Closing 13 sheep and six beef processing plants throughout New Zealand would result in savings of $215.5 million a year, international consultancy firm GHD has found.
An industry report from GHD was commissioned by Meat Industry Excellence, as part of a wider report released in Wellington last night, which provided independent analysis of the red meat industry.
MIE accepted that 100% co-operation among processing companies was ''improbable'' so the gross rationalisation benefits estimated within its report were ''overstated to some degree''.
A key issue in the GHD report was that overcapacity was the catalyst for a raft of negative flow-on effects from procurement to a lack of profitability, resulting in relatively poor levels of investment in marketing, research and development, MIE said.
Weekly killing capacity in the sheep and lamb sector had decreased by only 3.4% over the past decade, despite the reduction over the same period of 10 million sheep stock units.
GHD highlighted that ovine processing used only 47% of current capacity and that was constantly, if not daily, getting worse on the back of the ongoing reduction of capital stock.
It recommended up to 13 ovine plants by closed, out of the 34, reducing capacity by 21%, improving utilisation by 26% and driving down total operating costs by 8%.
Beef cattle numbers had decreased by about 500,000 head in the past decade and now numbered about four million.
Closing six of the 27 beef plants would improve plant utilisation by 19% and reduce total operating costs by 6%.
The average costs of rationalisation and closing plants, including fixed-asset writedowns and redundancy was $197.6 million, or an average of $10.5 million per plant.
Associated redundancy cash costs associated with closing the 19 identified plants was about $63 million out of the total of $197.6 million.
The proposed closures and resulting efficiencies, together with improved yield recovery and adoption of best practice, would add year-on-year savings of $5.75 per lamb and $39.25 per cattle beast for every animal processed.
MIE acknowledged anecdotal comment that reduced capacity would put farmers at risk during drought events, when they needed to get stock killed, but said the facts did not support that.
Even if all plants recommended were to close, significant latent capacity would remain in the industry should the remaining processors move to world best practice and increase double-shifting or consider triple shifts, the GHD report suggested.
As far as a solution in drought periods, MIE believed a more practical solution would be to ask Government to regulate a similar model to that adopted by NZ's power generation industry, where the industry determined the level of ''default capacity'' that should be set aside to manage droughts and/or floods.
GHD's work made it clear that continuing to do nothing was costing red meat farmers about $450 million a year, MIE said.
The fact processors had failed to grow the industry over the past five years had meant New Zealand farmers had paid a minimum of about $2 billion in that time to keep some processors operating.
Based on conservative 40 million sheep equivalents, that was an unnecessary loss of $50 cash off the bottom line per stock unit for every dry stock unit in New Zealand.
That equated, for the average farmer with 5000 stock units, to a cost of $250,000. Without change, those costs would continue.
Even if only the two southern co-operatives, Alliance Group and Silver Fern Farms, merged, analysts suggested savings of about $100 million a year were possible in the first five years.
MIE acknowledged such rationalisation would be difficult to implement ''due to the significant differences between the two leadership groups''. But gains were ''so financially compelling'' it was hard to rationally explain why that had not been, and would not be, tackled.
