Meat industry lacks leadership according to Cooke

The National Meat Workers Union’s General Secretary Grahame Cooke stated last Monday the large loss published by Alliance Group would be the first of several for the 2012 year. His point is fairly accurate, confirmed by Silver Fern Farms’ loss announced on Tuesday, writes industry commentator Allan Barber.

Of the other companies ANZCO and Blue Sky Meats will file their results with the Companies Office at the end of March. AFFCO is now a wholly owned subsidiary of Talley’s and doesn’t disclose its results, although the Meat Workers Union says (optimistically) these will be horrendous because of the lock out earlier this year. AFFCO’s results may not be as bad as all that because of the lack of a peak kill.

Cooke’s next point was the losses would inevitably lead to more industry rationalisation; this in turn would cause job losses for the meat workers who have already been affected by several plant closures in recent years. Job and earnings security suffered from fewer stock numbers and shorter season with workers being paid piece rates for shorter shifts; also higher average weights mean better productivity which is true for lambs, but not cattle.

His final point was about the lack of industry leadership in spite of the fact there are a number of good individual companies, all competing vigorously with each other. Cooke said the meat industry has not changed in the last fifty years with poor marketing and plant closures quickly followed by the addition of more capacity. He described the industry graphically as behaving like a cow with its head chopped off.

A look at the Union’s website provides more information on this topic: plant capacity has increased over the past decade with new plants, rebuilds and upgrades at nine plants across the country as well as capacity increases at several more. The Union believes the Government must initiate a ‘meat summit’ to address this.

So the questions are whether Cooke is correct or the industry is behaving in a perfectly rational manner.

My first reaction is the Government will never initiate a summit, almost certainly just another talkfest, because it realises the industry has a functioning commercial model. It competes in a global market and government should never interfere with privately owned businesses, provided they comply with the law. The meat industry has its own industry body, the MIA, which deals with all sorts of industry issues, but not those which impinge on competition between its members.

In addition, land use changes dictated by relative sector profitability will continue to occur regardless. The government would not be wise to get involved in picking winners or hobbling one sector’s ability to adjust its processing facilities.

My next reaction is meat processors and exporters are not the whole industry. There is a value chain which starts behind the farm gate and finishes in restaurants or consumers’ homes. The Red Meat Sector Strategy, FarmIQ and other company based initiatives attempt to define what can be done to join links in the value chain so they contribute to higher, more consistent returns. But it’s up to the farmers to produce to these specifications.

Meat exporters have done a great job over recent years to convert yesterday’s freezing industry into a sophisticated red meat member of the food industry, while also expanding into high value medical and other non-food product areas. More can always be done, but the industry has moved light years from the age of subsidies.

However, this process of modernisation has of necessity been achieved at a cost to overall jobs and terms of employment. The older plants were inefficient and built to service a different industry structure from a previous age. The period following deregulation and more particularly the removal of subsidies saw many farmers in serious financial straits, so their only option was to change farming practice or land use or sell. An unavoidable, even desirable, outcome was a big decline in sheep and prime beef numbers, offset to some extent by the growth in the dairy industry and the US manufacturing beef market.

Owen Poole made the point to me the losses are a sheepmeat problem and Alliance has responded by making the appropriate plant decisions, such as closure of Mataura sheepmeat processing, doubling Mataura’s beef capacity, increased venison processing at Smithfield and rendering at Lorneville. Keith Cooper also confirmed his satisfaction with SFF’s footprint in relation to livestock volumes, having already taken some tough capacity decisions.

This emphasises the regular requirement for new plant configurations to meet the demands of the market place and consequently the workforce must adapt as well. My experience tells me the meat industry does a pretty good job of responding to changes in market conditions, while generally trying to keep its workforce employed. But there is no future in keeping inefficient plants running to protect workers’ jobs, because these will disappear sooner rather than later.

Equally there are no prizes for leaving customer orders unsupplied when competitors are still prepared to process livestock. I certainly wouldn’t fancy the chances of the industry leader who sets an example by refusing to pay the money and has to tell Tesco or Marks and Spencer his company can’t supply because the stock costs too much this week.

Leadership is not as simple as it appears.

The item has appeared in NZ Farmers Weekly and at Allan Barber’s blog Barber’s Meaty Issues.

Alliance posts $50.8 million loss for 2012

Alliance posted its annual result on Friday which was every bit as bad as predicted, a net after tax loss of $50.8 million for the 12 months ended September, writes meat industry commentator Allan Barber in his recent blog post.

The result included restructuring costs of $13.5 million associated with the closure of the company’s Mataura sheep and lamb processing operations which followed similar costs of $19.4 million the previous year from the closure of its Sockburn plant.

The 2012 performance saw a $77.8 million deterioration at the operating level compared with 2011 which, despite the $9 million net after tax loss, produced an operating profit of over $20 million.

Chairman Owen Poole expressed his disappointment at Alliance’s first operating loss for 20 years which he attributed to the decline in the sheepmeat market exacerbated by the high New Zealand dollar and the unsustainable level of procurement costs earlier in the season.

In the 2012 financial year, Alliance was hit by a triple whammy of lower sales and product prices, ridiculously high livestock procurement prices driven by short supply pre-Christmas, and the high dollar. The strength of the dollar was in no way reflected in a realistic procurement market. There is a question whether other processors were equally affected or saved to some extent by a higher proportion of beef processing in their operations. This will be at least partially answered when Silver Fern Farms releases its result later this month.

One factor which Poole omitted to cover in detail was the significant impact of the last two years on the balance sheet which he said was “still robust”. Unfortunately, the equity ratio has declined from 81.5 percent in 2010 to 51 percent two years later. Clearly, it cannot keep declining at this rate for much longer, so the company’s board will be hoping fervently that markets will recover and livestock supply at least stabilise in the immediate future.

Poole referred in his statement to the operational upgrades to Mataura’s beef processing, venison processing at Smithfield and rendering at Lorneville which, when combined with the savings from closures, will lead to much improved efficiencies and a significantly better result for the current year. Growth of lamb sales to China, sales to Brazil, the contract with Marks & Spencer and better market outlook encourage some optimism for this year.

Longer-term, the sheep population is unlikely to increase to any great extent, although productivity can be expected to improve with genetics, technology and lambing percentage increases. Whether this will be enough to maintain the industry in its present configuration is doubtful, because individual processors will continue to look for efficiency gains. Silver Fern Farms is already thought to be planning a nightshift at its Gore plant to take advantage of the closure of Mataura.

Meat industry capacity adjustments and potentially company ownerships can be expected to change in response to market conditions. No different from normal!

Allan Barber is an agribusiness and meat industry commentator. This article has appeared at www.interest.co.nz. He writes his own blog at Barber’s Meaty Issues.