Allan Barber sees an industry trapped in its individual histories and unable to find the will to change given current incentives

By Allan Barber

When Eoin Garden retires as Silver Fern Farms’ chairman at the AGM in December, both cooperatives will have had a change at the top within three months of each other.

So the big question is whether this will make any difference to the way they operate: will there be a significant change of culture and leadership from the top or will it be much the same as before?

The Meat Industry Excellence Group is obviously hopeful of getting its preferred directors elected to the SFF board with Richard Young, MIE’s chairman until recently, and Poverty Bay farmer Dan Jex-Blake resigning from MIE to stand for election in their respective wards.

There is also one MIE aligned candidate standing for the Alliance board, long time supplier Don Morrison, although Fonterra director John Monaghan was keen to stand, but was rejected by the Alliance board under the terms of the company’s constitution.

MIE chairman John McCarthy says “this is a real slap in the face for Alliance shareholders” who want to see change and in his opinion “is typical of what’s wrong with the meat industry.”

It is still an open question whether Young, Jex-Blake or Morrison will succeed and there is even more doubt whether or not they will be able to influence either company’s strategic direction.

History suggests directors who join a board find it far harder to change things than it appears from the outside. Nevertheless it would have been interesting to see what influence Monaghan might have had with his experience of dairy industry restructuring.

SFF has made some very big changes of direction in recent years, as it moves down the value creation road, symbolised by its branded retail meat cuts and investment in FarmIQ. This has been a challenging strategy and the jury is still out on how successful it will be.

Garden told me last week academics have said it is impossible to follow the course SFF is attempting, because according to business wisdom a company must either be the lowest cost processor or a niche market value creator, not both.

As the biggest processor and exporter in the industry, Garden says SFF has no choice but to follow both paths, although he admits running both strategies side by side is very challenging.

In answer to my question whether SFF is coming right, Garden replied SFF, as the biggest operator, finds itself compelled to carry enough capacity to service its suppliers, even in a drought, but that comes at a cost. The industry’s structure, particularly the competitive model, makes it uneconomic to carry that cost.

Although we didn’t pursue that line of conversation, it took me back to the days when CEO Keith Cooper was talking about ‘right-sizing’ capacity instead of trying to handle all the available livestock. It sounded to me very close to an admission SFF can’t sustain the amount of capacity it owns spread across both islands.

This suggests SFF has found itself forced to continue to pursue the vanity of market share at the expense of the sanity of profit.

The major issue is how to reduce capacity to a sustainable level in a shrinking livestock environment without incurring unaffordable write-offs and closure costs. The scale of this particular challenge will become clearer with the release of the annual results in November.

If SFF has the problems of too much capacity and the industry leadership position, Alliance seems to be cautiously content with its present situation.

New chairman Murray Taggart sees no immediate prospect of change to the industry’s structure because companies will continue to operate the way they want to, at least until circumstances force a change.

Taggart says Alliance is neither leading nor condemning the present change options under consideration, but will continue to follow the commercial model.

The company’s aim is to target the top end of the market and to be the company of choice for those suppliers who are prepared to take the long term view.

He acknowledges land use will continue to change according to commercial viability, but to offset the trend in the deep south Alliance’s objective is to broaden its footprint in the North Island. However this must be commercially sensible while receiving the support of cooperative members.

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It isn’t clear where all this will leave MIE and its ambitions to bring about fundamental industry change.

While election of MIE sympathetic candidates and a new chairman of SFF, combined with tight financial resources, may improve that company’s attitude to a cooperative merger, I sense no willingness in Invercargill to give it much consideration.

I suspect the position hasn’t changed since last time a merger was mooted, when Alliance could see no financial justification for merging.

Balance sheet imbalances still exist, potentially even more so after the annual results come out.

It will take more than a couple of new directors to bring about the changes MIE desires.

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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he runs a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or read his blog here ». This piece was first published in the Farmers Weekly and is here with permission.