The meat industry mega merger has hit a bump, with accusations of foot dragging, unnecessary hurdles and what appears to be a failure to agree on direction by two of the biggest foundation stones.
In February Southland-based co-operative processor Alliance Group proposed creating a single entity with turnover of about $5 billion to manage 80 per cent of sheepmeat supply and with similar amounts for beef and venison.
Alliance chairman Owen Poole says agreement with other companies, or otherwise, must be reached within days if the process is to carry on and he wants work to take place on a business plan and valuation simultaneously.
Farmers have faced three years of low returns and Poole's aim is to get most of the merger done by the end of the calendar year, with the new season starting in October.
But PPCS chairman Eoin Garden says the Commerce Commission is not interested in the relative values of the respective parties but the competitive environment.
"The sequencing has got to be proof of concept and nailing down the Commerce Commission authorisation," Garden says.
Many companies go to the Commerce Commission for approval of a merger or acquisition without any predetermined sale or purchase price, he says.
But Poole says a business case cannot be prepared without knowing what is being bought and for how much.
"I'm disappointed that we've got a hurdle that I consider to be an unnecessary one," Poole says. "There's plenty of real ones out there for us to be dealing with."
Despite the difference of opinion the two parties are continuing to talk.
The complexity is all the greater because it is not just co-operatives Alliance and PPCS in the mixer but a total of five entities, which likely include private operators ANZCO Foods and Affco.
Alliance knocked back a prospective merger with PPCS alone last year and this deal is going to be all or nothing.
The failure to agree on process will slow things down for a couple of months but will probably be overcome, a more fundamental sticking point could be what happens with the beef and venison trade.
The original proposal by Alliance was for a single industry entity covering 80 per cent of sheepmeat and "with similar shares for beef and venison".
ANZCO chairman Graeme Harrison sees the problem facing the sector as more focused on sheepmeat where New Zealand controls 70 per cent of external world lamb trade.
New Zealand may dominate globally but the sector faces overcapacity, a lack of visibility on availability and overseas buyers playing companies off against one another.
Harrison does not see the problems facing the sector as a beef issue - an area in which he says ANZCO is the second biggest player - because New Zealand accounts for under 8 per cent of global trade and it is rare for companies to bump into each other.
Poole said last week that Alliance would soon know how much of the beef sector would be involved in a deal but warned it would not be all of it.
But PPCS wants the process to stick to the original Alliance proposal for beef and venison.
"Owen [Poole] is saying, 'Can't do, it's a show stopper," Garden says. "I'm saying we've got to do it."
PPCS is concerned that parties might use the merger as an opportunity to offload undesirable assets, carry on competing on beef and then later choose to come back into sheep.
"We won't get our shareholders to support a concept that fragments their own enterprise with the company," Garden says.
"We don't want to fix the lamb industry and then in three or four years time say we've got a crisis in beef."
Garden says PPCS is as supportive now as when the proposal was launched, although a letter sent last week to suppliers said: "At this stage we do not believe it is appropriate to commit significant funds and management time until a compelling business case has been prepared."
The language does sound somewhat cooler than previous chairman Reese Hart's who, back in February, described the concept as serious, robust and exciting.
The Meat Industry Action Group says it is heartened that PPCS supports the concept of a combined industry model but is astonished at the company's lack of urgency.
A meat industry merger was never going to be easy.
Alliance may have launched the proposal but others will want to feel they have a hand on the tiller.
Meanwhile, in the background sheep prices are starting to rise, albeit probably not by enough to make anyone forget why a merger seemed like a good idea in the first place.
Federated Farmers Meat and Fibre chairman Keith Kelly says there is more intensity for a merger among farmers in the South Island than their colleagues in the North.
The bigger population base in the North means farmers there can at times lead the South by $8 or $9 a lamb, Kelly says.
However, the disappointment will be felt by farmers on both sides of the Cook Strait if the industry fails to make the merger a reality.
Rabobank senior analyst Hayley Moynihan says season average lamb farm gate prices are about 10 per cent higher than this time last year despite the strong dollar, with signs of pricing strengthening internationally.
"So still not lifting prices yet to a level where New Zealand farmers would like to see them but certainly encouraging signs," Moynihan says.
The most important currencies for lamb were the euro and UK pound.
"So we haven't seen quite the same volatility as we have against the US dollar."
Crop expectations for grains out of the US had added more volatility to that market.
"It's likely to see corn prices or maize prices sustained at high levels internationally which tends to impact the feed input costs for intensive livestock industries."
The ripple effect of a change in the grains market may not see dairy commodity prices rise any further "but certainly supports holding at a higher level".
"Particularly where production had been increasing, for example from the US, with pressure on feed costs we would expect to see the rate of growth in their milk production ease back or plateau."
Rabobank international dairy specialist Tim Hunt, who spoke at this month's Large Herds Conference, says international dairy prices have roughly doubled in a year, although export prices have slipped from the heights of late last year.
"Rabobank believes the odds are still heavily in favour of international prices holding at relatively strong levels for several years to come," Hunt says.
"Asian diets are being westernised, bringing a rising appetite for dairy. And while dairy prices have risen, so have the costs of substitutes, tempering the incentives to switch to soy or palm oil-based products."
US producers are facing record feed costs, key Australian water storages remain close to empty and the Argentinian industry faces export taxes, energy shortages and attempts by Government to cap farm gate prices, Hunt says.
However, a vigorous response from the US or EU industries could quickly affect prices.
"Volatility is also likely to be evident for several years to come."
The winding up of NZX-listed Dairy Equity took a forward step on Thursday, with shareholders approving a plan to return capital via a repurchase and cancellation of shares.
Approval for the plan was also expected from the High Court in the following few days which would see the return of 25c a share - $22.9 million - payable on April 28 and the simultaneous halving of the number of shares on issue.
This will effectively give shareholders 50c a share for the cancelled stock.
A further capital return, expected to be 6.7c a share, totalling $6.1 million, was expected in August from the sale of about a quarter of the Fonterra fair value shares the company holds.
The company sought to give shareholders exposure to the dairy boom by buying the beneficial ownership of Fonterra's fair value shares held by farmers and thereby the rights to the value-added portion and the capital returns from changes in share value.
Chairman Peter Jensen says: "We thought farmers would be keen to have the choice of not actually having their money tied up in their shares and that proved not to be the case."
Investor choice has also been dropped by Fonterra as a reason for capital restructure after feedback from farmers.
Dairy Equity is winding up but Jensen expects that in the end shareholders will get back roughly the 50c they paid for shares initially.
"I guess for most companies where the concept doesn't work people lose money. On this one the concept hasn't worked but we've got back to the investors, if they've stayed with us ... effectively what they put in."
Results for the six months ended February released at the same time showed revenue down 25.7 per cent at $1.3 million and net profit up 23 per cent at $674,000.
A fully imputed interim dividend of 1.5c a share would be paid on shares after the 50 per cent capital reduction.By Owen Hembry Email Owen