“You’d have hundreds of people just sitting round most of the time, not doing anything. The issue is more complex than that.”
Hewett agreed with farmers who wanted enough killing space available all the time to cope with seasons like the current one, with drought conditions in many areas.
That meant a level of permanent overcapacity and that came at a cost.
“It’s a cost and the co-operatives are wearing most of it and it means the small, single-chain plants which have no extra capacity are freeloading on our capacity.”
Despite that criticism of the report, Silver Fern accepted there was a need for capacity reduction in the industry and was open to collaboration with others to try to take out some of the costs.
He did not believe the level of overcapacity for sheep meat processing was above 50%, as claimed in the report.
“No-one really knows but I’d say it is somewhere between 20% and 30%.”
The situations were quite different between the two islands, especially in the south of the South Island where grass growth meant the processing season was “very peaky” and capacity was needed for stock to be killed in a short time.
MIE and its consultants claimed significant savings and higher returns to farmers if 13 of 34 sheep meat plants and six of 27 beef plants were closed.
Hewett welcomed the debate on procurement and processing savings and their benefit to farmers but they were not the breakthrough the industry needed.
“If you get a $400 million prize over the industry that is $10 a head for lamb carcase equivalent. It is a nice number to have but isn’t the step-change we’re looking for.”
The real, long-term and sustainable benefit was in marketing and in fixing the product to the needs of the end consumer overseas.
Silver Fern had been open about its interest in talking to Alliance Group about a merger of the two co-operatives – the central objective for MIE but rebuffed by Alliance because the economics didn’t stack up.
The sums involved in that exercise were “not as good as MIE says they are and not as bad as Alliance says”, Hewett said.
He believed the case for discussion and exploring options was compelling but he agreed with Alliance chairman Murray Taggart that “commercial outcomes were based on commercial solutions”.
Silver Fern was pursuing its own capital-raising plan to seek $100m in new equity for investment in value-add and marketing, processing efficiencies and debt reduction.
A memorandum had gone out from investment bank Goldman Sachs to potential interested parties.
It was understood that involved only offshore investors and no NZ companies had been included.
Hewett couldn’t confirm that, saying Goldman Sachs had a “tight lid” on the process and his board did not have that detail yet.
“If you get a $400 million prize over the industry that is $10 a head for lamb carcase equivalent. It is a nice number to have but isn’t the step-change we’re looking for.”
ROB HEWETT
Silver Fern Farms
Silver Fern also wanted shareholders to invest further and the co-op was getting inquiries from a number of them.
Several Silver Fern plants were on the MIE list of potential closures in its scenario to reduce capacity and costs. They included Fairton, Wairoa, Waitotara, and the beef plant in Hokitika but Hewett said his co-op had no plans to shut them down.
“Some plants aren’t fully optimal but none of our plants are unprofitable and we are regularly reviewing supply levels and trends.”
Hewett had a career in the oil industry before he turned to full-time farming and his ideas for the location of processing plants were partly based on his experience there.
“The oil companies don’t replicate facilities at the storage ports. One will have the tanks at Bluff and another the tanks at Lyttelton but they all have off-take agreements, effectively sharing the storage and they all own a share in the coastal tankers.
“That takes the costs out of the supply chain and then the competition is all on at the pump. That’s how it should be done and you’d have a system of toll processing.”
He’s put that plan to competitors.
“They say that’s very interesting but then it gets lost in discussion about the complexity of different cuts, but that’s just a red herring.”
The MIE report offered ideas for a range of industry consolidation, including mergers of some or all of the four major exporters.
Given the range of ownership structures involved, getting any agreement for any of that would be very challenging, Hewett said.
