Allan Barber surveys the state of the South Island sheep processing industry following the Mataura shutdown decision

Allan Barber surveys the state of the South Island sheep processing industry following the Mataura shutdown decision

By Allan Barber

After the announcement last week of Alliance Group’s intention to close sheepmeat processing at its Mataura plant, union representative Gary Davis called for the government to intervene.

This was no doubt caused more by frustration over the loss of jobs than any realistic expectation that the government would interfere in a commercial situation.

Alliance has made a business decision based on declining sheep numbers, brought about largely by land use change to dairy.

The South Island’s share of national dairy production continues to increase every year with the result that more beef processing is needed at the expense of sheep chains.

Hence Alliance took the logical decision to retain beef processing at Mataura and to transfer sheepmeat to Lorneville.

Listening to statements by Davis and Meat Workers Union president Graham Cooke, one would think the meat industry, particularly in the south, had been engaging in rampant capacity expansion. But realistically there hasn’t been much new capacity introduced apart from small units; in contrast Silver Fern Farms ended sheepmeat processing at its Belfast, Christchurch plant in 2010.

What tends to happen is that individual processors make decisions to tweak, increase or close capacity based on predicted throughput which inevitably is not static, but changes in direct proportion to farm profitability.

Comments by the union about the illogical behaviour of companies should be taken with a pinch of salt. Although to the average observer meat industry behaviour may sometimes seem to fly in the face of reality, each decision has its own logic.

At the micro level every new investment can be justified, as long as it improves efficiency and takes forecast livestock volumes into account. Efficiency improvements will always have a competitive impact and may result in job loss at one plant or another.

Ever since the short lived Meat Industry Authority was established in 1976 to control the licensing of plants, taking into account the economic need in the context of national efficiency, processing capacity has presented an eternal problem. But before this, new developments were almost unheard of and the industry consisted of a host of ageing facilities which operated on a single shift to process the available livestock, mainly lambs.

Subsidies ensured sheep were retained in huge numbers, resulting in a sheep flock of more than 70 million. This has now declined to just over 31 million.

The landscape has changed so much in the last 35 years that the old meat plants and work practices are totally inappropriate today. Today New Zealand’s meat exports must comply with the needs of increasingly sophisticated global markets from the perspectives of food safety and presentation.

The sad fact arising from industry change of the nature announced by Alliance is that there is always a human cost. In this case 325 jobs will disappear in Mataura, although a number of those will be available at the Lorneville plant outside Invercargill.

The union may rail against an employer which takes these decisions, but it should really assist the process of rationalisation, because the alternative would be worse.

If Alliance doesn’t act promptly, its overall performance would deteriorate further with greater job losses in the future.

The meat industry has been such a high profile part of New Zealand’s economy for over 100 years and every plant closure affects its community disproportionately.

But inevitably the industry will continue to evolve and almost certainly this will require less, not more workers.

This is a fact of life and should be welcomed as evidence of adjustment to meet market demands. Unfortunately there will always be a short term human cost.

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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 »

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9 Comments

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Allan, maybe Gary Davis has a point, some heads need banging together so that we don't have a situation where farmers are told less than 18mths ago we couldn't satisfy the lamb markets to the situation now where " apparently" theres excess product sitting around and we are being told to expect far less. The inability of the industry as a whole to sell product far enough forward when prices are high is costing us all dearly but of coarse one company amongst many exporters cant take a long position. I know you are against a mega merger or thats the impression from reading your columns over the years but it needs to happen. If the benefits were clearly outlined in dollars maybe it could.  

Stevie
You are right about my attitude to the mega merger concept which was tried forty years ago (Meat Board acquisition of meat for export, Fletcher Challenge/Watties investment in Waitaki NZR) and just didn't work.
Your thoughts about heads needing to be banged together may have some justification, but my question would be whose heads and who should do the banging? It is up to the shareholders and nobody else.
Finally it's bloody hard to forecast when markets will go up and down, but one certainty is that what goes up (especially when prices are at an all time high) must come down because the buyers inevitably get serious indigestion at high price levels. Inventories build up, buyers won't buy until these have shifted and the price comes down, even though the exporters can't sell anything much.
No amount of forward planning will fully overcome the booms and bust of buying cycles, but it's up to farmers to make their decisions based on common sense and good business practice. I think things are improving slowly, but commodity industries will never grow consistently, however efficient the industry is.
Sorry I can't be more positive!
Allan

Allan, obviously Owen Poole didnt know much then, when proposing the mega merger according to you. Not sure about your comparisons to past takeovers. I would of thought we are in a different space now and as long as there is a willingness from all parties it could be successful. Considering your other comments re forward planning, I would of thought it far easier when you have the bulk of production, ie a fonteera type model than what we have now. I never mentioned fully overcoming cycles but an extra year of high prices from good forward planning would mean alot to most. 
 

Stevie
I think Owen's efforts to get the mega merger off the ground made good sense, but only if 80% of the industry was prepared to join it. Unfortunately that's like herding cats and was very unlikely to come to fruition in spite of the optimistic expressions of intent.
Unlike the acquisition by the Meat Board there would still have been enough smaller players that would have been able to maintain a degree of innovation and areas of expertise, much like Tatua, Open Country and Westland in the dairy industry. However the meat industry is much more complex than the dairy industry which is why you will always have a competitive situation between companies which develop specific types of product and market expertise.
I totally agree the objective should be to achieve better forward planning either through cooperation or more contract based livestock supply relationships.
Allan

OK Allan, so you agree with the 80% concept but because you believe others won't, ie farmers and other companies you won't back it. If you think its the place to be you should say so in your position and give some direction to farmers for something to aspire to as I don't believe it will come from within company management etc for various reasons, one of which is job security. Turkeys don't vote for an eartly Xmas do they. So to say its up to farmers is a little simplistic when many don't agree. So convince them whats possible.
 

Stevie
There's not much point in backing something that won't happen. I continue to believe that Silver Fern Farms and Alliance have such different cultures and personalities that only a complete clean out at board and executive level would create the climate for a merger between them - either that or one of them weakening to the point where a takeover is feasible.
Although AFFCO said it was prepared to consider joining the others, provded they were all willing, my gut feel was that their willingness was only lukewarm. This is even more true today.
My guidance for farmers is what it has always been which is that each farmer should be prepared to commit a season's livestock supply to his/her company of choice in return for which the company must offer more than just the spot price on the day. If every farmer did that, the weekly competition for livestock and the influence of the saleyards would be brougfht back under control.
Every season farmers could vote with their feet.
Allan

Allan, thats been tried and didnt work, probably divided farmers even more unfortunately. I know one companies strategy is bury the other. Actually its probably the others as well. Hasn't worked so far and not sure it ever will.
Your second point about commititng and being rewarded comes undone when large suppliers receive more with very little committment or loyalty. This upsets the average size shareholder/supplier and goes against the principles of a co-operative. When it comes to voting the big boys often win. I'm waiting for the day a few of them have the courage to put a stop to it but I'm not holding my breath. Allan,as farmers we're fed that many conflicting storys from companies, you can hardly blame us for being confused but I guess thats the strategy. I'm surprised your not getting more feedback on such an important subject to sheep farmers.
 

Watching re-runs of old Country Calendars should send shivers down the spine of every sheepfarmer . Basically the same issues still pervade the industry as they did 40 years ago (watch the one when the Shah of Iran visited Mt Linton in 73/74 when Bill Rowling was PM ,and Hilgendorf was vice- Chairman of the Meat Board ) . The reality is that Supermarkets will only pay what they have too , they know that our peak is in Feb/March so they buy short cos they know our freezers wiil fill quickly and they know that eventually they will be able to pay less .
The honourable intentions of SFF and Anzco with their forward contracts dont amount to much as CMP suppliers found out in the Autumn when a major UK supermarket reneged on a high percentage of a contract . I am also lead to believe that it was only the fact that that the Americans suddenly and somewhat unexpectedly emptied our freezers last spring was really the major catalyst for the high pricing last season , early on .
It is distressing also , to hear that hter is an oversupply of mutton in particuler in the markets at present due to the Australians . My God diidnt we think that over-supply was dead and buried after the 2007/2008 season . A man cant be blamed for feeling cynical !!
 

So jeeza, the question is how do we counter the power of the supermarkets. Do we negotiate with them separately as at present or do we remove some options from them, ie, a fonterra type procurement and marketing structure. The supermarkets may realise our peak is in Feb/March but if the bulk of its frozen and sold over a longer time frame fixes that. Not so sure about chasing the chilled markets as I think that plays into their hands.

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