Who Loses Out?

Friday 29 Nov 2002 Gerry Eckhoff Articles -- Rural

The only real potential losers in the ongoing PPCS Richmond battle are shareholder farmers - on both sides.

Distraction from the core business is obvious. PPCS announced an $8 million profit while it's similar-sized neighbour, Alliance, made $24 million.

Justice Young ordered PPCS to forfeit around $10 million of its Richmond shares, directing it to either attempt a full takeover of the remaining 90 percent of Richmond, or lose voting rights on their remaining share. Clearly PPCS has no other option but to attempt the former. The question remaining is what would be the effect of such a takeover.

It isn't too long ago that Alliance was struggling to survive, the weight of the Waitaki freezing works inexorably dragging them - and farmers - down. All meat producers paid for that decision. The schedule was pitched at a low level, to allow Alliance to slowly emerge from its mountainous debt. PPCS's schedule remained very similar to Alliance during that period, despite being in a much better financial position, and there was no obvious differential to either company's supplier shareholders.

Should PPCS receive 90 percent acceptance from Richmond shareholders, however, it will be burdened with substantial debt - as Alliance was with Waitaki. PPCS will be forced to offer their locked-in suppliers a price for lamb and beef they can afford due to their debt equity ratio. The price will become the benchmark throughout New Zealand until PPCS is able to claw its way back to profitability.

The questions then for all meat producers are: is this takeover in the best interest of my long-term future, or in the meat companies' long-term future? Does this takeover lessen or enhance competition? How much confidence can meat producers have in the integrity of major personalities within their industry, given Justice Young's stinging rebuke in his judgement?

If the full takeover proceeds, PPCS' resulting market dominance must be of concern. PPCS and Alliance have both moved to lock in suppliers by the allocation of space during peak demand times. No loyalty, no space. Many farmers, therefore, have no option but to comply. Life would be so much simpler for meat companies if no competition existed. Rural people are well aware of the benefits of strongly competing fertilizer or telecommunications companies - why should the meat industry be any different?

Competition drives success. Innovation and technologies abound where industries strive to remain ahead. It is, therefore, of real concern if a company achieves dominance in the market place. It was not overwhelming competition that brought the apple industry to its knees, but a lack thereof. The meat industry in the south has achieved well, but main players PPCS and Alliance still presuppose that their profitability is more important than the supplies. Both must occur.

The cooperative principal is fine, but choice of processing plant is essential to drive progress. The reason meat growers should be loyal to one company - and only company - must be questioned. When a meat company cooperative makes a large profit, it indicates that its basic schedule was too low in the first place. If this is allowed to continue, the company will never go broke - but the farmer can. Further, is it appropriate for meat producers to have all their eggs in one basket? Their shares in the preferred processing company remain static in value, while the dollar's purchasing power plunges. Investment outside the industry allows for a greater diversity, should the individual so choose. The meat industry should be about innovation, creativity and technology, not market dominance.

ENDS

For more information visit ACT online at http://www.act.org.nz or contact the ACT Parliamentary Office at act@parliament.govt.nz.

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