Meat company mergers could mean more dollars
If Dipton farmer Peter McDonald got another $10.95 a lamb he would pocket an extra $44,000 a year.
Over 10 years that's almost half a million dollars in his back pocket - for no extra work or cost.
"That's the size of the prize," McDonald said.
The new Meat Industry Excellence (MIE) report Pathways to Long-term Sustainability says a merger of farmer-owned co- operatives Alliance Group and Silver Fern Farms could benefit shareholders by a net $100 million a year from year 3 or over $400 million net gain in the first five years.
For sheep farmers like McDonald that's an extra $10.95 a lamb.
MIE commissioned international consultants GHD and AERU (the Agribusiness and Economics Research Unit at Lincoln University) to conduct a detailed assessment of the red meat sector in New Zealand.
The report was co-authored and edited by MIE's principle advisor Ross Hyland.
McDonald, an executive member of MIE, believes Silver Fern Farms and Alliance had a duty to their shareholders to pursue industry rationalisation, based on the contents of the 70-page report.
"If the boards are truly focused on creating wealth for their shareholders, are they not duty bound to pursue this net $400m?" McDonald asked.
The red meat industry injects more than $8 billion a year into the New Zealand economy.
That would have been significantly more if the national lamb kill had not fallen from 45 million in 1984 to around 21 million last year, because of poor profitability.
Yet despite these figures, more processing plants have been built or purchased in the past 10 years by Alliance Group, ANZCO and Affco, the report shows.
The report shows that eight ovine plants were closed around the country from 2005 to 2012 including Alliance's sheep meat plant at Mataura.
However, much of that capacity has been returned with six plants either purchased or built from 2005 to 2013.
This includes the South Pacific Meats Plant at Awarua which opened in 2005.
To achieve 100 per cent industry rationalisation a total of 19 plants would need to close as indicated in the rationalised ovine and bovine models in the report.
McDonald stressed that the models were based on best practice and "purely hypothetical" and due to complexity of industry ownership, most likely unobtainable.
"The decision to close any plants will be made by those who hold the levers of power."
The South Island plants listed on the rationalised ovine model include Silver Fern Farms Finegand plant, Prime Meats, Blue Sky, Alliance Group's Lorneville plant and Affco's South Pacific Meats Plant.
Further up country they include Lean Meats, Alliance's Pukeuri plant, Silver Fern Farm's Pareora plant and the ANZCO Ashburton plant.
Those plants missing from the ovine model include Silver Fern Farms Waitane plant at Gore and Alliance Group's Smithfield plant at Timaru.
Other smaller meat industry players around the country have also been affected.
The report calculates the average costs of rationalisation and closing plants, including fixed asset write-downs and redundancy is $197.6 million or an average of $10.5 million per plant.
McDonald, who farms in the Caroline Valley, near Dipton, believes there is an urgent need for consolidation. "We've got to cut the cloth to suit.
"If we don't make changes to secure the future of all participants in the industry, someone else will.
"Make no mistake, foreign capital is lining up at our borders to grab a chunk of Silver Fern Farms, and when that happens, my Co-op [Alliance] will have lost a once in generation opportunity. " he said.
A self-confessed passionate sheep farmer, McDonald is in the industry for the long-haul. But, he fears that doing nothing about rationalisation could result in a meat industry implosion.
"Deals will be done in the middle of the night and the gates will be locked in the morning. That's not acceptable - we need to do it properly and manage our future."
Farmers have overwhelmingly indicated support for a consolidated industry based around a co-operative model with scale.
The report suggests several different pathways to achieve this, but it requires the co-ops working together, McDonald said.
"We have to front up the the issues and solve them ourselves for the betterment of all New Zealanders instead of someone in Beijing making the call for their own benefit"
"Only two generations ago we were dominated by foreign ownership in the meat industry - we don't want this to happen again."
McDonald said it was time the processor boards came together and discussed the "size of the prize".
For him an extra $44,000 a year would pay for his maintenance fertiliser.
"Even if I only got half of that figure and the Co-op kept the balance to reinvest in the market I would be happy.
"If they did that, they would ultimately drive up the farm gate price of my lambs."
- The Southland Times