At the centre of the debate is New Zealand's biggest meat processor, Dunedin-based Silver Fern Farms, and the country's biggest sheepmeat processor, Southland-based Alliance Group. Together they represent about 55 per cent of the lamb trade.
Silver Fern is looking at raising $100 million to repay debt, for plant upgrades and to accelerate its value-added product strategy. Both co-ops returned to profitability last year.
MIE chairman John McCarthy said personality politics and parochialism had wrecked every attempt at industry reform over the last few decades.
"I believe that the futures of the two co-operatives are inextricably linked, no matter what their historical differences might be," McCarthy said.
The report, which pointed to rapidly declining sheep numbers as farmers switched to other land uses, such as dairy, meant the industry was shrinking at an alarming rate.
"We are shrinking and you can't shrink your way to success," said McCarthy.
At the current price of $82 for a 17kg lamb, farmers were not covering their cost of production, he said.
"I think that we've got to future- proof our industry and that this is the year to do it," McCarthy said.
"We believe that a co-operative with scale and size and a reinvigorated balance sheet is the way to go," he said. "And we don't believe that farmers will want to reinvest in either co-operative but that they would reinvest in a merged and reinvigorated entity that incorporated the true co-operative values and had the size to do so."
Competition was destructive beyond the farm gate, he said. At present, there are around 70 export licence holders competing in overseas markets, mostly on price.
MIE hired international consultancy GHD to advise on its report, which said farmers find themselves at the end of the food chain, unable to exercise any power or influence over the processors and marketers of their product.
"However, what is absolutely clear from the GHD work is that continuing to do nothing is costing New Zealand red meat farmers [about] $450 million per year and is mortgaging the future," the report said.
"The fact that processors have failed to grow the industry over the past five years has meant New Zealand farmers have paid a minimum of $2 billion in that time to keep some processors operating."
The report said farmers supported a consolidated industry based around a co-operative model with scale, estimating that more than $400 million in gains was available over five years just from Silver Fern and Alliance joining forces.
More than a billion dollars in savings could be realised from a rationalisation process that included the four largest companies agreeing to a co-ordinated and managed consolidation - Silver Fern Farms, Alliance Group, Anzco and Affco, it said.
Going on current rates of conversion to dairy, the report said ewe numbers could fall from 21 million today to 15 million in five years and 10 million in 10 years, while the national dairy herd climbs to 7.5 million from around 6.5 million.
It estimated the industry had the capacity to kill its lamb and beef production more than twice over each year.
"The resulting competition for stock throughput means that, for example, 50 per cent of sheep and cattle are transported beyond the nearest processing plant, more than doubling the cost-per-head of transporting stock," it said.
McCarthy said it mattered a great deal for New Zealand that its second biggest export industry was performing so poorly when the opportunities are so significant.
"The potential here is for another national champion to rival or even balance dairy exports, but this won't happen without structural reform."
Lamb and beef prices fall back
Lamb prices have continued to ease as the season heads into its traditional low point, says market information supplied by AgriHQ.
Last week's North Island lamb price was $4.93/kg, down from $5.33 last year. The South Island price was $4.86, down from $5.28 and the national average was $4.89, down from $5.30/kg. Mutton is down 23 per cent on last year.
International prices are weaker on most items. The UK frozen leg market is about 4.10 a kg, down from 4.50 last year.
The British market is expected to remain weak for the rest of the season, with little hope of significant price increase once UK domestic production lifts from June.
Prices in the Middle East and China on cuts such as shoulders and lamb flaps are down. Flaps are US$4.7-$5/kg and shoulder are about 15 per cent less than a year ago.
Sheepmeat stocks are still high in China because of high domestic production and a carryover of stock from the end of last season.
Published beef prices are off record highs but AgriHQ said there were encouraging signs with improving US markets after the port problems there in the past few months had started to clear up.
Published net North Island steer prices are down from late last year at about 4.50/kg, which is still 50c/kg or 13 per cent up on last year.
Cow and bull schedule rates are also up 12 per cent from this time last year.
Lamb prices
• $4.93/kg: North Island lamb price, down from $5.33 last year.
• $4.86/kg: South Island price, down from $5.28 last year.
• $4.89/kg: New Zealand average, down from $5.30/kg last year.
