Mega Monopoly or smarter competition?

Competition is the answer!

I have read in the print media rather selective views regarding the NZ meat industry. I have my own views but these seem to be contrary to the main stream of thinking. I feel like a Heretic but perhaps that is what’s required.

I feel the views expressed are just more of the same old, same old. Let’s be honest, if your farm dog performed as badly as the Meat Board it would have been taken out to the back 40 and shot without hesitation, and yet meat board members often stand unopposed to inflict more self righteous rubbish on the farming community? Do they fly business class when they flit back and forward to England to solve all our marketing problems for the umpteenth time. Who pays and what do we really get for our money?

I think that the reality is that the quota that New Zealand enjoys to the EU is the cause of most of our problems, not the savior of our industry it is proclaimed to be. It allows the meat companies to get away with lazy marketing and poor performance and creates the need for a meat board to allocate quota. Australia only has a small quota to the EU but their lamb prices appear to be way ahead of ours. Why? They were forced to develop other markets and also to nurture the local trade.

There is always going to be a lot of self interest in the meat industry that’s the way it should be. When Sam Lewis recommends PPCS Alliance merge then we need to ask what’s in it for Affco. The reality is that we have failed to let the market do its stuff. The Hawkes Bay Farmers Coop was closed after being brought out by its competitor to reduce competition. Weddell was purchased by it competitors and closed to increase efficiency and reduce competition and excess capacity. This is not what is supposed to happen.

Markets are my answer to the industries problems. Markets may not be perfect but time after time they have proven to be the best way to encourage strong healthy businesses. There will always be strong and weak companies and we need to accept the risk that some will fail. Some will make poor decisions or become arrogant and feel they can do no wrong. Others will behave in more conservative ways reducing to debt become strong and efficient.

The problem we have is that because of EU quotas we have a Meat board and these eminent people feel that they should get involved in helping to create a better meat processing industry. We then find that these intelligent people who think they know a lot about everything hardly know anything, but unfortunately we all pay the price. You cannot beat the market. Merging a strong company with another will be like finding two weeks into your honeymoon that your bride has aids.

It’s easy for the meat industry to return to profitability - just pay farmers less for stock. Is this the answer to industry profitability we want because it’s where we are heading if Alliance merges with PPCS.

I suspect that behind some Meat companies are some very nervous banks and well they should be - they too are answerable to the market, or should be!

Using Fonterra as a shinning example of monopoly might creating higher payouts is simply too simplistic. What Fonterra has done for the dairy industry needs to be questioned. It is a monster that hasn't delivered on what was promised when it was formed and is now going to bite every one of its shareholders. It simply buys expensive bulk milk from high cost suppliers and sells cheap i.e. commodities. It will do correspondingly badly as dairy prices ease.

Fonterra should never have been created and took government intervention and one thing I have learnt is that no matter how bad it looks, the government can always make it worse. Every dairy farmer supplying Fontera has grounds to be concerned about their future. Monopolies by their very nature become inefficient, top heavy and unresponsive to the market.

If a total merger of the meat industry goes ahead who would own it? The banks, or would you have tradeable shares? Who would own those? Would it be seen as a monopoly by the USA and by the EU and as a tool to manipulate markets? This would be a disaster but it is the answer of the chairman of Alliance. Is this the best he can do?

The reality is that Europe is getting poorer - especially the UK, and lamb is a luxury product at three times the price of chicken or pork and twice the price of Brazilian beef. Disposable incomes in the UK have tumbled as they are doing here. From 160 pounds a week three years ago to more like 50 pounds a week today. Enough for a one way train ticket from London to Leeds. UK supermarkets all announced profit warnings last winter. Why didn’t our meat board notice? Why in August when UK lamb farmers where getting 30 pounds for a 20 Kg lamb did our Meat Board expect prices here to be around 65 to 70 dollars. British farmers where only getting 72 NZ dollars for their 20 Kg lambs!

We have to accept that markets go up and down and without a defined product high prices encourage over production and in turn put pressure on returns. This has always been a reality in business. Our grandfathers always said that in good times you should consolidate and reduce debt.

When times get tough that is the time to borrow and expand. They learnt these lessons the hard way! So will many who have over borrowed in the last few years without thought to the risks they were taking if markets changed. The market will correct when volumes drop and demand increases due to cheaper prices and less supply.

The main problem we face is the debt that New Zealander's have built up with the outside world. We have 166 billion dollars of housing debt, 5 billion of credit card debt at 22 % and our farm debt is racing towards 40 billion.

Let’s look at this closely. Interest on this at 10% must be getting close to 21 billion dollars a year. I think I’m right in saying that Fonterra pays farmers about 8 billion a year. We can pay this off but we are all going to be a lot poorer for it. The fact that farm debt is increasing at 14.6% pa is something we should all worry about. We have over borrowed and over spent and our economy is going backwards. We have behaved like there was no risk. We need to correct our trade deficit and we need to do it now.
All the countries in the west feel their currencies are too strong. Talk to businesses in the Euro block and they will tell you similar stories to ours. A few years a go the Euro was worth 86 US cents now it is 149 US cents so it’s a race to the bottom for all the western currencies. The UK is struggling with too much personal debt, too much consumption and rapidly declining disposable incomes. The UK like us faces some huge problems that will have to be corrected. There is no easy way out. They may be a weak market for some time. The USA is facing problems that appear to worsen every day.

One problems of the west is that we have changed from a production orientated economy to a consumption orientated economy. For example two thirds of the USA’s GDP is consumer spending. The risk this carries is the potential for a massive sustained drop in spending.

A wise friend (C. Sandbrook ) said to me: ”The secret to life lies not in what you need but what you don’t need”. I think this is great wisdom for our times.