Comment: Whatever happened to the importance of the fifth quarter?

Allan BarberThere has long been a belief in the crucial importance of the meat industry’s fifth quarter to profitability. This somewhat obscure term refers to the co-products which contribute an essential revenue component over and above the value of the meat, explains meat industry commentator Allan Barber.

Every industry has its own version of the fifth quarter, but the combination of pelt or hide, intestines, tallow and meat and bone meal, especially when global demand for all co-products is high, makes a disproportionately large contribution to meat company profits.

Yet when I read the press release from Silver Fern Farms about the sale of the hide processing unit to Lowe Corporation and the supplier newsletter, not forgetting my phone conversation with Keith Cooper, I got a completely different impression.

This was to be a totally logical ‘back to the future’ strategic decision which has nothing to do with cash pressures or strategic reviews. According to the newsletter, this is a “smart strategic partnership where we are collaborating to avoid duplication and to create additional value for our farmers and shareholders in the sector.” As well as hide processing, SFF also plans to discontinue rendering at its North Island plants and contract it out to Lowe and Wallace.

This arrangement replicates that between Richmond and Lowe Walker in the 80s which involved an exchange of meat processing for rendering assets at what has been described as a cheap price.

In this case, Lowe Corporation has paid in the ‘double digit millions’ to acquire the business assets and staff of the leathers operation where it will toll process all SFF’s North Island hides. Although Andy Lowe talks of the combined volumes leading to economies of scale, Lowe Corporation is unlikely to close the plant it has just bought and push the throughput through other facilities, at least in the short term.

Having taken over all the staff on existing contracts the costs will theoretically be the same as they were in SFF’s ownership which makes it difficult to see Lowe providing a sweet toll processing deal without recovering its costs and a return on its multi-million dollar investment. Therefore, it is very hard to see how SFF will earn as much, let alone more money from the deal than it was before.

Despite the compelling logic which apparently drives the decision to divest itself of the Shannon pelt processing plant, North Island rendering and hide processing in order to focus on food, SFF will continue to process all Lowe’s South Island pelts. I wonder what the odds are on this unit being sold sooner rather than later.

The press release and supplier newsletter both make much of the benefits to be gained from rationalising production capabilities and focusing on core business. This very much follows the business theory which gained traction in the 80s and still holds sway today.

But it can equally be said to go against conventional meat industry wisdom which considers rendering and skin processing as an essential part of core business which contributes strongly to the bottom line, especially when meat prices come under pressure.

Other companies spoken to see SFF’s decision as posing a huge risk to future profits for short-term cash gain because it represents selling part of the family jewels. I haven’t yet found any other processor willing to dispose of its fifth quarter.

Allan Barber is a meat industry commentator. He has his own blog Barber’s Meaty Issues and can be contacted by emailing him at allan@barberstrategic.co.nz.

1 Comment on Comment: Whatever happened to the importance of the fifth quarter?

  1. Well done Alan – selling the family jewels – how right you are. The next thing you need to get into is SFF toll processing for the Chinese Company Bright – paying up front and sending frozen carases to China. Deal is reputedly US$25M which is the “off balance sheet” funding they often refer to. Again greed is taking over what the industry has painstakingly pushed for generations – add value in NZ by further processing Chilled and Frozen Cuts. Progressive Meats are up to the same thing with the same Chinese customer but a different PR spin and others will follow simply because the profits are too large to ignore.

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