[This post was first published in the New Zealand Sunday Star Times on 8 December 2013.]
Last week I wrote of how meat industry reforms have stalled. Given the processing overcapacity, and some book assets of doubtful value, it is therefore likely to be the banks which will shape the future.
In this article, I tease out the alternative scenarios as to how this might happen. My focus is on the ‘big four’ companies. This is because a failure of any of the other companies will not change the fundamental dynamics of overcapacity.
We know that at least three of the ‘big four’ have been making consistent losses. The Alliance Meat Company has lost in aggregate some $48 million post-tax in the last four years. Silver Fern Farms has lost 45 million. Ignoring some asset revaluation, ANZCO has lost 7.5 million in the four years through to 2012 with their 2013 results still to come.
The other member of the big four is AFFCO and we do not know their results. This is because they are a local private company, now owned by Talleys, and have no obligation to publish their results.
It is likely that Talleys can use other commercial assets to ride out any meat industry losses until one of their competitors falls over. The evidence suggests they intend to be long term players. It is also likely that ANZCO’s Japanese majority owners will continue to play the long game, although an option that allowed them to sell their sheep assets and retain the beef assets could be attractive.
The 2012/13 year was a bad year for producers but it should have been a good year for the processors. A nasty drought meant more ewes were sold and less female lambs were retained. However, even with these stars aligned, the processors struggled badly.
The same 2012/13 drought has meant that fewer lambs were born in the recent spring. Also, more female lambs will now need to be retained to rebuild the flocks. Hence slaughter numbers will be down this year. This is not good news at all for the processors.
Ironically, this 2013/14 years looks like being a strong year for producers. This is largely because of the greatly increased demand out of China. But at the processor level, the hard reality is that one of the big four has to fold.
I think this business failure will occur within the next one to two years. I have my own views as to which is the most likely business fatality, but have chosen not to name it. This is because, regardless of the specific firm, the alternative scenarios I lay out below are broadly the same.
Receivers always want to salvage the most money in the quickest time. So they will seek to find a buyer of the complete business. There is no money in New Zealand for such a task so it will have to come from either Brazil or China. No-one else will step up to the plate.
There are two Brazilian companies that have key global roles in marketing red meat. These are JBS which had 2012 global revenue of $US40 billion, and Marfrig with revenue of about $US11 billion. Several years back, executives of both companies were separately sighted at regional airports across New Zealand, and we can be confident they were not here for tourism. But nothing eventuated. If one of them did come in as a buyer then it would be to play the long game. The industry would still have its current overcapacity, and the only logic for buying into the industry would be if the buying company had a large war chest to drive other companies under. Potentially, in two or three years the new Brazilian company would be the ‘last man standing’ and from then on be able to charge monopoly processing rates. That is certainly not an outcome the farming sector would favour!
It is also possible but less likely that a Chinese company might show interest. Within New Zealand there is a tendency to see China as some monolithic entity controlled from the centre. However, if a Chinese group did invest it would not be because anyone at the centre of the Chinese Government told them to do so. It would be because a particular Chinese business thought the New Zealand meat industry was a good space to be in. But it would only be a good space to be in if this company, like the potential Brazilian buyers, could then play the game of ‘last man standing’. In fact the Chinese don’t have to own the processors to get the meat they want. Right now, they are buying up sheep through local agents and toll slaughtering through New Zealand plants.
The other alternative is that the receivers, unable to sell the company as a going concern, would sell it off plant by plant. Some of the plants would probably find buyers, but many would be closed. In this way, overall capacity would be rationalised.
Even then, the benefits would be to the surviving companies and not to farmers. There would be less procurement wars and the balance would shift to processors rather than farmers. Hopefully it would then create a new environment in which further innovation prevailed, but that may or may not occur.
Overall, none of the scenarios laid out above will seem particularly attractive to the farming sector. But reality is not always attractive. In the final analyses, it is the financial piper who calls the tune. And none of the tunes are necessarily soft on the ear.