Bobby calves success drives founder to exit

The nation's biggest processor and marketer of bobby calves is selling off its business.

Farmers have $30 million invested in Dairy Meats New Zealand, which has most of its assets in the form of cash debtors and stock.

Dairy Meats chairman Bill Baylis said yesterday the company was talking with prospective buyers and expected to come back to its shareholders with firm proposals within a few weeks.

It is expected to process about 40,000 more calves to complete the season, but this year's kill will only be about half the 1.5 million animals available nationally.

The co-operative made bobby calves a lucrative sector by developing added-value businesses. But it also made the trade so profitable that other meat processors moved in, "poaching" half the nation's calves in procurement battles over recent years.

In some cases, new farmers who did not want to front up with the share capital required to become a Dairy Meats supplier sold their animals to other companies.

Baylis said the company was set up as a service to farmers because none of the meat processors at the time had the motivation or the capability to ensure bobby calves could be collected, processed and marketed to the dairy industry's requirements.

Dairy Meats owns no slaughter plants and contracts processing on a toll basis with Affco Holdings in the North Island and Alliance, CMP Kokiri and Prime Range Meats in the South Island.

The co-operatively owned Dairy Meats Association - later Dairy Meats New Zealand - was established in 1988 and, in the early stages, half-owned by the Dairy Board.

The business grew from commodity trading - selling boned-out veal as a by-product of dairying - to develop a range of added-value products.

New products included high-value consumer veal cuts.

The company launched its own Nouveau brand from a leased Avondale plant for a high-quality cutlet that sells well in export markets. Calf parts that previously went to waste were developed as a petfood range.

Dairy Meats also sold rennet from the calves' stomachs to cheese manufacturers around the world and developed new opportunities for high-value enzyme products.

But bobby calf collection and marketing became so attractive that about 1994 the sector began fragmenting, with firms moving into the pool of more than a million calves.

Farming deregulation led to Dairy Meats' ownership reverting to farmers and increased competition.

Some companies found a bobby kill increased the efficiency of their meatworks by spreading out the slaughter season, while others saw it as an add-on to stock procurement they were already doing.

Baylis said meat processors were increasingly looking to procure calves directly from farmers.

By taking a strictly commercial approach to procurement, processors had been able to secure a growing share of the market, eroding Dairy Meats' supplier base.

Lower volumes had put increasing pressure on the company's per-unit procurement and processing costs to a point where its added-value activities could not offset the decline.

"The company's revenues are further being pressured because an increasing number of companies are selling into what is a very narrow market segment, thus shifting market power in buyers' favour," he said. "Dairy Meats does not have a long-term future if it is unable to attract sufficient market share to offset its processing cost disadvantage.

"The company is losing ground and the prospects of reversing that position are remote, at best."

Baylis said the $30 million of shareholders' money was an investment no longer justified by the return it delivered.

- NZPA