Red Meat Industry PAT WAY TO LONG-TERM SUSTAINABILITY March 2015 CONTENTS Chapter Page Foreword 1 Acknowledgements 2 Overview 3 Background 5 Issues Facing the Industry 9 Relationship Quality 13 Key Findings from Reports 15 Current and Proposed Future Processing Capacity 31 Rationalisation Options or Pathways 45 MIE Recommendations in Support of the Rationalisation of the Red Meat Industry 59 Additional Expert Review 63 Summary 65 Glossary 67 Bibliography 68 Appendices 69 Disclaimer 69 ISBN Number 978-0-473-31589-4 Front cover photo: Courtesy Beef + Lamb New Zealand www.meatindustryexcellence.co.nz FOREWORD I am pleased to commend this report to the farmers of New Zealand but also to all the stakeholders reliant on and related to the fortunes of the Red Meat Sector. At the outset I would like to pay tribute to those farmers who voted to support this initiative through the Beef + Lamb New Zealand remit process in 2014. I am hopeful, as the material contained within is brought into the public arena, that your confidence was justified. It would be negligent of me not to acknowledge the MIE team; their unstinting effort and belief in the opportunities around reform has been a hallmark of the process to date. We are not, however, alone. We could not have sustained the journey without the support, encouragement and wise counsel of innumerable businessmen, women and professionals. That generosity, on both a financial and intellectual level, has been inspirational. To our detractors, the defenders of the status quo and their own positions, I also commend this document. For me there are some main thrusts as to the need for reform: • To realise the opportunities associated with the most nutritious protein in the world and to make our farmers amongst the richest in the world as a result. • To balance our economic opportunities and our land use portfolio. • To rebuild and maintain the fabric of our regions and our rural communities and preserve the intergenerational family farm concept. • To maximise the return on investment on the substantial amounts of money of both taxpayer and farmer origin currently at risk from inefficient and destructive competition beyond the farm gate. • To promote a synergistic and co-operative approach within the industry primarily around procurement and in-market behaviours. • To encourage and foster grassroots knowledge and participation in the sector’s future, with a distinct focus beyond the farm gate. The information contained in this report is not new. It is, however, the first time it has been made so widely available with a pan industry focus. It is the sincere wish of the authors and those involved in its formation that this material is a catalyst for consensual, profitable and sustainable change. John McCarthy Chairman, MIE 1 ACKNOWLEDGEMENTS First and foremost, we wish to acknowledge and extend appreciation to the group of farmers who had the courage to stand up and organise meetings of concerned farmers up and down New Zealand in 2013. The MIE was thus born and this report is the culmination of enormous effort from a wide cross section of that group. They know ‘who’ they are and our sincerest thanks go to them. We also thank all those processor representatives that gave up their time so generously and made themselves available for interviews. Special thanks and acknowledgment also go to: • Graeme Baker and Robert Sinclair from GHD. • Fiona Hudson from Cinta. • Geoff Vautier (sub-contracted by GHD). • Caroline Saunders and Glen Greer from AERU. • Nic Lees; Senior Lecturer in Agri-business and Commerce, Lincoln University. • Andrew Gibbs from Deloittes. • Alasdair MacLeod for his deep knowledge. • Andrew Morrison from Morrison Mallett, Lawyers. • Sir John Anderson. • Malcolm and Sue Prouting for their support and for letting the co-author and editor take photos of their beautiful property, Mesopotamia. • Certain processor CEO’s, Managing Directors, Chairmen and Directors who have supported these MIE initiatives (they know who they are). • Those farmers and farming leaders from Mossburn to Kaitaia for their words of wisdom. We would like to acknowledge the input from the Beef + Lamb New Zealand Board, Chairman James Parsons and in particular the outstanding level of engagement and support from Chief Executive Scott Champion and Chief Operating Officer Cros Spooner. John McCarthy Chairman MIE 2 Ross Hyland Principal Advisor OVERVIEW Importance of the industry to the New Zealand economy The red meat industry is one of New Zealand’s largest export earners, vital to a balanced land use and an integral part of the country’s economy. The value of meat, skins, wool and co-products is estimated to have earned New Zealand circa eight billion dollars in 2014 – Ref: Situation and Outlook for Primary Industries 2014 (SOPI). The global shortage of quality protein and New Zealand’s reputation for nutritionally ethical products and clean green image support a favourable future for the red meat industry. However, low profitability in the processing sector due to falling stock numbers, procurement battles and structural deficiencies result in uncertainty and volatility of returns for farmers. These issues have simply compounded the ongoing instability in the industry and are a major contributor to the decline in capital stock numbers. The outcome of the current situation has been poor financial performance; the sacrifice of long-term strategy for short-term thinking; variable returns to producers and an erosion of trust between the farming community and other industry participants. The continuing decline of the industry in terms of livestock and more importantly the area of land dedicated broadly to its use are accepted as inevitable unless a successful programme of reform/restructure (that will benefit consumers, farmers and processors alike) can be implemented. The Red Meat Sector Strategy (Deloittes 2011) stated that sustainable change in the industry requires informed, aligned, behavioural change on the part of all stakeholders in order to achieve coordinated in-market behaviour, efficient and aligned procurement, and sector best practice. The industry is a challenging and unforgiving one. It is an industry subjected to the vagaries of climate, exchange rates, farmer DNA, procurement imperatives, balance sheet issues and a multiplicity of processors, exporters and politics. It is also an industry that has largely failed to learn the lessons that the ‘hand of history’ has dealt, a point illustrated by the following three quotes from 20-25 years ago: Source-Meat Acts. The New Zealand Meat Industry 1972-1997 (Mick Calder & Janet Tyson. Published Meat NZ) 1991 by Andrew Meehan, CEO of Southpac Bank…. “At a time where the requirements are for added value, research and development, distribution horsepower and visibility to the customer through focused marketing expenditure; the meat industry is, in my opinion behind the eight ball”…. 1993 by Sir David Beattie, in his Chairman’s address to the Meat Industry Association noted that… ”The fatalistic approach favoured by some outside observers, that ’only a few failures’ will resolve the industry problems, is not valid or an acceptable solution”… In the early 1990’s Council of Trade Unions (CTU) economist Peter Harris suggested there was a basic structural weakness in the industry and suggested it… ”staggers from crisis to crisis because the cycle traps it into a short term commodity situation, trading unprofitably with diminishing equity”….Harris went on….”Meat companies have low equity, high fixed costs and excess capacity forcing them to maximise throughput to spread overheads; individually each company under invests in product and market development, training and other investments that could improve returns in the long run; companies pay above actual market prices for stock in order to ensure throughput which depletes equity further and the company begins the next season in an even worse position. The industry never gets into a position where it is responding to long term market imperatives”…. 3 The findings in this MIE report and the anecdotal material demonstrate that little has changed in the past 25 years. However, the difference today from a quarter of a century ago, is that the jeopardy of doing nothing (as identified within this report) can no longer be sustained and is very costly. In the light of this, farmers and processors can no longer ignore the call to action if they wish to maintain a modern, scientifically based food industry of scale. There is strong support among farmers for change. The MIE survey of red meat producers in 2014 (Cinta) found that almost three quarters of those surveyed support restructuring of the industry towards a more substantial co-operative structure. They believed that this structure would enable producers to gain a larger share of the total value created, and thus increase their returns. The survey also found that there is overwhelming support among red meat producers for ensuring that more of the supply chain is captured by New Zealand farmers to remove any potential for it to be taken over by foreign corporates. The ownership of the New Zealand processing industry has shifted from predominantly foreign to primarily domestic ownership since the 1970s. Failure to address the issues facing the industry will increase the likelihood that a greater percentage of the industry’s processing assets will be acquired by overseas investors in the wake of ongoing financial duress of one or more of the existing processors. The Cinta survey showed that a much higher level of trust in the red meat processing industry will be required if the majority of farmers are to commit to supply contracts in the future rather than ‘sale by auction’. Key weaknesses in the industry have previously been identified by the Government’s major ‘Food and Beverage Information Project’ as have many other commentators and include: • Inefficient procurement of stock (competitive rather than coordinated). • Inefficient use of meat plants resulting in poor utilisation and unnecessary cost. • Lack of in-market coordination in overseas markets. • A proliferation of competing exporters. The Meat Industry Association (MIA) has 26 processor/exporter members. According to Beef + Lamb New Zealand there are 123 registered companies on their Red Meat Trade Directory. Recently the Alliance Group Limited (AGL) Chairman stated in his annual address, that there are some 70 competing exporters. Regardless of the precise number, the reality is that having so many New Zealand exporters competing with each other, erodes value for both the individual processors and farm gate returns. • And finally an inability to accurately link production to market demands. It is the earnest hope of the authors that this report will provide the genuine catalyst for informed debate resulting in a consensual as well as a non-adversarial approach that will be of future benefit to the farmers, processors and all associated stakeholders in what MIE believe to be a magnificent opportunity. MIE also hopes that the information and resultant opinions arising from this report will generate constructive debate and signal the beginning of the reform process that will deliver tangible and enduring benefits to the majority of industry stakeholders. Both processors and farmers alike must develop the platform that delivers long term sustainable profitability to the red meat industry. Ross Hyland Co-Author & Editor 4 1.1 Background The Meat Industry Excellence group (MIE) was established in early 2013. The Co-Author and Editor wish to acknowledge the significant contribution from many on the MIE Team, both past and present to this document. Since commencement, MIE has continued to build support from farmers to secure the long-term returns to New Zealand that the red meat industry is capable of. MIE came about as a result of a number of large farmer rallies around New Zealand in early 2013, where dissatisfaction was expressed with the financial performance of the industry. To date MIE has: • Engaged with farmers and industry stakeholders throughout New Zealand. • Appointed Ross Hyland as Principal Advisor in May 2013. • Endorsed candidates on a reform platform for the Boards of the two large South Island based co-operatives. • Lifted shareholder awareness and participation in those election processes. • Undertaken significant and ongoing consultation with Andrew Morrison (Morrison Mallett, Lawyers) and Sir John Anderson (Banking) regarding the way forward. • Submitted a funding remit to the Beef + Lamb New Zealand 2014 AGM resulting in subsequent endorsement by the Beef + Lamb New Zealand Board. • Commissioned an industry report from GHD. • Commissioned Cinta to conduct a nationwide survey of farmers. • Commissioned Lincoln University’s Agribusiness and Economics Research Unit (AERU) to peer review the GHD, Cinta and other reports prepared by or for MIE. • Consulted throughout New Zealand with 85% of sheep meat processors and 86% of beef processors by volume. • Consulted EY (Ernst & Young) to consider carrying out a high level economic impact statement of a consolidation proposal, involving ‘Chain Licencing’ and the treatment of redundant assets and long term impacts on farmer profitability. • Consulted with a range of key industry stakeholders. • Consulted with supplier and farmer groups. • Researched, developed and produced this Red Meat Industry Report. MIE set about focusing on the following questions and answers: Is there a problem? • Yes, most definitely. What is that problem? • Inadequate and inconsistent farm gate returns. • Inadequate processor returns. • Loss of land to other uses, particularly dairying. • An industry that is shrinking in scale. 6 What is causing that problem? • Over-capacity. • In some cases, inefficient and old plant and technology. • Over-investment in procurement relative to marketing. • Insufficient investment in marketing. Why aren’t these issues being addressed? • Too many competing processing and marketing companies, a lack of processor profitability and too little commitment by farmers to specific processors. What is the immediate annual cost of this problem? • $450 million dollars. (Refer GHD Report) What needs to happen to fix the problem? • Consolidate processing to get scale. • Determine what period would be appropriate for a moratorium preventing new capacity. • Long term supplier contracts. • Collectively, as an industry, determine reserve capacity for droughts. • Collectively close plants. • Consider ‘Chain Licencing’ as an enabler. Comment: Over-capacity is compounded by falling sheep numbers and cannot simply be taken care of with better lambing percentages and/or heavier carcass weights. Situation and Some History • Although the global market prospects for the New Zealand red meat industry are favourable, the industry is characterised by poor financial performance, variable returns and a lack of trust between the farming and processing sectors, with insufficient focus on consumers and value added strategies. • It is probable that the industry will continue to decline or perform sub-optimally unless reform occurs that truly allows the industry to focus on consumers and, in the process, create more value and capture a bigger share and return to New Zealand. If reform is to be successfully undertaken in the industry, the large majority of farmers need to commit to long term contractual supply relationships, which will require the development of much greater levels of trust between processors and farmers. MIE has consistently stated that processors must be prepared to address three key issues which have been identified by a number of commentators as the main weakness in the current industry structure: • Excess processing capacity resulting in inefficiency and unnecessary cost. • Inefficient procurement of stock created largely by this over-capacity. • Lack of in-market coordination by exporters in New Zealand’s export markets. These attributes remove the industry’s ability to be truly market and customer focused. The meat processing industry’s history illustrates cycles of over-capacity and under-capacity which in turn is created by the increase or decrease of stock sent for processing. The deregulation of the industry in the late 1970s led to the emergence of smaller plants which were more efficient than their larger counterparts. This trend continued with the emergence of ‘one chain’ companies specialising in ‘export cuts’, often sold at a ‘business to business’ level and operating profitably because they were able to achieve largely full capacity processing. 7 Despite a number of plant closures, the cost of entry was relatively low so a number of new plants opened. These plants are listed in Table 1 below. Ovine - recent processing capacity changes New Capacity; (purchased or built) Closures Table 1 Year Company Plant 2005 2008 2008 2009 2011 2011 2011 2012 Silver Fern Farms Silver Fern Farms Silver Fern Farms Wallace Corp Alliance Group Silver Fern Farms Progressive Alliance Group Tirau Oringi Canterbury Thames Sockburn Canterbury (*F/P) Waipukurau (*F/P) Mataura *(F/P) Further Processing, boning and cutting TOTAL Year Company Plant 2004 2005 2005 2005 2009 2013 Alliance Group ANZCO AFFCO ANZCO Alliance Group AFFCO GHD Data Dannevirke Rangitikei SPM Awarua Rakaia Levin Malvern TOTAL Weekly Killing Capacity 12,000 28,800 35,390 5,000 17,500 40,000 138,690 Weekly Killing Capacity 25,000 25,000 25,000 5,000 12,500 7,500 100,000 The conversion of traditionally red meat farm land to dairying has impacted negatively on the largest four meat processing companies in New Zealand – AFFCO, ANZCO, Alliance Group Ltd (AGL) and Silver Fern Farms (SFF). 8 • AFFCO, owned by the Talley family, has plants that are largely in excellent order after considerable investment in modernisation (circa $375 million over 7-8 years). • ANZCO is in a similar position to AFFCO in terms of modern plant. Its business is underpinned by effective marketing and branding with a strong (75%) Japanese shareholder that provides robust support and pathways to market. • AGL’s balance sheet is almost totally reliant on sheep meat revenues (90%) with the majority of its supply base in the South Island. The co-operative faces the most pressure from land use change. • SFF, the largest plant owner, has the most financial risk arising from a market that has material overcapacity and its balance sheet has been weakened by significant losses over the past five years. This has effectively manifested itself in an inability by SFF to close plants due to its constrained balance sheet. Debt reduction and a proposed capital raising will be critical during 2015. 2.1 Sheep Numbers and Trends Beef + Lamb New Zealand’s 25 year ‘trend line’ (refer data in Table 2) strongly suggests that the sheep industry will continue to decline unless organisations like MIE can put a framework in place that will enable reform. This reform must involve a pervasive consumer focus, must bring about profound behavioural change on the part of all stakeholders and, ultimately, deliver tangible benefits to farmers and processors. It will involve structural change in terms of reduced processing capacity and revitalised balance sheets, and it will involve regulatory change too. If this trend line is not reversed, then GHD’s recommended closure of 13 sheep/ovine plants will not be enough. The sheep industry is in need of the most urgent rationalisation. Whilst the nation’s beef herd also continues to decline, the surge in cull dairy cows has largely offset the total tonnage of annual beef exports and, despite clear over-capacity in the beef industry, the problem is at least for the time being, not in the rapid decline suffered by the sheep sector. However, this does not mean action is not required. On the contrary, over-capacity remains a major cause of reduced processor profitability. GHD has recommended that six beef/bovine plants be closed to remedy over-capacity. The other trend that has occurred over the past decade is that important advances in technology and processing throughput have been achieved elsewhere in the world. Modern ‘slaughter chains’ are now capable of processing 10 lambs per minute, e.g. following a significant upgrade, AFFCO’s Wairoa plant now processes at this 10 lamb per minute rate – an exception in the New Zealand meat processing industry. This is one of the compelling reasons why the industry must act. The lack of profitability and reinvestment across the majority of the processing sector has meant that the New Zealand industry is attractive to wellresourced overseas investors that have strong balance sheets and have already adopted latest processing technologies. These overseas food companies are setting the benchmark for ‘global best practice’. It is simply no longer good enough to be the best in New Zealand with ageing and redundant plant attempting to compete for land with the massively efficient dairy industry. Production of red meat will never be as efficient as production of milk. Red meat has to out-compete dairying for land by having a much greater focus on the final consumer and the value added opportunities of that food. It can do this because a significant proportion of red meat is sold directly to the final consumer. Unfortunately for New Zealand, the industry’s behaviour and its structure militate against a successful consumer and value add focus, helping to ensure that dairying continues to acquire more land. Note in the following Beef + Lamb New Zealand Table 2, MIE has extrapolated the trend lines for a further decade to 2024. MIE chose this timeframe for two reasons - the first is that 25 years ago the Government removed all subsidies to New Zealand farmers. As such, the trend lines are not blurred or affected by any historical subsidies. Secondly, it coincides with the current Government’s Growth Agenda timeframes for the primary sector through to 2025. 10 SHEEP & CATTLE NUMBERS NEW ZEALAND Table 2 70 000 7 000 60 000 6 000 50 000 5 000 40 000 4 000 30 000 3 000 20 000 2 000 Source: Beef + Lamb New Zealand Economic Service Statistics New Zealand In less than 10 YEARS, NZ will have under 20 million SHEEP. Less than 15 million EWES Confirms our forecast of 7.45 million DAIRY COWS The above trend line for the dairy industry clearly shows that it is heading for circa 7.5 million head of dairy animals, an increase from 6.5 million in 2014 (5.3 million lactating cows and approximately 1.2 million heifers or replacements). The growth rate is spectacular. The GHD Report estimates that on the current rate of conversions of sheep and beef farms to dairy farming, ewe numbers could well reduce from 21 million today to 15 million in five years and 10 million in ten years. It will be hard, if not impossible, to maintain a scientifically based red meat industry in this dwindling circumstance. MIE notes that these figures are estimates and contingent that the dairy industry maintains in the medium term, the high levels of profitability that it has experienced over the past two decades. Continuing reduction in sheep numbers is only likely if further land is available for conversion for dairying; firstly, due to irrigation schemes such as Ruataniwha, Wairarapa, Canterbury’s central plains water (CPW) and North Canterbury Huruni scheme and secondly, that on-going forestry to dairy conversions currently being carried out in both North Canterbury by Ngai Tahu and Wairakei Pastoral Estates north of Lake Taupo, will continue. Whilst a general slowing of dairy conversions can be expected in the short term due to a number of global macro factors, it is unrealistic to assume a rebuilding of the sheep flock as a consequence. The ‘Titanic’ effect of the decline means it would take some time to turn the sheep industry around even when the measures MIE advocates are put in place. With all the information it has assembled, MIE is of the view that it is probable industry livestock numbers will level out at 15-16 million lambs before any sustained growth returns to the industry. 11 - ' 3.1 Relationship Quality In search of completeness, MIE sought opinion and views from a range of industry leaders, commentators and academics. One of the latter was Lincoln University’s Senior Lecturer in Agribusiness and Commerce Mr Nic Lees, whose research work into supplier relationships was so compelling we have included one of his spreadsheets (below) on ‘Relationship Quality’. Within the current New Zealand red meat industry, Lees’ work regarding relationship qualities highlights the fact that structurally the current industry lacks the majority of first principles that his model recognises as best practice. From Lees’ research, the quality of these relationships between the processors and farmers is largely fragmented, lacks trust, demonstrates little loyalty and needs to improve dramatically if the industry is to find a way forward toward an enduring solution. The performance of the supply chain impacts on the quality of these relationships through satisfaction, building of trust, and commitment between the processor and farmer, and this also ultimately then leads to the sharing of mutual rewards. Nic Lees developed the schematic (Table 3) which highlights the linkage and the critical nature and impacts of having key relationships that build trust between supplier and processor. Table 3 14 4.0 Key Findings From Reports MIE commissioned the various reports to determine the issues facing the red meat industry: • The Cinta nationwide farmer survey focused on farmer attitudes and understanding of core issues and options facing the industry. • The GHD report drilled down on the core metrics facing the industry and laid bare the serious issues now facing the industry as a whole. • The Vautier and ‘Big Red’ papers offer different options and pathways. • The AERU report dissected all the reports and provides an excellent summary. • The draft ‘Chain Licencing’ paper was made available to MIE to build awareness. It is a draft intended to stimulate further discussion to explore realistic options for industry consolidation and change as advocated by MIE. 4.1 Summary of Cinta Research Nationwide Farmer Survey MIE commissioned Cinta Research to carry out a nationwide farmer survey in 2014. Cinta Research Ltd is an agri-research specialist company (est.1995) that completes both quantitative and qualitative market research studies throughout New Zealand, best known for their robust quarterly nationwide pastoral farmer omnibus surveys and annual dairy specific omnibus survey. Cinta operates a field force of 50 agri-specialist interviewers nationwide and achieves low refusal rates and high information transfer as they connect with farming policy decision makers throughout rural New Zealand. Cinta has an extensive track record of agri related projects with clients ranging from Pfizer, Merck, DINZ to Blue Wing Honda, Vetlife and Elders. Having farmed for 25 years Fiona Hudson, the Principal of Cinta, has 19 years within the market research and marketing industry and vast experience in the agriculture sector. Fiona is a Lincoln University graduate and a Lincoln University Kellogg’s Scholar and a full member of the New Zealand Market Research Society since 1995. (For the full Cinta report and survey results, refer MIE website). The Cinta survey provides some useful insights to farmer perceptions on elements around industry structure and possible solutions. 4.1.1 Key Cinta Findings Include: 16 • Strong support for a restructuring of the industry. • Strong support for capturing more of the supply chain by New Zealand companies across all farm types. • A bias against foreign investment. • Very strong support for a Fonterra type co-operative model with scale. • Meat companies had support for the marketing and promotion of New Zealand as an appellation. • More than three quarters (80%) of red meat producers support restructuring of the industry towards a co-operative structure. Almost 60% believe that this structure would enable producers to gain a larger share of the value chain and thus increase their returns. • Around 90% of farmers believe that more of the supply chain needs to be captured by New Zealand farmers to remove the potential for the processing industry to be dominated by overseas corporates as it was in the 1970s. Failure to change increases the risk that industry assets will be acquired by overseas investors. Further, the survey question which sought to understand the level of farmer support, or otherwise, to commit capital was felt by some commentators to be ambiguous. However, anecdotal evidence strongly supports the view that, if MIE or a group of processors could develop a clear strategy and a vision that provided sufficient detail and certainty, farmers would be prepared to invest in that strategy and vision. Do you believe that a Fonterra type co-operative could work for the NZ Red Meat Industry? Base: All respondents (793) - Excludes NA responses Yes No Don’t Know Maybe More than three-quarters of farmers believe that a Fonterra type co-operative could work or may work for the NZ Red Meat Industry. 4.1.2 Contracted Supply The structure of the question in the Cinta farmer survey around contracts drew some criticism. MIE accepts this and discarded the result. However, again anecdotal evidence confirms that there is an appetite by farmers to understand and garner more information around what ‘committed and/or contracted’ supply means for their farming businesses. Signing long-term supply contracts will largely depend on: • Two way trust between farmer and processor. • Standing by the contract, not walking away from it in hard times. • Clarity of a vision for the industry and by the industry. • An understanding of the potential long term benefits. 17 4.1.3 Restructure Supply Contracts • The Cinta survey highlights that 20% of farmers are, or have been, on contract and are happy to continue. • Further dialogue with some processors confirms that the contractual templates promoted by MIE were represented in supply arrangements outside the co-operatives. • Eighty-six percent of farmers could, or may, support a restructuring of the New Zealand red meat industry. 4.1.4 Fonterra Type Business Model/Co-operative Model • Sixty percent believe they would gain a greater share of the value chain from this ‘Fonterra like’ model. 4.1.5 New Zealand Owned Model • Ninety percent would like to have more of the value chain captured by New Zealand farmers. • Farmers want to maintain a significant degree of control of the red meat industry. • Farmers are prepared to consider a capital contribution to restructuring if there are clear benefits outlined to them in their future returns. These sentiments align with the core values that would entice or see farmers sign contracts. Would you like to see more of the supply chain captured by NZ farmers before we potentially lose control to foreign corporate owners? Base: All respondents (790) - Excludes NA responses 2% 1% Yes No Don’t Know Maybe Most farmers want to see NZ farmers capturing more of the supply chain rather than losing control to foreign ownership. 18 4.2 Summary of GHD Report MIE commissioned GHD to conduct a detailed assessment of the red meat processing sector in New Zealand. GHD is one of the world’s leading professional services companies operating in the global markets of water, energy and resources, environment, property and buildings, and transportation. They provide engineering, architecture, environmental and construction services to private and public sector clients. Established in 1928 and privately owned, GHD operates across five continents – Asia, Australia, Europe, North and South America – and the Pacific region. They employ more than 8,500 people in 200-plus offices to deliver projects with high standards of safety, quality and ethics across the entire asset value chain. Driven by a client-service led culture, they connect the knowledge, skill and experience of their people with innovative practices, technical capabilities and robust systems to create lasting community benefits. Committed to sustainable development, GHD improves the physical, natural and social environments of the many communities in which they operate. GHD are guided by their workplace health, safety, quality and environmental management systems, which are certified by Lloyds Register Quality Assurance to the relevant international standards (ISO and OHSAS). In alignment with the global demands of water, energy and urbanisation, their aim is to exceed the expectations of their clients and contribute to their success. For more information, visit www.ghd.com (For the full GHD report, refer MIE website) 4.2.1 Total Benefits GHD quantified the total value of benefits from rationalisation of the processing sector to be $444 million per annum, (year on year) contributed equally by the sheep and beef processing industries. The largest savings overall, and for each processing industry, come from rationalisation of processing capacity, followed by market supply chain benefits and savings in procurement costs as shown in Table 4 below. Table 4 Procurement Processing Market 19 4.2.2 Inefficient Procurement of Stock Inefficiencies in procurement arise primarily because over-capacity in the processing industry results in processors being more focused on maintaining throughput at plants to cover high fixed costs and minimising losses, as this has more impact on profitability, than maximising returns from the market. A reduction of the costs of third party commissions, as a result of greater use of supply contracts or committed supply, is estimated to increase those savings by $40 million per year. (a) Cartage Sheep The GHD analysis identifies that currently New Zealand processes approximately 21 to 22 million sheep and lambs per year. The average cost of transport to the nearest plant is estimated to be $3.20 per head. It estimated that 50% of the export kill goes past the gate of the nearest plant, making the average national cost of transport to be $5.50 per head. Transport savings and headline data include: Percentage Cost per head No. in millions $ Million 50% 50% 100% @ $3.20 average @ $5.50 average @ $4.35 average 10.5 10.5 21.0 33.60 57.75 91.35m If half of the stock were redirected to the nearest plant, GHD calculates an immediate $12 million of savings. Summary for transport, yard, weight loss, commissions and savings from injury. $ Million Redirecting 50% to nearest plant. Less weight loss with shorter distances. If third party commissions reduced by 30%. 12.0 6.5 22.1 40.6m Savings GHD’s assessment of possible Ovine procurement, transport or haulage savings equates to approximately $2 per lamb or savings of $40-42 million per year. 20 (b) Cartage Cattle Currently, New Zealand processes approximately 2.3 million beef per year. GHD estimates the average cost of transport to the nearest plant to be $35.00 per head. It also estimates 50% of the export kill goes past the gate of the nearest plant, making the actual national average around $60.00 per head. This leads to the following savings: Percentage Cost per head No. in millions $ Million 50% 50% 100% @ $35 average @ $60 average @ $47.50 average 1.15 1.15 2.30 40.25 69.00 109.25m Total for transport, yard, weight loss, commissions and savings from injury. $ Million Re-directing 50% to nearest plant. Reduction in sale yard volumes/savings. Reduction in weight loss. Weight loss due to injury. If third party commissions reduced by 30%. 14.5 8.6 9.2 5.2 18.0 55.5m Savings GHD assessment of possible Bovine procurement, transport or haulage savings equates to approximately $24.50 per head, or savings of $56 million per year. 4.2.3 Excess Processing Capacity (a) Over-Capacity The GHD analysis identifies the current level of over-capacity in the processing industry is almost 100% (53% unused sheep processing capacity and 41% unused beef processing capacity). The GHD analysis further estimates the impact of reducing processing capacity to a level sufficient to cover peak kill periods. (When considering which plants should be closed, GHD’s recommendations were based on operating efficiency, location relative to other plants and location relative to livestock concentrations of individual plants). GHD identifies savings of $215.5 million per year from closing 13 sheep processing plants and six beef processing plants (out of 34 sheep and 27 beef processing plants) and reallocating the kill among remaining plants. Comment: Any relocation and realignment of kill will be driven by the relevant market forces as a result of processing companies that choose to develop vastly improved supplier relationships with farmers. 21 b) Costs of Closure The GHD report calculates the average costs of rationalisation and closing plants, including fixed asset write-downs and redundancy is $197.6 million or an average of $10.5 million per plant. Table 5 Ovine Bovine Total Cost $ Million 5 3 1 3 1 1 1 2 2 - 6 4 3 5 1 62.4 41.6 31.2 52.0 10.4 13 6 19 SFF AGL ANZCO AFFCO OVATION TOTAL 197.6m Redundancy costs should these GHD plant closure recommendations be implemented. GHD calculates that associated redundancy cash costs associated with closing the 19 identified plants is circa $63 million dollars out of the total of $197.6 million. NB: The net asset losses were calculated by GHD on the basis of the value of fixed assets held by the three largest companies, and the total apportioned across all plants on the basis of the share of kill capacity. Savings on throughput after rationalisation The throughput benefits from GHD’s proposed rationalisation model: Ovine $59.2m 34 down to 21 plants Bovine $29.3m 27 down to 21 plants Throughput Benefits Total $88.5m Supply Chain efficiencies through better co-ordination The GHD analysis shows that the benefits of improving in-market co-ordination of the red meat export industry includes increased market returns and savings in exporting costs. GHD concludes that greater co-operation amongst processors in procurement and processing is likely to lead to greater co-operation in the market place. 22 MIE notes that ‘toll’ processing is common in other industries because it allows processors and factories to operate closer to optimum throughput, drives down unit costs of production and delivers greater overall profitability. A strategy that optimises plant capacity within the red meat sector will improve farm gate returns. 4.2.4 Market Supply Chain Benefits GHD’s discussions with senior meat company executives led GHD to conclude that an increase of 1.5% in returns ($108 million per year) would be possible with greater in-market co-ordination. In previous reports, the Agribusiness and Economics Research Unit (AERU) at Lincoln University has identified that large market premiums are available for New Zealand products in some markets. For example, consumers in the developing markets of India and China are willing to pay more than 20% more for lamb sourced from New Zealand than from other sources. This earlier AERU report clearly states that capturing this premium requires a verified/audited and traceable supply chain as international buyers (and consumers) require a level of ‘provenance’ in their food purchases, i.e. trust, traceability and integrity. A fundamental advantage of the establishment of contracted supply relationships between the majority of farmers and processors is that information from the market is more likely to reach producers and assist them to understand exactly what the market requires. This will encourage farmers to commit to systems that meet these market requirements. Greater security of supply will also be necessary for exporters to gain a premium position in these large markets. Opportunities such as these are largely lost under the existing highly fragmented structure. AERU’s Professor Caroline Saunders states… “consumer attitudes and behaviours are changing, particularly within premium segments. Many consumers are reacting to the associated environmental and social impacts of the products they are purchasing, and seeking out products that promote sustainable practices in production and consumption”…. In addition to the market premiums identified in these earlier AERU reports, GHD also identifies supply chain savings and contends that reductions in the costs of packaging, shipping, water, waste water and waste (estimated to be $23 million per year) could be achieved through greater co-ordination amongst exporting companies. 4.3 Industry Structure The GHD report identifies that current industry structural issues cost New Zealand farmers $440-$450 million in inefficiencies every year. The Cinta survey shows that 80% of farmers either support, or are prepared to consider the formation of a large processing co-operative and 90% believe that this type of co-operative would enable them to capture a larger share of the value chain and increase returns, as opposed to foreign ownership. While the formation of a larger merged processing entity with scale is often deemed the ideal, the simple reality is that the current disparate ownership structures amongst processors inhibit such a goal in the short term. Therefore, a consultative process that results in individual processors co-operating to address the weaknesses which undermine the industry will benefit all industry stakeholders. Comment: A key issue in the GHD report is that over-capacity is 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. To determine the pathway toward rationalisation and downsizing, there is a need to establish equitable processes for disposal of assets and implementation of staff redundancies, as this would involve significant capital losses for some companies which, in turn, will need to be supported by stakeholder financial institutions. It is the construct of this rationalisation framework that will be the key. 23 4.3.1 Inefficient Procurement of Stock GHD estimates that current livestock transport costs are inflated by around 70% because half the export kill bypasses the nearest processing plant. If even half of the stock that currently bypass the nearest processing facility were redirected, the estimated savings from reduced costs of transportation and decreased liveweight loss and injury associated with long-distance transport of sheep and cattle, is in the region of $57 million dollars per year. In addition, a reduction of the costs of third party commissions as a result of the greater use of supply contracts is estimated to increase these savings by $40 million to $97 million per year. Comment: This inefficiency is a direct result of companies focusing on throughput to mitigate losses, rather than optimising profits at the exclusion of market opportunities. Committed and contracted supply of livestock to the company of choice is essential and critical if processors and farmers are to invest in the necessary restructuring process. All parties need to understand that significant costs are involved to achieve the efficiencies identified by this MIE report. Capturing many of these benefits will only be possible if all parties commit contractually to the process. 4.3.2 Excess Processing Capacity (a) Sheep or Ovine Declining livestock numbers, especially in the sheep industry, has led to an ever increasing percentage of over-capacity. This has been compounded by lack of collaboration between processors, evident in new plants opening as others close (Table 1) effectively compounding the over-capacity issue. Weekly killing capacity in the sheep and lamb sector has decreased by only 3.4% over the past decade, despite the reduction (over the same period) in stock numbers of 10 million sheep stock units, i.e. circa 25% reduction in total sheep numbers. Sheep Kill by both Share and Capacity Lamb kill share by company Table 6 24 Prime Range 1% Lean Meats 1% Fresh Meats 1% SFF 25% AGL 30% AFFCO 12% Ovation 9% ANZCO 9% AMP 2% Crusader 2% Blue Sky 3% Taylor Preston 5% Lamb weekly capacity by company (000 head) Table 6a 5 Prime Range 5 Lean Meats 5 Fresh Meats 5 15 27.5 38.3 74.5 SFF 245.7 AGL 290.1 AFFCO 157.6 Ovation 77.6 ANZCO 74.5 245.7 77.6 AMP 15 Crusader 15 Blue Sky 27.5 Taylor Preston 38.3 157.6 290.1 The sheep industry has permanently lost more than one million head per year over the past 20 years. Lamb slaughter has fallen from 45 million in 1984 to 21.5 million in 2014. (Refer Beef + Lamb New Zealand’s Economic Service). This translates to a decrease on average of 2,945 for every day of those 20 years. The associated slaughter of capital stock has reduced ewe numbers to circa 20 million today and, ironically, has subsidised processor throughput over this period. Were it not for this permanent decline in capital stock, processors would have found themselves in even deeper trouble. GHD highlights that ovine processing only uses 47% of current capacity and this is constantly, if not daily, getting worse on the back of the on-going reduction of capital stock. Comment: To address this gross over-capacity in processing plants, GHD recommends that up to 13 ovine plants be closed. This would reduce capacity by 21%, improve utilisation by 26% and drive down total operating costs by 8%. (b) Beef or Bovine Beef cattle numbers have decreased by around 500,000 head in the past decade and now number around 4 million. However, in the same 10 year period, beef export tonnage remained reasonably flat at around 370,000 tonnes, effectively propped up by the increase in dairy cull cows. Comment: GHD suggested that six bovine plants be closed for the forecast 2.3 million kill in 2013/14. This reduces capacity by 69,000 head that can be processed per week. This improves plant utilisation by 19% and drives down total operating costs by 6%. 25 Beef Kill by both Share and Capacity Beef kill share by company Table 7 Taylor Preston 2% SFF 31% AGL 9% AFFCO 19% Greenlea 8% ANZCO 19% AMP 6% UBP 6% Beef weekly capacity by company (000 head) Table 7a Taylor Preston SFF 27.1 AGL 8.2 AFFCO 26 2.8 15.7 Greenlea 5.3 ANZCO 13.1 AMP 5 UBP 3.6 4.3.3 Savings Gained from Plant Closures in Ovine and Bovine The over-capacity in plant to process both Ovine and Bovine livestock has led to inefficient sunk costs, unconstructive procurement behaviours, wasteful and costly competition for livestock, marginal ability to make profits and often significant losses for processors. The focus is on throughput to pay for the fixed cost of processing plant, when it should be on a value add consumer focus. The current industry just does not allow this consumer based focus to happen at a level that would result in a significant and sustainable shift in prices and returns. GHD state that the proposed closures for sheep and beef processing facilities, resultant efficiencies together with improved yield recovery and adoption of best practice, will add year on year savings of $5.75 per lamb and $39.25 per cattle beast for every animal processed in New Zealand. 4.3.4 Droughts, Floods or other Serious Climatic Events MIE acknowledges anecdotal comment that reduced capacity would put farmers at risk during drought events when they need to get stock killed. The facts, however, do not support this. GHD suggests that even if all plants recommended were to close, significant latent capacity will remain in the industry should the remaining processors move to world best practice and increase double shifting or consider triple shifts (24/7). According to National Institute of Water and Atmospheric Research (NIWA) data, droughts tend to have a greater impact on the North Island than the South Island and these risks are somewhat mitigated by new or planned irrigation schemes, which are being developed in a number of at-risk regions such as the Hawkes Bay, the Wairarapa, Canterbury and Otago. NIWA data illustrates that in the last 75 years (since 1940) provinces like Southland have only had five years where droughts of any significance have occurred. It was only in those five years that Southland’s soil moisture deficit, or potential evapotranspiration deficit (PED) conditions, climbed above 200mm. (Refer Appendix 7 MIE website to view MPI Technical Paper No: 2012/18 titled “The 2012-13 drought: an assessment and historical perspective” prepared by NIWA and published in June 2013). http://www.mpi.govt.nz/news-resources/ publications.aspx To put the drought question into perspective, according to GHD the Lornville ‘works’ in Invercargill, if double shifted, could kill 7.3 million head of sheep or lamb over 240 days where the Finegand plant at Balclutha could slaughter 3.35 million operating on a single shift in the same 240 days. Those figures represent 100% of the current predicted South Island lamb kill. The 15 processing plants in the South Island alone can process some 26 million lambs annually, while the total New Zealand lamb kill is now at 21 million. That equates to an additional 24% of over-capacity for all of New Zealand’s needs in the South Island alone. Alternatively, the North Island’s 17 plants (of all sizes) can process 21 million lambs or 100% of all New Zealand’s lamb production for 2014/15. Under this scenario all of the South Islands plants could close. MIE is not advocating either of the above two scenarios, but believes these examples highlight the situation that has evolved around over-capacity. We reiterate, this in turn manifests itself in processors chasing raw material (livestock) to recover fixed cost overheads, leading to ever diminishing returns and the inevitable ‘procurement battles’. The resultant ‘bungee like’ financial return to red meat farmers makes it extremely difficult for them to plan or budget from one season to the next with the snowball effect of undermining banker and financier confidence. Similarly, pricing or market signals from the processors and exporters to their farmer suppliers are nigh on non-existent. Inevitably this lack of transparency further undermines confidence across the entire sector. 27 This situation is in distinct contrast to the dairy industry, and Fonterra in particular, which has created a very powerful pricing mechanism through its ‘Global Dairy Trade’ auction system, along with strong milk price forecasting up to a season in advance. Even when under the severe pressure the dairy industry currently finds itself in, changes or movements in global pricing are both transparent and articulated to farmers on a regular basis. At a balance sheet level, the processors in the South Island collectively have circa $1 to $1.2 billion of net tangible assets. According to GHD, more than 50% of this is not required. MIE does not believe there is an argument for farmers in the South Island to effectively fund, for example, $500 to $600 million of nonperforming assets on the chance there will be a drought. 4.3.5 Solution in Drought and Feed Pinch Periods A more practical solution would be to ask Government to regulate a similar model to that adopted by New Zealand’s power generation industry. This is where the industry determines the level of ‘default capacity’ that should be set aside to manage droughts and/or floods etc. A similar concept could be developed from a red meat industry perspective and in collaboration with Government. This could be achieved within the existing resources of both Beef + Lamb New Zealand and the Meat Industry Association (MIA). If this default capacity was to be set at, say plus 15% to 20% over the forecast demand (i.e. kill forecast for both Ovine and Bovine), then it would be the industry that would collectively determine which plants were to be maintained in a state of readiness, i.e. strategic allocation of reserve capacity. All processing companies within New Zealand would then be required to contribute on a pro-rata basis (based on their level of annual kill data) toward depreciation, repairs and/or maintenance and a pool of qualified and capable workers etc. MIE does not see why small, single chain processors should not bear their share of this default capacity alongside the traditional suppliers of this drought or crisis capacity, i.e. the multi-chain operators. Comment: There is a perception that there is a lack of capacity every time there is even a hint of a drought, (e.g. in early 2015 on the East Coast of the North Island and in Canterbury), it must be emphasised that capacity is not the problem. The issue is that processors have lost capability and staff as it grapples with falling supply. Any sudden spikes in demand for ‘space’ by farmer suppliers, mean the companies can no longer call on additional staff to man second or third shifts. According to Gary Davis (Secretary of the Southland/Otago Meat Workers Union) the companies have reduced and cut back workers’ hours so much in recent years, that many have either; taken on a second job to fill in all the down time, quit for off-shore work or left the industry altogether. Over-capacity is the root cause of many of the industry’s ills. The fact the industry does not operate at economic levels of throughput results in marginal economic outcomes. This manifests itself with companies not wanting to open additional chains and/or shifts in these dry or drought-fuelled ‘feed pinch’ periods. Dropping the schedule and collapsing prices at these times provides companies with the few opportunities to financially benefit and claw back earlier or previous excessive payments at non-market related levels to farmer suppliers. Capacity in this case is not the issue; processor profitability or lack of is ! Finally, it is also incumbent on farmers themselves to develop plans to mitigate the impacts of dry periods on their farming businesses. For example, more and more North Island hill country farmers are growing crops specifically targeted at what could only be described as typically dry February/March feed pinch periods. Crops such as spitfire rape, plantain and chicory (often in combination) are now being grown on a range of quite challenging hill country. Use of these forage technologies alongside water storage, improved genetics and better use of partnerships, provide farmers with the tools to de-risk their businesses. 28 4.3.6 Better Supply Chain Co-ordination to Market Removal of over-capacity along with consolidation of processing companies to secure true scale will reduce the dysfunctional level of competition for livestock to process. Supplemented by contracted or committed supply will free up resources to invest strategically in a manner that focuses on the demands of the final consumer. An obvious strategic opportunity is to better resource marketing to achieve higher prices. MIE notes that some companies have consistent and valued business to business relationships just as some companies have a stronger brand focus than others. It is the view of MIE that these initiatives cannot deliver full value because of the multiplicity of players/companies which inevitably results in a lowest common denominator with respect to price. It is worth noting again, premiums that could be gained by developing better-resourced marketing and branding, reductions in the costs of packaging, shipping, water, waste water and waste, are estimated by GHD to be $23 million per year and could be achieved by greater co-ordination amongst exporting companies. Comment: GHD believes an initial increase of 1.5 percent in returns ($108 million per year) would readily be possible with greater in-market co-ordination and better resourcing of marketing. 29 sew-4i": A "r I. I: .frq l'l?l1:15" I Ir. . . "ll L733 1* 1' CURRENT PROPOSED FUTURE PROCESSING 1 . -1 32 5.1 Current Processors and Locations MEAT PROCESSING IN NEW ZEALAND 1 MOEREWA 18 WAITOTARA 36 CHRISTCHURCH AFFCO Moerewa ME47 Silver Fern Farms Waitotara ME102 Alliance Sockburn ME69 SPM Malvern ME135 2 DARGAVILLE 19 WHANGANUI CMP Rakaia ME500 Silver Fern Farms Dargaville ME125 AFFCO lmlay ME39 Harris Meats A381 AFFCO Land Meats Canterbury Fresh ME6OO 3 AUCKLAND 20 FEILDING 37 ASHBURTON Auckland Meat Processors ME103 AFFCO Manawatu ME32 Silver Fern Farms Fairton ME16 Ovation NZ Feilding ME128 CMP Canterbury ME78 4 THAMES 21 WAIPUKU RAU Ashburton Meat Processors AB32 Silver Fern Farms Thames ME108 Ovation NZ PH31 5 PAEROA 22 TAKAPAU 38 DUNEDIN Silver Fern Farms Paeroa ME7S Silver Fern Farms Takapau ME58 ANZCO Green Island PH173 6 TE AROHA 23 BULLS 39 MOSGIEL Silver Fem Farms Te ArOha ME84 Riverlands Manawatu ME119 Silver Fern Farms Silverstream ME113 CMP Rangitikei ME188 7 HAMILTON 24 DANNEVIRKE 40 BALCLUTHA AFFCO Horotiu ME23 Alliance Dannevirke ME134 Silver Fern Farms Finegand M262 Greenlea Hamilton ME124 8 MORRINSVILLE 25 LEVIN 41 GORE Greenlea Morrinsville ME82 Alliance Levin ME136 snver Fem Farms Waitane ME112 Silver Fern Farms Waitoa ME100 Clover Export ME117 9 TE PUKE 26 MASTERTON 42 MATAURA AFFCO Rangiuru ME56 .H Kintyre Meats A378 Alliance Mataura ME21 10 TE KUITI 27 WELLINGTON 43 INVERCARGILL Te Kuiti Meat Processors ME104 Taylor Preston ME86 Alliance Lorneville MESO Universal Beef Packers ME127 SPM Awarua Blue Sky Meats MEBO 11 BENNEYDALE 28 NELSON Prime Range Meats ME132 Crusader Meats ME118 Alliance Nelson ME40 12 GISBORNE 29 BLENHEIM Ovation NZ Gisborne ME130 CMP Marlborough ME70 13 WAIROA 30 GREYMOUTH AFFCO Wairoa ME42 CMP Kokiri ME66 Silver Fern Farms Wairoa ME83 31 HOKITIKA 14 STRATFORD Taranaki Abattoir A818 Silver Fern Farms Hokitika PH206 14 ELTHAM 32 BELFAST Riverlands Eltham ME43 Silver Fern Farms Belfast ME15 15 NAPIER 33 TIMARU Fresh Meats ME77 Alliance Smith?eld ME17 16 HAWERA 34 PAREORA Silver Fern Farms Hawera ME9 Silver Fern Farms Pareora ME34 I 17 HASTINGS 35 OAMARU I a, P. 0 new ml Silver Fern Farms Paci?c ME52 Alliance Pukeuri ME18 U: I 4. - - L..- 54:] Progressive Meats Lean Meats ME137 28 Beef + Lamb New Zealand PO Box 121, Wellington, New Zealand Phone: +64 4 473 9150 Freephone: 0800 233 352 Website: www.beeflambnz.com Web version URL: http://www.beeflambnz.com/guide/index.html 33 5.2 A ‘Snapshot’ of Current Processing Companies in New Zealand Silver Fern Farms (SFF) • Second largest ovine share with 24.9% and largest beef kill share. • New Zealand's largest meat processing co-operative with turnover of over $2.2 billion. • Eight bovine sites with 3 in the South Island. • Eight ovine sites with 3 in the North Island. • One site (Silverstream) supplies only further processing capacity available to the Otago/Southland plants. • A complex processing model with added logistics, e.g. Silverstream. Alliance Group Ltd (AGL) • Largest ovine share with 29.8% with turnover of $1.4 billion. • Considered a South Island ovine co-operative that also processes some beef. • Nine percent of beef market share in New Zealand with three sites in the South Island and one small plant in the North Island. • Six ovine sites with two small plants in the North Island. • One large ovine site (Lorneville) with nearly 50% of the company’s capacity. (AGL shut the Lorneville beef killing room in 2012). AFFCO • Third largest ovine share with 12.5% - a private company with turnover estimated at $1.2 billion. • Second largest bovine processor – equal with ANZCO. • Six ovine sites with two in the South Island. • Recent upgrades to Malvern and Wairoa processing sites. • Six beef sites with five in the North Island. ANZCO • Shares fourth equal ovine kill share with Ovation. Privately owned with majority held by Japanese shareholders. Turnover of over $1 billion. • Second equal largest bovine processor with 19-20% market share. • Spread between both North and South Islands. • Operates New Zealand’s only and highly successful beef feedlot near Ashburton. Ovation • Shares fourth largest ovine kill share with ANZCO. • Privately owned North Island company with very small beef operation. • Recent upgrades to Feilding processing site. • Considered best practice. Auckland Meat Processors (AMP) • Largest multi-species single plant in New Zealand located in Auckland. • Privately owned and first and foremost a domestic abattoir with an export license. Crusader • Small, privately owned, single plant, ovine processor located at Benneydale. Taylor Preston • Privately owned, Wellington single plant processing for both domestic and export. • Multi species plant. Blue Sky • Privately owned, single site ovine plant located in Southland. Others • Prime Range, Lean Meats and Fresh Meats – all small abattoirs carry out some export of ovine. • United Beef Packers, based in Te Kuiti, regarded as one of the better operators in the beef processing sector with good throughput and low overheads. Weekly capacity 3,600. 34 5.3 GHD’s Ovine Meat Industry Costs Today Table 8 Before Rationalisation Sheep & Lamb (Millions head) Total NZ SFF AGL AFFCO Ovation ANZCO AMP Crusader Blue Sky Taylor Preston Prime Range Lean Meats Fresh Meats 34 8 6 6 4 3 1 1 1 1 1 1 1 Capacity 45.9 11.8 10.7 7.3 3.7 3.6 0.7 0.7 1.3 1.8 0.3 0.4 0.2 Share of Forecast 2013/14 Kill 21.5 5.4 6.4 2.7 1.9 1.8 0.5 0.4 0.7 1.1 0.2 0.3 0.1 100.0% 24.9% 29.8% 12.5% 8.8% 8.5% 2.2% 2.1% 3.0% 5.1% 1.0% 1.5% 0.6% 47% 45% 46% 37% 51% 51% 66% 62% 49% 60% 70% 79% 57% $430.2 $126.3 $131.4 $51.9 $31.1 $30.3 $8.3 $7.3 $11.2 $20.2 $3.9 $5.8 $2.5 $20.01 $23.61 $20.54 $19.25 $16.50 $16.48 $17.33 $16.48 $17.18 $18.38 $18.38 $18.38 $18.38 Fixed Costs $290.1 $78.4 $73.9 $38.2 $22.3 $28.3 $7.6 $6.9 $10.3 $14.9 $2.9 $4.5 $1.9 Total Costs $720.3 $204.7 $205.3 $90.1 $53.4 $58.6 $15.9 $14.2 $21.5 $35.1 $6.8 $10.3 $4.4 $33.42 $38.26 $32.09 $33.42 $28.25 $32.16 $33.22 $32.02 $32.95 $31.91 $32.21 $32.68 $31.95 Company No. of Ovine Sites Kill Share Utilisation Variable Costs $/hd $/hd After Rationalisation Sheep & Lamb (Millions head) Total NZ SFF AGL AFFCO Ovation ANZCO AMP Crusader Blue Sky Taylor Preston Prime Range Lean Meats Fresh Meats 21 3 3 3 3 2 1 1 1 1 1 1 1 Capacity 36.4 8.8 11.0 4.9 3.1 3.1 0.7 0.7 1.3 1.8 0.3 0.4 0.2 Share of Forecast 2013/14 21.5 5.4 6.4 2.7 1.9 1.8 0.5 0.4 0.7 1.1 0.2 0.3 0.1 100.0% 24.9% 29.8% 12.5% 8.8% 8.5% 2.2% 2.1% 3.0% 5.1% 1.0% 1.5% 0.6% 59% 61% 58% 55% 61% 59% 66% 62% 49% 60% 70% 79% 57% $430.4 $124.5 $132.0 $51.8 $31.0 $31.9 $8.3 $7.3 $11.2 $20.2 $3.9 $5.8 $2.5 $20.01 $23.28 $20.62 $19.22 $16.44 $17.38 $17.33 $16.48 $17.18 $18.38 $18.38 $18.38 $18.38 Fixed Costs $230.7 $50.1 $57.8 $29.0 $19.1 $25.7 $7.6 $6.9 $10.3 $14.9 $2.9 $4.5 $1.9 Total Costs $661.1 $174.6 $189.8 $80.8 $50.1 $57.6 $15.9 $14.2 $21.5 $35.1 $6.8 $10.3 $4.4 $30.74 $32.65 $29.66 $29.97 $26.54 $31.41 $33.22 $32.02 $32.95 $31.91 $32.21 $32.68 $31.95 $59.2 $30.1 $15.5 $9.3 $3.3 $1.0 - - - - - - - Company No. of Ovine Sites Kill Share Utilisation Variable Costs $/hd $/hd Savings 35 Variance Analysis Table 9 Export Ovine Industry Summary ($ Millions) Company Before Rationalisation Variance Comments 34 21 13 Only the 5 multi-plant companies contribute Capacity 45.9 36.4 9.5 A reduction in capacity of 21% Utilisation 47% 59% +26% $430.2 $430.4 -$0.2 $20.01 $20.01 - Fixed Costs $290.1 $230.7 $59.4 A reduction in fixed costs of 21% Total Costs $720.3 $661.1 $59.2 A reduction in total costs of 8% or $2.68 for every head processed $33.42 $30.74 $2.68 No. of Ovine Sites Variable Cost $/hd $/hd 36 After Rationalisation A significant improvement in utilisation Virtually the same Locations of plants under a rationalised model OVINE Plant Locations After Rationalisation North Island 1 2 3 4 5 6 7 8 9 10 11 12 13 AFFCO Moerewa AMP Benneydale Ovation Gisborne AFFCO Wairoa Fresh Meats Ovation Hastings SFF Takapau AGL Dannevirke AFFCO Imlay ANZCO Marton AFFCO Feilding Taylor Preston Auckland South Island 14 15 16 17 18 19 20 21 22 ANZCO Ashburton SFF Pareora AGL Pukeuri Lean Meats SFF Finegand Prime Meats Blue Sky AGL Lorneville AFFCO SPM Wellington Christchurch Dunedin 37 5.4 GHD’s Bovine Meat Industry Costs Today Table 10 Before Rationalisation Beef (Millions head) Total NZ SFF AGL AFFCO Greenlea ANZCO AMP UBP Taylor Preston 27 8 3 6 2 5 1 1 1 Capacity 3.87 1.24 0.34 0.77 0.26 0.70 0.25 0.17 0.13 Share of Forecast 2013/14 Kill 2.27 0.70 0.19 0.44 0.18 0.43 0.14 0.13 0.05 100.0% 31.0% 8.6% 19.5% 8.1% 19.2% 6.0% 5.7% 2.0% 59% 57% 57% 57% 70% 62% 55% 75% 33% $301.9 $99.7 $28.0 $56.9 $22.0 $57.9 $17.1 $14.6 $5.7 $133.00 $144.80 $143.71 $125.76 $120.00 $133.14 $126.15 $112.00 $130.35 Fixed Costs $229.1 $71.0 $19.1 $41.5 $17.5 $51.4 $13.1 $10.5 $5.1 Total Costs $531.0 $170.7 $47.1 $98.3 $39.4 $109.3 $30.2 $25.0 $11.0 $236.26 $247.49 $250.15 $222.65 $209.27 $251.23 $222.90 $200.28 $243.32 Company No. of Bovine Sites Kill Share Utilisation Variable Costs $/hd $/hd After Rationalisation Beef (Millions head) Total NZ SFF AGL AFFCO Greenlea ANZCO AMP UBP Taylor Preston 21 7 2 4 2 3 1 1 1 Capacity 3.24 0.99 0.26 0.63 0.26 0.55 0.25 0.17 0.13 Share of Forecast 2013/14 2.27 0.70 0.19 0.44 0.18 0.43 0.14 0.13 0.05 100.0% 31.0% 8.6% 19.5% 8.1% 19.2% 6.0% 5.7% 2.0% 70% 71% 76% 70% 70% 79% 55% 75% 33% $298.5 $99.6 $27.9 $56.7 $22.0 $54.9 $17.1 $14.6 $5.9 $131.63 $141.66 $143.01 $128.49 $120.00 $126.12 $126.15 $112.00 $130.35 Fixed Costs $203.2 $64.5 $16.9 $35.4 $17.5 $40.3 $13.1 $10.5 $5.1 Total Costs $501.8 $164.1 $44.8 $92.1 $39.4 $95.2 $30.3 $25.0 $10.9 $221.8 $233.45 $229.52 $208.64 $215.42 $218.77 $222.90 $192.50 $243.32 $29.3 $6.6 $2.4 $6.2 - $14.1 - - - Company No. of Bovine Sites Kill Share Utilisation Variable Costs $/hd $/hd Savings 38 Variance Analysis Table 11 Export Bovine Industry Summary ($ Millions) Before Rationalisation Company After Rationalisation Variance Comments 27 21 6 Only 4 of the 5 multi-plant companies contribute Capacity 3.87 3.24 - A reduction in capacity of 16% Utilisation 59% 70% +19% $301.9 $298.5 $3.4 $133.00 $131.62 $1.37 Fixed Costs $229.1 $203.2 $25.9 A reduction in fixed costs of 11% Total Costs $531.0 $501.8 $29.3 A reduction in total costs of 6% or $12.90 for every head processed $234.13 $221.24 $12.90 No. of Bovine Sites Variable Cost $/hd $/hd A significant improvement in utilisation A slight decrease due to plant mix 39 Locations of plants under a rationalised model BOVINE Plant Locations After Rationalisation North Island 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 AFFCO Moerewa SFF Dargaville AMP SFF Te Aroha Greenlea Morrinsville AFFCO Horotiu Greenlea Hamilton UBP Te Kuiti AFFCO Wairoa ANZCO Eltham SFF Hawera SFF Pacific ANZCO Bulls AFFCO Feilding Taylor Preston Auckland South Island 16 17 18 19 20 21 SFF Belfast ANZCO Ashburton SFF Pareora AGL Pukeuri AGL Mataura SFF Finegand Wellington Christchurch Dunedin 40 5.5 Processor Variable Costs (See GHD report for full analysis) The GHD analysis is notable for its assessment of the industry/processor costs. Current variable costs for sheep processing range from ANZCO $16.48 being amongst the most efficient, (Ovation $16.50) to SFF variable costs circa 43% higher at $23.61 per head. Similarly, variable costs for beef processing range from United Beef Packers (UBP) being the most efficient at $112 per head, (Greenlea $120) compared with AGL at $143.71 and SFF at $144.80 (circa plus or minus 30% variance in efficiency). 5.6 Best Practice MIE did not attempt to examine specific factors required to drive the industry toward best practice at a processor level. However, the variance between the best and worst operators (as identified by GHD) is costing farmers and some investors significantly. A further $70-$90 million annually would be released were all processors to move into the upper quartile of best practice efficiency of plant operation. ‘Chain Licencing’ (refer MIE website for full draft ‘Chain Licencing’ discussion paper) could enable a faster transition into improved technology, greater throughput and drive the efficiencies identified by GHD. Ultimately, this will lead to increased profits. However, MIE is unable to offer a firm opinion on ‘Chain Licencing’ without more specific details and financial modelling work. Despite our concerns that more work is required on the concept of ‘Chain Licencing’, MIE contends that its pathways for reform (as outlined in Chapter 6) when combined with ‘Chain Licencing’ would enable industry consolidation in concert with the installation or upgrades of the latest plant technology enabling processors, to drive down unit costs in line with the upper quartile, (see Tables 12 and 13). Such efficiency gains would lead to improved processor profitability and a lift in farm gate returns to farmers would ensue. 41 Ovine Best Practice Opportunities Table 12 • • • This applies to direct wages only. The difference between the average of the upper quartile plants and the average of the remainder is $2.40 per head. The potential savings if all plants were in the upper quartile costs is between $40m and $45m. Ovine Best Practice Variable Costs Remaining Average $12.65 The Upper Quartile Average $10.25 $9.83 2 3 4 $10.13 $10.13 $10.58 14 $11.93 $11.93 $11.93 5 $10.58 15 $12.50 6 7 8 9 $10.73 $10.98 $11.55 $11.55 $11.55 16 $12.50 $13.55 $14.37 $14.49 $14.86 $16.03 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 16 15 17 18 19 20 11 12 1 13 17 18 19 20 21 $11.93 21 Bovine Best Practice Opportunities Table 13 • • • This is direct wages only. The difference between the average of the upper quartile plants and the average of the remainder is $18.67 per head. The potential savings if all plants were in the upper quartile costs is between $30m and $35m. Bovine Best Practice Variable Costs Remaining Average $88.03 The Upper Quartile Average $69.36 1 2 $64.00 $67.20 3 4 5 $70.00 $70.00 $75.60 6 7 8 $76.15 $77.25 $77.65 9 $78.10 $78.55 10 1 42 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 11 12 13 14 15 16 17 18 19 20 21 $79.43 $80.10 $87.52 $87.61 $87.76 $89.11 $95.23 $97.31 $100.76 $100.76 $115.13 Note: Re, The GHD Research; Four key assumptions underpin the GHD analysis: • The majority of farmers would collectively agree to sell livestock on a contract basis to the nearest slaughter plant. • All meat processing companies would co-operate in industry rationalisation that would result in the closure of the most inefficient plants owned by processors who operated multiple plants. • The chronic over-capacity and enforced reliance on throughput has delivered a lack of profitability to all major processors. • The smaller operators are often in a dissimilar situation with favourable geographic supplier relationships and more flexible operating structures. Note: This is the opportunity for the red meat sector to achieve major savings for all stakeholders by creating a stronger and more viable meat processing industry. Note: MIE supports any industry initiatives that; • Ensures in the long term, that the reallocation of livestock amongst processors will be determined by supply drivers demonstrating transparency of pricing, two way loyalty and a genuine focus on removing unnecessary costs. • Promotes synergistic procurement practices. • Promotes greater co-operation amongst meat industry participants with respect to procurement contract systems that will provide stability across the supply chain including banker certainty. This in turn would lead to greater co-operation in the market place. • Ensures the processing industry achieves consistent profitability with sound, well capitalised balance sheets. • Links and delivers superior levels of sustainable profitability to farmers and processors. 43 It is worthwhile to contrast the red meat sector with two other sectors of the primary industry: a) The New Zealand fishing industry operates under a quota system as it has to operate within a managed fish stock and within ecological limits by individual species. The ‘total allowable catch’ is regulated accordingly and results in tradeable quota. Toll processing amongst the New Zealand fishing industry is the norm as they recognise that, to compete on the global stage, it is paramount that unit costs are driven down. b) The Kiwifruit industry operates under a single desk marketing umbrella known as Zespri. The power of the brand, according to business analyst Rod Oram, means the Zespri brand delivers a return which is double the price of global kiwifruit competitors. 6.1 Consolidation Pathways The reference to the fishing and kiwifruit industries has relevance to the MIE proposals to consolidate the red meat sector. The following four options have been reviewed in depth by MIE. As the reader will note, some have been dismissed as impractical under the current environment. Others offer a multiplicity of pathways. The important point is that whatever options are considered, there are considerable savings and cost benefits to be had. What’s clear is that the cost of doing nothing is definitely the worst outcome for both processors and farmers. Option (a) One Hit Rationalisation Strategy Within its MIE brief, GHD sub-contracted ‘Geoff Vautier International’ which outlined a ‘one hit’ rationalisation strategy that involves the formation of a single merged processing company with all companies joining on the same date. Vautier considered that a staged rationalisation process would have a lower probability of success than a ‘single-hit’ approach for a number of reasons. These included the risk of losing momentum as the share of potential realised benefits increase and the costs of over-capacity/inefficient procurement systems decline. A staged process would result in greater disadvantage for early participants; the need for cross-company cooperation to achieve some potential benefits and the fact that the implications for issues such as bank asset security ratios, taxation and headline profits might be easier to manage than across a larger number of companies. Under the Vautier proposal the assets to be rationalised would be sold at book value, to a ‘Meat Industry Rationalisation Company’ (MIRCO) which would dispose of them. The assets would not be sold to MIRCO for cash but for a debt registered against it. MIRCO’s activities, and the repayment of loans to the individual companies, would be funded by a levy of livestock killed, which could be funded in a number of ways. This would preserve value for shareholder companies; provide a level of equity among participants; and transfer the issue of asset disposal to a specialist team leaving the running of the business to the new processing company. Vautier recommended that, while fundamentally the same process, the implementation of redundancies would be separate from the rationalisation of assets. MIRCO would borrow the money for redundancies (preferably from Government or commercial banks with a Government guarantee) and lend it back to the individual companies to meet redundancy costs. Repayment would be funded by a levy which would remove the immediate cash impacts on large companies and spread the costs throughout the industry. The required change in relative kills and resultant reduction in profitability at individual plants would be funded by a levy to be paid annually, by the companies which gain over those that suffer, so the impacts of changes would overall be neutral. MIE has considered and would be prepared to endorse the Vautier proposal, however, it believes a more careful and progressive engagement with processors, directed at gaining a sufficient percentage of the industry for restructuring is a more pragmatic process in the medium term and is more likely to proceed. 46 Option (b) ‘Chain Licencing’ In late 2014, a number of processing companies began to review the concept of ‘Chain Licencing’ as a possible pathway forward. MIE was invited to review the proposals as a concept and enabler for change. (Refer MIE website for the full ‘Chain Licencing’ draft discussion paper). MIE believes there is merit in engaging in wider dialogue on ‘Chain Licencing’. The challenge and issue which now presents itself is that communications now appear to be strained between the various companies, preventing consensus to even begin dialogue on the merits or otherwise of a wellintentioned proposal. MIE contends that, through farmer support, it may well be the one organisation prepared and able to break down these barriers and seek a meaningful solution through genuine, sincere and confidential dialogue. In essence, ‘Chain Licencing’ requires strict mandated protocols on the number of allowable chains and how they could, or would be managed. This would need clear oversight. The ‘Chain Licencing’ paper identifies that an increase in capacity can arise from three distinct sources: • • • New entrants or new plants. Expansion of existing plants or by building new chains. Upgrades to existing chains utilising new and improved technology. The proposal re; ‘Chain Licencing,’ is for both Sheep (Ovine) and Beef (Bovine) animals. These Licences would not be transferable between plants and/or owners, however, they could be sold on a willing seller, willing buyer basis. A moratorium is proposed to prevent new capacity being built for a period of time and provide a window for consolidation by the existing players. Overseas investment is restricted to the current levels in the respective processors where this is the case. Any new overseas ownership, whether in part or whole, would require new OIO (Overseas Investment Office of the New Zealand Government) regulations to allow monitoring. Rationalisation of this type would result in disposal of the least efficient plants owned by each company, but not necessarily the most inefficient plants in the industry as a whole. One of the outcomes of ‘Chain Licencing’ could well be a rapid consolidation of the industry that could result in some companies adopting ‘toll’ processing as a means to driving greater efficiencies and throughput with a clear outcome being to lower the unit costs of production. MIE supports ongoing discussions around any efficiency proposals that ensure enduring improvements in profitability for processors and farmers. However, MIE’s support is conditional on the basis that farmers’ positions are protected, that the benefits at the farm gate are enduring and that enabling legislation provides 47 a sufficient timeframe under the proposed moratorium to ‘bed in’ the changes. Option (c) ‘Big Red’ - A Proposal ‘Big Red’ is a concept where a single holding company would hold redundant assets of the processing industry. Success would depend upon securing sufficient political and other industry goodwill for such a proposal to succeed. Accordingly, MIE has proposed several alternative concepts which adopt a pragmatic approach so that rationalisation can be accomplished more in line within an industry-wide context. ‘Big Red’ provides for the transfer of plants (of those processors who participate in the rationalisation scheme known as ‘Big Red’) for closure to be implemented by exchanging the redundant assets for the issue of equivalent value of shares to a new entity that could be known as the PASCO (Past Asset Company). This would allow PASCO to start operating without debt and the net proceeds of asset sales could be passed back by PASCO to the respective entities that joined the rationalisation process. This could be a merged entity or individual processors. Under the ‘Big Red’ scheme the redemption of shares and payment of subsequent proceeds would go back to the scheme’s participants. Over time PASCO would attempt to leverage the best possible value from the redundant assets and return any surplus back to the participating processors. This was achieved in the past and known as ‘Trial Run Holdings’. However, ‘Trial Run Holdings’ failed to prevent new capacity and within two to three years, the opportunity created under this initiative had largely been lost. Creation of ‘Big Red’ and ‘PASCO’ would give those processors who enter into the ‘Big Red’ scheme the chance to consolidate, (through the proposed moratorium) giving them time to shift the focus away from the current destructive procurement practices towards a value add and consumer focus. The participants could choose to merge. MIE looked closely at what could or would be practical solutions to an enigmatic and highly complex problem, i.e. disparate ownership structures throughout the red meat industry is the antithesis to what the dairy industry confronted when it drove consolidation 20-25 years ago. The fact the dairy industry was dealing with a number of existing co-operatives, meant the argument over consolidation largely centred on balance sheet issues and/or the bigger prize that could be achieved through scale. The result, Fonterra, is now considered a global powerhouse in dairy manufacturing and processing. Fonterra became a powerful brand on the global stage. Culled dairy cows make up an estimated 40% of the national beef kill along with bobby calves. One of the options that might be canvassed is whether Fonterra has any interest in the red meat sector (note; this potential has not been canvassed). There are others that could also be canvassed with respect to capital, such as the NZ Super Fund and the investment arm of the Accident Compensation Commission (ACC). However, the Cinta survey highlighted that dairy farmers supported a consolidation of the red meat industry. But the points are, Fonterra could for example: • • • • • • • Bring capital, scale and global marketing experience. Avoid duplication of global facilities. Drive out procurement costs. Deliver a large percentage of cull cows to its chosen investment partner. Build on the New Zealand brand and its food story. Deliver better returns for its dairy farmers from cull cows and bobby calves. Provide vital support to the dairy/crossbred grass fed beef supply chain. MIE recognises that, unlike the dairy industry, the consolidation of the red meat sector, has additional challenges and complexity, none more so than the challenge surrounding the disparate ownerships within the sector. Notwithstanding, MIE argues that the majority of the processors understand and appreciate that change must happen, irrespective of ownership models and sources of capital. 48 Option (d) Pathways re; Different Multiple Plant Consolidation MIE undertook a comprehensive analysis of the GHD data and carefully assessed all the different options, pathways and/or permutations for industry consolidation. This included forecast plant closures, percentage market share after rationalisation (MSAR). It considered options including the privately operated processors (POP), estimated cost savings based on this GHD data and finally evaluated distributable earnings post rationalisation, again using the forecast savings identified by GHD. MIE considered and evaluated the savings under a number of different merger combinations and the following five tables are the initial analysis of these options. Plant Closure Results Table 14 (Table 14 is based solely on collating the data provided by GHD) Plants To Be Rationalised Processor Ovine Bovine SFF 5 1 AGL 3 ANZCO Cumultv. Ovine Bovine Cumultv. 6 6 24.9% 25% 31.0% 31% 1 4 10 29.8% 55% 8.6% 40% 1 2 3 13 8.5% 63% 19.2% 59% AFFCO 3 2 5 18 12.5% 76% 19.5% 78% Ovation 1 - 1 19 8.8% 85% 0.0% 78% Greenlea - - - 19 0.0% 85% 8.1% 86% AMP - - - 19 2.2% 87% 6.0% 92% UBP - - - 19 0.0% 87% 5.7% 98% Taylor Preston - - - 19 5.1% 92% 2.0% 100% 13 6 19 Totals • • • Total % Market Share After Rationalisation The table on the right is again based on the GHD data. To take account of forecast, continued attrition on stock numbers, additional plant closures are assumed for Years 3 and 5. The cash costs shown are extrapolated from GHD data. Cumultv. 91.8% Plant closure costs ($m) Plant closure cash costs ($m) Plant cost Year 3 [total / cash] ($m) Plant cost Year 5 [total / cash] ($m) 100% Total Average 198 63 10.4 3.2 15 20 4.6 6.2 49 Potential ‘Big Red’ Combinations Table 15 • • • Table 15 provides a number of the possible merger permutations (into ‘Big Red’) of the current ‘Seed Companies’ and the resulting outcomes of their respective, combined Ovine and Bovine market shares after rationalisation (MSAR), again using the GHD data. The savings indicated are calculated using the % Ovine and Bovine MSAR against the maximum total of $443.6m, reduced by a factor equivalent to the expected % of MSAR itself. This further factor is intended to reflect a lower level of collective savings based on less than 100% of GHD efficiencies being captured as a result of the smaller ‘Big Red’ combinations. Potential ‘Big Red‘ Combinations 50 Post Big Bang MSAR Annual Savings $ Million Ovine Bovine Ovine Bovine Total BIG 2 55% 40% 69 34 102 BIG 2 + ANZCO 63% 59% 92 74 166 BIG 2 + AFFCO 67% 59% 103 75 178 BIG 2 + OV + 4 x POP 71% 61% 115 81 196 BIG 4 76% 78% 131 132 263 BIG 4 + OV 85% 78% 164 132 295 BIG 2 + ANZCO + 4 x POP 71% 81% 114 139 253 BIG 2 + AFFCO + 4 x POP 75% 81% 127 140 268 BIG 2 + ANZCO + OV + 4 x POP 79% 81% 144 139 283 BIG 2 + AFFCO + OV + 4 x POP 83% 81% 159 140 299 BIG 4 + OV + 4 x POP 92% 100% 193 215 408 BIG 4 + OV + 7 x POP 100% 100% 229 215 444 Estimated Cost Savings Table 16 • • • • • Table 16 shows the cash and total costs of the plant rationalisation targeted by GHD, using their data and applying it to the respective potential ‘Big Red’ combinations shown. The combined annual estimated savings are based on the Table 15 calculations and assume: From the Hyland/MIE ‘Big Red’ paper, Big Bang occurs at the beginning of the processors 2015/16 financial year. To be more conservative still, a ramping-up of accessing the savings is shown (as the % in the third line) so that it is assumed that 100% of the efficiencies producing savings will only be accessed in the fourth full year, or 2018/19 as shown below; and Finally, deductions are also made from the savings in Years 3 and 5 for the cash costs only of closing one further plant in each of those years, in line with the costs calculated in Table 14. Plants Rationalised Potential ‘Big Red’ Combinations No. Costs $m Combined Annual Estimated Savings $ Million 2015/16 2016/17 2017/18 2018/19 2019/20 5 YEAR Cash Total 60% 85% 95% 100% 100% Total BIG 2 10 -32 -104 61 87 92 102 96 407 BIG 2 + ANZCO 13 -42 -136 99 141 153 166 159 676 BIG 2 + AFFCO 15 -48 -157 107 152 165 178 172 726 BIG 2 + OV + 4 x POP 11 -35 -115 117 166 181 196 190 815 BIG 4 18 -58 -188 158 223 245 263 257 1,087 BIG 4 + OV 19 -61 -198 177 251 276 295 289 1,226 BIG 2 + ANZCO + 4 x POP 13 -42 -136 152 215 236 253 247 1,061 BIG 2 + AFFCO + 4 x POP 15 -48 -157 161 227 250 268 261 1,118 BIG 2 + ANZCO + OV + 4 x POP 14 -45 -146 170 241 265 283 277 1,191 BIG 2 + AFFCO + OV + 4 x POP 16 -52 -167 180 254 280 299 293 1,255 BIG 4 + OV + 4 x POP 19 -61 -198 245 346 383 408 401 1,721 BIG 4 + OV + 7 x POP 19 -61 -198 266 377 406 444 437 1,869 51 Forecast Net Cash Table 17 • • • Table 17 utilises the calculations and assumptions detailed in the previous Tables to show the net cash positions (accumulated year on year) generated by the savings of the respective ‘Big Red’ combinations, based also on the further assumptions that: The cash costs only of the GHD targeted plant rationalisation are taken fully in Year 1 (with the cost of one further plant closures in each of Years 3 and 5); and The cost of write-downs on asset sales are excluded here as they would be booked through the P&L account as non-cash costs. Forecast Net Cash At Year End $ Million Potential ‘Big Red’ Combinations 52 2015/16 2016/17 2017/18 2018/19 2019/20 BIG 2 29 116 208 311 407 BIG 2 + ANZCO 57 198 351 517 676 BIG 2 + AFFCO 59 210 375 553 726 BIG 2 + OV + 4 x POP 82 248 430 625 815 BIG 4 100 323 568 831 1,087 BIG 4 + OV 116 367 642 937 1,226 BIG 2 + ANZCO + 4 x POP 110 325 561 814 1,061 BIG 2 + AFFCO + 4 x POP 112 340 589 857 1,118 BIG 2 + ANZCO + OV + 4 x POP 125 366 630 914 1,191 BIG 2 + AFFCO + OV + 4 x POP 128 382 662 962 1,255 BIG 4 + OV + 4 x POP 183 530 912 1,320 1,721 BIG 4 + OV + 7 x POP 205 582 988 1,432 1,869 Distributable Earnings Ahead Table 18 • • • • • Table 18 shows the potential distributable earnings of ‘Big Red’ combinations, assuming: Agreement with ‘Big Red’s’ bankers as to distributions and banking covenants are met; A pay-out ratio of 30% of annual savings, provided the year end net cash (from Table 17) is greater than $50m in each case; but What might be viewed as ‘core profitability’ (i.e. a level of profits that might usually have been generated by the ‘Seed Companies’ before Big Bang) is specifically excluded here. For reference, in the 5 financial years of 2007-11, the combined distributions of the Big 2 to their shareholders appear to have ranged annually between $12m-35m (Source: SFF + AGL data). Potential Distributable Earnings $ Million Potential ‘Big Red’ Combinations 2015/16 2016/17 2017/18 2018/19 2019/20 - 26 28 31 29 BIG 2 + ANZCO 30 42 46 50 48 BIG 2 + AFFCO 32 45 49 54 52 BIG 2 + OV + 4 x POP 35 50 54 59 57 BIG 4 47 67 74 79 77 BIG 4 + OV 53 75 83 89 87 BIG 2 + ANZCO + 4 x POP 46 65 71 76 74 BIG 2 + AFFCO + 4 x POP 48 68 75 80 78 BIG 2 + ANZCO + OV + 4 x POP 51 72 79 85 83 BIG 2 + AFFCO + OV + 4 x POP 54 76 84 90 88 BIG 4 + OV + 4 x POP 73 104 115 122 120 BIG 4 + OV + 7 x POP 80 113 122 133 131 BIG 2 53 AERU The AERU then took both the GHD data and the previous work (Tables 14-18) done by MIE and produced the following cost benefit analysis highlighted in Table 19. These estimates show that although the biggest gains are expected to be associated with the rationalisation of all 12 companies, approximately 60% of the total savings (over a billion dollars over five years) would be derived from rationalisation of the four largest companies (SFF, ALG, ANZCO, AFFCO) into a single entity. Table 19 Estimated Savings 2000 1800 1600 $ Million 1400 1200 1000 800 600 400 200 2018/19 5 year total 54 BIG 4 + OV + 7 x POP BIG 4 + OV + 4 x POP BIG 2 + AFFCO + OV + 4 x POP BIG 4 + OV BIG 2 + ANZCO + OV + 4 x POP BIG 2 + AFFCO+ 4 x POP BIG 4 BIG 2 + ANZCO + 4 x POP BIG 2 + OV + 4 x POP BIG 2 + AFFCO BIG 2 + ANZCO BIG 2 0 As stated previously, the disparate ownership of these big four companies means that a single consolidation is unlikely. However, MIE believes that the three options below are plausible. MIE data confirms that a collaborative approach between three of New Zealand’s largest meat processors could deliver savings of around $700-$750 million over a five year period; that is $140-$150 million per annum with a payback period of approximately one-two years. Such a scenario would consolidate 64% of the current sheep kill and 59% of beef sectors. The three options considered by AERU are; • • • The 100% consolidation concept. Rationalisation of three of the Big Four. Entice rationalisation involving only SFF and AGL. Fourthly, a ‘Zespri like’ over-arching New Zealand Inc red meat branding and marketing model could also be achieved with the right leadership. Even if only the two Southern co-operatives chose to review a merger towards a single entity, the previous analysis suggests that savings of circa $100 million per annum are possible over the first five years (see Table 16, Big 2) with estimated costs of closures and redundancies from seven to eight Ovine plants and one to two Bovine plants being circa $80 million-$110 million; i.e. one and a half to two year recovery or payback period delivering year on year or on-going savings of $80 million plus, per year from year two. The estimated benefits of restructuring discussed previously are the estimated annual benefits once restructuring is complete. During the earlier years and, as identified in this report, the up-front costs are significant including the restructuring process, the write-down on redundant assets (less the costs of recovery on land etc.) and redundancy payments to staff at the affected plants identified for closure. MIE acknowledges that such rationalisation will be difficult to implement due to the significant differences between the two leadership groups. However, the gains are so financially compelling it is hard to rationally explain why this has not been, and would not, be tackled. 55 6.2 Net Present Values of Three Options Three different options and the Net Present Value (NPV) benefits were considered by the AERU. (Refer Table 20 below). • • • 100 percent rationalisation. Rationalisation involving only the four largest companies. Rationalisation involving only SFF and AGL. The estimated Net Present Values (discounted at six percent) for the five years post-rationalisation, after accounting for the costs of rationalisation, under each of these rationalisation options are: Industry wide (100%) = $1,327 million, Big 4 (54%) = $722 million, SFF & AGL = $246 million Table 20 Net benefits by year SFF & AG 100% Big 4 Year 0 6.3 Year 1 Year 2 Year 3 Year 4 Year 5 Total Costs of Rationalisation and Closure On this basis the net capital costs of closures, (if all identified plants were closed) was estimated to be $137 million and the costs of staff redundancy approximately $63 million. This would bring the total estimated costs of closure to $198.4 million, or approximately $10.5 million per plant closed. The analysis of the net benefits of an industry wide rationalisation as well as the range of scenarios as undertaken, included a staged realisation of the benefits of restructuring over a five year period, which also involved the closure of one additional plant in each of the third and fifth years. (Refer ‘Big Red’ report in full on MIE website). The ‘Chain Licencing’ proposals could complement the ‘Big Red’ proposal, where a group of assets to be closed, are pooled under the new entity prior to disposal. 56 The Vexed Question of an Umbrella Marketing Entity? A fourth option that MIE has considered relates to consolidation of a significant percentage of the red meat sector under a single New Zealand Inc brand and marketing organisation, similar to what the Kiwifruit industry has achieved under Zespri. There is no doubt that such a strategy has some compelling logic if New Zealand meat processing companies are to develop the scale and financial horsepower to capture a greater portion of the value chain. Just as importantly it would provide greater opportunity to increase the value due to the provenance of the New Zealand story, e.g. quality assurance, traceability, food safety, knowledge of the origins of the food for the consumer, the very provenance that the AERU report referred to earlier confirmed could add 20-40% on top of current prices. MIE believes this concept deserves a separate body of work. Again, it requires companies that are prepared to engage in a longer term vision of the future for the New Zealand red meat sector. Seizing this window of opportunity will depend ultimately upon securing supportive leadership and a level of consensus from the majority of larger processors in the first instance. Alternatively, it could be argued that farmers have become conditioned to view processors/marketers as one and the same. This need not be the case. The current situation sees the processors’ biggest investment in plant and equipment, bricks and mortar. Marketing in the current industry is too often an exercise in disposal rather than extracting maximum value from the customer. There could be an argument to establish producer ownership of marketing along the lines of a ‘Zespri’ and/ or even similar to the revitalised Cervena model, where some 95% of the venison processing capacity is collaborating in three markets under a single brand (five processors). If either of these two options were adopted for sheep, lamb and beef products, the processors could then be left to sort their capacity issues through attrition. 6.4 • • • • • Summary of Options or Pathways The Vautier ‘One Hit’ rationalisation is simply deemed unworkable. ‘Chain Licencing’ could be a catalyst for change. ‘Big Red’ would enable a faster transition and consolidation but requires Government support. Multiple plant consolidation options provide clear outcomes and identifies the costs associated and the related NPV’s show a number of alternative pathways. A Zespri like model should be seriously considered by at least three of the Big Four processors irrespective of mergers. Alternatively, a farmer-led producer group could be mandated, similar to Zespri, to take over marketing. Note: Zespri does not own pack-houses just as a National Meat Marketing Company would not need to own the processing facilities. The important point is that all pathways offer significant financial benefits for both processors and farmers. MIE believes it will only be through such quantum leaps forward, as outlined in this report and under a managed consolidation process that the benefits identified can possibly be attained. The issue of who pays is succinctly articulated by Rabobank below; Rabobank’s Publication-Agriculture in Focus 2014 …… “With the sheep flock halving since 1990, the adjustment to both processing capacity and capability has not kept pace and is consequently impacting returns. Clearly inefficiencies and fragmentation within the industry need to be addressed, but it remains to be seen whether farmers and the industry can promptly provide the necessary capital to retain control further downstream in the supply chain. Alternatively, a more passive and delayed response might risk farmers losing control of the future shape and control of the value chain.” 57 6.5 Additional Work Required This report has been resourced by MIE through its successful remit to Beef +Lamb New Zealand. However, to determine the most appropriate pathway toward rationalisation, considerably more work and resourcing will be required in the areas of: a) Over-capacity: The chronic over-capacity has led to poor business practices and behaviours surrounding procurement of livestock (the raw material). Fix this over-capacity issue, introduce contracted supply models and the current crippling costs of procurement will be slashed. Use ‘Big Red’ as a vehicle to park redundant plant that is retired from production. In conjunction with ‘Chain Licencing’, these initiatives would enable the consolidation process to begin. This could lead to possible mergers. b) Enable Change: To review how this ‘Chain Licencing’ and ‘Big Red’ concept can be utilised in tandem to ensure a relatively rapid transition and avoid leakage of value through the consolidation phase. c) Umbrella Marketing: If agreement can be reached in principle on an ‘umbrella’ marketing structure between either the Big Three or even the Big Four, then urgent and detailed financial assessments need to be carried out to identify the benefits to be had from the market under this business model. The focus must be toward long term supply contracts that will lead to greater investment in value add consumer based strategies. d) Moratorium Timeframe: Detailed financial assessments need to be completed to assess the benefits to be had from the proposed moratorium across the industry and for all stakeholders. More data is required to allow judgments to be made on the most suitable timeframe and/or review periods that will allow for consolidation of processor balance sheets, while ultimately ensuring market forces prevail that are in the best interests of both New Zealand farmers and the country as a whole. e) • • • • • • • 58 The further work required on ‘Chain Licencing’ would also need to consider: What are the macro financial benefits to the industry as a whole through the introduction of a refined ‘Chain Licencing’ type of proposal? What would the financial impacts be on SFF and AGL from the introduction of ‘Chain Licencing’? What would be the financial impacts on three out of the Big Four processors from ‘Chain Licencing’? What would be the impact on farm gate prices to New Zealand red meat farmers on both medium and long term pricing from the introduction of ‘Chain Licencing’? Would the proposed rationalisation drive a long term solution? What would be the soundest commercial timeframe for a moratorium against new supply being built? Does the combination of ‘Chain Licencing’ and the rapid consolidation of redundant plant and overcapacity through a ‘Big Red’ holding entity create value for participating companies in the medium term? - .4 7.1 Red meat sector processors need to put individual differences aside and work collaboratively and in confidence with MIE, to find an industry-wide solution that provides long term and enduring viability. Comment: MIE accepts that 100% co-operation amongst processing companies is improbable so, on this basis, the gross rationalisation benefits estimated within this report are overstated to some degree. There is a view within the industry that rationalisation would not involve any alteration in the relative share of total kill processed by each of the existing companies. MIE’s view differs from this, in that it believes that those companies that embrace change and display genuine and sincere support for their farmer shareholders and/ or suppliers will increase their share of the ‘national kill’. MIE supports any initiative by the processors to find an enduring solution providing that these same processors engage with MIE in sincere and genuine dialogue. 7.2 MIE believes the initiative referred to as ‘Chain Licencing’ is a concept worthy of review. (Refer MIE website for ‘Chain Licencing’ paper). ‘Chain Licencing’ also promotes a moratorium preventing the building of any new plants for a period to enable the restructuring outcomes to be ‘bedded in’. Any of these associated structural changes will require enabling support from Government. MIE would only support a moratorium in principle as a mechanism to enable a more stable trading platform as a precursor to more sustainable and profit focused solutions. Comment: MIE would require further work and financial modelling to establish the appropriate timeframe and/or review period before it could support any such moratorium. Longer term, MIE wants to ensure that a constructively competitive environment prevails (market forces). A moratorium will also allow time for the maturing of these ‘relationship quality attributes’ between farmer and processor to develop as the benchmark for supply commitments. 60 7.3 MIE advocates a structure and/or holding company for plant closures, e.g. ‘Big Red’. This would enable supportive companies to transfer their assets in plants and/or facilities that need to be closed across to ‘Big Red’. This has been done in the past through ‘Trial Run Holdings’, however, the difference advocated by MIE is that the suggested moratorium (if supported by Government) must provide a sufficient timeframe to enable the liquidation, sale and/or scrapping of these assets along with the consolidation phase that will be necessary for the industry. Comment: The costs of operating ‘Big Red’ will be offset by a levy back to participating companies, with the sale of any assets being returned to the participating processors as and when they occur. The financial modelling promoted in 7.2 would be necessary to establish the level of contributions or levies required. However, from initial high level MIE financial estimates, these costs are relatively low at around $5.00 per lamb and $25-$30 per cattle beast, spread over two to three years. However, Vautier assessed these one off costs at $3.76 per lamb and $25.22 per beef animal based on one season’s kill. Although the costs of closure are estimated by GHD at around $10.5 million per facility, according to AERU the payback period and NPV is relatively short. For example, combining the two largest co-operatives shows in excess of $80 million per year or $400 million of savings (or additional payments to farmers/shareholders) over the first five years, less one off costs. For example, the cost of rationalisation of SFF and AGL of some 10 plants between them is, according to GHD analysis, some $110-115 million, with a payback period of less than two years. 7.4 MIE contends that Government has an essential role to play in enabling the consolidation and stabilisation of what is a cornerstone industry in New Zealand. Comment: MIE has been encouraged by the support of the Minister for Primary Industries in that, should MIE and the processing sector harness some 80% support for a restructuring plan, the Government will support the proposal. This is particularly helpful to the Government’s stated goal of lifting export receipts from this sector to $14 billion by 2024. 7.5 MIE believes that committed and/or contracted supply is pivotal in achieving long term stability. Comment: Committed and/or contracted supply will drive down the costs of procurement and enable a significant lift in investment by those companies remaining in the industry and enable them to deliver value added strategies including branding and marketing platforms. 61 7.6 MIE strongly recommends that the red meat sector consider the initiatives employed by the New Zealand Electricity Industry to respond to seasonal or severe biological events such as drought under peak kill demand. Comment: Finally, with respect to the perception that there is a lack of capacity every time there is even a hint of a drought, (e.g. in early 2015 on the East Coast of the North Island and in Canterbury), it must be emphasised that capacity is not the problem. The issue is that processors have lost capability and staff as it grapples with falling supply. Any sudden spikes in demand for ‘space’ by farmer suppliers, mean the companies can no longer call on additional staff to man second or third shifts. According to Gary Davis (Secretary of the Southland/Otago Meat Workers Union) the companies have reduced and cut back workers’ hours so much in recent years, that many have either; taken on a second job to fill in all the down time, quit for off- shore work or left the industry altogether. (Refer 4.3.4 & 4.3.5 herein for details). 7.7 MIE believes farmers will support a capital raising proposal that provides a clear vision and pathway into the future. Comment: A sound investment proposal must be bankable and fundable and/or equity should be sourced domestically. MIE accepts that foreign investment is present but believes that this is a last resort after all other options and pathways have been genuinely and sincerely explored. Who pays when the whole industry benefits is often raised? MIE genuinely believe that if farmers were in fact given a sound and clear business plan and pathway forward around a consolidated industry, then the question of who should pay will be relatively and easily answered. 7.8 MIE believes the structural changes advocated must result in an industry that transitions significantly from a production led model to a customer focused value added model. Comment: This is the only way in the long term that will provide the means for sheep and beef farm returns to compete with dairying. 62 ADDITIONAL • Andrew Morrison (Morrison Mallett, Lawyers) and Sir John Anderson were asked by MIE to consider the strategies outlined for formation of a merged co-operative and asset disposal entity. They reported that the proposed ‘One Industry’ solution would not work, in reality, because it would not be possible to persuade the companies to join a merged processing entity. This does not, however, preclude cooperative industry rationalisation. Sir John Anderson…“The opportunities that may arise and can be done presently with the "farmer lobby" could come from: - (whilst patience awaits an opportunity) • • • • A serious industry downturn/crisis. A banking intervention. A prospect of a serious initiative when perceptions change (with farmers) significantly. A collapse. In the past rationalisation has mainly resulted from a crisis in the industry, which in turn led to the demise of Borthwicks, Weddels, Waitaki and Whakatu”…. 64 • Morrison and Anderson consider that the… “Process of persuasion and understanding of participants about the nature of the problem is far more important than an endeavour to persuade all of the companies to participate in a large single co-operative or combination, because the truth is that they simply will not do so…” However, persuading them to co-operate in industry rationalisation such as the scheme mooted using ‘Chain Licencing’ and the ‘Big Red’ scheme, would have great benefits for the whole industry. • Should an 80% threshold of support be achieved or reached, there would be broad consensus that Government would see the long term benefits and provide the necessary support. MIE has suggested that the only chance processors have of bringing the industry together is with farmer support. There is a growing consensus by enlightened processors around this point, particularly in light of the fact that all other processor led initiatives over the past decade have failed. • All industry participants, including the banks, need to contribute to funding the rationalisation process, but Morrison and Anderson are of the opinion that a banking solution can be found that will achieve the goals of rationalisation through a carefully managed process. . . .. N1, . . - - . iaww? .. . .. MIE has laid bare the most important issues facing the industry. Farmers currently find themselves at the end of the ‘food chain’. They often feel unable to exercise any power or influence over processors, marketers, transport, logistics, wholesalers, retailers, supermarkets or restaurants. It is only through world renowned co-operatives such as Fonterra, Rabobank, Ballance Agri-Nutrients and CRT/Farmlands, whereby New Zealand sheep and beef farmers draw strength and optimism that retaining an element of control and power through scale, via a farmer controlled co-operative structure, is the most effective mechanism to retaining financial benefits and returns from the downstream value chain. However, what is absolutely clear from the GHD work is that continuing to do nothing is costing New Zealand red meat farmers circa $450 million per year and is mortgaging the future. The fact that processors have failed to grow the industry over the past five years has meant New Zealand farmers have paid a minimum of circa $2 billion dollars in that time to keep some processors operating. Based on conservative 40 million sheep equivalents, that is an unnecessary loss of $50 cash off the bottom line per stock unit for every dry stock unit in New Zealand. This equates, for the average farmer with 5000 stock units, to a cost of a quarter of a million dollars ($250,000) over the last five years alone. Without change, these costs to every farmer in New Zealand will continue. One can only imagine where the industry would be today, if it had shown the leadership to capture that opportunity and reinvested that $2 billion dollars in developing and investing in world class processing plant and technology, and in a consumer focused value chain. Where would it be if it had invested a portion of that lost $2 billion dollars in branding, marketing, research and development, educational training, and value added strategies? “The significant problems we have cannot be solved at the same level of thinking with which we created them.” Albert Einstein GHD’s Overall Rationalisation Summary Item Sheep or Ovine Savings Beef or Bovine Savings Revenue $ millions $/Head Revenue $ millions Procurement Processing Rationalisation Supply Chain Market Benefits Total 40.6m 125.2m 63.3m 229.1m 1.90 5.80 2.90 10.60 56.3m 90.3m 67.9m 214.5m Overall Savings 443.6m $/Head 24.50 39.30 29.50 93.30 MIE is determined to facilitate and enable a solution to the current industry wide conundrum. However, it is clear that a solution cannot proceed without the active support of the majority of red meat sector farmers. New Zealand farmers need to recognise anew, that through their collective horsepower and wisdom, they can achieve significant and meaningful change. MIE contends that the current structure of the red meat sector means that it is missing many of the financial benefits that flow from pooling resources, achieving an industry with scale, and a brand that commands the respect of a large number of global consumers through integrity, provenance and trust. At the very least MIE hopes that as a consequence of this report, readers will be more informed with an objective understanding of the challenges faced by the industry and the opportunities which exist. MIE strongly recommends that all stakeholders review the full reports as commissioned and/or prepared for this body of work on the MIE website, as these outline some of the options and pathways that could lead to long term sustainability for the red meat industry. Ultimately, it will be farmers who choose the destiny of their red meat industry. Meat Industry Excellence Group (MIE) March 2015 66 GLOSSARY AERU AFFCO AGL AGM AMP ANZCO B+L NZ Big Four ‘Big Red’ CEO ‘Chain Licencing’ Cinta Circa CPW CTU Deloitte NZ DINZ DNA EY F/P GHD ISO MIA MIE MIRCO Morrison Mallett MSAR NIWA NPV NZ OHSAS OIO PASCO PED POP SFF SOPI UBP Agribusiness and Economics Research Unit - Lincoln University Meat Processing Company Alliance Group Limited Annual General Meeting Auckland Meat Processors Ltd Christchurch Based Meat Company Beef + Lamb New Zealand AGL, SFF, ANZCO, AFFCO A concept that enables existing Companies to place redundant plants or those that should be closed into a Holding Company (PASCO) for subsequent liquidation and disposal. Chief Executive Officer A concept that ensures all existing slaughter or processing chains must be licenced with a central body. Market Research Company Approximately Central Plains Water Council of Trade Unions Audit, Consulting, Financial Advisory Services Deer Industry New Zealand The fundamental and distinctive characteristics or qualities of someone or something. Ernst & Young Further Processing (boning & cutting) International Consultancy Firm International Organisation for Standardisation Meat Industry Association Meat Industry Excellence Group Under the Vautier proposal, MIRCO was going to be used as the Meat Industry Rationalisation Company. Lawyers Market Share After Rationalisation National Institute of Water and Atmospheric Research Net Present Value New Zealand Occupational Health and Safety Advisory Services Overseas Investment Office of the NZ Government Past Asset Company (Under the ‘Big Red’ Scheme) Potential Evapotranspiration Deficit Privately Operated Processors Silver Fern Farms Limited Situation and Outlook For Primary Industries United Beef Packers 67 BIBLIOGRAPHY • • • • • • • • • • • • • • • • • • • • Ministry of Primary Industries. Situation and outlook for primary industries 2014. Wellington, MPI, July 2014. 48pp. Accessed from: http:// www.mpi.govt.nz/news-resources/publications.aspx? title=Situation+and+Outlook+for+Primary+Industries&keywords=SOPI&2012 McDermott, A., Saunders, C., Sinclair, S., de Aragao Pereira, M, Dowling, S. (2008). Meat sector literature review: Report for MAF. Hamilton, AgResearch, August 2008. 136pp. GHD NZ Ltd (2014). The Size of the Prize NZ Export Meat Industry Reform. A report prepared by GHD NZ Ltd for the Meat Industry Excellence Group (MIE), August 2014. 76pp. Deloitte. Red Meat Sector Strategy Report. Auckland: Deloitte Touche Tohmatsu Limited, 2011. Accessed from: http://www.mia. co.nz/docs/Red Meat Sector Strategy Report - May 2011.pdf Cinta Research (2014). 2014 nationwide farmer winter omnibus survey results: Confidential Report prepared for MIE. 26pp. Evans, L. and Grace-Webb, E. Meat industry performance and organisational form: A commentary. Wellington, New Zealand Institute for the Study of Competition and Regulation, Victoria University, 2007. Accessed from: http://www.iscr.org.nz/f384,21365/ Meat_Industry_Performance_and_Organisiational_Form_Lew_Evans.pdf Crofoot, S. (2013). Meat industry options: A discussion paper. Wellington, Federated Farmers, December 2013. Accessed from: http://www.fedfarm.org.nz/files/2014-01-10 - Meat Industry Options - A Federated Farmers Discussion Paper.pdf Coriolis (2014). iFAB 2013 meat review. Wellington, Ministry of Economic Development, January 2014 v100b. 58pp. Accessed from: http://www.med.govt.nz/sectors-industries/food-beverage/pdf-docs-library/information-project/reports-released-in-2014/ ifab-2013-meat-review.pdf Saunders, C., Guenther, M., Tait, P., Saunders, J. (2013). Assessing consumer preferences and willingness to pay for NZ food attributes in China, India and the UK. Proceedings of the 87th Annual Conference of the Agricultural Economics Society, University of Warwick, United Kingdom, 8-10 April 2013. Banbury, UK: Hyland, et al. (2014). Structuring ‘Big Red’ – Draft for discussion. A presentation for the Meat Industry Excellent Group. 8 September 2014. Vautier. G. (2014). Industry rationalisation. Wellington, Geoff Vautier International, August 2014. Sub-contracted by GHD Confidential Report. 7pp. Ministry of Primary Industries- Future capability needs of the Primary Industries in New Zealand prepared by Infometrics and NimmoBell & Company Ltd 2014. The Crown Maori Economic Growth Partnership He Kai Kei Aku Ringa- Action Plan 2012- 2017 as prepared by the Maori Economic Development Panel November 2012. Beef and Lamb- Red Meat Sector Conference paper 2014, R Davidson, A Burtt, R Gibson, A Eggar 28 July 2014 Silver Fern Farms Meat Industry Reform – ‘Just Start’ 1 June 2013. MPI Technical paper No 2012/18. An assessment prepared by NIWA on historical droughts; June 2013 MEAT ACTS-The New Zealand meat industry 1972-1997 (Mick Calder & Janet Tyson, published by Meat New Zealand 1999 ) Coriolis (2014). iFAB 2013 meat review. Wellington, Ministry of Economic Development, January 2014 v100b. 58pp. Accessed from: http://www.med.govt.nz/sectors-industries/food-beverage/pdf-docs-library/information-project/reports-released-in-2014/ ifab-2013-meat-review.pdf (Evans, L. and Grace-Webb, E. Meat industry performance and organisational form: A commentary. Wellington, The New Zealand Institute for the Study of Competition and Regulation, Victoria University, 2007. Accessed from: http://www.iscr.org.nz/f384,21365/ Meat_Industry_Performance_and_Organisiation) (Crofoot, S. (2013). Meat industry options: A discussion paper. Wellington, Federated Farmers, December 2013. Accessed from: http://www.fedfarm.org.nz/files/2014-01-10 - Meat Industry Options - A Federated Farmers Discussion Paper.pdf) Photo Sources: • • • • 68 Front and back cover courtesy of Beef + Lamb New Zealand Courtesy of John McCarthy p1 Courtesy of Beef + Lamb New Zealand p5, p9, p30/31, p63, p65 Courtesy of Ross Hyland p12/13, p15, p44/45, p59 APPENDICES Two versions of the Red Meat Industry Pathways to Long-term Sustainability have been produced - this print copy which refers to but does not contain the full set of Appendices, and online (www.meatindustryexcellence.co.nz) which contains the following #1 #2 #3 #4 #5 #6 #7 Cinta Farmer Survey GHD Report AERU Summary of Reports Hyland/MIE ‘Big Red’ Vautier International Paper ‘Chain Licencing’ Draft Paper MPI Technical Paper No 2012/18. (An assessment prepared by NIWA on historical drought data). DISCLAIMER This report has been prepared in good faith by the Meat Industry Excellence Group (MIE) for the purposes of undertaking a review of the current meat industry structure. This report contains information collated from a number of sources and neither MIE, nor its officers, employees, agents, professional advisors, contractors and any other parties that have contributed to this document makes any representation or warranty (whether express or implied) as to the completeness, fairness, accuracy, adequacy or reliability of information, statements, estimates, opinions or other information contained in this document, or the likelihood or otherwise of such statements, estimates, opinions or other information proving to be correct. You should conduct your own review and investigation of the matters raised in this report (including by consulting with a qualified professional lawyer or other expert advisor). In all circumstances any decisions or actions taken as a result of relying on this report are made or taken at your own risk. To the maximum extent permissible by law, MIE, and its officers, employees, agents, professional advisors, contractors and any other parties that have contributed to this document disclaim all liability and responsibility (including, without limitation, any liability arising from fault or negligence on the part of MIE, and its officers, employees, agents, professional advisors, contractors and any other parties that have contributed to this document) for any direct or indirect loss or damage which may be suffered by any person through use of, or reliance on, anything contained in, or omitted from, this report. 69 RED MEAT INDUSTRY PATHWAYS TO LONG-TERM SUSTAINABILITY In 2014 the Meat Industry Excellence (MIE) group, with the endorsement of red meat sector farmers and Beef + Lamb New Zealand, conducted one of the most objective analyses ever of New Zealand’s red meat sector. The objective of the review was to identify the issues facing the red meat sector and recommend pathways which will deliver long-term sustainability. The findings are submitted to farmers and the wider industry with the sincere hope they will be a catalyst for informed debate that will lead to the consensual and non-adversarial change needed to rebuild an industry which has in the past, and can again in the future, deliver so much value to New Zealand Inc.