The stand-off between farming organisations and the beef industry in recent weeks has been an interesting spectacle. Behind the headlines there are a number of uncomfortable truths and it will require much more than pickets to change them.
It is a fact that Irish farmers have no ownership or equity in the beef processing sector. That, alone, adversely affects their ability to derive wealth creation from the processing of their cattle. It was not always like that. In the 1980s Cork Marts, a farmer controlled co-operative, controlled a large meat processing business called IMP. It failed. Later, Kerry Group, another farmer controlled entity, acquired a meat factory and threw its best management brains at it. It failed too. These two expensive engagements ended the ownership experiment for Irish farmers. Kerry and Avonmore Foods (the precursor to Glanbia) also owned pigmeat and lamb processing facilities. Those were either sold or closed down as the returns were simply insufficient to warrant continuing.
Meat processing is a highly competitive and challenging business to enter. It is dominated by ferociously competitive operators who would respond aggressively to any new entrant to their marketplace. It would require deep pockets and a gritty determination for any enterprise to enter the beef processing market, yet if farmers really want a say at the table they will need to think strategically and prepare to put a lot of skin in the game.
Horace Plunkett, one of rural Ireland’s great heroes, faced enormous challenges when he dared to suggest farmers could control and manage their own processing assets in the dairy industry. That was in 1894 when rural education levels were low, farm incomes were minute and the idea of creating co-operatives amid full blooded capitalism was a deeply radical notion. By 1908 Plunkett had inspired the creation of over 880 agricultural co-operatives.
Since then and now the co-op concept morphed into something akin to a West Coast surfer’s idea of business organisation. I don’t think Horace Plunkett had a pony tail or a tattoo so he may have found the modern version of co-operation, as advocated by some lobbysists, hard to stomach. His view is more in line with what I envisage co-ops can do — provide a hard alternative business model that can not only survive but prosper in a free market economy if given the mandate to behave commercially. Dairygold and the Irish Dairy Board are current good examples.
This all circles back to our beef processing theme. If farmers are serious about creating value from beef processing and/or exerting some element of control in the sector they will have to consider; (1) organising themselves in to a co-operative structure; (2) providing the hard cash equity to establish that enterprise; (3) giving the managers of those assets full authority to be profitable and not be hamstrung by short-term cattle price pressures (a fatal element of the IMP collapse), and; (4) being prepared for an aggressive competitive response from incumbents in the sector that will challenge the profitability of the new entrant.
Do we really believe farmers, collectively, are up for such a challenge? The easy answer is to say no but that leaves them in an industrial structure defined by a highly fragmented supplier base and a relatively small number of large and private buyers, hardly a formula for economic success at farm level.
In preparing some notes for a conference next week, I calculated that the agrifood companies that joined the stock market in the 1986-1990 period have a value today that is over 30 times what it was 25 years ago. Moreover, the farmer co-ops that remain material shareholders of the co-op/plcs still have equity holdings valued at over €3 billion. Owning food processing assets, therefore, can be a highly profitable enterprise but only when managed along tough commercial lines.
Farmers debating the beef industry need to think long and hard about their next steps in the sector. Pickets alone will not suffice.
Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.
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