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Faint praise from industry body for 'Fonterra for meat' report

18 Mar 2015

The industry body that helped fund a major study to reform the red meat sector has damned with faint praise the resulting report from the Meat Industry Excellence initiative, saying it overstates the problems in the industry and that current structures are producing returns for top-performing farmers equivalent to top-performing dairy farmers.

James Parsons, the chairman of Beef & Lamb New Zealand, which helped fund the MIE report after farmers voted to assist the initiative, described the report as "a constructive document" with "potential to inform and stimulate initiatives." But he questioned whether the extent of the proposals' benefits were "real".

The report, released in Wellington last night, effectively proposes a Fonterra-style structure for the red meat industry, with government regulation to limit new investment in meat processing plant during a five year restructuring process that is estimated to cost around $200 million in asset writedowns and redundancies and would close 19 plants in a bid to stop what the report says is over-bidding by processors for livestock, which is damaging for profitability and stifling investment in marketing higher value cuts to export markets.

MIE recommends the creation of a 'bad bank'-style holding company to quarantine the assets marked for closure, and would see the two largest players - Silver Fern Farms and Alliance Group - close a cumulative 10 plants between them. ANZCO and AFFCO, the next two largest industry participants, would close three and five plants respectively if the whole plan were initiated.

This holding company, dubbed "Big Red", might also be accompanied by a system of "chain licencing", involving government regulation of plant ownership. It would be used to enforce a moratorium on the construction of new processing plant during the rationalisation phase, estimated to take five years, and would restrict foreign ownership and investment, on the grounds that one of the sector's ambitions is to support farmer cooperative structures and New Zealand ownership of the sector's future.

If just the SFF and Alliance elements were implemented, that could save the industry around $400 million over five years, while the participation of the wider sector in such reform could deliver savings of more than $1 billion over that period.

The report also considers the merits of creating an export monopoly seller, drawing on the Zespri model used for the sale of kiwifruit in most export markets.

However, Parsons' statement questioned the report's focus on average farm returns, saying "averages don't always tell the whole story."

"In reality, the performance of the top 20 percent of sheep and beef farmers is neck and neck with the top performing 20 percent of dairy farmers," he said, while acknowledging that "average farm returns need to improve" and that Beef + Lamb NZ had invested accordingly in Red Meat Sector Strategy and Red Meat Profit Partnership initiatives.

"Every single sector has the opportunity to better," said Parsons in a statement. "Even if the savings and gains are not as significant as the report claims, they are deserving of exploration."

"Meat companies, as the mandated commercial leaders, now have the opportunity to work collaboratively together and realise these gains, if they are real."

The MIE report noted that one of the impediments to some of the proposals, including chain licencing, was that "communications now appear to be strained between the various companies, preventing consensus to even begin dialogue on the merits or otherwise of a well-intentioned proposal."

The backbone of the MIE report is a research report prepared by GHD New Zealand, the local arm of a global consulting firm, and an array of industry advisers and experts, including former National Bank chief executive Sir John Anderson and "certain processor CEO's, managing director, chairmen and directors who have supported these ... initiatives (they know who they are)," the report says.

SFF, the largest industry player, returned to profitability in the year to Sept. 30 after two years of losses and has been mulling options for a $100 million capital-raising, having failed to convince farmer shareholders to support a similar capital raising in 2009.

Since then, SFF and Alliance - both farmer-owned cooperatives and accounting for about half the industry, the Talley's Group family-owned Affco, and ANZCO Foods, have tried but failed to reach agreement on restructuring initiatives.

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