KEY POINTS:
The meat industry took a big step towards a Fonterra-like mega-merger yesterday as Southland-based processor Alliance Group proposed radical reform backed by rival company PPCS.
Alliance's bold concept is the creation of a new single entity with turnover of about $5 billion, managing 80 per cent of the
country's livestock supply from farm to market.
In a letter to shareholders Alliance chairman Owen Poole said low returns during recent years threatened the long-term viability of many suppliers. "It is clear that a small step consolidation, including a merger with PPCS, will not bring the required benefits," Poole said. "We believe a more radical and bold approach should be evaluated."
Recent seasons have been hard on sheep farmers. Reform of the Common Agricultural Policy in Europe and drought in Australia had pushed an over-supply of sheep into the market during the last two years, while parts of the east coast of the North Island suffered a drought last year.
International prices had risen about 7.5 per cent but the value of the New Zealand dollar meant that returns were unchanged.
This year's dry summer has many farmers facing a third year of cash losses as animals sell for less than production costs.
Consolidation of 80 per cent of the sector's procurement, processing and marketing into one entity would lift on-farm returns by about $400 million a year, Poole said. "We believe short-term gains for sheepmeat would be in the order of $15 a lamb, arising from market cohesion and reduced overhead costs from the removal of excess processing capacity."
Medium-term gains included a more secure and focused marketing platform, better product mix and branding, better yields and use of best practice, improved purchasing power, consolidation of ancillary operations and a co-ordinated approach to research and development.
Legislative assistance from Government would be needed and maintaining about 20 per cent of capacity outside the new entity would provide competitive tension, Poole said. Alliance will discuss the concept with shareholders at meetings during coming weeks to ensure it had a mandate for action.
Previous prospects of a significant industry merger came to nothing in September last year after Dunedin-based processor PPCS said it wanted to merge but Alliance declined the offer.
Together the two major processors together account for about 59 per cent of sheep-meat, 37 per cent of beef and 78 per cent of venison exports.
PPCS chairman Reese Hart has given the new proposal early backing.
"There is now a serious and robust concept on the table," Hart said. "A combined industry structure would remove the duplication of costs within the industry and will allow the new entity to base its profitability on its success in international marketing rather than on its processing throughputs."
He hoped for clear direction within the next few months.
"That would ensure that the new season commencing in October 2008 is the starting point for a new New Zealand meat industry," Hart said.
Meat Industry Action Group chairman Keith Milne said the concept was exciting and more than the group had thought possible.
"The industry's in a perilous state at the moment and I'd hate to speculate where we'd be if we can't achieve within the next six months rationalisation and or consolidation."
THE PLAYERS
ALLIANCE GROUP
* Farmer-owned co-operative based in Invercargill.
* Has eight processing plants, employing more than 5000 people at season's peak.
* Approximately 27pc of sheep, 6pc of beef and 20pc of venison national exports.
* Annual turnover for the year ending September 30 of $1.1 billion.
PPCS
* Farmer-owned co-operative based in Dunedin.
* 25 processing plants, employs about 9000 people at season's peak.
* Approximately 32pc of sheep, 31pc of beef and 58pc of venison national exports.
* Annual turnover for the year ending August 31 of $1.8 billion.
MEAT INDUSTRY ASSOCIATION OF NEW ZEALAND
* Membership covers majority of the industry.
* 39 processors and/or export member companies.
* Employ about 24,000 to 25,000 people at season's peak.
* Export revenue of $5.4 billion for the year ending May 2007.