KEY POINTS:
Sheep and beef farmers have good reason to look enviously at their dairying counterparts. Not for them the luxury of an international price bonanza that puts even the high New Zealand dollar in the shade.
Their lot is poor returns, to the extent of some animals selling for less than production costs. Their reality is also an industry that has failed to position itself to deliver a maximum dividend. Again, they look jealously at dairying, which has developed a cogent structure through the abandonment of traditional rivalries and the formation of Fonterra. The only real surprise, therefore, is that a concrete proposal to shake up the meat industry has taken so long to emerge.
Southland-based meat processor Alliance Group wants to create a single industry entity to manage 80 per cent of New Zealand livestock from farm to market. It estimates the mega-merger would lift farm returns by about $400 million a year and deliver short-term gains of about $15 a lamb, thanks to greater market cohesion, reduced overheads and the removal of excess processing capacity. This plan replaces a proposed merger between Alliance and Dunedin-based rival PPCS that was abandoned last year because of the latter's debt levels. The new proposal embraces more meat companies and is thus far bolder.
It needs to be. For many farmers facing a third year of cash losses, a Fonterra-like structure has obvious appeal. As was the case with dairying, meat companies competing on price in overseas markets are being played off against one another by wholesalers and supermarkets. A single entity would guarantee far greater clout. Those opposed to the mega-merger insist this could be achieved by continuing to compete for livestock within New Zealand while trying to market under a single entity overseas. PPCS has, in fact, already taken some steps along those lines. But the Alliance plan simplifies matters considerably.
This would be a less thoroughgoing situation than that of Fonterra because 20 per cent of the meat industry would remain outside the merged entity. Most of these would be niche operators, although some element of competition in the country's second-largest export sector would remain. Nonetheless, far more eggs would be placed in one basket and the new $5 billion company would, in the interests of the national economy, have to get it right. That will not necessarily be easy. Fonterra has had its share of teething troubles and is still debating the structure that will enable it to pursue its global ambitions while extracting the best return for dairy farmers.
If anything, however, the meat industry should find it easier to come together. There is probably not quite the same degree of rivalry as between Taranaki's Kiwi and the Waikato-based Dairy Group in pre-Fonterra days. Additionally, dairying was in a far more robust state than is the case with sheep and beef farming today. The meat industry should find a merger somewhat smoother if only because the need is so much greater.
A tight timetable is proposed. It is hoped that the new season in October will be the starting point for a restructured industry. Shareholder approval and Government legislation will be required. Neither should be an issue. This sort of change is needed to secure the long-term sustainability of the meat industry, as well as short-term relief. Dairying-style wealth may not be immediately foreseeable because drought in Australia and European agricultural policy reforms have created an oversupply of sheep. But when matters take a turn for the better, the meat industry would be well poised to profit.
