Allan Barber says meat company shareholders now need to back their companies to make painful capacity cuts

By Allan Barber

After the discussions between meat companies, lobbying by MIE, conferences and strategy debates, right now an eerie calm has settled over the meat industry.

This is partly due to the mid winter slowdown in processing activity with only bobby calves to get excited about.

At this time of year companies are doing their best to minimise any losses in the last quarter.

There is no doubt the final results will be a lot better than last year, but they have to be, because the large companies could not sustain another big hit to their balance sheets.

Combined current and non-current debt between Silver Fern Farms, Alliance and ANZCO of $710 million at 30 September 2012 to fund losses and inventories means a substantial improvement this season is absolutely essential.

The noises from the processors suggest moderate profits at best, mainly because of a sell down of inventory leading to reduced current debt and better control of procurement, offset by lower margins.

However there will have been no big gains among those companies most exposed to sheepmeat, while the beef processors, particularly the smaller independents, may have done better.

That said, beef margins are half last year’s.

Nor is there any agreement on future strategies to address the sector’s volatility.

There will be a meeting of MIA member companies at the end of the week which Bill Falconer will facilitate in a private capacity, not as MIA chairman. But it’s still hard to see the gap being closed between the large companies, generally in favour of tradable rights, and the smaller independents, especially beef processors.

These companies see the issue as predominantly a South Island sheepmeat problem, mainly confined to the large processors with too much capacity for the reduced flock.

My gut feeling says this perspective isn’t very far off the mark, at least in the short term. Alliance points to its capacity closures as evidence it is prepared to bite the bullet.

A completely robust assessment of the situation isn’t possible because of the paucity of published financial information, since a large part of the industry is privately owned and not required to publish annual results. Significant players in that camp include AFFCO, Greenlea, Progressive Meats, Taylor Preston, Universal, and Auckland Meat Processors among others.

The lamb kill will be about 3 million lambs down next season and the latest SONZA report forecasts a continuing decline in sheep breeding numbers between 2014 and 2017 at which point they will be 13% below 2011’s level.

Beef cattle follow a similar trend with a predicted fall of 10% over the same period.

The big advantage for specialist beef processors is the increase in cull cows which will compensate for the lower beef herd.

Nevertheless for the meat industry as a whole, it is not simply a sheepmeat problem.

The exodus from sheep and beef to dairy will continue inexorably, unless either the international dairy price falls dramatically or there is a significant increase in sheep and beef farming profitability.

Therefore there are two separate issues here and capacity rationalisation, whether through tradable slaughter rights or something else, will only solve one of them.

One can argue TSRs will provide a short term solution to the capacity problem, avoiding company collapses which leave suppliers unpaid; but they won’t resolve the real or perceived competition in the international marketplace.

Most probably TSRs will bring lower procurement prices through less farm gate competition.

-------------------------------------------------------------------------------------------------------------------------------------------

Farms For Sale: the most up-to-date and comprehensive listing of working farms in New Zealand, here »
-------------------------------------------------------------------------------------------------------------------------------------------

I remain firmly of the view the meat companies will not reach any worthwhile agreement on an industry restructure that will address both rationalisation and international marketing. There are too many vested interests to arrive at a solution, as has proved to be the case whenever this has been attempted with or without government intervention.

The meat companies must sort out their own individual problems by ensuring their capacity matches the constraints of reduced livestock numbers.

This responsibility comes back to the shareholders of each company to ensure their companies have strong enough balance sheets to handle the costs of overcapacity, plant modernisation and improved processing efficiencies.

MIE has based its campaign on farmer ownership of a significant proportion of the industry. The starting point should be to make sure farmers can continue to own that part they already own which may well require some tough decisions about the injection of more farmer capital into the cooperatives.

The banks will not sit back and let another procurement war trash the security of their loans to the industry.

History provides plenty of evidence of what happens when equity ratios get too stretched and protection of balance sheets will be the key success factor for the foreseeable future.

It will be those companies with efficient facilities designed to handle the available livestock which will be able to afford to pay suppliers the best price. Resolving marketplace competition may have to come later.

---------------------------------------------------------------------------------------

Here are some links for updated prices for
- lamb
- beef
- deer
- wool

---------------------------------------------------------------------------------------

Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he runs a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or read his blog here ». This item was first published in Farmers Weekly. It is used here with permission,