KEY POINTS:
Sheep and beef farmers are contemplating the most radical change to their industry since the tsunami of economic reform hit them 20 years ago.
It testifies to something like desperation that they are prepared to consider sacrificing competition for their stock at the farm gate.
Wherever they turn they face
rising costs, while any tentative improvement in product prices is gobbled up by a rampant kiwi.
Looking at buoyant returns to dairying, or reports of Chinese pork prices rising 60 per cent in a year, they must be wondering what what they are doing wrong.
The better question is: when will it be their turn?
The Government, after all, has just announced a $700 million vote of confidence in the future of pastoral farming in the form of the Fast Forward fund for research and development. Together with matching finance from the private sector it is expected to boost investment in the farm sector's intellectual capital by the best part of $200 million a year.
There are a number of reasons to be optimistic about its medium and long-term future. But we have to get through the short term first.
So what are the obstacles facing Alliance's plan for a mega-merger to create a company with an 80 per cent share of the meat trade?
Details of the proposed structure are so far scanty but it is a fair assumption farmers will only countenance the creation of a dominant player if they control it.
Alliance and PPCS are already co-operatives but money may well be needed to buy out the investor-owned companies, Affco and ANZCO. Banks will therefore need to take a strategic view.
"It has to be bankable," Agriculture Minister Jim Anderton told Meat and Wool NZ's annual meeting yesterday.
"The Government - at least on my watch - will not be writing out a cheque to pay for industry restructuring."
Then there is the issue of competition law.
When Fonterra was formed the Government happily bulldozed a legislative track around the Commerce Act, which exists after all for the protection of domestic consumers, not foreign ones.
But Anderton said yesterday the Government was likely to require that any merger application go to the Commerce Commission. "The Commission would provide an independent assessment of whether the benefits would be greater than the drawbacks."
A more delicate issue is quota markets.
Tariff rate quotas to the European Union and the United States cover around half of the lamb trade and beef trade respectively.
The challenge to the butter quota after Fonterra was formed was based on competition law within the European Union.
In the case of the meat industry conventional competition analysis might well find that if there are any issues about excessive market power here they rest on the buying side - in particular the power of the big supermarket chains to dictate terms to suppliers most of whom are, of course, European.
Providing some countervailing heft to that market power, and making it harder for the supermarket chains to divide and rule, is one of the main motivations of the merger proposal.
Trade Minster Phil Goff says defending the current arrangements with the EU is a key priority.
"This is particularly important given European farmer agitation about the current structural and economic difficulties the sheepmeat industry there is facing."
National's trade spokesman Tim Groser, who as an official negotiated the current quota arrangements during the Uruguay Round, said it would be necessary to proceed with great caution but from the starting point that the Government should seek to facilitate whatever the farmers wanted to do.
"Given the parlous state of the sheep industry in northern Europe have no doubt whatsoever that people will look at this and see if they could create the basis for a challenge to our sheepmeat quota," Groser said.
"Unfortunately, there is no precise answer as to how to solve this other than to get on a plane and, at various levels, talk to our main customers, and develop the dialogue already undertaken 18 months ago with the industry in Europe about common issues of marketing and so on."
In one respect the news is better for hard-pressed sheep and beef farmers: the housing market has run out of steam and historically the strength of the housing market has been a good predictor of strength of the exchange rate.
If the currency is indeed and at last heading for a fall, it is better late than never.
Over the past year spot prices for dairy products have risen 54 per cent but in New Zealand dollar terms the rise was a more modest 34 per cent.
Meat rose 14 per cent in world price terms but in New Zealand dollars hardly at all.
Meat & Wool New Zealand's economic service estimates a rise in the exchange rate from US75c to US80c cuts farm gate returns by 7 per cent for sheep farmers and nearly 9 per cent for beef.
As Food and Agriculture Organisation price indices show, world dairy prices have soared over the past few years, cereals and oilseeds have also risen strongly but meat has gone sideways.
On the face of it this is odd, as one of the factors underpinning dairy's strong showing has been a rise in the proportion of people, especially in Asia, whose incomes have risen to the level where they can afford the foods of affluence, and that includes more meat.
At the same time the rise in cereal prices, partly driven by the ethanol boom, has driven up the cost of rearing grain-fed livestock.
Economists explain the apparent paradox (dry stock farmers probably have another word for it) by saying dairy and meat producers respond differently to supply side shocks like drought.
A dairy farmer can immediately throttle back output.
A sheep farmer, on the other hand, might in the short term increase output by sending for slaughter ewe lambs or other stock that might otherwise be kept for breeding.
Similarly, higher feed costs or policy changes like the 2003 reforms of the Common Agriculture Policy, which "decoupled" subsidies from production, might have the effect of reducing supply in the medium and long term but boosting it in the short term.
The meat industry worldwide also seems to be perpetually subject to animal health issues - mad cow disease in one place, foot and mouth in another - with corresponding on again, off again trade bans.
But underlying those perturbations are some trends that look positive for the sector. We have recently past a tipping point where more than half the world's population is urban.
The demographers tell us there will be three billion more mouths to feed by mid-century. The effect of that on demand for food will be amplified by rising incomes.
Much of the increased demand will be met by increased production in South America and perhaps eastern Europe.
But to the extent that the real competition is between grass-fed and grain-fed systems, the greater energy intensity and carbon footprint of the latter ought to give the former an advantage.
In that sense sustainability is not a politically correct gimmick. It is a survival strategy.
