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Meat industry consolidation stumbled on differing strategies, uncommitted farmer suppliers

New Zealand meat companies abandoned efforts to consolidate and reduce surplus capacity last year because they lacked an agreed export strategy and farmers wouldn't commit stock to firms that closed plants, industry sources say.

The country's four biggest meat processors - farmer owned cooperatives Silver Fern Farms and Alliance Group, accounting for about half the industry, the Talley's Group family-owned Affco and ANZCO Foods, with a majority ownership held by a Japanese food company - ended talks after failing to reach agreement last year.

A proposal for competitors to share the cost of closing plants was rejected, as was a plan for each company to retain its stock volumes for a period of up to five years following a closure, so they weren't disadvantaged, according to people involved in the talks, who asked not to be named.

The fragmented industry ownership and lack of agreement about how to market New Zealand meat overseas hindered the meat companies from conforming to a model which locked in supply, especially amongst the 17 odd smaller exporters who would need to broadly agree to consolidation. Meat companies are using different strategies to market their product to the world, ranging from Silver Fern Farms' branded cuts for the supermarket shelf, to Affco's high-throughput model, making it difficult to reach consensus.

Meanwhile, farmers, who play meat companies off to get the best farmgate returns, were advised not to commit stock through long-term agreements to support meat companies who were reducing capacity, on concern it would reduce competition, the people said.

The cooperatives face tension from their farmer shareholders wanting higher farm gate prices for the stock they supply versus the longer term gains they could obtain from retaining earnings in the business to reinvest in marketing and product development, to build higher returns for the future.

New Zealand meat companies haven't significantly reduced their processing capacity even as sheep numbers fall. New Zealand sheep numbers fell below 30 million this year, from a peak of about 70 million in 1982, according to Beef + Lamb New Zealand's Economic Service.

Meat is the nation's second-largest commodity export, worth about $5.6 billion a year, behind dairy products at $15.8 billion, according to government figures.

Processors are competing for the diminishing supply, as increased throughput of livestock makes their plants more efficient. That means in times of scarce supply, farmers are paid a higher price for their livestock which bears little relationship to what the final consumer is prepared to pay as processors avoid having their plants sit idle.

Dunedin-based Silver Fern Farms, which had $2 billion of annual sales last year, will probably provide an update on a PriceWaterhouseCoopers strategic review of the business in its annual report published towards the end of this calendar year. The review, which focused on future options following the stalled industry aggregation discussions, was presented to the meat company's board in February.


Comments and questions

The banks need to show leadership on this
PPCS is just a zombie - most of the debt is current
Alliance is gun-shy
The farmers too old to care and just farm for capital gains and sell out for dairy conversion

You won't get industry co-operation in the red meat sector, comparisons to Fonterra are ludicrous. A dairy farmer has to work with other in order to sell there product, can't hold on to a vat of milk for a better price or sell early if the market is good because the cow hasn't produced it yet.
Red meat is not like that and never will be, you sell stock early in a drought or you hold when prices are low to fatten a bit longer or build your herd a bit. There is no incentives to work together and there is no evidence that doing so will actually get the farmer a better return long term. The barriers to entry are not that high so even if you did get serious consolidation it is easy for a smaller operator to start up and cherry pick the best stock with a bit of a premium.

Whose idea was it that the companies meet and agree on "restructuring"?
Why should they?
And what is wrong with a new entrant "cherry picking the best stock with a bit of a premium"?
Is that not how normal commerce works?
Fonterra is not normal..

... it is appropriate to reassess how we should react to the prospect of one of our meat companies being the subject of a takeover offer from a Chinese investor, most particularly what sort of criteria we would expect the OIO to impose on a prospective buyer to retain some control of the value chain. In the event the target actually happens to be Silver Fern Farms, its status as a modified farmer-owned cooperative and the amount of bank debt on its balance sheet are two relevant factors. If any investor tried to buy 100 percent of the company, it would be a complicated exercise, but more significantly it would risk alienating a large number of suppliers. They might take the money and run, no doubt many of them to the south. Therefore a wise investor, Chinese or otherwise, would attempt to find an investment structure which preserves the loyalty of the existing shareholder suppliers and delivers value to all parties. An investment also needs to offer a return ... (Allan Barber)

The lack of agreement was entirely predictable, this is an industry limited and defined by patch protection and individual balance sheet agendas. Herding cats is easier.this excess capacity is costing the industry in excess of $200million year on year and continues to be the biggest roadblock to achieving sector opportunity. Air NZ faced a similar problem, bums on seats-lambs on chains,they got rid of the boeings and once they had addressed their capacity issues headed back into the red. Sometimes in business in order to upsize you have to right size . The second reason is the lack of any relationship value between 20-30%of farmer suppliers and processors, so the procurement platform is a dogs breakfast which in turn results in banker jitters and short term marketing focus. All rather stupid as we produce some of the best protein in the world and yet the industry continues to shrink its way to success.(oblivion)