A meaty is­sue



There is broad agree­ment that re­form in the meat pro­cess­ing in­dus­try is nec­es­sary. How­ever, there is no in­dus­try con­sen­sus as to how it should oc­cur.

The fun­da­men­tal is­sue is that the red meat in­dus­try has been in de­cline, with the main prob­lems con­cen­trated in the sheep in­dus­try. It is dif­fi­cult to be prof­itable in a meat pro­cess­ing in­dus­try which has over-ca­pac­ity com­bined with strong com­pe­ti­tion.

In terms of struc­ture, the meat pro­cess­ing and air­line in­dus­tries have key fea­tures in com­mon. Both have high fixed costs and low mar­ginal costs. The lat­ter means that each ad­di­tional unit of through­put has low ad­di­tional cost rel­a­tive to the over­all cost of op­er­a­tion.

In the avi­a­tion in­dus­try, where two or more air­lines are ser­vic­ing the same route there tends to be fierce price com­pe­ti­tion to get pas­sen­gers on seats. This can work well for pas­sen­gers, and even for the air­lines, as long as the in­dus­try is grow­ing. But when times are tough and the mar­ket is con­tract­ing in size, then the com­pe­ti­tion be­comes de­struc­tive. In those con­di­tions, the best way to make a small for­tune is to start with a big for­tune. The long-term his­tory of the air­line in­dus­try is of a few suc­cesses and many fail­ures, but there al­ways seems to be some­one new will­ing to step up to the plate.

In the meat in­dus­try it is some­what sim­i­lar. Our sheep in­dus­try has been in de­cline for more than 30 years. Pro­duc­tiv­ity gains both on the farm and in the pro­cess­ing works have been enor­mous, but the shift to other land uses, and to dairy in par­tic­u­lar, has made it im­pos­si­ble for most processors to pros­per. There is too much ca­pac­ity, and this leads to de­struc­tive com­pe­ti­tion.

Over the years, as one com­pany fails, there have al­ways been oth­ers will­ing to step up in the be­lief they could do bet­ter. The last big crash was of For­tex in 1994. Since then, the ma­jor com­pa­nies have strug­gled on, with some plant clo­sures, one big amal­ga­ma­tion, and on­go­ing cy­cles of staff re­dun­dan­cies.

Much of the cur­rent over­ca­pac­ity is in the South Is­land and this is where both of the meat co­op­er­a­tives are based. In­ver­cargill-based Al­liance Meat Co-op­er­a­tive has about 30 per cent of the na­tional sheep meat mar­ket, and Dunedin-based Sil­ver Fern Farms has about 25 per cent na­tional share. How­ever, Sil­ver Fern Farms is hugely dom­i­nant in beef pro­cess­ing, and is over­all New Zealand’s big­gest red meat pro­cess­ing and mar­ket­ing com­pany. If there is to be over­all in­dus­try ra­tio­nal­i­sa­tion, then the co-op­er­a­tives will be the key to this oc­cur­ring. Many be­lieve that the two co-op­er­a­tives should be com­bined. The Meat In­dus­try Ex­cel­lence (MIE) group is a na­tion­wide group of farm­ers, with some high power peo­ple in the back­ground, who are push­ing for this. They are cur­rently seek­ing to get their nom­i­nees onto the board of each com­pany.

Some six years ago there was a push by a some­what sim­i­lar group called the Meat In­dus­try Ac­tion Group (MIAG). In 2007 it man­aged to get its nom­i­nees on the board of each com­pany. How­ever, once on the boards, th­ese new di­rec­tors

re­alised that amal­ga­ma­tion was a lot more com­plex than it had ap­peared from the out­side.

Both Al­liance and Sil­ver Fern Farms have re­cently an­nounced their fi­nan­cial per­for­mance for the 2012/13 year. Al­liance has re­ported a small post-tax and postre­struc­tur­ing profit of $5.6 mil­lion and a large cash flow op­er­at­ing sur­plus of $89m. Its bal­ance sheet eq­uity has re­cov­ered this year from 51 per cent to 61 per cent of to­tal as­sets. This fol­lowed a dis­as­trous 2011/12 year with a loss of $51m. For the last four years in ag­gre­gate it has made losses of $47.9m af­ter tax and re­struc­tur­ing costs.

At Sil­ver Fern Farms the cur­rent sit­u­a­tion is some­what worse. The 2012/13 op­er­at­ing loss was $28.6m, op­er­at­ing cash flow was a deficit of $5.1m and eq­uity has de­clined to 39 per cent. How­ever, its ag­gre­gate per­for­mance over the last four years is sim­i­lar to Al­liance with an over­all loss of $44.9m.

Both co-op­er­a­tives want re­form but both are also agreed that there is no "bank­able case" for amal­ga­ma­tion. How­ever, an across the in­dus­try ap­proach fa­cil­i­tated by Gov­ern­ment is also off the ta­ble.

The Gov­ern­ment has pri­vately in­di­cated that it would need to see 80 per cent pro­ces­sor sup­port and 80 per cent farmer sup­port be­fore be­ing in a po­si­tion to con­sider fa­cil­i­tat­ing change.

So what is the likely so­lu­tion? The an­swer is that in the long term it will most likely be the banks which de­cide which co­op­er­a­tive sur­vives. It is also pos­si­ble that some of the in­vestor-ori­ented firms will fail. What­ever hap­pens, there will be both win­ners and losers, but that is a story for another time. Keith Wood­ford is Pro­fes­sor of Farm Man­age­ment and Agribusi­ness at Lin­coln Univer­sity

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