Not sure it’s realistic for farmers to own the meat industry

There is a lot of noise about the dysfunctional or broken meat industry accompanied by the suggestion it would be solved if farmers owned a bigger slice of it.


The Meat Industry Excellence group has been touring the country since earlier this year, holding farmer meetings and trying to drum up support for fixing the industry’s problems. In total some 3,000 farmers attended meetings from Gore to Gisborne which, even if every attendee was firmly in support, only represents a maximum of 20% of sheep and beef farmers.


Unfortunately local elections aren’t the only democratic process that suffers from apathy.


However well intentioned its spokespeople are, it’s not certain MIE stands for all farmers in expressing dissatisfaction with the way the industry has performed or presents a generally acceptable solution to the problem. The wool industry’s efforts to get sheep farmers to commit money to a shareholding in Wools of New Zealand should indicate how hard it is to get shareholders to invest capital in a new venture where success is far from certain.


MIE’s Mission Statement is to “Reform the NZ meat industry to become the world’s premium supplier of red meat through a united processing and marketing structure controlled by suppliers.” The objectives which are intended to turn the Mission into reality include six optimistic items from the group’s wishlist, most notable among them a farmer controlled entity with sufficient critical mass to optimise market returns, total transparency for all suppliers, and shared responsibility by all stakeholders for restructuring the industry.


All the farmers have to do, apart from fronting up with some capital, is supply livestock to specification.


The four main meat companies are apparently still discussing what they are willing or able to do to meet MIE’s requests. Both Alliance Chairman Owen Poole and ANZCO Chairman Graeme Harrison have been reported as being supportive of the group’s objectives at the Federated Farmers AGM. But neither was exactly rushing to make a firm commitment when I spoke to them at the Red Meat Sector conference less than a week later. I can’t see how they can.


MIE’s Mission presupposes that a united (i.e. single) processing and marketing structure controlled by suppliers is actually best for the meat industry, while its objectives suggest that all stakeholders (including banks, company owners and all suppliers) will agree to share the responsibility (i.e. bear the cost) of restructuring the industry.


Unfortunately all the evidence points to the fact that single desk marketing doesn’t suit the meat industry, because of the vast number of different products and markets which no single company can service. An enormous amount of expertise and overseas contacts resides in all the exporting companies, both big and small. It would be impossible to concentrate all this expertise under one banner.


Processing innovation has often come about as a consequence of new investment in the sector, while older companies have sometimes found it difficult to keep up with the many demands of maintenance, renovation and compliance.


An example of innovation is Waikato based Greenlea Meats which recently celebrated 20 years in the meat industry. Their two plants are basically full on both shifts all year round. This year they will process more than 200,000 cattle and in the past five years they have invested more than $45 million in their plants.


Owned by the Egan family Greenlea is not one of the big four meat companies, but instead it is part of a group of smaller players who do not seem to share the view that the meat industry is ‘broken and dysfunctional’. Nor do they regard collaboration with farmers as an issue and in fact they get plenty of support. Greenlea’s Managing Director Tony Egan argues that this is due to mutual respect, saying “they see us doing our job well and give us their support. It’s as simple as that”.


At the Red Meat Sector conference, an East Coast farmer, Dan Jex-Blake, challenged me to come up with a strategy and structure that would suit farmers without necessarily having to take into account what is best for processors. Unfortunately that’s not possible, because of the capital and ownership structure of the processors.


The banks have hundreds of millions tied up in debt and would be very reluctant to put their faith in a new farmer owned company, while writing off company debt as well as carrying a whole swag of on farm debt.


The most constructive solution to meet the respective objectives of MIE group, farmers and banks is the obvious one that has been looked already and found wanting: merge Alliance and Silver Fern Farms, rationalise the plants to reflect the anticipated livestock volumes, and combine the New   Zealand and overseas sales and marketing units.


But MIE group has no directors on either Board, so trying to attract attention from outside the tent won’t achieve very much.


Since farmers generally and MIE group in particular think that meat companies sub-optimise returns to farmers from the market place, my next bright idea is for MIE group to set up a farmer owned commercial company which would perform four core functions:


  1. negotiate      toll processing, storage and distribution arrangements with preferred      processors and service providers in both islands (thus avoiding capital      investment in processing facilities);
  2. coordinate      supply of livestock to specification of weight, grade and timing;
  3. perform      sales and marketing to all main markets
  4. pay      suppliers for their livestock by a combination of progress, second and      final (market) payments.


This concept would require shareholders’ equity and bank debt to fund working capital to cover administration, accounting, processing, sales, marketing and distribution, as well as collection of receivables and payments to suppliers.


Unless there is a large group of farmers prepared to take on all this responsibility, the idea is a non-starter.


I agree the volatility of the meat industry with a good year being followed by a disastrous one is not good for farmers or the meat companies. However the exchange rate and international market prices for lamb, mutton, beef, wool, leather, offal, casings and other co-products will inevitably fluctuate from year to year.


Meat processors and exporters may undercut each other when inventories are high, continue to pay more for livestock for longer than they should; and capacity may be more than is needed in a normal season. But unless farmers are prepared to commit to a contract with their processor of choice for one or more seasons, this state of affairs will persist.


Under this scenario rationalisation will occur when one company or another finds that it cannot continue and sinks under its weight of debt.


If MIE group doesn’t get enough support from suppliers, processors or the banks for its plans, it may have to refine its ambitions to what is achievable and become an agent for meat industry change.


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One Response to “Not sure it’s realistic for farmers to own the meat industry”

  1. Rural round-up | Homepaddock Says:

    […] Not sure it’s realistic for farmers to own the meat industry – Allan Barber: […]

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