WorkinWords Comments and occasional rants on agribusiness and other topics – mainly New Zealand

A few years ago I came across a couple of reports about the consolidation of the US meat packing industry. The usual 80:20 rule applied in the beef industry – four firms handled 80% of the beef slaughter.

The focus was on beef, pork and poultry and the report had little if anything to say about lamb. But it got me thinking about the NZ meat industry, so I wrote an article about it and recently I reviewed what I had written to see if anything had changed over the years.

Four multi-plant operators; Affco, Alliance, ANZCO and Silver Fern Farms – still dominate the NZ lamb industry, with Ovation running close behind. According to recent data released regarding the 2012 allocation of the EU quota they handle about 75% of the lamb going to the EU. The actual numbers of stock processed by each company is commercially sensitive information, so there no figures for total sheep and cattle slaughter, but it is likely that the 80:20 rule applies.

Each of these major companies have been involved in what has been euphemistically termed the “rationalisation” process over the last 30 years, with closures, mergers and consolidation being the prevalent activity, presumably with the aim of matching the processing capacity to the numbers of stock available.

This might lead to the conclusion that the industry has achieved that much heralded nirvana promoted by Charles Hilgendorf and Adam Begg of the Meat Board, and Waitaki’s John Neilson, in the 1970s and 1980s.

They advocated the development of four large NZ owned companies plus some niche operators; this is close to a model structure being promoted by some of the speakers at the recent MIEC roadshow, although the MIEC preference is for one farmer owned company controlling some 80% of the business.

But a quick bit of research shows that after all the rationalisation, restructuring, changes in ownership, company crashes, plant closures and reconfigurations in the last 30 years, the number of plants has not changed significantly. Only the names of the companies have changed with Richmond disappearing and ANZCO joining the ranks ot the top four.

According to Beef and Lamb New Zealand there were 56 licensed meat export plants in 2012; this is 4 more than in 2000 and equal to the number in 1990; so despite all the consolidation activity the numbers remain the same. The only difference is the increase in the number of plants processing beef (there are now 37 handling beef either alone or in a multi-species operation), reflecting the change in livestock numbers and the increase in culled dairy stock.

So while the NZ processing industry might be seen as following the same path as the USA, there has been little change in the degree of consolidation over the years. While the bigger companies rationalised plants to achieve economies of scale, other entrepreneurs continue building capacity with smaller plants.

The USA reports noted that with the emphasis on cattle feed-lotting, “hog” farms and larger production units, it was economic to establish large slaughter units close to the production source. Also changes in plant technology had improved scale economies, and there had been some vertical integration of slaughter, further processing and packaging activities.

The variable NZ geography, a wider spread of livestock production, high transport costs and little use of feedlotting means that the clustering effect with larger scale processing plants is less likely here. However further processing and packaging has developed apace with an increase in the proportion of cuts and the greater emphasis on chilled product.

One of the concerns that the USA report considered was that consolidation led to reduced competition. The reports pointed out that fewer operators raised the possibility of lower prices paid to livestock producers, and for increased prices to retailers and consumers.

While the possibility of reduced competition for livestock exists here in NZ with four large operators, the tendency for new small plants to proliferate is likely to provide producers with a reasonable level of competition for their stock.

So the processing sector may have been rationalised to gain efficiencies but the penchant for having small operators to keep the big players honest still prevails. Any suggestion of further consolidation is likely to result more small processing operations to fill in the gap, or to “keep the buggers honest”; a case of deja vu all over again.

And the export and selling side is as fragmented as ever.

From a chauvinistic Kiwi stance, we should aim for the best possible returns from the overseas markets. We should have a structure to ramp up prices or at least provide the NZ meat export sector with some market power, as can be seen in the dairy industry.

The reality in meat export marketing is a little different. At the latest count there were 123 licensed meat exporters – this is well down on the 263 registered exporters more than ten years ago, but you still have to wonder what they all do.

While some may be specialising in selected products or markets, many will be competing to sell similar products to a limited number of buyers in our major markets, with price being the only real variable in the equation.

Maybe it is time to look at different structures to provide that market power. Watch this space.

It never ceases to amaze me that there are so many people offering practical advice these days. I noticed this first in the writing, publishing editing field where there is any number of advisors, consultants and gurus offering to improve your abilities or productivity – at a price. I suppose if you have lost your muse setting up as a writing/editing consultant at least keeps the cash flowing in a positive direction. (I have tried it and it works.) The number of advisors suggests there is a ready market for such advice.

But the writing sector pales into insignificance when compared with the business sector. In recent years, along with the questionable reliance on the efficiency of the market ecnomy, there has been a surge in the ranks of ‘consultants’ providing all sorts of advice, and new ideas, mainly reflecting competitive market principles, to companies, industry sectors, and the government in all of its many and varied forms.

This latter increase probably bears some relation to the decline in numbers of public servants, resulting from the restructuring requirements that have been imposed, possibly as a result of advice from other consultants.

Consultants used to be independent “experts” flashing some form of business management degree like an MBA which somehow gave them incredible insights as to how to advise on the restructuring, rebalancing or reorganisation their client’s business to achieve greater efficiency; actual experience in running a company or managing an organisation was not necessarily a prerequisite.

Now, consulting advice has become one of the many services offered by the major accounting corporations. They acquire information as part of their accountancy and/or auditing roles, and simultaneously they position themselves to offer informed advice on the management of the business, if and when such advice is sought. So they gain revenue streams not only from telling enterprises where they have been, but also from advising where they think they ought to be going.

There used to be an adage that if you asked a consultant what the time was, he would borrow your watch, tell you the time (maybe with a power point presentation) and then keep your watch. In other words they would find out what you were thinking and present it to you in a persuasive manner to convince you that you were heading in the right direction.

More pragmatically there can also be a tendency to recycle ideas from companies in other industries or countries, or even regurgitate proposals from earlier studies of the same industry. All of which suggests that there is probably a significant volume of data and ideas already in existence, and readily available to those currently employed in the industry.

But there can be a yawning abyss between theory and reality; consultants’ recommendations may be very reasonable and acceptable, but their implementation can often be problematic due to lack of commitment, or lack of funds, or just plain bloodimindedness on the part of some of the players concerned.

When the report is written and the recommendations come out it is likely the parties will wrestle with the implications and how they might be affected. Then there are questions about implementation, so finally nothing much happens; so, many reports by consultants gather dust on the shelves of corporate libraries.

I suppose the growth in the numbers and activities of consultants demonstrates that there is still a belief that external “experts” (particularly those from overseas0 are more knowledgeable than those already on the ground, or at least they will not be pushing their own agendas, so their advice is more objective. The reliance on consultants also shows there are sufficient wide eyed pretenders who believe the hype and pay the fees, in the hope that the gurus will provide them with the silver bullet solution.

That has certainly been the case for the meat industry which has been inundated with reports from Commissions of Inquiry, Meat Industry Task Forces, study groups and various working parties, as well as myriad consultants investigating and reviewing all or part of the industry and its problems.

As a result there have been proposals for (and sometimes implementation of) company mergers or consolidation, Associated New Zealand Farmers, national pools, Tradeable Killing Rights, Meatmark, NZ Lamb Company, Meat Industry Trading Organisation, Trial Run Holdings, Lamb Promotion Council, Meat Industry Freight Council, Beef Council, and the Meat Research & Development Council, as well as Meat Board intervention and control of sheepmeats. It is not a case of lack of knowledge; it usually comes down to lack of commitment to implementation or dissatisfaction with the outcome among the various factions of agribusiness politics.

So it is of concern to learn that the Meat Industry Excellence Committee propose to use consultants (or architects) to advise them on an appropriate industry structure or business model for the future. On the basis of previous experience the idea of hiring yet another grooup of consultants to reiterate known options will be a futile waste of time, money and energy.

The industry does not need external advice to come up with another solution. It needs to have a commitment from the major companies (in consultation with the MIEC and other farmer bodies) to develop a common goal and strategy with an agreed time horizon, and a business plan to implement it.

It would really only require an industry task force to determine what is achievable, affordable, does not cause too much disruption, and meets at least some of the requirements being sought by MIEC. In the circumstances improvements in the marketing activities seems to be the most likely. The models are known and some of them are working or would work if they were implemented with serious commitment from the major players, including the producers.

Is the sheep and beef sector going around in circles?

After the extensive reporting on the meeting in Gore called by the Meat Industry Excellence Committee (MIEC), I was prompted to review the origins of the New Zealand Meat Producers Board (NZMPB) almost 100 years ago. The factors causing farmer concerns were different but the reactions in terms of farmer meetings and the various shades of support or opposition are incredibly similar to those being reported today.

The first few chapters of “Golden Jubilee – The story of the first fifty years of the New Zealand Meat Producers Board” by Dai Hayward, set out the factors (mainly an overhang of stocks in cold stores and rising costs of processing and shipping, exacerbated by the onset of the economic recession) which led to a serious decline in prices for lamb in 1920/21.

Farmers began agitating for changes to the existing business model in the meat industry to alleviate the plight of the producers. They had discussed a scheme for the co-operative handling and marketing of primary produce, but they went one step further than the MIEC and called for goverment assistance or intervention. Perhaps fortuitously, Prime Minister William Massey favoured setting up a Meat Pool Scheme and the establishment of marketing board involving farmers, businessmen and government representatives, with “any power they want”.

As could be expected stock and station agents, meat exporters and processing companies, as well as some farmers, were adamantly opposed to these ideas; some cynics would suggest they were just protecting their patch.

The issue came to a head with a meeting in Wellington on January 10, 1922, with a farmers’ conference in Wellington attended by selected delegates from around the country, with views either for or against the proposals.

There was some vigorous debate, with suggestions that the proposed scheme was socialistic. Massey countered that “there is nothing socialistic about what we are proposing. It is co-operation.” The main opposition concern was that the proposed board would take over all meat and market it, known brands of lamb would lose their identity, and/or that there were plans to wipe out all the meat operators. Some of these views had been promulgated by the meat companies.

In the end, after a day of debate, the vote was in favour of change, and subsequently a Board was established with extensive powers “to control the export meat trade”. But in its first 50 years the Board did not exercise its powers to assume complete control; that came later.

It would be disingenuous to suggest the MIEC are aiming to resurrect the NZMPB and all of its powers, let alone contemplate any government intervention, but the issues being discussed and proposals for change are remarkably similar to those of the 1920s; the economic and political climate is quite different. However the calls for a Fonterra style structure suggests that the farming community are seeking a complete rethink of the business model with an overhaul of the meat supply and marketing chain.

The proposals particularly for marketing reform may be a reaction to the PGP proposal to use farmer controlled reserve funds to encourage them, once again, to improve productivity, when they have been doing that almost continuously for the last fifty years. Experience has shown that farmers will respond to consistent price signals, so maybe the current agitation is a call for a better system to deliver those consistent price signals.

Even so, proposals to emulate the dairy industry could be a tad optimistic. Fonterra arose from a long established single desk marketing organisation (the Dairy Board) and mergers of a number of co-operative dairy processing companies, before they were pushed together, and the business model was cemented in place via legislation.

Setting up such a structure for the meat industry would require a significant change in thinking, not only among farmers who would have to adjust to the idea of long term supply contracts, but also among processing and exporting companies, especially if the idea went so far as one major marketing enterprise. It may even require some government intervention in the form of legislation.

An arrangement like that for the meat industry is likely to be a bridge too far for all the parties. Some form of incremental commercial arrangement with more modest goals may be possible, if there was a willingness to co-operate. The reported discusions between Alliance and Silver Fern Farms (and maybe others) would appear to be a good start.