What is right size is $64,000 question

The interim profits announced by PPCS and AFFCO, the only two meat companies required to publish results at the half year, represent a significant improvement on last year, contrasting strongly with farmers’ returns.

 

This underlines the inevitable reality of the meat industry which can be summarised in a nutshell: when there’s plenty of grass, farmers have choice and can feed their livestock until they’re ready to go to the works or saleyards, whichever is paying the best money, but in drought conditions most can’t get stock to the works fast enough, regardless of the price.

 

This season has been cruel to sheep and beef farmers and, apart from the payout, not that kind to dairy farmers. Hence the big gain from the two processors, in each case achieving a turnaround from pre-tax losses to profits to the tune of $34 million by PPCS and $31.5 million by AFFCO. There are clearly a number of issues which have contributed to the lift in performance, but volume throughput and livestock costs are by far the most important factors.

 

The impact of drought has meant both a longer seasonal peak, particularly for sheep and cull cows, and additional volume from the slaughter of capital stock. Therefore these are animals which would not normally have been sent for slaughter and certainly won’t be able to perform their intended purpose of adding to the future livestock population. The processing performance improvement has absolutely nothing to do with better marketing which is what the industry so desperately needs.

 

Comments last week by Hamish Gow, an expat New Zealander who is now Associate Professor of International Food Marketing at Michigan State University, suggested we might have thrown the baby out with the bath water when we dismantled the producer board marketing bodies. Ironically the Meat Board, after an unsuccessful flirtation with acquisition about thirty years ago, wasn’t a good example.

 

But Professor Gow made the valid point farmers should think very carefully before rushing to invest their marginal dollars (those available for discretionary investment over and above their own core business) in processing plants. He asked what the point would be in owning bricks and mortar when their real need was to exert influence at the consumer end of the value chain.

 

So when I see the MIAG group drumming up support from North Island farmers to get behind the campaign to persuade the boards of PPCS and Alliance to merge, I wonder if they’re really addressing the right problem. Then I see the debate around the role of MIAG candidates elected to the boards of the two companies and it looks as though those newly elected directors may be realising it’s not as simple as it looks from the outside, which of course is not what MIAG wants to hear. Farmers must get their heads round the unpalatable fact they don’t usually have the skills to run a meat company as well as their own business.

 

The difficulties experienced by sheep farmers for the last couple of seasons would not be solved by merging and rationalising processing capacity. As demonstrated by meat company results for this season and last, it matters not whether companies are farmer or investor owned – they must make money when they can, because it’s so easy to lose a packet when times aren’t in their favour. Co-operatives must either behave like any other company, maximising profits where possible while paying fairly for raw material, or they will go bust.

 

The best industry structure is one which allows competition to flourish where it leads constructively to innovation, but recognises where competition is destructive. A monopoly at either end of the chain would grow fat and lazy, which is why more than one processor and marketer is essential, let alone what the Commerce Commission and overseas authorities would say about a monopoly.

 

Right sizing makes sense, but what is the right size and which companies should do the rationalisation? I suggest farmers should stop trying to fix what they can’t and concentrate on what they can, because industry rationalisation will happen regardless of farmer attempts to get companies to merge. For instance PPCS has lost whole heaps of market share and consequently EU sheepmeat quota and US beef quota in the last two years which makes plant closures inevitable, before you even start taking falling stock numbers into account.

 

On the positive side is the new found focus on branding with Silver Fern Farms taking over from PPCS, although this will take time to produce results. An option I would like to see is a European marketing initiative like the New Zealand Lamb Company in North America and then the industry would finally be doing something which would produce worthwhile benefits for farmers.

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