Allan Barber: New meat industry restructuring plan looks dead in the water

Five South Canterbury farmers formed the Meat Industry Restructuring Group about three weeks ago with the sole objective of achieving a sustainable future for the meat industry through a merger of the two largest companies, PPCS and Alliance.

Since launching the campaign, MIRG has gained a lot of publicity for its proposal and members intend to raise it at the companies' farmer meetings which start this month.

At this early stage the chances of success are hard to gauge, although it will take an enormous groundswell of support from shareholders of both processors to achieve a position of influence at board level.

Even if individuals succeed in being elected, they face a long, hard battle to gain a majority in favour, unless there are some miraculous performance improvements suddenly appearing over the horizon.

The first question is whether the merged company will solve the problem MIRG is trying to address. Then there are two bigger questions: one, does a merger of two companies with different cultures, methods of operation and balance sheets have any chance of success and two, is the co-operative structure the right one for an industry change of this magnitude?

The drop in lamb prices last season came about because of the strength of the New Zealand dollar and a serious case of indigestion in the premium UK and European markets. All processors expected prices to hold up better, gave the wrong message to suppliers and then compounded the problem by rewarding suppliers for putting too much weight on. Merging two big exporters wouldn't have solved this.

It's probable one big processor and exporter would be able to cut transport, marketing, procurement and administration costs, much as Fonterra and PGG Wrightson have done. But, realistically, this is unlikely to contribute more than $1-$2 a lamb.

The main expectation is that New Zealand marketers would no longer compete with each other, but against the rest of the world. Fine, in theory, but it ignores the activities of AFFCO, Canterbury Meat Packers and others.

It seems MIRG is really harking back to the disastrous days of central control of product sale by the Meat Board, whose closest modern equivalent is probably Fonterra.

But meat is a totally different product from dairy at both ends of the process: farmers can keep their livestock on the farm as long as there's grass and can send it anywhere for processing, while processors must satisfy the needs of major supermarkets, restaurants and food producers every day with chilled, value-added products. Frozen meat has less value.

The question of culture and operating methods is also fundamental to any assessment of whether this proposal is worth considering. Although PPCS and Alliance are both farmer-owned co-operatives, they are worlds apart in most other ways. These differences would seriously challenge the abilities of a united board and management.

Last week's Government-industry taskforce report on the food and beverage sector suggested co-operatives should consider how they might reinvent themselves because producer co-operatives focus too hard on maximising short-term supplier payout instead of longer-term growth opportunities. If this conclusion is correct, it is unfortunate four out of the five largest food and beverage companies, Fonterra, Zespri, PPCS and Alliance, are co-operatives. But farmers, whether co-operative members or not, have businesses to run and must receive fair returns. It's still not clear how farmers could be paid enough for their livestock, while companies fund more extensive growth projects.

The MIRG proposal seems dead in the water, both because it's hard to see shareholders of PPCS and Alliance voting for the necessary change in board representation to have any chance of success and, if the food and beverage taskforces conclusions are right, the co-operative structure won't necessarily deliver the desired result.

* Allan Barber is a freelance writer, business consultant and former chief operating officer at Affco.