In a NZ$220 million financial investment, rural servicing firm PGG Wrightson will take a 50% share in the New Zealand meat marketing and processing co-operative, Silver Fern Farms Limited. When the deal is approved by the boards of both companies, the Silver Fern Farms' chairman, Eoin Garden, says an evaluation has identified prospective short-term gains of more than NZ$60 million a year, coming from the deal with longer term financial benefits ranging up to NZ$110 million a year. Silver Fern Farms Limited is New Zealand's foremost meat-marketing and processing company, exporting sheep meat, beef, venison, as well as associated products to about 60 countries. It supplies markets in North America, the United Kingdom, Europe, Asia and the Middle East though a network of international offices. It draws on 60 years of international processing and marketing expertise to generate annual revenues of NZ$1.9 billion. Silver Fern Farms is owned by about 9,000 producers, owning or leasing 24 strategically placed processing facilities throughout New Zealand.

 

 

PGG Wrightson is New Zealand's largest - and only nationwide – rural services company. The company has the country's largest field force of livestock representatives, who manage relationships between farmers, meat processors, livestock exporters, stud stock breeders and buyers. They facilitate the buying and selling of livestock on behalf of clients at auction and privately on-farm. Silver Fern Farms and PGG Wrightson see their agreement as a precursor to further consolidation of the meat industry. In its white paper "The New Zealand Meat Industry: Creation of the Integrated Supply Chain", Silver Fern Farms argues that the goal of further consolidation within the industry must be to deliver superior returns to New Zealand producers. It says the success of this partnership should also create opportunities for other meat processors if they seek to copy the new industry model of further industry consolidation.

 

 

Silver Fern Farms notes that it has been clear for a long time that returns from livestock production were not good enough. Its white paper says that among the major causes of the poor performance of the country's meat industry is a lack of vertical integration of the

supply/value chain. As a result, there is insufficient co-ordination between what is produced on the farm, when it is produced and the specifications, quality and consistency required by consumers who are prepared to pay a premium price. Beyond the partnership with PGG Wrightson, Silver Fern Farms will work to expand existing markets and open up new markets. As a result of on-farm improvements, supply agreements with farmers and better co-ordination between production and processing, there will be greater consistency in the quality and specification of the products supplied. Additionally, the international connections of PGG Wrightson will also create opportunities for Silver Fern Farms to source livestock from other countries, thereby creating certainty for its global customers. This function will continue to be managed directly by Silver Fern Farms.

 

The agreement between Silver Fern Farms and PGG Wrightson comes at a time when New Zealand, as the world's leading exporter of sheep meat, is seeing its meat industry struggling to realise its potential. The New Zealand red meat industry is in a crisis and adds that despite a global boom in soft commodities, sheep, beef and deer farmers in New Zealand continue to endure instability in returns, even taking into account the recent upturns. Garden says meat processors - and in particular the large processors owned co-operatively by producers - are also badly affected by the present crises in the red meat industry. They are dependent on the supply of animals by producers, and they face the additional problem of overcapacity - essentially a result of the decline in stock numbers over recent years along with competition from niche players for specific livestock, leaving the “balance” for the co-operatives.

 

 

Agribusiness economist, Professor Frank Scrimgeour, says it is going to take more than structural changes to revitalise New Zealand's sheep meat industry. Professor Scrimgeour participated in a study by the Agribusiness Research and Education network (AREN) analysing the key elements of success and failure in the New Zealand sheep meat industry between 1980 and 2007.

 

Professor Scrimgeour says the PGG Wrightson deal does have the potential to improve capacity utilisation, which is critical given declining sheep numbers in some regions. But he adds that it does muddy the waters to have both a cooperative and an investor owned firm trying to run the one business. He notes that it wasn't all bad news in the sheep meat industry - while flock sizes have fallen, lambing percentages and weight per lamb have risen. He says the industry is currently back to its historic average return rate on assets of 2%, but that the shift to dairying will exacerbate problems as less stock

 

The industry has been adapting, he says, moving towards chilled meat rather than frozen, and from carcasses to cuts, but the big question is to what extent the industry continues to focus on the European market. Preferential access with quotas has made Europe the market of choice, but Professor Scrimgeour says there is growing potential in Asian markets. The New Zealand meat industry may have to consider, he says, whether the European preference for skinny lambs with associated costs is a suitable type with the costs and specifications for other markets. He notes that New Zealand's market may yet see the return of the Southdown ram. Although the

Southdown ram is known for its high-yielding carcass and meat quality, Professor Scrimgeour says the industry must be realistic about its prospects. The PGG Wrightson consolidation move may help, he argues, but in itself it will not resolve the fundamental farmer/processor tensions and market development challenges. MI

 

Source: Meat International magazine Volume 18. No. 9