with fewer plants, while the South Island kill could be handled at a pinch if Alliance plants were no longer operating.
This of course assumes normal weather conditions with no drought, although the trend to forestry will eventually reduce the peak, requiring less processing capacity.
It was noted earlier this year in a Farmers Weekly opinion article that cooperatives are an incredibly efficient model that permits their returns from procurement and processing to be bundled to set the benchmark livestock price against which all companies are judged.
The authors maintained it is essential for Alliance to remain a cooperative, as otherwise that benchmark will be lost and the remaining companies will only pay what they have to, while returning the rest to the owners.
Past experience in the meat industry indicates the industry’s schedule-setting process, still unchanged for 40 years, calculates the market value of each component of the carcase according to the week’s exchange rate and direct costs. Having arrived at the schedule for each species, companies then decide on any premiums for supply to a particular specification, for seasonal variation or volume.
It is public knowledge there are special deals available to large suppliers and third parties in times of need, although the two cooperatives have often been the ones offering them when supply from shareholders has fallen short.
Fonterra and Zespri, were cited as two successful examples of the value of the cooperative model. Unfortunately this ignores the failure of this model in the highly competitive environment of red meat processing and selling where farmers have a choice.
The higher the above-schedule premiums, the higher the cost of livestock with the obvious impact on profit, unless the excess can be recovered from the market. The nature of the livestock market model is driven by maximising the price of the entire carcass, not just the prime cuts that are always commonly referred to, with only up to 15% of the carcase able to command a market premium, paying over the odds for procurement for the other 85% makes it very difficult to recover the additional investment.
It is worth noting a brief time warp of our Meat co-operatives – SFF from 2012, and Alliance again today – have tended not to invest enough in their assets, pay too much for livestock and allow overheads to balloon, resulting in more core debt, higher interest costs and declining shareholder funds.
After being rescued by outside investments in 2016, SFF now shows signs of falling into the same trap again. The key to success, whether a cooperative or not, is discipline and a focus on the basic model.
New Zealand now has at least 100 registered cooperative businesses and organisations. Together, their annual revenues exceed $43 billion – almost 15% of our GDP. Globally there are an estimated 2.6 million cooperatives that turn over at least $US3 trillion a year and employ 250 mln people.
The names Thomas Borthwick and Sons, Vestey, CWS and Swift and Co may not mean much today, but they are etched in New Zealand’s red meat sector history.
For almost a century they and other foreign-owned processors dominated NZ’s export meat industry.
To break their industry stranglehold, groups of farmers up and down the country banded together through the 1950s, ’60s and’70s to establish cooperatives to compete with the predominantly United Kingdom-based companies.
AFFCO, Hawke’s Bay Farmers Meat Co and PPCS, among others, were formed to give shareholders skin in the game and to share in the profits captured by the foreign owners.
It also gave suppliers a presence beyond the farm gate and ultimately the cooperatives helped the industry become mostly locally owned.
About 15 years ago Silver Fern Farms, like Alliance today, failed in its attempt to raise capital from its shareholders.
This drove SFF to seek outside capital, in this case hybrid ownership of its processing arm by Silver Fern Farms Co-operative and Shanghai Maling.
The reluctance of Alliance shareholders to commit is not helped by two financially tough years for sheep and beef farmers.
Nor is it helped by shareholder resentment at the board’s refusal to address what many consider favourable treatment for third-party traders.
In a related mover (that failed), instead of considering what they were losing, sheep farmers allowed an end to the strong wool levy and without that income, the value of strong wool has been lost.
This is another crisis moment for the meat industry with the Alliance board left with few options. The risk is that by extension, their ultimate decision could also leave the wider sheep and beef sector with few options as well.
The Alliance shareholder group believes the recapitalisation failure is also impacted by a lack of understanding at what a cooperative is and what will be lost.
Will the shareholders meekly and with little debate accept an outcome that ends Alliance’s status as a cooperative, citing the demise of the wool industry as an example?
8 Comments
Basically the industry consists of three sections. Farm, processor and market. Neither of the first two can exist without the other two, but the third can always find alternative supply. The co-operative model evolved out of “the open door policy” that allowed farmers to contract processing and retain ownership of their product all the way into the market, if they so wished. However it is a fine balance between the above three sections and just one of them, applying more emphasis and weight to itself, will upset that balance, and in so doing, ultimately weaken itself too.
The strength of the Fonterra and Zespri cooperatives lies in there single desk export marketing. That gives those entities market power in the international marketplace - more price setters than price taker.
As far as red meat cooperatives go in NZ, I suggest they are token cooperatives. Each is competing in the international marketplace against each other to a greater or lesser degree. Meaning they are more price takers than price setters.
From a product perishability perspective, red meat is more aligned with kiwifruit. That being the case, then the Zespri cooperative model is one the red meat sector should consider. Establish a single desk exporter to realise marketing scale and deliver returns at farm gate.
But history clearly illustrates that NZ farmers can be their own worst enemies in that they have rejected compulsory acquisition for both wool and red meat in the past.
Just compare the trajectory of the economics of kiwifruit over the last 40 or so years, with the red meat or wool sectors.
Bring in compulsory acquisition of meat and wool and make those products clearly high quality, Kiwi branded, in the global market.
You cannot have a single desk seller unless you own the product at which point you have to own the processing as well. That was proven in the 1980s when under Muldoon, alongside SMPs, acquisition by the Meat Producers Board was legislated and resultantly, those two mechanisms cost the NZ taxpayer over $2 billion as a dead loss. In those days, from memory, there were likely over thirty concerns with meat export licences.That has narrowed down dramatically as too has the number of processors and actual plants. But even so, who exactly is going to stump up with the loot to acquire all the plants that are still operating so as to apply only single management of their operation(s.)
It would not be easy...
But Zespri does not own the pist harvest operations.
Fonterra had it a bit easier because at it's formation all the processing was owned by cooperatives anyway. And there were 2 massive cooperatives, 1 south Island, 1 north Island plus west land and tatua.
Tatua is a bit of an outlier because of it's product extraction. Westland, is no longer farmer owned so is now in the same boat as Synlait etc but with a geographical isolation aspect that works in it's favour and supplying butter to Costco
No it would not be easy. Ironically it would have been much easier before the 1980s and the NZMPB intervention when the large percentage of lamb and mutton was in basic carcass form. Such was the uniformity of product by grade that cargo was discharged to the Uk importers on a rotational basis meaning one shipment you might get say Waitaki carcasses the next AFFCO. You see horticultural product like kiwi fruit behave more or less the same being graded but left in their entirety and with dairy that is virtually a chemical flow process outturning uniform product in bulk bags, blocks etc. Whereas the understandable development by the meat industry into further processing has meant production breaking out into a myriad of individual cuts and presentation all of which with inherent differences in costs and quality. On the other hand there has been a degree of market cooperation, a semblance to your suggestion if you like, such as in North America where the majority of the processors (AFFCO being the biggest exception ) have combined to supply one entity in the market.
Whatever the structure the sale price needs to provide enough income for all the parties, processing and growing, to cover costs and make some real profit. Over the past 30 to 40 years the animal numbers have reduced as farmers have moved to other options to make better, or some, returns, or survive. The next processing rationalisation is upon us now as a result. It’s really about real business profit (not just covering wages!!) especially for sheep.
The question is will this result in a stop in decline? Is there a point at which NZ red meat becomes so niche the price allows a certain sized grower and processor size to be truely profitable?
There is a possibility that processing capacity will continue to decline. To ensure kill space farmers will be pressured to sign supply contracts. So the "reset" could come naturally.
Both Alliance and SFF have repeat performances of having to somehow raise capital, then running it off and then having to do it again. Alliance is evidencing that right now. With both Alliance & SFF struggling to remain profitable, more on the sheep meat side of the trade and likely heavily so, the prospect of the amalgamations, plant closures and resultant reduction of actual exporters, forced on the industry by the trading banks in the 80s could well be on the horizon. For the South Island though a merger of Alliance and SFF would definitely and largely reduce competitiveness at the farm gate.
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