KEY POINTS:
It's rather ironical to find the meat industry being urged to become more like the dairy industry just when the dairy industry is showing signs of imitating the meat industry.
Affco's announcement that its subsidiary Dairy Trust intends to set up four dairy factories by next season has
led at least one commentator to predict a return to local competition, obsession with commodities and an export-only business model.
At the same time sheep farmers, hit by poor returns, are threatening to convert to dairying while the Minister of Agriculture is embracing the dairy industry's co-operative model as the one most suited to New Zealand's agricultural production.
Jim Anderton cites the success of dairy, kiwifruit and horticulture, compared with meat and apples, as the justification for co-operative marketing, if not single-desk selling, which has been tried before in the meat industry with disastrous results.
I get the strong impression the meat exporters are now more willing to embrace the principles of co-operation, not just because lamb prices are low but also because there has been a change of the old guard in top management of the two South Island co-operatives.
PPCS and Alliance have expanded into the North Island and now realise the principle of "co-opetition" has more value than cut-throat competition, which could never have happened as long as Stewart Barnett and Jim Pringle were CEO and chairman of PPCS.
Until leaving to join AgriQuality, Tony Egan, former Affco CEO, was urging greater co-operation between meat exporters to overcome their tendency to compete profits away. Meat companies at times have the unfortunate tendency to cut each other's throats in the field to ensure throughput for their plants, while undercutting each other in overseas markets to reduce inventories and meet bank demands for cash.
This is exactly the sort of behaviour that horrifies the dairy industry, livestock farmers and the Minister of Agriculture. As a result the last thing anybody wants to see happen is the dairy industry descending into similar competition at either end of the value chain.
However, the only alternatives are either re-establish a monopoly on the lines of the old Dairy Board, which trade partners would reject, or introduce competition for milk procurement and exports, which legislation will permit from next year. Therefore the second alternative will happen, with the risk it could pose for the meat industry.
This pessimistic view is based on an outdated business model for the meat and dairy industries. Meat exporters still show some signs of the bad old days especially when they have paid too much for the wrong specification of lambs, ended up with too much of the wrong inventory and had to generate cash in a hurry.
This happened two seasons ago and the present low prices are the last effects of that hangover, but I'm confident things will improve. If the dollar weakens, the sheep farmer will be smiling again.
It would be extreme to conclude that the meat industry can't change for the better, now that the processing plants are all more efficient.
The main cause of cut-throat competition are inefficiency and high cost, which lead to strong competitors gathering around the decaying body of the weak processor in its death throes while it struggles to stay in business.
If meat exporters recognise each other's efficiencies, cost structures and marketing strategies, they will be ready to respect those areas of excellence and focus on doing their own business well.
It's important for any industry to be tolerant of different ownership structures, rather than trying to impose one model over all others. That's why the successful meat companies include co-operatives, publicly listed companies and private companies. It is also why Fonterra, with only Tatua and Westland as competitors, was never going to be the long-term shape of the dairy industry.
The requirement for Fonterra to allocate 400,000 litres of milk to Goodman Fielder and other new entrants has already set the scene for dairy industry competition in the market place, resulting in the entry of Open Country Cheese, Independent Dairy Producers, Synlait and others.
The formation of Dairy Trust will lead to competition for supply, firstly because there isn't enough available from the 400,000 litres to allocate to Dairy Trust, but also because I suspect its ambitions go well beyond its 50 million litre entitlement.
The argument that Affco's entry through Dairy Trust is bad news for the dairy industry suggests its shareholders are only interested in low-cost commodity production. If Fonterra can be consistently undercut by a company adding no value, then it's got its business model wrong and farmers will benefit from the competition.
There is no justification for Fonterra to retain its dominant position unless it does so through more efficient production of added value products. At the moment these make up barely 10 per cent of the annual payout, so there's plenty of room for improvement.
The dairy industry increasingly resembles the ownership structure of the meat industry, with co-operatives, public and private companies. If the Minister of Agriculture's desire is to see more effective co-operation in the meat industry which will underpin market prices, he's right to pursue this objective, but I'm uneasy about the reference to achieving this through the Meat Act.
It smacks of political interference, which won't do anything positive for farmers or the industry. It also begs the question of what will he do if the dairy industry becomes truly competitive, instead of a quasi monopoly as it is at the moment.
History shows that commodity industries move through price cycles - which will continue regardless of attempts to change industry structures. Lamb was at the top of three years ago and will be there again, while dairy has only just emerged from the ogre of a below-$4 payout.
At least with co-operatives farmers can demand performance through their board, but this shouldn't be the only industry structure.
* Allan Barber is a meat industry consultant and former CFO with Affco.
