Wednesday, 18 March 2015

Meat processors are trying again...

The NZ meat processing industry is struggling to escape from a nasty but very stable situation. There is excess capacity but any firm shutting a plant pays all the costs and spills many benefits to its rivals. This has been the case for at least 20 years, over which period the shift towards dairying has reduced sheep & beef numbers further, making the situation worse.

Well-intentioned people try to fix this problem periodically. Federated Farmers (pdf) had a crack in January 2014, and yesterday we had the Meat Industry Excellence group report which is basically seeking a meat processing monopoly, at which point plants could be closed because the benefits would be internalised. MIE reckons this would save $450m per annum.

Right on cue, one of the biggest processors today argued that MIE's plant closure plan was too aggressive. These people obviously have trouble agreeing with each other, which is why competition seems a more likely long-term scenario than monopoly.

An alternative "solution" is for one of the big processors to innovate in ways that give it a real edge over the others. Last year I suggested that a focus on the final customer might provide some insights into how this could be achieved. With that idea in mind, here's a snip from the MIE paper

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.
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 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
This is almost entirely a supply side analysis. There is only one oblique reference to customers, which is that suppliers aren't spending enough on marketing.

While each processor probably feels obliged to participate in these apparently endless attempts to force unwilling parties to merge, I hope this is not at the cost of an increasingly strong customer focus.

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