'Fundamental step' needed to positive outcome

08-09-2010 | Sandra Taylor

A 30% volume gain by any one of two largest meat processors will have the same gain as a medium size amalgamation of assets without any cost to the farmer.

This message was repeated several times by Alliance chairman Owen Poole at the company's shareholders and suppliers meeting in Christchurch last month.

He told a large crowd, including two former Silver Fern Farm directors, that this commitment to supply was the single most powerful decision a farmer could make to effect immediate change in the meat industry.

"If farmers are not prepared to take this fundamental step, how will amalgamation provide a positive outcome?"

Poole acknowledged that a 30% volume by any one processor would result in overcapacity in others, but said this overcapacity would fall where it fell.

Despite the global economic recession, market prices for lamb were the second-highest on record, yet Poole noted that on-farm profitability was inadequate and the industry faced several challenges including its unique supply profile, its exposure to the vagaries of foreign exchange, and land-use changes.

While Alliance was striving to improve returns for sheep meat by extracting more value out of by-products and amending product forms, gains in these areas would take some time to materialise, unlike the immediate gains made by a 30% shift in volume to a single processor.

Clearly frustrated by continued suggestions the meat industry should be taking a leaf out of the dairy industry's book in terms of structure, Poole pointed out that the dairy industry was a production-driven model mainly selling commodity milk powder with only 10-15% of its production having value added to it.

The 25% fall in the value of milk powder in the past three months in Fonterra's auction system indicated the monopoly-type model did not remove volatility and he believed it was beginning to unravel with the emergence of competing dairy companies such as Synlait and Open Country cheese.

In contrast the sheep and beef model was one of exporter processor and ownership is disparate. In order to facilitate critical mass some parties other than co-ops needed to exit the industry by selling to farmer ownership, but the opportunity for this to happen was missed 21⁄2 years ago.

Poole said anyone could join the meat industry and there was provision to make European quota available to new entrants. Local trade plants also attracted quota if they were export capable.

He pointed out that over the years many attempts had been made to aggregate assets of different meat companies and while these were seen to be doing the right thing, they typically hadn't worked out the way everyone hoped.

"We need some fresh thinking here."

Poole said Alliance was supportive of the Beef and Lamb-initiated Meat Sector Strategy, but also defended the company's decision to pull out of the Emerging Markets Project which was a collaborative effort by Alliance, ANZCO, and Silver Fern Farms to identify opportunities in China's super premium food market sector.

While phase one of the project - an initial desk-top study - indicated demand for lamb of 10,000t/year generating $24 million in net present value over a five to 10-year time frame, a more detailed study revealed a different picture with a net present value loss of $6.3m after the same time period and an annual demand of only 890t/year, due largely to competition from tariff-free unregulated trade known as "grey" trading channels which are commonplace in China.

Grey channels make legal structures difficult to deal with and Poole believed it was prudent to wait for China to develop a more sophisticated infrastructure in the retail and regulatory environment.

"The opportunity is great, just not now."

Back at home, sheep's milk is among the co-products Alliance has been working on; Alliance CEO Grant Cuff said results so far looked impressive with sheep's milk being worth more than twice as much as cow's milk on the US market.

It would provide another income stream for farmers, it was environmentally neutral, would require no change in stocking rate and would encourage farmers to lamb three times over two years, which evened out the lamb supply for the processors.

Alliance is continuing work in this ovine dairy area looking at both the numbers required and the practicality of it.

Cuff and Poole acknowledged the importance of wool as a co-product but said they were waiting on a prospectus and business plan from a wool company (presumably Wool Partners International) and if it was to their satisfaction they would do everything they could to support it.

"It is the last bus for wool," Poole said, and if the industry didn't get it up and running now it was never going to.

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