Processing changes may not mean better capacity alignment

The meat industry will see a number of processing initiatives taking effect over the next 12 months, all of them designed to create greater efficiency for their owners. They may not necessarily lead to better alignment of capacity with predicted livestock numbers for which B&LNZ Economic Service forecasts an increase from 2011 of 5.7% to 20.1 million lambs, second lowest in more than 50 years, and 1.8% more cattle, mainly cull cows.

Individual processors are intent on getting themselves fitter, with decisions focused on better configuration of their existing plants, leading to some interesting initiatives. The most notable announcements this year are Silver Fern Farms’ rebuild of Te Aroha, acquisition of Wallace’s Waitoa plant, the recent purchase of Frasertown Meats and announcement of seven day processing at Waitotara, and the closure of Alliance’s Sockburn plant at the end of the 2012 season.

According to CEO Keith Cooper, SFF’s initiatives are not about capacity increases, more about providing the right type and size of processing facilities to meet local requirements. This signals a move away from multi shift operations to which stock must be trucked long distances, provoking supplier dissatisfaction, and replacing them with small footprint local sites. To a query about the likely capacity available when Te Aroha comes on stream next year, Cooper says the plant’s cost model does not require double shifting to be economical. In his view the double shift model is becoming outdated, although I’m sure at the peak of the season Te Aroha will be capable of double shifts, if needed.

The purchase of Waitoa, not far from Te Aroha, and Frasertown are strategically interesting, because these plants will provide SFF with greater presence at local level to attract new suppliers. However there does not appear to be any intention to change staff numbers or cost structures in the early stages.

In contrast the announced closure of Sockburn is entirely driven by efficiency improvements through fewer Alliance sites with more production capacity being created at Mataura and Pukeuri. Grant Cuff, Alliance CEO, told me this realignment of capacity was the result of a careful study of the options available which showed clearly the lower cost structure to be gained from the change. This indicates Sockburn’s closure was inevitable and begs the question why the decision took so long to reach, unless it was out of consideration for the Canterbury region.

One company that already appears to have its plant configuration well aligned with the industry’s livestock dynamics is AFFCO whose North Island plants are mostly multi species with a small footprint, far removed from the dinosaurs of less than 20 years ago. Its two South Island plants are small units designed specifically for the purpose. The company is proud of its investment in recent years, spending well in excess of its depreciation rate on building and machinery upgrades. Chairman Sam Lewis questions how long it will be possible to continue maintaining old plants on large sites as distinct from carrying out a substantial rebuild on a reduced footprint.

It may be premature to examine whether the present wave of processing capacity changes are likely to contribute to the Red Meat Sector Strategy’s (RMSS) goal of achieving informed, aligned behaviour change across the sector. But it is logical for processor decisions to be dictated by their own bottom lines and generally what is good for the processor is also good for the industry.

Keith Cooper’s press release following the purchase of Frasertown made the point about the consolidation of exporters in the international market place which resulted from the aggregation of the processing base, emphasising the “theoretical recommendations of RMSS would ultimately be driven by commercial decisions in relation to aggregation”. However aggregation of exporters and processors was specifically not an area RMSS was concerned to address and this will remain a commercial matter for meat companies.

The first report by the Sector Coordination Group strategy implementation report summarises the present state of cooperation, notably the NZ Lamb Company in North America, ovine automation involving nine companies, some smaller in market collaboration initiatives and the MIA Renderers Group research project, all of which preceded the RMSS. The future action list includes an online auction system for lower value cuts, engagement with the stock and station industry, historical cost benchmarking, transparency of market pricing signals, and leveraging of industry data.

This list alone will not deliver dramatic sector behavioural change, but hopefully it will be instrumental in building trust between participants that will assist the process. If this is combined with more consolidation, the RMSS may start to achieve its goal.

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