If there was ever a compelling reason for the meat companies to sort out the problems of procurement competition and excess capacity, the debt levels on the balance sheets of the big three at the end of last season provide one, believes Allan Barber.
Between them they stacked up combined current and non-current borrowings of $710 million, 45 percent of these on Silver Fern Farms’ books, 28 percent on Alliance’s and 27 percent on ANZCO’s. No wonder they can’t afford another loss-making year like 2011/12 which makes this year so important for getting back into as healthy a condition as possible.
The forecast livestock volumes, especially sheep and lambs, for the next four years place a great deal of pressure on the companies to find a solution urgently before procurement competition breaks out yet again. MPI’s Situation and Outlook Report which came out in June predicts a gradual recovery in values, but livestock numbers and export tonnages are virtually static or declining, because of the effects of the drought, herd and flock rebuilding and the impact of dairy on land use.
Although hopes for a successful conclusion to the discussions between the companies are high, solid facts are hard to come by. Efforts to find out what’s going on and when some positive news might be forthcoming have so far been unsuccessful. The longer it takes, the more suspicious I become that the talks must have gone off the rails without it being possible to reach an agreement.
There can only be three topics for discussion: procurement, capacity and international markets, and the most pressing of these are the first two which are inextricably linked. Rumour suggests the concept of tradable slaughter rights (TSR) is under serious consideration as a solution to the excess capacity issue, but there may be some disagreement about the basis of allocation of the rights or the level of competition this will provide.
Another problem may be a split down a line between the large multi plant companies which favour TSR and the smaller operators that see less justification for them.
However getting back to the balance sheets and quantum of debt carried by SFF, Alliance and ANZCO, the position is unlikely to have improved much since last September. Keith Cooper has been quoted as saying this season’s result is ‘neutral’ which could be taken to mean roughly breakeven and tends to confirm the not much improvement scenario. Alternatively ‘neutral’ could mean similar to last year’s $42 million pre tax loss; if that is the case, the pressure to do something becomes even more compelling.
Even if the industry’s position is a bit better than that, it won’t be enough to strengthen those balance sheets markedly before the procurement battle starts up again. The single and two plant operators are generally in better financial shape than the big boys, so may be better able to weather the storm. Under Talley’s ownership AFFCO no longer has public scrutiny of its performance and also, more importantly, has removed itself from the risk of under capitalisation.
The best solution to the meat industry’s problems is a combination of sufficient capacity to cope with a normal seasonal range, satisfactory levels of capital and contractual supply arrangements based on fair and transparent livestock prices.
Allan Barber is a meat industry commentator. This item has also appeared at www.interest.co.nz. He has his own blog Barber’s Meaty Issues and can be contacted by emailing him at firstname.lastname@example.org.