Alliance Group faces big issues over carbon farming and its own corporate structure in the wake of a proposed closure of its meat works in Timaru

The survival of the Alliance Group of meat plants as a farmer-owned co-operative has been revived by the proposed closure of one of its big processing plants, the 139-year-old Smithfield meat factory in Timaru.  

The proposed Smithfield closure has also put renewed attention on the impact of carbon farming on agricultural communities. 

Approximately 600 staff are affected. Alliance says some of them will be absorbed in other plants, such as Lorneville  near Invercargill and the Pukeuri plant near Oamaru. 

“However, there will be a significant number of redundancies,” Alliance says. 

Alliance’s big rival, Silver Fern Farms, halved its status as a co-op in an earlier restructuring with Shanghai Maling taking a 50% stake.

Eric Frykberg spoke to the Alliance chairman Mark Wynne, and asked him why this is happening. 

WYNNE:  The primary driver behind today’s proposal is really declining livestock numbers.  And as those numbers of sheep in particular continue to decline, it means that Alliance and the industry in general have far too much processing capacity, and keeping that going comes at a huge economic cost.

INTEREST.CO.NZ:  So, fewer sheep are going through, but I guess you still face significant fixed costs?

WYNNE:   That’s exactly right, yes.

INTEREST: Does that mean over the last few months, you would have been running at a loss in operational terms?

WYNNE:   Well, we won’t go into the actual financial details of Alliance as a whole, or site by site. But if you look at livestock procurement over the last few months, that has been really challenging. Some very, very high prices have been paid to farmers as meat processors have been scrambling to get enough stock to keep their plants full. That's not unusual for this time of the year, but this year has been more intense as the livestock flow continues to decline. And I guess, particularly over this last year, the drought in Canterbury, the lower North Island, and the top of the South Island, also impacted livestock numbers.

INTEREST: Has there been a downward spiral as farmers with fewer lambs to sell eat into their inventory of breeding ewes and therefore increase the problem long term?

WYNNE: That is what we think has happened. We understand from Beef + Lamb NZ that roughly 500,000 breeding ewes were processed rather than kept, arguably because of the drought but possibly because of economic pressures as well.  And yes, that will definitely have a knock-on effect in the 2025 season and longer term as well. 

INTEREST: Is there anything to blame for this, the spread of forestry, government red tape, or anything else?

WYNNE: At a high level, land use change has been a part of farming since forever.  Even in the early 2000s in New Zealand, you saw a significant shift out of sheep farming into dairy and in certain parts of the North Ireland, you are now seeing a move out of dairy and into kiwifruit. Farmers are continuously chasing the best economic return, which is very logical. But in recent years, we have also had some significant policy interventions around forestry and that has made forestry, particularly carbon farming with permanent aforestation, very attractive from the point of view of financial returns.  The economics of sheep farming in particular are poor, and the current settings on carbon farming are very attractive.

INTEREST: So, do you think the Government should change those rules?

WYNNE: Yes, I do, I think the rules are not balanced at the moment. They have been strongly influenced by a minority part of New Zealand and it has had a huge impact on farming and on rural communities and employment. These things have been predicted in the past and you are now seeing the actual outcome of those decisions.

INTEREST: So, will you speak to the Government about this?

WYNNE:  Yes, I have already done so and I will continue to engage with the Government, and it has been well received. [Agriculture and Forestry] Minister Todd McClay in particular has been very vocal around the policy settings which are being reviewed, and he hopes to deal with this by the end of the calendar year.

INTEREST:  Will a closure of Smithfield enable your other plants to take up the slack and become more viable themselves?

WYNNE: Yes, that is exactly what happens. This is about decreasing our fixed costs, and then we have the capacity to process Smithfield’s livestock through our other locations, which in turn will be more profitable for those locations as well.

INTEREST: You reported a loss in the September 2023 year of $97.9 million. How are you looking for the current financial year which ends in a few days?

WYNNE: We will reveal all over the next few months, and I won’t comment further until we can release our results to everybody at the same time.

INTEREST: Earlier this year you sought an input of capital from your farmer shareholders. Might that have to happen again?

WYNNE: That process is still ongoing. We have indicated to the farmers that we need to strengthen our balance sheet. This is a highly volatile industry and you need a strong balance sheet to ride through variants that brings. So, we’ve kicked off an internal capital raise and that would be a deduction from the processing sheet for livestock going through Alliance.

We have also indicated to the farmers that we will be appointing an investment bank which will help us lead an external capital raise and we will take that option back to the shareholders. At the end of the day, the farmer shareholders have three very simple choices. If farmers supply the capital, we remain a 100 % cooperative. If they don’t supply enough capital, we will have some external and internal capital and will become a joint venture or a hybrid company.  The third option is to divest 100% of the company. So, we don’t know the outcome, but the choices are clear.  We are going to pursue external capital and put that option back in front of our shareholders.

INTEREST: Is anyone interested in buying part of the company, has anyone knocked on your door?

WYNNE:  We have a number of interested parties, both serious contenders and people we suspect are tyre kickers.  But once we have appointed our investment bank, they will help us work our way through that process, and we expect solid interest.

INTEREST: Besides lamb, you process beef and deer. So, what is the meat industry overall looking like?

WYNNE: Well, the declining livestock numbers in lamb in particular impact pretty much all of the players. Beef is much bigger than venison, but overall, the market for beef and venison is pretty much static. These things can change but they will only change when there’s a fundamental increase in the return on capital available to farmers. If we can get into that – and it is driven primarily by offshore markets – then sheep and beef farming can become an economic unit that can compete and provide a return on capital. But right now, it’s very tough.

Consultation on the proposed closure will run until October 11, and a final decision is expected to be made by October 18.