Tag Archives: procurement

Silver Fern Farms bullish in spite of $31 million loss, says Barber

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Allan Barber has been speaking to Silver Fern Farms (SFF)’s chief executive Keith Cooper, following this afternoon’s announcement of a big loss for the co-operative for the year ending 30 September 2012. In his latest blog post, Barber reports finding Cooper bullish in spite of the loss.

Cooper confirmed the effect of lamb on the season’s losses, saying SFF had been comfortable with what it was paying for lambs price before Christmas. Market demand had suddenly stopped dead in February because of the market price and companies had all been hit by exposure to expensive stock, unable to reduce the price quickly enough. The net result was too much product going into overvalued inventory which resulted in a write-down of $25.6 million at balance date.

The company’s media release has highlighted the same reasons as Alliance for the loss, says Barber – unjustifiably high procurement cost, high dollar, sudden drop in market demand, inventory writedown – but made very positive reference to the future outlook. It has made significant new investments, including the Te Aroha rebuild, $8 million of new marketing initiatives and $4 million commitment to FarmIQ.

In the current year, SFF intends to invest a further $22.6 million in brand development, marketing initiatives and FarmIQ. According to chairman Eoin Garden, this “clearly demonstrates our confidence in, and commitment to, the growth path we have charted for our company” notwithstanding the poor performance during the year ended September.

High inventories are already being substantially sold down to a point where the company’s inventory level is already much closer to normal for this time of the year, lonely six weeks after balance date. As will be the case with Alliance the equity ratio will have already benefited from this.

The suspicion that SFF’s loss would not be a large as that posted by Alliance because of a greater proportion of beef in its kill proved to be correct. Nor did SFF have to take any plant closures on the chin. CEO Keith Cooper said the company’s footprint was consistent with livestock numbers and no further closures were under review.

In answer to a question about further industry rationalisation Cooper said SFF had already taken over two small companies, Frasertown and Wallace, and he was always in favour of aggregation. This invariably involved smaller companies being acquired by one of the big four. However it was ultimately up to farmers to decide on the industry’s structure, because industry rationalisation only lasted so long before a new processor emerged, which farmers would then typically support.

The general mood in the meat industry, confirmed by SFF, is positive for the new season. Procurement prices are aligned with the market, livestock volumes are stable, even recovering slightly, and capacity is fairly well balanced with throughput.

In conclusion, Keith Cooper said while 2011/12 was a poor year financially, strategically it was a progressive one. “2012 marked a continuation of our unwavering commitment to executing our Plate-to-Pasture strategy. This is a progressive and long term plan, which demands perseverance and determination, to ultimately generate sustainable value for our farmer-partners, by meeting the modern consumer’s requirements.”

This article appears also at Allan Barber’s Barber’s Meaty Issues. Read more …

Alliance posts $50.8 million loss for 2012

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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.

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.