Where milk's gone, meat must go

By HUGH de LACY*

The New Zealand meat industry is on a path to achieve its vast and so-far-unrealised potential, and the Richmond-PPCS court case is but a tiny milestone on the way.

Whatever the court's decision on the declaratory judgements being sought by PPCS and Richmond in the High Court at Christchurch this week, the industry that made this country rich is heading inexorably towards becoming a single large, farmer-owned co-operative, kept honest by a cluster of smaller companies.

Just like the dairy industry.

The scuttlebutt in the meat industry is that the court case is some sort of judicial shootout between the investor-owned Richmond and the PPCS co-operative.

It's not.

It's a side-show, the only outcome of which will be the temporary appeasement of a group of Richmond shareholders unhappy with the way PPCS went about acquiring an interest in their company, or the co-operative's vindication on that fine legal point.

Either way, it's irrelevant in the wider scheme of things.

What is indisputable is that PPCS, one of the two wealthy South Island co-operative meat companies, is under increasing pressure from overseas markets to expand its production season and its inventory, so it can give its customers year-round supply.

The only way PPCS can do this is by acquiring a stake in the North Island.

The South Island is too cold and its growing season too short for PPCS to achieve year-round supply from its home base.

It has to expand into the warmer North Island.

Once it has succeeded, the other equally well-heeled southern co-operative, Alliance, is commercially bound to follow.

Because the two big North Island investor-owned and publicly listed companies - Richmond in Hawkes Bay and Affco in Auckland - are a couple of floundering crocks that can't turn a decent profit even in these boom times, the eventual outcome is pretty well ordained - the South Island co-operatives will swallow the North Island privateers.

The co-ops will then have to address the same market imperatives that faced the New Zealand Dairy Group and Kiwi and which resulted in their eventual and inevitable merger to form the Fonterra money-spinner.

While much has been made of PPCS' tactics in acquiring its potentially dominant stake in Richmond, resistance to it boils down to narrow self-interest and parochialism from a minority of Richmond shareholders.

Just as with the $14 billion dairy industry, the $5 billion meat industry will get traction in global markets only by maximising its critical mass and vertically integrating its supply.



The co-operatives each make up about a quarter of the industry.

They are as efficient as they can be in their present form, and are increasingly desperate to escape the limitations that the South Island's climate imposes on them.

The four major New Zealand meat companies are all about the same size, with turnovers a little above $1 billion each.

They offer much the same products to much the same buyers, and pay their farmer-suppliers virtually identical amounts for their livestock.

They compete directly against each other in overseas markets, fighting to supply quality-assured, chemical-free, grass-fed red meat to buyers who grossly under-value it.

This is not because those buyers don't appreciate how attractive it is to health-conscious consumers, but because they are able to play each company off against the others to keep prices artificially low.



Until the mid-1990s there wasn't a lot New Zealand could do about this because so much of the processing industry in both islands was owned by foreigners.

Now that the four main companies are wholly New Zealand-owned, there's nothing to prevent them restructuring themselves to take advantage of the huge overseas demand for the sort of healthy, clean, natural protein they offer.

All that's holding them up - apart from the occasional appeal to the courts for guidance on how to go about it - are the myths spread by the narrow and sectional interests that oppose it.

One such myth is that the southern co-operatives pay less for their livestock than the investor-owned northern companies, and that northern farmers will be disadvantaged if the southerners move in.

Hogwash.



The long-standing difference in north and south stock prices is caused by the different climates in the two islands.

North Island lambs kill out at least half a kilogram heavier than southern ones because they're born earlier in the spring and the grass keeps growing longer into the winter.

It's because they're bigger that North Island lambs are worth more, not because the southern co-ops are too miserable to pay more.

This is demonstrated by the way the co-ops are buying them in increasing numbers to ship south for processing.

Another myth is that investor-owned companies are more efficient than co-operatives.

If that's the case, why are the co-operatives earning record profits from the current record prices when the privateers aren't?

Last year, Alliance made a profit of $42.5m on turnover of $1.2 billion after paying tax and a $30.3m pools rebate to farmers.



PPCS made $28.2m on turnover of $1.16 billion after paying tax and $18.6m in pool rebates.

Richmond managed a profit of $20.6m on the biggest turnover of the lot of them, $1.43 billion, and Affco managed barely $500,000 on turnover of $1.2 billion.

Since then, although prices have held up surprisingly well, the two North Island companies' fortunes have plummeted with their bottom lines.

In the six months to March this year, Richmond lost $1.5m, and Affco lost nearly ten times that.



Richmond has admitted it will be lucky to break even for the whole year, and Affco has gone cap in hand to the sharemarket for the second time in eight months, seeking $27m on top of the $11.2m it squeezed out in November.

Richmond's share price is hovering at $2 and Affco's is under 20c and falling- in no small part because at least one major investor has signalled that he's desperate to abandon the sinking ship.

The privateers' conspicuous non-performance cannot be blamed on the market.

World meat prices are down from their cyclical highs of a year ago, and that's been exacerbated by the rise in the Kiwi dollar.

But if the privateers can't ride out that sort of setback they shouldn't be in the business.

The fact is that, good times or bad, investor-owned meat companies that look big by New Zealand standards are too frail to cut it in the overseas meat market - which is why they've become extinct in the South Island.

A further myth obscuring the logic of PPCS' northern sally is the claim that the co-operatives, and PPCS in particular, are commodity traders adding little or nothing to the value of the meat they process before dumping it wherever they can.

More hogwash.

Take a look through the cutting rooms of any of the four major companies and you'll find the degree of value-adding, and the proportion of animals still being shipped away in carcass form, are much the same.

Nor is there any secret alchemy to the South Island companies' consistently strong financial performance.

Co-operatives thrive in markets that are a graveyard for similar-sized private companies because of the resilience inherent in vertical integration.

When the people who individually own the farms also collectively own the processing and marketing facilities, they can ride out cyclical reverses by spreading their risk across the entire production and supply chain.

They pour their surpluses straight back into the business by way of farms and freezing works.

Private meat company assets are tied up in the bricks and mortar of their freezing works, which are practically worthless anyway since they can't be switched to any alternative use.

The New Zealand meat industry at present is vertically integrated in the South Island and vertically fragmented in the North.

And vertical fragmentation is the proven recipe for reducing farmers to price-taking peasantry, and private companies to permanent penury.

Within the next fortnight, a judge in the Christchurch High Court will decide if PPCS can continue its march towards an eventual 52 per cent shareholding in Richmond, or be sent back a few squares - maybe right back to square one - in its quest for a stake in a major North Island processing and marketing company.

Either way, it's now axiomatic that the one giant co-op model, which overnight turned the fragmented New Zealand dairy industry into a truly global power in the milk business, is equally applicable to our red meat industry.

It's going to happen.

It has started already.

And the Richmond-PPCS High Court showdown is just a pebble on the path to realising it.

* Hugh de Lacy is a award-winning South Island freelance journalist, columnist and author, and agribusiness commentator.