Fran O'Sullivan and Alexander Speirs: Politicians chew over meat

Some say the red-meat industry could follow Fonterra's example in the export sector. Photo / Val Sherriff

New Zealand's red-meat sector has not been a picture of robust health in recent years.

While dairy has boomed -- that's until this year when China put the clamps on to cope with a massive overbuild of milk powder inventory resulting in Tuesday's downgrading of the Fonterra milk payout -- meat has stuttered with below-par growth and performance resulting in a dip in profits and confidence across the sector.

Now the politicians are getting in on the action, adding their voices to industry leaders who again want to put consolidation of the meat-processing sector on the agenda.

The metrics tell the story: Silver Fern Farms, our largest meat processor, made a loss of $28.6 million last year, following a $31.6 million loss in 2012. Alliance Group, second largest to Silver Fern Farms, made a modest $10.9 million profit last year after suffering $57 million of losses in 2012.

Under a Labour Government the meat industry would be subject to radical changes with consolidation at the top.

Despite the differences between the meat and dairy sectors there is an upside to forming a big company with international marketing clout and the success of Fonterra provides a strong platform for supporters to argue from. Consolidation has been attempted twice before. The most serious go was in 2008 with an attempt to forge an agreement that would have encapsulated 80 per cent of the meat industry. That merger failed when Silver Fern Farms could not reach an agreement with Alliance, Anzco and Affco on the formation of a single company.

But Labour is promising the industry would be provided with resources and leadership to have another go. Says Damien O'Connor, Labour's spokesman for Primary Industries, Biosecurity and Food Safety: "The current Government's approach has been if you come up with the right solution, then we will look at it. We believe that the government has to be a key player in helping the industry arrive at that solution. That means taking a leadership role in addition to the funding that's currently committed -- which could perhaps be spent in better ways."

Labour would commit to amend the Commerce Act which prohibits a collaborative approach as it would substantially lessen competition.

Labour also has its sights on the Government's $350 million Primary Growth Partnership Programme -- an initiative targeted at supporting primary sector innovation and lifting exports. The project will pay out close to $700 million over its lifetime. The apparent generosity has drawn the ire of critics and the Auditor-General, who is in the process of investigating the entire scheme.

"There's still a lot of work to be done to identify which is the best model moving forward. We don't profess to know what that solution will be, but there are many committed people within the industry who, with the assistance of government leadership, will be able to develop and arrive at a better industry structure," says O'Connor.

The chairman of New Zealand Beef & Lamb, James Parsons, said: "We appreciate that Labour is keen to support moves towards an improved red-meat sector structure, and agree that any structure needs to be up to those in the industry, in particular the owners of those businesses."

It's not hard to read between the lines to see that any proposed leadership from the Government would be met with a healthy dose of scepticism from industry. Both Silver Fern Farms and Alliance Group have increased their co-operation in recent times, undertaking a number of joint ventures -- though it's far from the collaborative environment a Labour Government would desire.

"I think there's genuine improvement for change and improvement at the farmer level, but there are many layers in the meat sector -- some of them entrenched and some who make money regardless of the returns to farmers or companies. That structure has to be changed," said O'Connor. "There are a number of existing layers within the meat industry who want no change because they are doing so well from it and that would include, of course, the supermarket chains who have been able to successfully play off one company against another to drive down the market returns for their stock."

Next week we'll look at how agribusiness issues are becoming a political football as the election gets closer.

Fran O'Sullivan is a business columnist for the NZ Herald and Alexander Speirs is a business journalist for Herald Business Reports.