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Allan Barber reports the stress on the red meat sector from the drought is giving yet another push for major consolidation. Your view?

Allan Barber reports the stress on the red meat sector from the drought is giving yet another push for major consolidation. Your view?

By Allan Barber

Not for the first time, sheep and beef farmers have called for a single processing and marketing company representing 80% of the red meat industry.

At a meeting in Gore on Monday up to 1,000 farmers from Southland and Otago, and as far away as Hawkes Bay voted overwhelmingly for a consolidated structure.

The organisers now intend to promote the concept to other farmer groups throughout the country.

But the industry has been down this route before without reaching a satisfactory conclusion.

So what is different this time?

In 2006 a group of South Island famers formed the Meat Industry Restructuring Group which called for a merger of the two big cooperatives, Alliance and Silver Fern Farms or PPCS as it then was.

In 2008 Alliance Group led an attempt to reach agreement with those companies that made up approximately 80% of the industry which was seen as the minimum level required to achieve critical mass.

Neither initiative was successful.

Alliance has always been reluctant to merge with SFF because of the relative strength of their respective balance sheets; and, as has become clear in recent weeks, neither company believes a merger of the two cooperatives would achieve anything constructive.

They say the inevitable result would be a substantial loss of their combined market share while they address the issues of excess capacity, integrating management structures and resolving cultural differences, including some very large egos.

It is believed the 80% solution fell over because SFF was seen as unwilling to compromise on matters that Alliance, ANZCO and AFFCO considered essential prerequisites for a successful single company on the lines of Fonterra and the dairy industry.

It is not immediately clear what has changed since then among the processors, but a significant factor is the drought which will inevitably cause a further reduction in sheep flock and beef herd numbers.

When this season’s high slaughter volumes have been processed, this reduction will put pressure on the economics of operating meat companies, including plant cost recovery and disposing of inventories profitably. Consequently all processors must have concerns for their future long term profitability.

The biggest change is in the apparent willingness of farmers to speak with one voice, if the meeting in Gore is an accurate guide.

Tapanui farmer Fiona Hancox said three key factors – stability, viability and transparency – were essential to the future prosperity of the sector, supporting commitment of supply on long term contracts in preference to best price on the day.

There was plenty of approval of ANZ Chief Economist Cameron Bagrie’s view that one big company with four or five small buggers to keep the big one honest was the ideal model.

Radio commentary since the meeting has been notable for the view, outlined by Gerry Eckhoff, Central Otago farmer and former ACT MP, that farmers must not approach the current situation with pre-conceived ideas of the ideal structure and process for getting there.

In contrast it was important to draw all the players into the debate from farmers to processors, exporters and importers (I presume this means the overseas customers who have a vested interest in the survival New Zealand’s red meat industry).

Eckhoff stated “we cannot control the climate or the currency, but having the right industry structure will shelter us to some degree.”

Asked on Morning Report how long the restructure process might take, he replied that there was a lot to do, but he was optimistic it could be in place by the start of next season which means only six months away.

The outcome of this promising beginning will become clear over the next few weeks.

Two massive questions are the attitude of the large processors to the ‘Fonterra’ single processor and exporter concept and how many farmers will actually be prepared to support a major restructure with commitment to long term contracts.

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Here are some links for updated prices for
lamb
beef
deer
wool

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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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5 Comments

It was certainly a big statement of solidarity yesterday. People have had a gutsful. Lots of dissatisfaction with special deals for some at the expense of loyal clients  has bred great distrust. Lots will depend on how this message gets recieved on the road. The deep south is co op heartland, north of the Waitaki and especially north of Cook straight where the Sunday night auction exponents reside is where we will see if there is enough support for a new direction. Its not just meat companies that need to change its farmers as well, who will have to guarantee the supply of their stock through contact.  Word on the street is there is a grand bargin on the table, which was hinted at by Owen Poole as well.

SS, you lost me in your last comment. Whats the word on the street?.

Stevie, my understanding is that there is quite abit going on behind the scenes between the meat co's both co-op and private. Owen Poole hinted at it on Monday. Something has to give as there is another round of capital stock gone west through drought and dairy \dairy support conversions not to mention the probable scanning % decrease which just compounds the overcapacity situation.There is also talk that the Brazilian multinational JBS are sniffing around ANZCO, apparently the Japs want out.That would put a real spanner in the works!

Hope its not just talk like last time SS. Did Chris Kelly get a grilling?. I hear some helpful comments come from Cameron Bagrie.

Im sure something will happen this time as everyone has a need for a better outcome. Bagrie was very good,was a supported of consolidation abd outlined a plan. He added some drama by directly contradicting Eion Garden at one point.Kelly presentation was fine but he got heckled during Q and A  when he defended the special deals they get, essentially saying if you had 300k lambs you'rd get them too! Eckhoff shut that down which was a pity as that was just the problem people are p#ssed off about!