Tag Archives: meat processors

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.

Meat industry lacks leadership according to Cooke

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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.

Praise for industry’s animal welfare approach

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Primary Industries Minister David Carter has praised the Primary Industry Chief Executive’s Animal Welfare Forum for its contribution to animal welfare.

Carter attended the biannual meeting of the Forum recently and endorsed the group’s 2012 plan.

“New Zealand’s major livestock production industries are taking a responsible approach to animal welfare standards through encouraging voluntary compliance and proactive initiatives,” he said.

One of the Forum’s key 2012 projects involves working with farmers, meat processors, transport operators, private veterinarians and MAF to ensure that all transported animals are fit for transport. The group is also focusing on the on-farm welfare and transportation of bobby calves for slaughter.

David Carter, Minister for Primary Industries