Analysis: IFA report on ABP-Slaney deal

Fresh from the fallout with ABP over the collection of the EIF levy, the IFA has published its report into the proposed ABP takeover of 50% of Slaney Foods.

The IFA published its submission to the European Commission’s Directorate-General for Competition (Dg Comp) on the proposed ABP takeover of the Allen family shares in Slaney Foods. The report, which extends to over 100 pages, was prepared by Dr Pat Mc Cloughan, of PMCA Consulting. It analyses the Irish beef sector at both farming and processing level, with particular focus on ABP and Slaney. It deals with the supply patterns of cattle and sheep to factories by Irish farmers and uses a model to demonstrate how the proposed ABP venture with the other half of the Slaney partnership, Linden Foods, would reduce competition in the southeast, particularly for steers and heifers. It also highlights what it describes as the “integration” nature of the deal – the extent of factory feedlots affecting the market for finished cattle and the possible impact on the rendering sector in which Slaney is involved as well as ABP, which is a major renderer in the UK as well as Ireland.

The report found that the procurement market for cattle in Ireland is characterised by weak competition and the proposed deal is likely to weaken competition even further.

Huge concentration in the southeast

The report estimates the overall share of the national kill at 20.5% for ABP and 5.3% for Slaney – 25.8% combined.

However, this figure grows substantially when the type of cattle that each business focuses on. For prime, “in-spec” steers and heifers this figure grows to 36.2% for ABP and Slaney combined at a national level, rising to 44% when applied to the south Leinster region. This is where the reports highlights where the real danger to competition for buying cattle comes from.

Listen to an interview with IFA president Joe Healy and report author Dr Pat McCoughlan in our podcast below:

In this category of cattle, PMCA estimates that after ABP the next largest player is Kepak with 17% of the national kill followed by Dawn on 13%. Slaney’s estimated share of 8.4% of this type of cattle puts it next in terms of size, and it is the proposed combination of the top player and fourth player in the Irish meat processing industry that poses the threat to competition.

From a competition perspective, the volume of cattle in itself isn’t taken as the measure of competitiveness.

Competitiveness is calculated using an economics measure known as the Herfindahl-Hirschman Index (HHI) of market concentration. The scale runs from 0 to 10,000, with 0 being perfect competition and 10,000 a monopoly.

As we can see from table above, the HHI Delta score remains below 250 when considering the wider categories of cattle population but rises to 469 when the cattle pool is narrowed to the ideal industry-specification premium steer and heifer population at a national level. When applied to the south Leinster region, the HHI delta score soars to 959.

Choice limited if deal goes through

The report highlights work done by the then Irish Competition Authority in 2003 when Dawn acquired Galtee’s Charleville factory.

Reference is made to the fact that while Irish farmers can slaughter their cattle anywhere in the country, in practice they chose a factory within 60 miles or an hour’s drive. If Slaney is removed as a major independent factory, the choices for farmers in the southeast is limited.

The impact on sheepmeat is equally significant, with Irish Country Meats, Slaney’s lamb division, having 40% of the lamb kill in Ireland. Even though ABP aren’t directly involved in lamb processing in the state, the small number of export lamb factories (Kepak Athleague, Kildare Chilling and Dawn Meats) means that ABP’s Northern Ireland lamb business in Lurgan Co Armagh has to be considered. The huge numbers of lambs coming south each year for processing has also the effect of making Northern Ireland very much part of the consideration when assessing competition in lamb sourcing.

The report delves into the profitability of beef production for Irish farmers and contrasts the marketing opportunities for British farmers compared with Irish counterparts. Significant attention is drawn to the widening gap in beef prices in Ireland over the past five years and those in Britain, our main export destination.

It explores the difference in the structure for marketing cattle in Ireland and the UK. In Ireland, the only real route to market is by dealing with one of the major meat exporting factories. This relationship is essentially managed by the factories’ network of agents, who are paid by the factory to source suitable cattle.

In Britain, while there is direct procurement by major exporting factories, the report highlights two important distinctions. There is the option of selling finished cattle live through auction markets, of which there were 115 across Britain and account for the sale of a fifth of all finished cattle in Britain. The second option in Britain is the greater number of smaller factories focused on serving the domestic market which the report recognises as huge compared with Ireland. The report pointed out how the beef processing industry is much more concentrated in Ireland compared with England, with large processors accounting for 85% of the kill compared with 50% in England. In contrast, small- and medium-sized processors account for 43.3% of the kill in England and only 8.9% in Ireland.

At this point, the report successfully suggests that part of the UK farmgate price strength relative to Ireland is driven by the live markets and strong smaller sized independent factories.

Factory feedlot cattle and control of rendering

The report highlights how increasing use of their own feedlot cattle enables the major groups dampen demand when cattle off farms are scarce or on occasions like Christmas when farmers are reluctant to travel. As they finish more cattle themselves, factories will be less active in the market to buy farmers’ cattle.

The report also highlights that rendering or processing of animal byproduct would also be affected by the deal. Attention is drawn to the fact that Slaney, along with ABP and Dawn, are the only meat plant-owned renderers of animal byproduct in Ireland, and if the acquisition were to go ahead, that effectively leaves just two industry-based players in the meat sector.

Conclusions

PMCA has produced a series of recommendations at the end of the report that require further investigation prior to DG Comp coming to a position on the proposed acquisition. They have highlighted that ABP and Slaney are numbers one and four buyers of prime in-spec cattle in the country with a combined share of over 35% rising to 44% in south Leinster. The report wants the total national slaughter capacity established.

Factory-owned feedlots are identified as a threat to normal operation of the market, as is the dominance that would exist in rendering if acquisition goes ahead. The report also suggests exploration of an auction market system for Ireland like exists in Britain and encourages DG Comp to consider the relevance of the lower proportion of large- and medium-sized processors to better prices for cattle in Britain than in Ireland. It is also asking DG Comp to delve further into the potential dominance in the niche breed market as well as the customer base of both companies and the impact of residency and movement requirements on farmers by Irish factories. DG Comp has sent a copy of the report to ABP.

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