Tag Archives: Mataura

Meat companies high debt levels must concern the banks

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New Zealand meat companies’ high debt levels, must be of concern to the banks, says meat industry commentator Allan Barber.

Silver Fern Farms (SFF) is operating on a three month extension to its bank facility which expired at the end of September, but reported current (expiring within 12 months) loans of $316.7 million at the end of its 2012 financial year, Barber writes.

In its last published annual accounts to September 2011, ANZCO had current and non-current loans of $220 million which must surely have increased in the very challenging 2012 year. Lastly at the end of September Alliance had $331.8 million of assets and non-current loans of $196.1 million which are clearly not causing any immediate concern.

The two big co-operatives published their annual reports last week and neither makes pretty reading. Both results benefited from a large tax loss which, to be effective, must of course be offset eventually by profits.

Alliance’s financial position was fully flagged in its announcement of a $50.8 million post tax loss including the $19.4 million write down of its Mataura sheep processing unit, which was actually a pre-tax loss of $70.6 million before tax credits. Its balance sheet with 51 percent equity ratio is still strong, although not nearly as strong as twenty four or even twelve months earlier.

SFF had already announced an after-tax loss of $32.2 million which was also, in reality, a loss of $44.2 million pre-tax, which included no restructuring costs. Debt rose during the year from $111 million to $316 million, a massive increase which was largely accounted for by the inclusion of $35 million insurance payout for Te Aroha in the 2011 accounts, the cost of the rebuild, $83 million of higher livestock and finished product inventory, and the funding of the annual loss.

A careful study of the annual reports sheds an interesting light on the company’s banking arrangements. Its 2010 report stated that its facilities had been renewed for two years till September 2012 and included $75 million for repayment of its SFF030 bonds. The 2012 report notes that its facilities expire in September 2012, hence the classification of all secured loans as a current liability, as was the case in the 2011 accounts.

I understand from chief financial officer Keith Winders that SFF has been operating on a temporary extension to its banking facilities since the end of September; he claimed this was quite normal because of the annual renewal arrangement with its bankers. However it appears unusual to me, because firstly SFF previously had a two year facility and secondly it can’t be ideal to carry $300 million of bank loans into the new financial year without negotiating secured banking arrangements. However, the directors must have received solid assurances of the company’s continued trading ability to allow it to continue to operate and incur liabilities.

Winders was also quite definite that there would be no significantly different terms and conditions attached to the new facility when finalised. This suggests the operating environment since September must be at least stable, although there is little evidence of an improvement in market demand, especially for sheepmeat which caused all the problems last season.

The only major improvement I can see is the reduction in lamb prices which have fallen from $140 to $90 in a year for a 17.5 kg lamb, but the season hasn’t yet got sufficiently into its stride for trading performance to have recovered many of last year’s losses.

What is absolutely crystal clear is that the banks will be watching their exposure to the industry like hawks and will demand some dramatic improvements for the rest of this season for which the critical period will be from January to May. Last season’s problem was that the price was much too high to start with and none of the processors was brave enough to lead the way to get it down when stock numbers were low.

I imagine none of the meat companies will have any appetite for chasing market share at the expense of margin this year and, if they do, their banks will be down on them like a ton of bricks. Farmers had a bonus last season, but there’s no point in hoping for a repeat any time soon. This presupposes that processing capacity is fairly well aligned with livestock volumes because the last thing the industry can afford is a procurement led price war.

Unfortunately my impression is that there is still excess capacity in the country, even after the closure of Mataura, but for the time being the companies will all be determined to rebuild their balance sheets. Past experience suggests industry peace will only last as long as necessary to repair the damage before the companies find the prospect of grabbing market share too hard to resist.

The only long-term remedy will be rationalisation of processing capacity and ownership, combined with seasonal supply commitment like the dairy industry. The banks are one of two critical factors in a change of this nature, but they would have to work together and accept write-offs in the interest of a lasting solution.

Farmers are the other critical factor, but the process of converting them to seasonally committed suppliers is a slow one and nothing will make this happen overnight.

The meat industry appears likely to be consigned to a further period of instability, but this season may give some indication of whether it is heading in the right direction.

This item has appeared at interest.co.nz and also at Allan’s own blog Barber’s Meaty Issues.

New venison plant for Alliance Smithfield

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Alliance Group’s $8.6 million new venison plant at its Smithfield site, near Timaru, is now operating at full capacity.

New Zealand’s leading meat processor and exporter is processing up to 420 carcases a day at the plant, which serves the company’s upper South Island suppliers.

Until now, Smithfield has only processed sheep and lamb, so the venison plant marks a major milestone for Alliance. More than 50 workers are based at the venison plant, which operates most of the year.

Murray Behrent, general manager of livestock says: “Alliance Group has invested in Smithfield as part of its dedication to delivering exceptional product quality and food safety standards. It is also a reflection of our confidence in the region and we have received great support from our suppliers, who are producing the quality livestock that we require.”

“Smithfield is yet another example of Alliance Group’s ongoing investment to ensure we meet the needs of our suppliers,” he adds.

The outlook for venison remains positive and the investment at Smithfield showed the company was focusing on processing a variety of products for global markets, says Behrent.

ViaScan to be installed at Smithfield in the next year

The new venison plant was built to accommodate Alliance’s innovative ViaScan meat scanning technology, which will be installed within the next 12 months at Smithfield, the company says.

ViaScan visually analyses carcases measuring the lean meat, fat and bone, to capture yield performance levels. It has been available since 2003 for analysing sheepmeat, and is already in use at eight Alliance Group plants. The company announced it was first to be extended to its venison suppliers at the Alliance Makarewa in Southland in July this year.

Along with providing suppliers with the opportunity of improving returns, ViaScan also aligns farmers with current market information and helps them with decision-making and the selection of good genetics.

“Exceptional product quality and food safety standards are vital for Alliance Group’s export market,” said Behrent when announcing the move. “We’re targeting high-end consumers with discerning palates who rate meat quality highly when making purchasing decisions and ViaScan helps our suppliers produce the quality livestock that is required.”

ViaScan will also mean suppliers can measure the performance of each individual carcase, particularly when the National Identification and Tracing Scheme (NAIT) is introduced in February 2013 for deer, says Behrent.

Smithfield is one of the three Alliance premises selected by Marks & Spencer to provide chilled New Zealand lamb for its UK retail stores. It is also one of the five first plants to introduce the new Ovine Post-Mortem Inspection system of sheepmeat carcase checks this year.

In 2011, Alliance Group completed a $15 million project to upgrade its Mataura beef plant in Southland.

No chance government will legislate to restrict meat capacity

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After the announcement the week before last of Alliance Group’s intention to close sheepmeat processing at its Mataura plant, Meat Workers Union representative Gary Davis called for the government to intervene. This was no doubt caused more by frustration over the loss of jobs than any realistic expectation that the government would interfere in a commercial situation.

Industry commentator Allan Barber argues at his blog that there is no chance government will legislate to restrict meat capacity.

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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 to transfer Mataura sheepmeat processing to Lorneville

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Alliance Group announced this afternoon its intention to close its sheep and lamb processing operations at its Mataura plant and transfer them to its main Southland lamb plant at Lorneville, reports Allan Barber.

Mataura’s beef facility which has recently had a $15 million upgrade will continue to process beef with its remaining staff count of more than 400.

This decision is still up for final consultation with the workforce and union but, as always, this is a formality in as much as the decision has already been made. However, the media release indicates that other options could emerge during the consultation process. If the proposal remains unchanged, approximately 260 workers will be offered the chance to transfer to Lorneville with a further 65 engineering, administration and management staff also affected.

In a media release, Alliance’s chief executive Grant Cuff refers to the company’s status as one of Southland’s largest employers, emphasising its duty as a cooperative to its shareholders to operate the plant configuration most appropriate to the available stock numbers. Significant efforts had been made to retain complementary sheep, lamb and beef processing at Mataura, but declining stock numbers have made this unsustainable.

Cuff refers to the strength of Alliance’s balance sheet, which will enable it to withstand the challenge of a difficult period for the industry as a whole. He also says: “We are confident in the long-term outlook and these changes are essential to allow the company and its 5,000 farmer shareholders to benefit from the demand for New Zealand meat products in the global market.”

Today’s announcement confirms the rumours of industry rationalisation that have been circulating in recent days. The fact that Alliance has made the first move does not mean there won’t be further changes in due course affecting either the South Island’s other large cooperative Silver Fern Farms or ANZCO’s Canterbury Meat Packers operation near Ashburton.

However Alliance’s move will provide a small breathing space before further capacity or structural changes are necessary.