The meat industry in the South is set for yet another upheaval which is likely to be terminal for the Alliance Freezing Co Ltd in its present form.
This follows the recent forced restructure of the former PPCS, now Silver Ferns Farms, which was also facing receivership until Chinese capital and restructuring by the banks saved the company.
The question arises: has the co-operative model served the meat industry well? Any independent assessment would probably indicate that, no, it hasn’t.
The continuing land use change is evidence enough that the meat industry is underperforming, despite vast increased returns this past season. Suitable land is moved to dairying and the better hill country into pine trees to farm carbon for carbon credits.
The history of the meat industry in the South is littered with failure, then closures due to competition and a lack of older plants being structured to meet demand for processing space for a longer season and thereby enhanced profitability. This previous history is entirely relevant to the proposed bid by Irish company Dawn Meats for a 65% stake in Alliance.
Borthwick’s, Ocean Beach, Southland Frozen Meat, South Otago Meat Co, Fortex, Waitaki Industries, NZ Refrigeration and Canterbury Frozen Meat are now distant memories of a bygone era. The contraction of the sheep industry is largely due to sheep numbers falling from a high of 70 million in 1982 to 23 million today but that is not the only reason.
Crossbred wool prices have collapsed to the point of being a liability to the sheep farmer. Not so very long ago, meat and wool each made up approximately 50% of a farmer’s income. Wool is the most natural and environmentally friendly fibre on the planet yet is almost worthless. Why was this allowed to happen?
The demise of Waitaki Industries in 1990 was a lesson too late for the learning, yet the industry ignored the reality that excessive capacity had to close, forcing a far greater discipline requirement of the entire sheep industry, farmers and processors.
That didn’t happen. It was thought a political directive from then prime minister Sir Robert Muldoon insisted Alliance take over the much larger but failing Waitaki Industries.
It took Alliance too many years to recover enough to realise its potential, due to the burden of debt. Waitaki should have been allowed to go to the wall.
Fledgling meat company Fortex founded in 1990 was seen as a way forward for the entire industry and therefore became a real threat to the co-operatives especially. Somehow the co-ops found more money than Fortex could reasonably pay for procurement. Fortex could not compete and the receivers were called in.
Fortex lasted only four years. That was a tragedy for the wider industry.
The hostile takeover of Richmond meat company by PPCS in 2003 probably exemplifies the industry. The six-year battle cost $140million, yet it was not clear to many suppliers just where the advantage of the takeover lay. The meat industry’s geographic spread from north to south offers year-long supply, if only the companies could work together. Compulsion is unlikely to work.
The co-operative structure (PPCS and Alliance) appealed to many sheep breeders as it was hoped to be an ideal structure for the meat industry. Both companies became co-operatives, but in name only — unlike the dairy industry (Fonterra) which continues to succeed as a genuine co-operative.
Supply of lamb was never guaranteed by the farmer shareholder of either co-operative so finding enough stock became a daily auction between all the processing companies. The removal of subsidies in the 1980s when a lamb was worth no more than a single figure indicates the sheep industry has probably done quite well to survive — thus far.
Alternative land uses therefore have become the natural consequence of the wider sheep industry’s inability to compete with dairying and beyond.
Beef and dairy products continue to be in worldwide demand. Beef dominates the meat industry worldwide.
New Zealand ranks a distant 36th in world production of meat. The sheep industry is reliant to a very large extent on China.
Alliance is New Zealand’s biggest lamb processor, but lamb makes up a small part of the world’s meat trade, making the reliance on sheep meats very exposed to any downturn in lamb prices.
Dawn Meats has apparently offered $250m for a 65% stake in Alliance which has been told by bankers to find $200m by the end of this year.
Alliance shares are valued at between 30c and 80c per share, after 45 years of existence.
The main issue is not the Alliance share price or whether the offer is fair value but whether banks should take control of Alliance and if excess capacity should be eliminated. A small group of farmers appear to want to keep the co-operative status alive without addressing the elephant in the room — or really in the South Island — which is overcapacity.
That group needs to create a vision for sheep farmers to achieve real support. More of the same just doesn’t work any more. Questions exist around preferential pricing for some big suppliers. If that is correct, it is hardly part of the co-operative ethos, or is it?
More works have to be closed and lamb producers have to change the way they do business with their chosen processor. The grass curve in the South creates real problems for processors as demand for space increases. The supply curve therefore must change, despite being difficult to achieve.
Dawn Meats has given no indication as to whether it is prepared to close any Alliance-owned processing plants and alter the rules of engagement with suppliers.
Should the deal go ahead with Dawn Meats and sheep farmers don’t like the prices they offer for stock, it’s the farmer who has the whip hand, not the processor.
The very real problems of the meat industry therefore cannot be laid at the feet of any one of the sectors that go to make up the wider industry but rather a combination of factors left to drift for too long by too many of the wrong people who don’t understand we should co-operate locally to be able to compete internationally — with beef, pork and chicken.
Perhaps it is time for a meat industry summit where all the players can search for common ground based on the realisation that the status quo cannot continue.
• Gerry Eckhoff is a retired Central Otago farmer, former Otago regional councillor and former Act New Zealand MP.
