Although the meat companies are not exactly making huge profits or enjoying strong balance sheets, it would be entirely false to accuse them of lack of innovation and high operating cost structures. What is still relevant is the issue of excess capacity, but the end result today is not too much cost, but too much procurement competition.

Of course surplus capacity produces too high an industry cost structure with too many overheads handling too little livestock. But the main problem for the industry as a whole is the volatility of farmer returns, when seasons swing wildly between grass and drought driven market conditions.

The TSR proposal, rejected by the industry 28 years ago, could have solved the industry’s capacity problems then, but it has some fish-hooks for the meat industry of today. PCEK also noted it had no mandate to propose solutions for the weakness of New Zealand’s international meat marketing. However it did note the two key challenges for the industry: to reduce the cost of delivery to its markets and develop products to satisfy changing consumer tastes.

A reading of the PCEK report shows the strategy’s main objective was to facilitate the reduction in the number of plants around the country. It was a plant specific rather than company-focused strategy which was designed to allow the closure of inefficient plants, financed by the sale of slaughter rights equivalent to the market share of each plant.

Although not explicitly stated in the report, the expectation was for a particular company to decide to sell its slaughter rights for a plant to a competitor. Although PCEK envisaged TSR transfer between plants in the same ownership, this already happens as a normal part of business decision making as shown by Alliance’s decision to close its Mataura sheep chain.

It is less clear how the TSR model would work under today’s very different farming environment and industry structure of multiple plant companies operating two or three shifts, supplemented by efficient single and two plant competitors. The livestock population has decreased and changed considerably since 1985. The biggest changes have been the massive reduction in sheep and lamb volumes and the increase in dairy farming, particularly in the bottom half of the South Island.

The attraction of tradable slaughter rights was its potential to minimise the exit costs for an individual company which would receive a sum of money from the purchaser equivalent to the market share processed through the plant in question. The retired plant and stockyards would then be demolished. The calculated TSR rate would desirably cover the costs of asset writeoff, redundancy and remediation for the vendor, while providing an economic return for the buyer.

After my initial enthusiasm for the concept of TSRs, I now struggle to see how it can be modified to suit the current industry problems. I understand the meat company group has considered among other things how TSRs could provide a solution to the issues of volatile prices, but have no knowledge of its conclusions.

In contrast to the situation in 1985, the meat industry is now efficient and it has very good international marketing networks; farmers generally receive a price for their stock which reflects market conditions, always recognising there is more volatility than is ideal. The exchange rate and international trading conditions are more important factors than the structure of the industry. Therefore overall improvements are more likely to be at the margins than the outcome of fundamental restructuring.

The MIE group’s five point wishlist consists of three structural items – one company with 80% of the stock, government backing for the restructure and farmer responsibility for restructuring costs with help from the banks – but solving the real problem can only come from achieving the other two items on the list, change in farmer supply culture combined with transparency and equality of procurement prices.

If the last two don’t change, it is likely the industry would revert to the same state in a few years. This is the hardest part, but it rests entirely in farmers’ hands. If all farmers refuse to deal on the spot market or to send stock to a company that applies differential pricing, the problem would go away.

It isn’t necessary for farmers to sign a contract or commit to fixed pricing; instead they should have a frank discussion with one or more processors, negotiate and agree mutual expectations of the relationship which both parties would stick to. Both parties must be prepared to terminate the relationship in case of default.

This won’t happen quickly, but the sooner the process starts the better.

For farmers they provide certainty, but often it’s only the certainty they could have done better by selling on the spot market which they only find out when it’s too late to change. Equally the meat company has to take a punt on what the market price will be when the livestock is available or able to be matched to contracts it must fill. There are also times when the farmer commits to supplying to specifications which seasonal conditions make it difficult to achieve.

The big challenge for the company is to be able to calculate several months in advance the value of all parts of the carcase which will inevitably be sold into many different markets. The easiest time to do the calculation is when there is a specific supply contract for a defined and limited period, like the UK Christmas lamb market. Nevertheless their supply contract is only for certain high value cuts and as a result the processor has to estimate what the rest of the animal will be worth.

However early spring is the hardest time for the farmer to get the lambs up to the required weight range in time to meet the shipping schedules which normally finish around the first week of November. The pre Christmas contracts always offer the best prices, so provided the season is normal, farmers who know the productive capability of their flock and farming country shouldn’t have too much problem complying with the terms of the contract.

There are also winter supply contracts available which require a change in farming practices and involve additional costs. But there is not really any call for a contract through the peak of the season when supply is plentiful and it’s often when a meat company aims to make some money.

Therefore amid all the mud slinging and hand wringing about the state of the red meat sector, it is not easy to see a solution that will work either every year or even for a whole season. Volatility is inevitable in a soft commodity market, especially when 90% of the product is sold overseas to a range of different markets.

The exchange rate, whatever some politicians would like to claim, cannot be influenced by action by the Reserve Bank Governor. New Zealand is so small that our dollar is like a kayak in a hurricane on the ocean. It is viewed as a safe haven because our economy is performing better than many of our trading partners in spite of relatively high debt levels and a trade deficit. That could always change.

Red meat prices would be a lot better in NZ dollar terms if the world didn’t rate our economy and our currency was worth what it has been historically. But the price of a lower exchange rate would be correspondingly higher prices of imported goods, including oil, electronics, cars and a whole range of capital items.

The big differences between meat and dairy are world demand for dairy products which appeal to the mass market, increasingly so in Asia, and the comparatively simple range of dairy products. In contrast red meat has an enormously complex product range which must be disaggregated in the processing plant before they can be sold onto one or other of the global markets available for a particular product type.

I am not trying to suggest that the meat industry can’t do better for farmers, but it’s not easy to provide an answer to farmer expectations at all times, especially without certainty of supply. I am still certain that the best sort of relationship between farmer and meat company is one built on mutual trust.

This requires commitment from both parties: the farmer commits to supply a proportion of the livestock to one company to a delivery schedule and specification in return for some guarantees; the company promises to offer a price, whether contract or spot, which is at least as good as any other price offered to any other supplier for stock of similar specification and delivery timing. In case of capacity constraints, as in a drought year, the farmer who has committed to a supply programme gets precedence over any other category of suppliers.

The Meat Industry Excellence Group should focus on getting buy-in to just two of the items on its wishlist: a change in farmer supply culture from current model of chasing the extra money and transparent and equal treatment by the meat companies. Fixing those two would do wonders for increasing the level of trust between the parties, infinitely more than forming a company with 80% of industry throughput or trying to achieve farmer ownership of the whole industry.

I believe MIE can make some real progress if it acts as a mediator between processors and exporters on the one hand and farmers on the other. If it tries to achieve the impossible, the parties will retreat into their respective corners and a good opportunity will have been lost, possibly for good.

Although this doesn’t have much relevance to business or agriculture, Parekura was a son of the East Coast where it’s hard to get away from matters rural.

My own experience of him was over a relatively brief period during the first few months of 1998 when I had the dubious pleasure of leading the process of integrating (merging) three government departments to form WINZ. The big two were Income Support (remember Christine Rankin), part of the Ministry of Social Welfare, and the Employment Service, part of the Department of Labour.

Then there was the minnow which was the Community Employment Group, headed by Parekura. CEG was in a sense an orphan, having no offices outside Wellington, but operating out the labour Department’s Head Office. The unit consisted of a series of Government funded programmes across the country specifically set up to employ Maori or PacificIsland youth. But what made it so impressive was the enthusiasm and passion that Parekura brought to his work which he absolutely believed in.

He saw it as his responsibility to take me to see as many of these programmes as possible, given my time constraints trying to work through all the issues of merging two separate departments that didn’t like each other. We travelled to Napier, Christchurch and Auckland visiting various work programmes, as well as the Executive Council of Ngati Kahugnunu and the Wapareira Trust.

I spent quite a bit of time with Parekura on these trips, as well as occasionally in Wellington at the Green Parrot and other restaurants. I liked and respected him enormously – he cared about his people, was passionate about improving their lot, and he also genuinely liked people in general.

He was determined to convince me of the value of his small business unit and he succeeded to the extent that my final report, before Christine Rankin took over as Chief Executive of the new department, recommended leaving CEG intact. Parekura had convinced me of the value that his unit was contributing to the future of young Maori and Pacific Islanders, while I also thought it made good sense for the National Government at the time.

We never talked politics, so I never really knew whether he was Labour or National, but of course National policy at the time was all about mainstream solutions for all and CEG was closed shortly afterwards. Parekura was an obvious choice to represent Labour at the 1999 election with his amazing network of contacts throughout Maoridom and an even more logical choice as Minister of Maori Affairs.

Although he didn’t have much to do with business in the formal sense, as opposed to the public service, Parekura provided an object lesson in how to network and get on with people, while ensuring that things got done. He had the respect of everybody who knew him and I was privileged to work with him, albeit only for a short period.

Goodbye Chief!

Alliance and Silver Fern Farms were both represented and the respective chairmen, Owen Poole and EoinGarden, spoke in support of the group’s aims. Poole told the meeting the industry was working constructively to develop an improved model which was simpler than MIE’s plan and it was important to ensure the two plans were complementary.

He said the industry’s plan should provide a platform for further reform and a decision on whether to go ahead could be expected within two months. While both cooperatives are willing to turn up to the MIE meetings and commit their support, ANZCO and AFFCO’s position is not clear, so it will be interesting to see what sort of industry plan emerges from the discussions.

Garden reiterated the determination to reward farmer loyalty, but said 100% commitment had to be the bottom line, because commitment was bankable. Companies could be transparent if they had commitment.

This is where I see the real danger to the success of the campaign, because there is nothing to compel either total farmer commitment to their chosen processor or the processor’s absolute transparency on prices paid to suppliers. The obvious risks are that only a proportion of supply will be 100% committed, as is the case at present, while meat processors will find themselves seriously disadvantaged if they don’t compete for livestock to fill a shortfall.

The committed farmers may only represent less than half the sheep and beef farmers in the country; after all the meetings will not attract more than a quarter of them at best, so it’s quite possible there is still a majority out there that prefers to play the field. This majority will quite correctly say none of the companies has ever stuck consistently to the principle of rewarding loyal suppliers as opposed to paying higher procurement prices to spot market suppliers or traders.

Mike Petersen, Chairman of Beef & Lamb New Zealand, has picked up on my piece on interest.co.nz in late March which raised the question of Tradable Slaughter Rights (TSR), first recommended in 1985 by Pappas Carter. His April Chairman’s Update has gone unreservedly for this concept as the answer to the industry’s problems because, as he writes, “this proposal delivers meaningful change and – importantly – the behavioural change required to get this industry functioning better for all participants.”

My understanding is that the meat companies involved in discussions about a new industry model have certainly considered the TSR concept, although there will undoubtedly be some variation to the Pappas Carter model. TSRs only address the question of processing capacity, not the issues of market behaviour and seasonal supply commitments, but they would provide both some breathing space for the industry and a platform for a new model to emerge.

In the meantime livestock numbers would be allowed to find their appropriate level and companies could assess their appetite for continuing as they are or deciding they would like to expand or shrink their business.

The first step is for farmers and companies to develop complementary strategies they can both live with, so that they can learn mutual trust. Only then will they be able to move forward together instead of blaming each other for their problems.

The statement that there are three kinds of lie – lies, damned lies and statistics – is often attributed to Benjamin Disraeli, 19^th century British Prime Minister, but it was popularised by Mark Twain. Students of two of this country’s best known (and generally most profitable) agricultural commodities may find it hard to believe, but you can’t really argue with the facts.

In 1991 soon after I started my agricultural career in the stock and station industry before moving to the meat industry two years later, the price of lamb hit a low point of $14 a lamb; mutton was even worse, being down around $4 a ewe at the meat plant. In contrast the 1991 dairy payout was $3.40 per kilo of milk solids.

For the last three years the price of lamb has averaged $105, 7.5 times the low point of 1991, while in contrast the dairy payout has averaged $6.43 per kilo, less than twice the price 22 years ago. Now of course you can argue with some of the conclusions which this comparison allows – for example you could take a different base year when the lamb price was higher – but it is still true that lamb and mutton have been more profitable on average than dairy.

There are other factors to consider in a sheep farming enterprise like the price of wool, returns from lamb pelts and by products, and the premium positioning of most of the products from sheep and lambs (for example high priced meat cuts, woollen carpets and clothing, high quality leather goods).

Much more than dairy and beef, at least for the fast food trade, lamb is a premium product which is dependent on consumer spending patterns. Prime beef and venison are the two other meat products which have a similar profile to lamb. Nobody can argue that the global markets for high priced commodities have been unaffected by the recession of the last few years.

The price comparisons all reflect the exchange rate which has strengthened dramatically against our main trading partners which makes it even more difficult to achieve price increases. For instance in 1991 the US$ was 60 cents to NZ$1 (84.5 today) and the pound was about 30p (55 p today), so the NZ dollar costs 41% more in US dollars and 83% more in sterling terms.

None of this will necessarily change farmers’ views that the meat industry is a cot case which can only be rescued by some yet to be determined intervention that may actually be worse than the illness it is attempting to cure. But I am somewhat puzzled by the bad rap the meat industry always seems to get when it has actually done a good job of producing products that the market is, as a rule, willing to pay a premium price for.

I think the answer to this conundrum is a combination of several factors – communication, behaviour, expectations, and volatility.

The meat processors and exporters have not been good at communicating what they need the farmer to supply, when they need it and to what specifications. Yes, there are contracts available which specify certain weights, grades, supply schedules and timing. But their reluctant uptake by suppliers suggests suspicion that they may be ripped off, unless the price is uneconomically high. Companies must get better at communicating and living up to what they promise.

Behaviour must improve on both sides of the fence. Meat companies must honour contractual arrangements and not pay a premium above the contract price for spot market supply; they should also stop using third parties and traders. Equally farmers have to honour their commitments, once they have made them.

Farmers’ expectations have a tendency to be unrealistic. When the Federated Farmers target of $150 a lamb was reached, there was an assumption this was a sustainable price which farmers fully deserved. Yet when, as was inevitable, our main markets put the shutters up and refused to pay the price, meat exporters get caned for dropping the price at the farm gate and shifting inventory at reduced price levels to get cash flow.

This year’s drought has also pushed stock into the plants earlier than usual and farmers get upset that the price drops, even though the livestock is worth a whole lot less. It also seems to me that the meat industry gets the blame when farmers pay more than they should for store stock and can’t make their margin on it.

The final factor is volatility which is a well known feature of commodity markets. If farmers can’t cope with volatility from one year to another, they shouldn’t be in the agricultural sector. They should get into something safe like local government.

So some people may argue with the facts, although not with much success because it’s hard to argue with statistics, and others may argue even more with some of my conclusions. But I shall look forward to the debate.

The next meeting organised by MIE will be held in Christchurch this Friday, but without Gerry Eckhoff who chaired the Gore meeting but has resigned over a disagreement with the strategy. Having said on the National programme the morning after the meeting that the new system and structure could be in place by next season at the beginning of October, he is now saying this is completely unrealistic. I told you so, Gerry!

His main problem with his former committee members is that they insist on engaging with the meat companies before they have a mandate from farmers throughout the country. Meanwhile ex Meat Board director John McCarthy also says he doesn’t agree with MIE’s approach, although he broadly shares their objectives. However he is organising a NorthIsland farmer meeting in Feilding on 26 April which Gerry Eckhoff will chair.

McCarthy’s view is that they shouldn’t be chatting amicably to the meat companies who symbolise the present system which has let farmers down.

With all due respect to McCarthy and Eckhoff, I can’t see how on earth they think they can change the system without the cooperation and assistance of the meat companies. It won’t make a blind bit of difference to gain a mandate from one or even several meetings in the NorthIsland, if they don’t find out what the companies are thinking.

The other thing that beggars belief is that these two champions of the downtrodden peasant farmers actually believe it’s all the fault of the meat companies. Haven’t they read the Red Meat Sector Strategy? This clearly lays the responsibility for the solutions at the feet of all the participants in the industry.

To refresh the memory, the recommendations of the RMSS were to achieve coordinated in market behaviour, aligned procurement and sector best practice. All these require cooperation between farmer and processor/exporter. Without guaranteed timing and quality of livestock supply, the exporters will have trouble meeting customer demands and will inevitably have product surpluses or shortfalls. Procurement alignment could be solved by contractual supply agreements; while best practice would enable farmers to supply to specification most of the time, provided they know what the market wants.

None of this is rocket science, but a drought year like this one makes it difficult to achieve a perfect supply pattern. However a mutual relationship of trust between farmer and meat company would make it much easier to manage. Conversely a season with plenty of grass like last year puts the farmer in the driving seat which explains why the lamb prices stayed too high for too long.

It seems that farmers decided last year’s lamb prices were what they needed and deserved to be paid, despite the fact the meat companies lost more than $200 million. However this year’s prices are completely uneconomic and the industry’s structure is to blame. There’s a case for arguing that the meat companies should have kept the price down last year, so they could pay a higher price this year. But the Commerce Commission might have had something to say about that and, of course, nobody knew this would be a drought year.

My reading of what MIE is seeking is that it understands the realities of the industry and would like to work with the meat companies to develop a workable strategy for future improvements. Messrs McCarthy and Eckhoff appear more idealistic and reckon they can reach Utopia by demanding concessions from the companies. I wish them luck.

But after seeing the numbers from Alliance and Silver Fern Farms in December, it was possible ANZCO’s could have been quite a bit worse. That they weren’t appears to have been the combination of strength in beef and some good management decisions which mitigated the worst effects of a very difficult year.

ANZCO’s business is split approximately 65% beef and 35% sheepmeat and, while lamb was the major cause of industry losses last financial year, beef was quite profitable. Impressively from the management perspective, cash flow was positive to the tune of $35 million, compared with a negative cash flow of $22 million the previous year. This was the result of good control of inventory and receivables, because the company recognised early that cash was doubly important in a year of tight margins and procurement competition.

ANZCO’s total borrowings consequently came down by nearly $30 million which saw the debt to equity ratio improve slightly. Its share of EU sheepmeat quota also increased for the second year in a row, indicating an increase in the company’s overall share of exports, although the meat companies are not currently filling their quota entitlement. This is due to the reduced lamb kill in recent years and market diversification to non-traditional markets for sheepmeat.

China has emerged as New Zealand’s second biggest sheepmeat market, although the volume percentage shipped there exceeds its value by a considerable margin. After several years when China was considered nothing but a disposal market for low value cuts, exports to that market have considerably lifted in value and demand from high end restaurants. With the global financial crisis still depressing European demand, the industry’s ability to diversify to China is a blessing.

Although Alliance has the biggest share of sheepmeat sales to China, ANZCO has very good Asian connections, particularly in Japan and Korea. Its majority shareholder is Japanese meat company Itoham which is also the main customer for the value added products from ANZCO’s Gourmet Foods subsidiary.

The current financial year is likely to be very profitable for all the meat companies which inevitably perform well in a drought, because both throughput and procurement prices are favourable. It should enable them all to restore the strength of their balance sheets after the caning they took last year, which makes ANZCO’s performance all the more creditable.

While a pre-tax loss of $25.6 million isn’t exactly a cause for celebration, the company must have been cheered to be able to reduce debt and inventory levels in such a difficult year. This stands it in good stead to take full advantage of more favourable conditions this year.

However the most critical issues facing all the meat companies are the serious effects of the drought on future years’ processing volumes and the increasingly strong demands from farmers for industry rationalisation. While many farmers will reserve their right to continue to play the spot market, there will be increasingly strident calls for two way commitment between farmer and processor. How the companies respond, whether individually or collectively, will be a big challenge.

Key aspects of the Excellence Committee’s plan are one company controlling 80% of processing and marketing, a change in farmer supply culture, procurement equality and transparency, farmers to fund the restructure with assistance from the banks, and government backing.

This wish list may sound completely logical and comparatively simple, but it contains a number of assumptions, all of them very hard to achieve and some pretty unrealistic. In the first flush of optimism after the meeting Gerry Eckhoff suggested the new structure could be in place by the start of next season in October. That is patently ridiculous because a wish list doesn’t equate to a workable strategy and business plan.

All components of the plan will have to be rigorously debated and tested in the next few weeks, while the Committee conducts its road show across the country. Only when there is a national mandate for a plan which has the full support of farmers as well as meat companies will it be worth asking the government to give its backing for regulatory change. This will all take time.

There is an urgent need to take advantage of the groundswell of farmer opinion, as well as capitalising on the discussions behind the scenes by the meat companies which Owen Poole referred to at the Gore meeting. But any plan must pass the sanity test and I can see plenty of reasons why this one doesn’t do that.

The concept of one company with 80% of processing capacity and marketing sounds like a desire for the Fonterra model. But, as ANZCO Chairman Graeme Harrison says, there is one big difference – the Dairy Board handled virtually all dairy product marketing, so it was just a matter of achieving a merger of processing facilities in which only Kiwi and NZDG were involved after the spate of mergers and takeovers during the previous decade.

The meat industry which consists of cooperatives, privately owned large companies and single plant operators, all with their own sales and marketing arms, is not such an easy candidate for rationalisation. The thought farmers should fund the restructure with help from the banks is not realistic. They would have to compensate the shareholders of the privately owned companies for their assets, as well as carrying the costs of rationalising their cooperatives. Owen Poole has estimated the cost at around $600 million.

The banks won’t leap at that proposal with any alacrity, especially as it would imply willingness to write down the overvalued assets in the industry. It is a truism to say a meat plant when closed is only worth the salvage value of the assets and the land minus the cost of remediation. Valuation as a going concern is all that supports current plant valuations on the companies’ books.

A sea change in farmer culture, combined with transparency of procurement prices, won’t occur automatically. This will only happen, if plant capacity and industry structure have been rationalised to the point where all companies are efficient with their own points of differentiation.

This leaves government backing. Apart from needing to see a plan which has the demonstrable support of the industry’s participants, the government will have to make sure it does not contravene any inter-governmental agreements or world trade negotiations concerning market access, free trade agreements and monopoly legislation. This will be time-consuming, especially if legislative change is required which will have to get through parliament.

Farmers will say there must be a solution to the present situation. However one must realise this is almost entirely sheepmeat related and the direct consequence of the strong NZ dollar, coupled with price resistance in our main markets in straitened economic times to the highest value parts of the animal.

Interestingly a viable solution was proposed in 1985 by Pappas Carter in a report on Meat Industry Cost Competitiveness commissioned by the Meat Industry Council. This was the concept of tradable killing rights which would encourage less efficient plants or companies to exit the industry. It would remain in place for a fixed period, minimum five and maximum ten years. There would presumably have to be a moratorium on new plant capacity for the duration of the scheme.

Closure would be compensated by payment for killing rights, the cost of which would be set below the penalty applied for killing more than the purchaser’s entitlement. Any plant or company which elected to close and sell its tradable rights would be required to close permanently. However the penalties would not be so high as to prevent companies from exceeding their entitlement, therefore ensuring continued competition for livestock.

Unfortunately there is one remaining factor to consider. If the national and regional plant configuration is efficient, there won’t be enough capacity to cope with a drought like this year.

It is up to farmers to decide what they want!

There were two key recommendations, the main one being the introduction of a tradable killing rights scheme to encourage the stronger competitors to take volume from the weaker companies or plants which would then close; the second recommendation was to abolish averaging of transportation schemes and to reduce meat inspection costs through structural and policy changes.

Even today, 28 years after it was published, the first of these proposed solutions still appears to be a logical means of preventing the never-ending expansion of processing capacity and consequent livestock procurement competition. After all, nothing else in the meantime has been successful, but it wasn’t given the chance to see if it worked.

According to Meat Acts written in the late 90s by Mick Calder and Janet Tyson, the report was damned with faint praise by the industry, having, in the opinion of the processors and exporters, come up with nothing significantly new. Considering what happened in the early 90s, ironically Trevor Gibson, Chairman of the Meat Industry Association or Freezing Companies’ Association as it then was, stated that there were other solutions to the problems than those recommended by the consultants.

The Meat Industry Council was a short lived body set up at the behest of the Lange’s Labour Government to oversee the efforts of the Meat Board representing farmers and MIA, representing processors and exporters in both North and SouthIslands. It only lasted less than two years, no doubt discouraged by the lukewarm reception of the report it had commissioned.

In the late 80s several things happened which consolidated plant and company ownership in fewer hands, but achieved none of the industry stability envisaged by Pappas Carter’s report. The consolidation process weakened the surviving companies because much of it was debt funded.

Among other things, PPCS took over Southland Frozen Meats, Advanced Meats started the attack on Hawkes Bay Farmers Meat Company, AFFCO took over R&W Hellaby, Goodman Fielder Wattie moved in on Waitaki Meats; it wasn’t long before the banks got involved in encouraging Alliance and AFFCO to take over the South and North Island Waitaki plants, nearly sending both companies into receivership, because GFW wanted out. In AFFCO’s case the farmers’ equity was worth nothing and the banks had to write off a substantial amount of debt before the company was listed on the stock exchange in 1994.

Pappas Carter’s argument was that the tradable killing rights scheme was the “most effective feasible way of meeting the three essential criteria for any scheme to reduce costs in export processing: that plant utilisation should be raised industry-wide; that competitive behaviour among plants should be strongly encouraged; and that minimal budgetary costs should be imposed on the New Zealand people.”

The report outlined four alternative solutions, none of which was accorded much merit:

               i.            Rely on market forces to achieve closures and efficiency improvements;

             ii.            Draw up a list for closure and enforce it;

            iii.            Control and reduce killing charges which would force weaker plants to close;

            iv.            Finance voluntary exit, either by industry levy or government subsidy.

The consultants considered forced closure to be the least undesirable of these alternatives.

What has actually been in operation since 1985 is the first alternative of reliance on market forces. As a result farmers are not happy with the current state of the industry, although there is no real likelihood that any change will solve the problems of the exchange rate or market prices.

However if the Meat Industry Excellence Committee is determined to achieve changes in farmer culture, procurement transparency, industry structure, as well as gaining government backing, it will have to develop a plan.

A good starting point would be to understand the concept of tradable killing rights which may ultimately offer the best solution. However the meat processors and exporters may be no more favourably disposed to this solution than they were 28 years ago. Therefore it would be sensible to initiate discussions with the MIA as soon as there is national farmer agreement on the concept.

Government support will be much easier to obtain if the whole sector is in favour of a particular course of action, especially if it requires relatively little financial input from the tax payer. At the same time the banks will be happier to accept a managed process that has industry support.

At last farmers have the chance to have a positive say in the future of the meat industry instead of feeling alienated from what happens outside the farm gate.

At a meeting in Gore on Monday up to 1000 farmers from Southland and Otago, and as far away as HawkesBay 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.