Allan Barber can't see any immediate changes in the meat processing industry, but with most capacity now controlled by overseas interests, the next changes will be hard-headed

The imminent ownership change for Alliance will no doubt bring relief to most of the shareholders and disappointment to the owners of the other meat processors who would have secretly hoped for an early Christmas present of instant capacity reduction.

But for now, there is no immediate prospect of any more changes, given all meat processors are backed by stable, long-term investors.

On completion of the deal, three companies will be substantially or wholly owned by overseas shareholders, Japanese, Chinese and Irish, while the rest of the processing side is privately held by New Zealand owners. Those that do best under today’s industry conditions will be the ones who are prepared to reinvest in the business.

All agricultural production is seasonal and reduced livestock volumes only serve to place greater emphasis on efficiency gains, both behind the farm gate and beyond. To earn the highest returns, farmers must farm efficiently for delivery that meets their processor’s specifications and timing requirements. At the same time, they must cope with seasonal variations, whether too dry, too wet or too cold, and price volatility.

Meat processors have lived through many fluctuations of supply and demand, each demanding different plant configurations, depending on livestock flows, labour relations, changing land use, and availability of capital. Most plants were built under different conditions from those of the present day which places great pressure on the owners to keep investing in plant modifications, upgrades and complete rebuilds. Some like Smithfield last year will be closed permanently.

In the past processors competed furiously for market share in the mistaken belief it was critical to fill every hook to maximise profit. In fact this meant livestock cost more than it should have done and every livestock unit above the level for which there was a profitable sale incurred a loss. Companies, especially those with newer, more flexible plants, can now operate profitably at lower kill levels. It is possible to take tension out of livestock procurement by being willing to concede market share.

Farmers who became used to the weekly schedule comparison and eagerly sought the best offer have now realised a partnership with a processor they can trust to pay them fairly is infinitely preferable. Longer term contracts are now common.

Improved efficiencies by all processors have unfortunately not been enough to keep pace with the impact of changing land use and declining livestock numbers. This situation has led to progressively worsening levels of plant overcapacity with no prospect of rationalisation. Talk of cooperation between processors to achieve a planned closure of capacity always comes to nothing.

Dawn Meats’ acquisition of two thirds of Alliance makes this even less likely, although when the new owners finally get to look under the hood, they may realise a bigger task lies in front of them than they expected. The quoted sum of $20 million to be allocated to capital projects is only a drop in the bucket needed to for the work required to make Alliance truly competitive.

Despite Alliance’s recent attempts to upgrade their facilities and systems, it is probable the age of the plants, associated processing costs and union costs will make it difficult to get anywhere near the required standard. Unless Dawn is prepared to invest at least as much again as it has spent on buying its share, I doubt it can get there.

As one industry executive said to me, they have only bought a ticket to the ball, but they haven’t bought the dress or paid for the dinner. But that said, the new owners are very experienced and profitable operators who may yet surprise me.

They will undoubtedly work very hard on supplier relations, dealing fairly and communicating well, because there is no doubt Alliance has lost support in the past few years. Most important is to solve the issue of third party procurement and differential pricing. This has long been a bone of contention for loyal farmers, a tactic justified by the need to fill plants when there was not enough livestock. This is the penalty for having large, inefficient facilities which must be fed constantly when capacity is operating.  

On the other hand, several years ago Alliance decided to put on extra capacity to handle the anticipated volumes before Christmas when the weather turned against it and the livestock didn’t arrive. This was an example of sacrificing efficiency to keep its suppliers happy.

As a cooperative the company felt obligated to look after the interests of its shareholders instead of taking a less benevolent approach. This was also reflected in the board decision last time Alliance made a substantial profit to pay a dividend instead of retaining cash for capital investment or balance sheet strengthening.

Alliance’s latest result, to be announced this week, will show how successfully costs have been cut. A profit of $20-24 million has been signalled, hence the improved payment by Dawn Meats, but this is nowhere near good enough to compete with the rest. Much hard work remains to be done.