Differing debates on producer industries

Debate over the structure of meat and dairy companies is nothing new, but, as Agribusiness Editor Neal Wallace reports, the current discussions about the future of the meat industry and ownership of Fonterra provide graphic evidence facing the two sectors.

The contrasting positions are obvious to observers of the debate occurring on the nation's farms.

On one side, dairy farmers are deciding how to grow Fonterra further by attracting outside capital. On the other, sheep and beef farmers are fighting to find ways to help the meat industry survive.

Both debates concentrate on the structure of the industries, an issue that regularly rears its head, but there is some concern that this could be at the expense of focusing on markets, an issue especially pertinent for the meat industry.

About the only similarity between the two debates is that they are being driven by farmers, not unusual for the dairy industry, but a welcome change from sheep and beef farmers.

In short, the proposals centre on retaining farmer ownership, but with the meat industry proposing consolidation and Fonterra opening up its ownership.

There is a risk, however, that both industries could end up with a hybrid ownership structure.

If farmers do not have dominant ownership, Fonterra and the meat industry could both struggle to set attractive prices for milk and meat as they juggle the interests of co-operative supplier-owners and investors.

But too much farmer control could deter outside investment.

Fonterra shareholders have already rejected a proposal to publicly float part of the company, sending the directors back to the drawing board.

Fonterra chairman Henry van der Heyden said this week shareholders would be presented with other options that addressed the need to reduce redemption risk, access capital and provide farmers with choice.

There is a view that Fonterra was rushing, that it did not have a great track record with off-shore investments and supercharged demand for dairy products meant the time was not right to be looking for new dairy companies.

Fonterra, the market leader, is already grappling with how to establish a transparent milk price, and the same issue would apply to a meat mega company - who gets the money? The suppliers or the investors?

Backers of the Alliance Group's proposal for a meat mega company controlling 80% of processing and marketing, will walk a tightrope as they negotiate with public, private and foreign-owned meat companies to create the new entity.

Not only has it got to bring them into the fold, but ensure farmers retain enough control to keep them committed.

The preference for both dairy and meat suppliers has to be farmer control, to avoid any clash of interest, but cash-strapped sheep farmers, they may not have the financial clout to buy existing meat companies, fund the required restructuring and invest in marketing.

Alliance chairman Owen Poole said depending on the new ownership structure, co-operative members might have to contribute up to $40,000, which comes at a bad time for sheep and beef farmers who are also being called on to contribute to a new wool industry marketing structure and to fund industry science in order to access promised new funds from the Government.

While the structure debate may be necessary, for the meat industry especially, it will not be the end. Agreement on a new, united structure may be necessary but equally important is expanding markets.

There has been criticism from North Island farmers that the meat mega company model relied on scale to succeed, rather than being market driven.

But that ignores the fact the industry needs to reduce processing capacity, address the number of quota suppliers to the United Kingdom, invest in research and development and grow new markets. 

It all takes money and, as Fonterra has discovered, supermarkets with billion-dollar-plus turnover want to deal with fewer suppliers and those suppliers need scale to get access to buyers and have negotiating clout.

Meat exporters are effectively reliant on two markets which have stopped growing - Europe and North America, which take 92% of our sheep meat exports - and the industry needs to start spending money on new products and nurturing new markets in oil-rich economies in the Middle East and Russia, along with China and India.

These are costly, long term investments and the meat industry does not have the time or the money to do it alone.

While consolidation would help, there are huge hurdles to clear and agreement by early 2009, as has been suggested, would be a major ask.

Support for a meat merger has grown in the South Island, where farmers are accustomed to working with two large farmer-owned co-operatives, but the North Island is quite another beast.

Companies there are generally smaller and either publicly or privately owned, and the Sunday night auction is a weekly occurrence for farmers negotiating the best price for their stock among a host of potential buyers.

Another hurdle is satisfying European Union competition regulators. They recently flexed their muscles at Fonterra, claiming it had excessive market dominance over butter imports.

Similar accusations appear likely with a Fonterra-sized meat company.

Creating Fonterra had an advantage over meat companies in that there were philosophically similar but regional competitive co-operative companies, with the Dairy Board doing all the marketing.

This made merging quite simple, but taking the next step desired by the board is not a given, as Mr van der Heyden has already found out.

The sheep industry has complex ownership administering complicated, seasonal product.

What it has in its favour is that farmers are motivated for change, tired of cyclical improvements in price, and meat companies are motivated because they are not making money.

As with the dairy industry, it is not certain whether that desperation will translate into a new ownership structure.

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