No easy fix for the meat industry

The amount of hot air forecasting the imminent death of the meat industry suggests desperate hand wringing more than considered thoughts about finding a solution to what everybody agrees is a big problem. The only snag is, while the hot air purveyors seem to know exactly what the problem is and whose fault it is, their heavy breathing doesn’t produce any sensible ideas about how to fix it.

Their desperation derives from the inability of industry organisations, consultants, financiers and governments to find a solution for the last 25 years since the removal of subsidies. New Zealand now has the purest, least subsidised agricultural production in the world, but unfortunately the relative strength of our economy compared with our main markets means the exchange rate makes it harder than ever to export profitably. So the only way to fix the meat industry, according to some commentators at least, is to become more like Fonterra which is both ironic and difficult.

Ironic because Fonterra was established as a quasi monopoly by Act of Parliament, but is finding competitors increasingly nibbling at its ankles, since it must provide them with a significant number of litres to allow them to get started, while they build up their own supply base. Difficult because meat doesn’t have to be collected daily by tanker from the farm, but can be trucked wherever and whenever the farmer chooses.

These commentators ignore the complexity of meat as a product, the collapse of the wool and pelt contribution to the total price received, and the effect of the exchange rate. They also seem to think the meat industry can solve the farmers’ income problems by closing capacity and merging several processors’ operations and, if they won’t do it, Beef & Lamb should be able to lock the companies in a room and hide the key, until they reach the desired decision. Then farmers could get on with farming the way they have always done and live happily ever after. Yeah right!

Westpac was reported last week as saying farmers are efficient behind the farm gate, so the problem lies between farm and market. This is one of the myths the meat sector strategy must set about disproving, because, unless farmers start to recognise they may be part of the problem, there won’t be much progress. I understand a large percentage of sheep and beef farmers still have neither a business plan nor a budget, while I heard very recently of a large corporate sheep and beef farming enterprise with South and North Island properties which has enjoyed a very good year.

Therefore it’s perfectly possible for a business with sufficient scale, good management, systems and plans to thrive at a time when we are led to believe the industry is broken. A comparison of meat and dairy prices in the ANZ Commodity Price Index since 1986 shows a relatively small difference between them – from a base of 100, dairy returns increased to 281.5 despite substantial volatility and sheep, including wool, and beef increased with much greater consistency to 252.3 over the period.

This makes me wonder whether the industry’s problems aren’t more tied up with lack of size and management capability than with the generally perceived incompetence of the processors, exporters and marketers. It may be worth smaller farm properties looking to see how they could improve their operations by combining to produce greater economies of scale and management efficiencies.

We must also get over the constant wittering about plant closures and company mergers, as though they are either possible or desirable in the short term. The last, relatively successful capacity rationalisation was in the mid 1990s when Trial Run Holdings was set up to manage the disposal of Weddel’s assets after it went into receivership in 1994. That required agreement on how much each bank involved in funding the meat companies should write off and how the sale of assets should be managed.

Another irony is, when Weddel folded 16 years ago, AFFCO almost went into receivership and nearly didn’t become a profitable component of Talley’s operations spanning the food industry including a growing dairy investment. The reason Alliance and Silver Fern Farms haven’t even moved past first base in merger talks is the difference in the respective balance sheets and the effect of plant closures on banking arrangements. The message appears to be companies must make their own decisions about what is best for their shareholders, instead of acting in the perceived best interests of all industry stakeholders.

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Tags: AFFCO and Weddel, Alliance and Silver Fern Farms, capacity rationalisation, Meat industry restructuring