Farmers in favour of meat industry restructuring

October 4, 2014

Preliminary results of research conducted by Meat Industry Excellence group (MIE) have shown, not surprisingly, that farmers are strongly in favour of industry reform around a cooperative model. This is the first part of the new industry plan being prepared with the assistance of funds advanced by B+LNZ.

 

The research showed farmers believe overwhelmingly that the cooperative model has the potential to deliver more control of the total value chain and a greater share of revenue back to farmers, while at the same time preserving the industry in New Zealand ownership. Chairman John McCarthy is certain farmers would be willing to invest their own money to help fund a restructure, possibly via a per capita fee on stock processed.

 

The results are based on 491 responses from an initial sample of 800 sheep and beef farmers selected from across the country in geographically representative numbers. While the findings appear to be convincing, it is a comparatively small response base in answer to a set of pretty leading questions.

 

The heads up press release issued late last week claims to have more than 80% farmer backing for industry reform as outlined which should prove to the Minister for Primary Industries that consensus does exist among stakeholders; this being a prerequisite for the government to get involved.

 

Unfortunately agreement from one side of the industry does not constitute a consensus. It’s hard to imagine the near 50% of the processing side of the industry in corporate ownership being in agreement to move towards a greater degree of cooperative ownership. That is without even beginning to convince the coops they would like to combine, although that would be a start.

 

McCarthy offered the tempting notion that minimum savings of $400-450 million would be achievable from restructuring processing and procurement which would of course have to be funded in order to get things happening. That probably doesn’t include the cost of buying out those companies in corporate ownership that don’t necessarily want to exit the industry. I can think of at least four medium to large sized processors which would not be willingly up for grabs except at a very advantageous price.

 

Everybody has a fairly good idea of what needs to happen to reform the meat industry, but how to do it remains the problem. Key things that need to be addressed are capacity rationalisation to cope with reduced livestock numbers and regional land use changes, livestock procurement methods, supply contracts, competition between exporters in the market place and volatility of market returns.

 

I hope MIE’s industry plan, when finalised, can point to a constructive way of solving all these issues, as well as achieving the type of industry ownership farmers say they want. I am sceptical whether the envisaged benefits of greater farmer ownership and control of the value chain will actually be achievable. I am also suspicious of the projected savings from the restructure of processing and procurement.

 

In an ideal world both are possible, but the world is not ideal, especially without a substantial amount of new capital and full bank support. For me the jury is out, at least until I see some compelling financial analysis and, more important, evidence that major players are willing to consider a proposed solution.

 

There is a lot of water yet to pass under this particular bridge.

Tatua result and forecast cast doubt on Fonterra’s strategy

October 1, 2014

Tatua’s amazing final payout of $9 a kilo of milk solids, trumping Fonterra’s $8.40 (admittedly after adjusting the milk price calculation) is just one element of an impressive performance by one of New Zealand’s most consistent performers.

 

The forecast of $6.50 for the current season compares with the recently adjusted $5.30 announced by Fonterra. It may not survive the vagaries of the season, but then neither may Fonterra’s significantly lower number.

 

Tatua also announced an increase of 10 in supplying dairy farms, rising from 109. Presumably the company won’t have any trouble filling this new requirement, because being selected as a Tatua supplier must be a bit like being picked as a permanent member of the All Blacks. The only problem is to qualify the farm has to be in a very small part of the Waikato within reach of the plant.

 

At a time when Fonterra’s sheer size casts doubts on its ability to add value to its product range, not least because its cooperative members expect maximum payouts, Tatua is a great example of a small niche company which has built its business on value added products.

 

It is not easy to be in Fonterra’s shoes: it must collect, convert into product and market the output of more than 10,000 dairy farms. Tatua in contrast has only a fraction of this number of farms and, if it needs more milk at any time, it can apply for an allocation under the provisions of DIRA. Synlait is an example of a well structured niche player in the South Island which has been successful because, not in spite of, its size.

 

But the suspicion remains, Fonterra’s scale may be both an advantage and a curse. It is very difficult to convince members they should be willing to forego payout in exchange for investment in brand building, but that may be just what the company should do, if it wants to compete with the big consumer goods companies like Danone and Nestle.

 

In the interest of ensuring above board milk pricing and the preservation of fair competition between dairy companies, Fonterra must calculate its milk price based on the milk price manual. This involves using a basket of commodity reference products such as whole milk powder and skim milk powder and their by-products, but excludes lower value products such as cheese. These price calculations are closely linked to Fonterra’s monthly global dairy trade auctions which have incidentally been dropping like a stone in recent months, since unrest in the Ukraine, resulting Russian trade embargos on European product, and a slowdown in China purchasing.

 

However the fact remains, Fonterra is heavily bound and constrained by commodity markets and their price structures. Fonterra claims with justification that it is a major world supplier of ingredients, not so much a branded goods marketer. But a report just released shows Fonterra to be lagging way behind its major consumer goods competitors in spite of its production capacity.

 

It has become axiomatic for the dairy industry to be held up as a model of how an agricultural industry should be in contrast to the meat industry. The cooperative nature of dairy, purely because a dairy farmer’s milk must be collected every day, has compared very favourably with the competitive nature of the meat industry. Higher payouts have merely served to confirm this viewpoint.

 

But it looks as if the dairy industry has its own particular problem which is how best to convert what it produces into something worth more than just a commodity.

Election result should be good for agriculture

October 1, 2014

Beef+Lamb NZ’s Manifesto which was issued before the Election contains a very concise summary of the red meat sector’s wish list for the next three years, although it doesn’t necessarily include the big elephant in the room of meat industry restructure. But the National government’s attitude on that one is well known and unlikely to change until the industry can present an agreed solution favoured by a majority of industry participants.

 

I contacted Nathan Guy, at present acting Minister of Agriculture, to find out the government’s priorities for the next term and how they dovetailed with the B+LNZ and Federated Farmers manifestos. He responded in some detail, stating satisfaction with the strong support received from rural New Zealand which gave confidence the last government was very much on the right track.

 

Major initiatives would be RMA reform, a strong policy requirement of the Prime Minister, continuing focus on strengthening biosecurity protection, investment in science and innovation which has increased 70% since 2007/8, attracting more young people into careers in agriculture, more free trade deals, an increase in water storage and developing the potential of Maori agriculture.

 

This all seems pretty consistent with the two manifestos, although there will never be enough money to go round all the priorities listed. Feds’ push for $600 million additional investment in science over the next three years with specific reference to the three Centres of Research Excellence which missed out on the last funding round may be a leap too far. $1.5 billion is already committed for next year with a large proportion going towards the primary industries through universities, the Callaghan Institute, the Sustainable Farming Fund, AgResearch and Scion.

 

PGP funding of $708 million has been allocated across 18 different projects with matching industry investment with an assessed potential to generate returns of up to $11 billion by 2025. My impression from Guy was very much the intention to proceed with present policies which all appear to be on track to deliver the desired outcomes.

 

My first question to B+LNZ’s chairman James Parsons was whether he saw any change to current policy settings following National’s re-election as well as whether there were any specific areas where more action and investment were needed.

 

He is very committed to the success of the PGP programme, citing the Red Meat Profit Partnership as a prime example of the benefits from providing a platform from which nine partners – six processors, two banks and B+LNZ – could combine forces; there was no way this would have happened without government funding.

 

One of Parsons’ main concerns is to achieve the goal of the People Powered report produced in July to attract an average of 5000 people a year into the industry. However as the report shows over the next 10 years, the most important factor will not be the absolute number of entrants, but the change in the make up of the workforce. In 2012 44% of the workforce had a tertiary qualification, but this will rise to 62% by 2025.

 

Government response has been to raise subsidies for agricultural degrees at tertiary level or higher, as well as looking to improve information and material available to careers advisers. I suspect this will not be nearly enough on its own to achieve the required rate of increase. It remains a mystery why a career in agriculture, New Zealand’s largest export sector by a country mile, continues to be less attractive than a whole range of other less exciting and productive choices.

 

Other priorities for B+LNZ include environmental policy with a sensible discussion about nutrient allocation, reduced regulation where appropriate, and negotiation of improved trade access agreements with important trading partners where New Zealand is at a disadvantage. Specific examples of priority agreements on tariffs which must be pursued vigorously are Korea and Japan, particularly on beef access, where progress has been slow.

Japan’s commitment to the TPP has stalled over dairy access, while Australia has a sub optimal FTA which provides for reducing beef tariffs, while New Zealand beef tariffs into Korea will be higher than those enjoyed by Canada and Australia from 2015. Non tariff barriers on Chinese imports of beef and green runners and beef to Indonesia are also an issue in need of urgent resolution.

 

Parsons corrected me when I raised the necessity of introducing NAIT for sheep if we are serious about controlling disease outbreaks such as Foot and Mouth. This would impose a conservatively estimated cost of $80 million on sheep farmers to track stock in the event of an incursion of what is a wind borne disease. NAIT is more relevant to food safety than biosecurity problems. An infinitely preferable mechanism for tracking livestock would be the mandated introduction of electronic Animal Status Declarations to avoid the use of paper records, impossible to trace quickly and comprehensively.

 

One topic notable by its absence from the manifesto is a Government Industry Agreement with the meat industry, already signed with the kiwifruit and bee industries. B+LNZ suggests road testing a GIA document for an outbreak of FMD before the industry would be willing to make a commitment.

 

On balance the new government’s agricultural policies appear to correspond to the wishes of the red meat sector which is a good start, built on the solid foundation of the last three years’. At a time when global demand for beef and sheepmeat is robust, this is a good time to emphasise the sector’s importance to our economy.

Future of red meat promotion under threat

September 17, 2014

Next year’s Commodity Levy Act referendum is one of the factors concentrating meat industry minds on the question of red meat promotional investment. B+LNZ is currently conducting a consultation round with individual meat companies to find out how this critically important, if contentious, topic should be agreed for the benefit of all industry participants.

 

B+LNZ Chief Executive Scott Champion told me it’s too early to make any predictions about the outcome, at least until after completion of the consultation round at the end of September. With the referendum about 12 months away, the process is geared to providing time to gather enough detail for promotional strategy development before taking this out to farmers to test it in advance of the vote.

 

The purpose of the discussions with meat companies is to ensure market expenditure is aligned with what the meat industry wants while enabling B+LNZ to fund its essential activities which must now confront new pressures such as environmental constraints. Any new proposal will also have to satisfy levy payers or risk derailing the success of the referendum, although improved sheep and beef returns if maintained should make a Yes vote more certain.

 

The present mix of promotion funded by the farmer levy includes two main strands – the first is country of origin marketing for lamb in the UK, Europe and North America and for beef in China, Japan, Taiwan and Korea, supplemented by some jointly funded variations that support individual exporter programmes; the second comprises campaigns with matching contributions from participating exporter groups across a range of markets and products.

 

For example since 2011 exporting companies have put $1 million a year into sheepmeat promotion in UK and Europe to supplement B+LNZ’s budgeted expenditure. Equally a group of exporters has shared in a campaign to promote New Zealand grass fed beef in China.

 

This strategy has resulted in a move away from generic mass marketing and advertising to more tightly focused campaigns based on research and analysis. This has reinforced the importance of educating consumers on how to cook beef and lamb. In addition to the website, social media is becoming an increasingly important weapon in reaching the target market.

 

While many years’ brand development investment in the UK has resulted in 90% top of mind consumer recall of New Zealand lamb, research has identified the need for exporters to target consumers closer to the point of purchase because of lamb’s premium price position. A large part of the promotional work in Asia to support New Zealand beef has focused initially on the benefits of grass fed beef – low calorie, low cholesterol and low fat – for the premium restaurant trade as the most effective way to reach consumers.

 

Spending limited funds wisely, whether contributed by farmers or meat exporters, is a crucial issue for New Zealand’s red meat sector, both internationally and domestically. Withdrawal of promotional support as a result of failure to get agreement between meat companies and B+LNZ would effectively mean the industry has chosen to shoot itself in the foot.

 

An immediate issue is whether it will be remotely possible to obtain agreement of all MIA members to contribute funds for the purpose of country of origin promotion and, if so, how much. Of the larger meat companies, Silver Fern Farms’ CEO Keith Cooper has indicated a strong preference for company brand promotion as opposed to the generic alternative. Instead of glossy marketing in traditional markets, he would be prepared to consider some funding for educational promotion in emerging markets. Other companies are still in favour of country of origin New Zealand promotion in specific markets.

 

Since it often seems there’s as much chance of getting an agreed meat industry position as there is of formulating an agreed United Nations resolution on Syria, I suggested to Champion this might be a challenge. However he said he was ‘reasonably optimistic’ of getting an industry agreement.

 

The big question farmers and companies alike must consider is what the long term impact of ceasing all country of origin promotion would be. There will obviously be some changes to the current promotional mix to make better use of available money, otherwise B+LNZ would not be in discussion with the meat companies on developing a promotional strategy that better matches its objectives.

 

The unanswered questions are how much B+LNZ is willing to spend on country of origin promotion as against jointly funded activities and what the companies are willing to contribute to the general rather than individual good.

 

In my opinion the New Zealand brand is an umbrella under which individual company brand activity should function, but it isn’t realistic for any one company to achieve consumer recognition for its brand in one, let alone several, markets without that support.

 

It is obviously important for meat exporters to support their own branded programmes in selected markets, while the New Zealand industry maintains its competitive nature.

 

But levy paying farmers have both an obligation and a right to support their product both in New Zealand and overseas. B+LNZ is farmers’ vehicle for coordinating their investment by investing their levy funds to the best effect. The meat companies have an obligation to reach an agreement which will support this investment constructively. If not the red meat sector will be in danger of completely losing its way.

Science and bees essential for prosperity

September 15, 2014

Among the vast array of press releases I receive from Federated Farmers, two in particular struck me as very relevant to our future, possibly more than the interminable pre-Election debates between politicians. After all this second category bidding for our attention and our votes is either trying hard to avoid rocking the boat by stating any new vision (the government) or making promises they don’t have to worry about keeping (most of the rest).

 

The first press release concerned the importance of bees and the second was a plea by Feds’ president William Rolleston for an increase in science investment of $600 million over three years. These topics may be seen as at opposite ends of the spectrum from the perspective of impact and importance.

 

But just looking at bees for a moment, the humble bee is responsible for pollinating the plants and crops which allow the growth of all agricultural production. Two thirds of our food sources would disappear without pollination, leaving a diet of fish, starch, grains and seaweed. We probably all know in vague terms what would happen without bees without actually envisaging the reality.

 

Federated Farmers Bee Chair John Hartnell lists several ways we can contribute to the continued life and health of bees which are worth stating because they are common sense – avoid spraying and irrigating during the day when bees are flying, locate hives away from irrigation and in a sunny spot, and plant bee friendly plants in urban areas.

 

The decline in the bee population in recent years suggests these practices, especially agricultural sprays and irrigation, are not being observed as rigorously as they need to be if bees’ survival is to be assured.

 

Rolleston’s speech was the focus of the launch of Federated Farmers’ Election Manifesto at Lincoln University on Wednesday. He cites the importance of science in underpinning agricultural production which contributed nearly three quarters of New Zealand’s merchandise exports last year.

 

While there are many initiatives in agricultural research, $100 million of it estimated to be invested by farmers through the PGP programme and through individual industry sector organisations, New Zealand only invests 1.2% of GDP in R&D, significantly less than other first world countries..

 

According to the speech, “The formation of the Centres of Research Excellence (CoREs) have also increased collaboration between institutions and in some areas are contributing to vital strategic capability for the primary sector.

 

That is why the potential loss of funding for the three CoREs targeting biosecurity, food innovation and reproduction, would be a strategic blow to New Zealand……Institutions like the Bioprotection Centre, Gravida and the Riddett Institute are fundamental to the success and advancement of our primary industries as well as our economy.” Loss of research funding by these institutions is the reason for the additional investment Feds are calling for.

 

Rolleston concluded by drawing attention to the disproportionately small number of students graduating with a degree, diploma or certificate in the primary industries disciplines compared with such disciplines as sports and recreation, journalism and communication. But by 2025 it is estimated two thirds of primary industry roles will require a tertiary qualification.

 

Federated Farmers deserve credit for highlighting these topics for public awareness. I wish them success in getting politicians and the public to recognise their importance to our future prosperity.

Thorny question of wool levy benefits

September 10, 2014

Sheep farmers have the chance to vote for or against a compulsory levy under the Commodity Levies Act (CLA) in October. The Wool Levy Group’s proposal indicates a levy of 3 cents a kilo which would raise $4.7 million to be spent on a combination of education, communication, advocacy, R&D and administration. This is either too much, far too little or a worthwhile beginning which depends on your point of view.

 

In this week’s Farmers Weekly Ruth Richardson argues very strongly against wasting any more farmer money on a compulsory levy, citing quite justifiably the enormous waste of funds both by the Wool Board and on its subsequent disestablishment. On the opposite side of the fence sit the Wool Levy Group and its supporters.

 

Of course Richardson speaks from the perspective of being Chair of the NZ Merino Company which broke away from the Wool Board after successfully arguing for the separation of merino farmers’ levies from the confusing morass of overhead and expenditure on wool, both beneficial and useless.

 

She maintains what the wool industry needs is more market, not more levy and highlights the success of NZ Merino in ‘facing and making markets from consumer to grower’ as the best way of moving up the value chain.

 

Of course she is probably correct because you can’t argue with the profitable performance and success of NZ Merino since it went solo. But my feeling is this point of view may be a bit too simplistic for the rest of the wool industry which covers a much wider spectrum of wool types, microns and end uses. Merino has the advantage of being a more easily promoted fibre with its predominant application for high quality and high fashion woollen clothing.

 

In last week’s Farmers Weekly Steven Fookes argued the necessity of the industry investing funds wisely in promoting the unique characteristics of wool to bring wool back to the attention of retailers, designers and architects who are looking for just such a fibre.

 

There are two examples of industry initiatives which are doing just what Richardson and Fookes say should happen, both achieved without the imposition of a commodity levy and both concentrating on strong carpet wools at the opposite end of the spectrum from merino..

 

Wools of New Zealand has 700 shareholders representing 14.5 million kilos of strong wool and with the Laneve brand has a number of carpet yarn and carpet manufacturers as partners in North America and the UK.

 

Elders Primary Wool’s efforts and progress with Just Shorn in the USA are a prime example both of what can be achieved with selective distribution and targeted promotion as well as the time it takes to achieve the objective. Just Shorn is specifically focused on promoting wool’s qualities for carpets to top end flooring retailers in the retail group which are franchisees of CCA Global Partners.

 

Therefore the big question is whether a levy is likely to produce better or quicker results than the industry has achieved of its own accord. The main benefit of a levy would be to capture all wool growers, not just those that have been willing to invest in one or other of the initiatives.

 

But then one must ask if the small amount of funds raised in a levy would be better spent on the existing initiatives rather than being applied to a new organisation with another overhead structure. Richardson’s point the amount available for R&D will go nowhere is undoubtedly correct, while even $3.2 million for advocacy and education to raise demand is unlikely to go very far or achieve any measurable improvement.

 

Fookes’ comment about the importance of industry investment is also quite right, but it is already happening without a levy. A better solution would be to try to build on the moves towards industry rationalisation which have started to happen with the Primary Wool Cooperative’s offer for a 5% share in Wool Equities and chairman Bay de Lautour’s stated desire to merge PWC with Wools of New Zealand to form a single farmer owned organisation.

None of this will happen in a hurry, but it seems to me to be a tidier solution than to set up a new organisation which harks back to the days of the Wool Board.

 

As with the meat industry the challenge will be to get all growers to agree what they want and are willing to pay for, but the focus on strong carpet wools would be a clear goal which all strong wool growers should be prepared to support.

Unravelling the schedule gap between North and South Islands

September 3, 2014

Every year when livestock numbers pass their peak in the North Island, there is a constant stream of trucks carting stock across the Cook Strait to plants for slaughter. There are two obvious reasons for this – either there isn’t enough South Island capacity at the time or the cost of procurement plus transport is less than the price in the North Island.

 

These two explanations are two sides of the same coin, because there is no need for South Island processors to pay more than they have to when their plants are full. This is even more evident from the species with the largest price gap which is cull cows, possibly wider than it has ever been. However there is absolutely no point in paying dairy farmers over the odds for what is a fully depreciated asset they have to get rid of.

 

But the price gap isn’t restricted to cull cows, because the same applies at the moment to bulls and prime. Admittedly there aren’t very many of these species being slaughtered at this time in the South Island, but the current NZX Agrifax Farm Gate report shows a gap of 48 cpk on prime and 68 cpk on bull, $144 and $214 per head respectively at 300 kg.

 

So I decided to do some research into the variation between the two islands to find out if there was a more fundamental reason for the difference. All the companies spoken to were very willing to discuss the issue and provided plenty of logical explanations.

 

Alliance’s Livestock General Manager Murray Behrent reckoned the gap is almost entirely procurement driven, although he added the South Island pays lower levies than the North.

However there is plenty of evidence South Island farmers get lower rewards than their North Island counterparts, especially at certain times of the season.

 

There was general agreement from Silver Fern Farms, ANZCO and AFFCO on the importance of procurement competition in determining the main reason for the divergence between the two islands. But other factors mentioned include the seasonality of the South Island, a flatter kill profile in the North, relative plant operating and processing costs, differing union agreements and cartage costs, and a higher proportion of chilled production in the North Island.

 

Plants in the North have more ability to recover fixed overheads because of the kill profile which allows better utilisation of plant and employment of labour. Keith Cooper highlighted the respective scale and efficiency of Silver Fern Farms plants across the country: three times as many cattle processed in the North Island, but the same number of slaughter facilities, while two ovine slaughter plants process the same volume as four southern plants.

 

Conversely the shorter killing season in the South Island means higher labour costs and larger facilities capable of handling the peaks. Nor at this stage do sheepmeat operations in the South have the benefit of an extended bobby calf kill when lambs are not so readily available.

 

The lamb kill has changed markedly in recent years with both islands having a similar number of lambs to slaughter, compared with 20 years ago when the South Island had up to 50% more. Over the same period, but especially since the formation of Fonterra, the land use profile has changed dramatically to dairy, boosted by the increased dairy payout and rise in the amount of irrigation.

 

In spite of plant rationalisation, notably at Belfast and Mataura, carried out by both SFF and Alliance, they have found it a challenge to handle the change of processing configuration dictated by today’s land use. There is less opportunity to dedicate South Island plants to specific types of production and certain customers, while it is also harder to justify installation of machinery to save co-products which are an important source of revenue.

 

SFF operates on a regional basis within each island rather than on a North and South Island pricing structure, although the company continues to publish only two separate schedules which Cooper reckons are ‘pretty close to the mark.’

 

Another factor mentioned to me is the fact there is more contracting in the South Island, with the contract price generally being quite a lot better than spot prices. But North Island procurement prices are more volatile and are adjusted up or down faster than in the South.

 

The inevitable conclusion is South Island farmers suffer a price disadvantage because of a shorter season leading to the need to recover overheads over a shorter period and the resulting peak kills which cause backlogs at the very time farmers must get livestock slaughtered. They also suffer from being serviced by plants which are generally older than the North Island plants and which were originally built to handle a different mix of species. This must adversely affect the processing margin and procurement price.

 

Even taking all these factors into account, suppliers must question the justice of companies with operations in both islands paying more, in some cases substantially more, to their North Island suppliers. But judging by the reasons given to me, South Island procurement prices are unlikely to improve to the point where they match those across the Cook Strait. In that case raids by North Island processors are unlikely to stop any time soon.

Beef + Lamb NZ expenditure on overseas promotion under review

August 28, 2014

Next year sheep and beef farmers will have their five yearly referendum under the Commodity Levies Act when they get to vote on whether they wish to continue funding Beef + Lamb New Zealand as their industry good body. Read the rest of this entry »

Just what the doctor ordered, no way or only a matter of time?

August 20, 2014

There are three possible responses to the prospect of an overseas, probably Chinese, investor buying seriously into the New Zealand meat industry: bring it on, not on your life or it’s inevitable.

 

So far Chinese interests have recently bought a minority stake in Blue Sky Meats and an application to buy Prime Range Meats is with the Overseas Investment Office; ANZCO is just under 75% Japanese owned with New Zealand management and staff holding the balance. ANZCO’s ownership structure has remained like this for over 25 years bringing positive benefits to the company, its suppliers and New Zealand as a whole.

 

This year rumours have been rife of Chinese interests looking seriously at buying one of the remaining large meat companies. There aren’t too many likely candidates for sale, although Keith Cooper, CEO of the rumoured target, Silver Fern Farms, laughed when I asked him the question and said he had heard the rumours too. However he denied there was any truth in them.

 

If we apply the old adage ‘where there’s smoke, there’s fire,’ there are at least three compellingly relevant issues here: first whether the farmer shareholders would be willing to sell, second how much a buyer would be prepared to pay for the assets which are substantially funded by bank debt and third the OIO’s criteria at the time.

 

In light of Shanghai Pengxin’s $70 million deal to buy Lochinver Station, currently subject to OIO approval, and the political uproar it has created, it seems like a good time to assess the merits of selling all or part of a meat processor and exporter to overseas interests. The ownership structure of ANZCO clearly establishes a precedent, but my instincts suggest it could attract a different response today, especially if there is a change of government in September.

 

I asked Minister of Agriculture, Nathan Guy, for his comments, but his one line reply indicated unwillingness to speculate or comment on a private sale matter. However Damien O’Connor, Labour’s spokesperson, was happy to give me his thoughts on the issue. He agreed any application would almost inevitably meet the OIO’s present criteria for approving an acquisition. However he was very concerned at the potential loss of control of the whole value chain which would condemn New Zealand farmers to taking the price at the farm gate without the potential to benefit from adding value. He would support a change in the Overseas Investment Act, although it isn’t clear what form this would take.

 

O’Connor’s concern at losing the value chain was echoed by Rick Powdrell, Federated Farmers’ Meat and Fibre Chair, and MIE’s John McCarthy, but as McCarthy said, it will be up to farmers to determine the ownership stake in the industry they desire.

 

Overseas investment does not necessarily imply total ownership, as ANZCO’s shareholding shows. But the debate about foreign ownership is in danger of becoming polarised; broader, more relevant questions would be about sources of capital, whether local or overseas, the degree of ownership and the structure of any partnership. More important than any of these is the alignment of an investor’s values and objectives with those of the company.

 

The sale of productive agricultural land seems to be an especially emotive issue. The concern about overseas, specifically Chinese, ownership of farmland is driven by fear of one country becoming too dominant. The fast rise of China to be the biggest buyer of sheepmeat by volume and whole milk powder makes us nervous. However it’s worth remembering the hundreds of thousands of hectares of forest that were sold earlier this century in the central North Island without much objection.

 

Although overseas ownership of our meat industry is not a new development (remember the Vesteys), it is appropriate to reassess how we should react to the prospect of one of our meat companies being the subject of a takeover offer from a Chinese investor, most particularly what sort of criteria we would expect the OIO to impose on a prospective buyer to retain some control of the value chain.

 

In the event the target actually happens to be Silver Fern Farms, its status as a modified farmer owned cooperative and the amount of bank debt on its balance sheet are two relevant factors. If any investor tried to buy 100% of the company, it would be a complicated exercise, but more significantly it would risk alienating a large number of suppliers. They might take the money and run, no doubt many of them to the south.

 

Therefore a wise investor, Chinese or otherwise, would attempt to find an investment structure which preserves the loyalty of the existing shareholder suppliers and delivers value to all parties. An investment also needs to offer a return which has not always been easy to achieve in New Zealand’s meat industry.

 

One thing is certain. The election has already provided a platform for some political parties to play the foreign ownership card as a means of attracting votes. If there is a change, the motley collection of parties forming the next government will have the challenge of agreeing their position on foreign investment. To see how they honour their various election promises while maintaining New Zealand’s international trade commitments will be interesting to say the least.

Livestock numbers forecast shows little change – unlikely to achieve MPI’s optimistic revenue forecasts

August 13, 2014

The Beef + Lamb New Zealand Economic Service’s latest stock numbers survey shows only minor changes in next season’s predicted volumes. However total sheep numbers are estimated to fall below 30 million for the first time. Read the rest of this entry »


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