Tag Archives: sheepmeat

Season just ended could produce messy results, says Barber

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The season just ended could produce messy results, according to meat industry commentator Allan Barber.

The two largest processors and exporters, Silver Fern Farms and Alliance, have captured the headlines in the last couple of weeks.

Hot on the heels of its announced intention to close its sheepmeat chain at Mataura, Alliance has come out with an offer to suppliers of $20 in November per lamb contracted before the end of October.

From the other cooperative camp Keith Cooper, chief executive of Silver Fern Farms, last week sent an email out to suppliers which highlighted the disappointing financial result for the year ended 30 September because of the exchange rate and declining sheepmeat values in January and February not being reflected in procurement prices.

The final results will be declared in about two months when the market will be able to see just how disappointing the performance of the two companies actually was. Rumours of multi-million dollar losses have been prevalent, but rumour is just what they are until we see the actual figures. There is no doubt the problem has been almost entirely with sheepmeat in spite of the exchange rate, because exporters have been far more successful at reining in beef procurement costs.

It doesn’t take an Einstein to work out that the shortage of lambs for Mataura and the procurement competition are just two aspects of the same problem. The lowest national lamb kill for 51 years at 18.6 million, 15 percent down on the five year average will have made it very difficult for any company to get sufficient capacity utilisation to come close to making a profit. With Alliance’s largest sheep plant outside Invercargill, Mataura just over 50 km up the road was always under threat from declining volumes.

Blue Sky Meats, which balances in March, presaged the 2011/12 season’s problems in its declared annual result – a pre-tax loss of $604,000 and no dividend paid. The company termed this the most disappointing result in its history and drew attention to the excessive prices paid for stock through the turn of the year, both because of the high dollar and the drought in Southland.

It will be interesting to see how successful Alliance will be in securing committed lambs from suppliers stimulated by the $20 cash advance. Keith Cooper’s reaction was to say Silver Fern Farms had tried it six years ago with no success because some suppliers were affronted by the implication they were short of cash and didn’t want to close out their slaughter options. He prefers to rely on the company’s suite of supply plans rather than to repeat the cash in advance offer.

In his email to suppliers, Cooper sounds quite bullish about the new season’s prospects with a ‘fully configured operating platform’ and some exciting new marketing initiatives, even being bold enough to state that realistic livestock values are being established. If that is the case, it will either be because there’s enough livestock around to satisfy all processors or he is confident Silver Fern Farm’s overhead structure is competitive enough to guarantee filling their requirements.

Either way that is a big call in spite of the gains Silver Fern Farms has made in recent years, notably the closure of the Belfast sheep chain, improvements to its Finegand sheep processing and the rebuild of Te Aroha in the heart of the dairy farming Waikato/Bay of Plenty region. There are expected to be another 1.5 million lambs, but not enough to change processing dynamics much, while the market is another factor.

The meat industry is unique in that it has to compete at both ends of its supply chain. While livestock procurement has the most obvious impact on company profitability, demand from the market is also critical. Last season’s disappointments and losses have been as much about carrying too much inventory which the market couldn’t digest as the cost of the livestock to produce it.

When companies fail to manage both ends of the chain properly, things get messy. Just how messy they were last season will become clearer at the beginning of December when Alliance and Silver Fern Farms publish their results.

Alliance getting ready for new season

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Meat processor and exporter Alliance Group, like many others, has been busy getting ready for the new meat export season. The company has announced new plant and process modifications at two of its South Island plants, Pukeuri and Lorneville, recently. 

Additional shift and modifications at Pukeuri

Alliance is to provide an additional shift at its Pukeuri plant as it ramps up cattle processing in the peak period, the company announced last week.

The third shift at the plant north of Oamaru will enable the company to process 880 extra cattle a week through May and June when the cattle throughput traditionally hits its peak. the third shift will also offer about 80 existing employees from the sheep and lamb processing shifts a longer season.

Alliance Group is currently undertaking a number of modifications to the plant, including extending the cattle yards ahead of the change.

John Brader, general manager of processing at Alliance Group, says the additional third shift was necessary to ensure Alliance continues to meet the needs of its suppliers.

Alterations have been made in Alliance’s systems to accommodate the additional cartons, giving more flexibility to which blast freezers or equilibration chillers the product can be directed, he explained.

Pukeuri processes more than 10,500 sheep and lambs a day. More than 900 staff work at the plant, which is the largest employer in North Otago. It is estimated the plant injects around $100 million into the local economy each year.

New rendering plant at Lorneville

In addition, Alliance announced that it has also completed the construction of the building for a new $13 million rendering plant at it’s Lorneville plant near Invercargill. Rendering machinery is now being installed in the 1,121 square metre building. The facility, which is designed to reduce Alliance’s energy and operating costs, as well as improve product recovery, is expected to be commissioned in October.

The new plant incorporates the latest technology, including a Press Dewatering System, which uses less energy and produces high quality products. When fitted with a waste heat evaporator, the process is virtually ‘zero waste’, resulting in high product yields and low wastewater output.

The first stage in a larger rendering redevelopment project, two further stages are proposed in the future. The complete project is said to save 9,000 tonnes of lignite and more than 1.5 million hours of electricity a year, enough to power 170 homes a year, the company says.

John Brader says the new rendering plant represented the largest single investment at the Lorneville plant for more than a decade.

“Completion of the building marks a major milestone for the development. Rendering remains a significant contributor to Alliance Group’s income and the investment in the latest technology will ensure we maximise revenue in this area.

“Alliance measures energy use and the associated greenhouse gas emissions from its plant to assist in making good business decisions.

“Since 2000, Alliance Group has reduced greenhouse gas emissions from energy use at its processing plants by 26 percent per unit of production and total fuel use has been reduced by 32 percent.”

Almost 2,000 people are employed at Lorneville, which is New Zealand’s largest sheepmeat processing plant.

Full cup, steady hand

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While New Zealand sheepmeat producers have been enjoying a ‘full cup’ in recent times, with strong farmgate returns, a ‘steady hand’ will be needed to balance future production levels with demand uncertainty across European markets.

A newly released report Sheepmeat – full cup, steady hand from global agribusiness banking specialist, Rabobank, says that the strong farmgate returns in the past two seasons, have been as a result of retail price increases and limited supply availability.

Report co-author Hayley Moynihan says global sheepmeat supplies are forecast to increase from 2013, off a low productive base, although this volume growth is expected to be modest and availability will not recover 2010 levels until 2015.

“While sheepmeat demand has softened in developed markets, we expect retail prices will normalise at new levels – typically 10 percent higher than the three-year average for most regions,” she says.

“For New Zealand producers, a positive outlook will persist in export markets as the economic outlook improves and the market balance remains tipped in their favour.”

As the governments of the EU countries seek to restore balance to their economies, policy changes are expected to place increasing pressure on consumer purchasing powers, says Moynihan. In real terms, the increased cost of living for the average EU consumer is likely to exceed any growth in income, at least for the next 12 to 24 months.

Meat price inflation has led the charge in annual food prices, averaging 4.5 percent year-on-year, with eastern European countries experiencing increases as high as 10 percent in 2011.

“These factors can be expected to weigh heavily on sheepmeat demand and to limit growth prospects.”

Rabobank is picking a slow recovery for developed markets through to the end of 2013. “Emerging markets will continue to grow, albeit slightly below the rate of previous years and offer opportunities for sheepmeat demand growth,” says Moynihan.

The Rabobank report says retail prices will also be influenced by continued strength of competing meat prices; the impact of lower beef production from the US and EU on global supplies; and the rising beef production costs from Brazil, China and Australia..

“These factors are likely to mean that retail price movements for lower-value cuts will continue to rise faster than high-end cuts. This will be particularly evident across emerging economies and consequently only provide limited upward pressure on farmgate returns for exporters,” it says.

Moynihan says that by 2015, sheepmeat production from key exporting regions is expected to lift by an additional 135,000 tonnes a year, which would bring global export supply back to 2010 levels.