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Billions Could Be Saved in New Zealand Red Meat Sector

25 March 2015

NEW ZEALAND - Savings of hundreds of millions, potentially billions of dollars can be made in New Zealand’s red meat sector through industry rationalisation and consolidation.

These are some of the findings from a new report ‘Red Meat Industry – Pathways to Long-Term Sustainability’ provides independent analysis of the industry, commissioned by Meat Industry Excellence (MIE), to help farmers and industry players make progress to reform the structure of the sector.

The report extrapolates various savings estimates from industry rationalisation and consolidation. It shows that more than NZ$400 million in gains is available over five years just from the two big meat co-ops Silver Fern Farms and Alliance Group getting together.

More than a billion dollars in savings could be realised from a rationalisation process that included the four largest companies agreeing to a co-ordinated and managed consolidation, (Silver Fern Farms, Alliance Group, ANZCO and AFFCO).

MIE chairman John McCarthy said the report highlights the gains possible if the industry can tackle its structural challenges co-operatively.

The report finds:

  • There are hundreds of millions of dollars to be made if the two big meat co-ops alone get together, let alone further consolidation which offers billions of dollars in gains.
  • Farmers support a co-operative led sector and are very concerned about the risk of foreign ownership of their supply chain.
  • Providing a cohesive and comprehensive strategic plan is developed, farmers would be willing to invest to boost future returns.
  • Over-capacity is costing farmers and processors a great deal, and distorting market behaviour to the detriment of export value.

Mr McCarthy said MIE’s focus is on returning more money to farmers so that the industry’s productive base stops shrinking and returns to growth.

“Returns to sheep and beef farmers are too low and not sustainable,” he said.

“If we don’t turn this around, New Zealand’s number two export industry will dwindle as its productive base erodes.”

The report notes that current rates of conversion to dairy, shows that ewe numbers could fall from 21 million today to 15 million in five years and 10 million in ten years, while the national dairy herd climbs to 7.5 million from around 6.5 million today.

While New Zealand dairy farmers were the best paid in the world, Kiwi sheep and beef farmers earn on average, around half what their overseas counterparts do, said Mr McCarthy.

“We want to make New Zealand red meat farmers amongst the best paid in the world so that our industry grows and thrives, and provide land use competition to dairy farming,” he said.

“A balanced land use portfolio is in the national interest.

“The export opportunities for New Zealand meat protein are enormous, but we are hamstrung by an inefficient and destructive industry model.”

The report finds strong support among sheep and beef farmers for a consolidated co-operative model.

A feature of the report is the extent to which over-capacity in the processing sector is imposing a heavy cost on farmers. The report finds the total value of benefits from rationalisation of the processing sector to be NZ$444 million per year, the largest savings coming from rationalising processing capacity, as well as savings in supply chain and procurement costs.

The analysis shows that the industry can currently kill its lamb and beef production more than twice over each year.

The resulting competition for stock throughput means that, for example, 50 per cent of sheep and cattle are transported beyond the nearest processing plant, more than doubling the cost-per-head of transporting stock.

Included in the report are eight recommendations in support of the rationalisation of the industry:

  • Red meat sector processors need to put individual differences aside and work collaboratively to find and industry-wide solution.
  • ‘Chain Licensing’ is an initiative worthy of review.
  • A structure or holding company, e.g. ‘Big Red’, may be needed to park redundant processing capacity and facilitate plant closures. It would also enable the whole industry to participate and that makes rationalisation viable.
  • The government has an essential role to play in enabling the consolidation and stabilisation of what is a cornerstone industry in New Zealand.
  • Committed or contracted supply is pivotal to achieving long term stability.
  • The red meat sector should consider initiatives employed by the New Zealand electricity industry in considering how to deal with seasonal or peak processing events.
  • Farmers are likely to support a future capital raising proposal, if it were to provide a clear vision and pathway into the future.
  • Structural change must result in a transition from a production led model to a consumer focused, value added model.

Mr McCarthy said that the report would be made available for farmers and other parties interested in the detailed analysis on MIE’s website along with the individual reports from various contributors.

He said it was important for farmers to have a robust, warts and all understanding of the sector, so that they could engage with their co-operatives and other industry stakeholders to promote change.

“Farmers are the ones with most at stake, and it’s extremely tough for sheep and beef farmers at the current low levels of returns,” he said.

“But it also matters a great deal for the NZ economy that our second biggest export industry is in crisis and performing so poorly, when in fact the opportunities are so significant.

“The potential here is for another national champion to rival or even balance dairy exports, but this won’t happen without structural reform.”

TheCattleSite News Desk

Top image via Shutterstock

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