Tag Archives: Silver Fern Farms

A new Te Aroha emerges from the ashes

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Silver Fern Farms' Te Aroha exterior.Two years after Silver Fern Farms’ Te Aroha beef processing operation was destroyed by fire in December 2010, a state of the art facility opened in December and is up and running in its place.

Silver Fern Farms’ new $67m Te Aroha plant is a hot-boned beef processing operation designed for best practice processing of manufacturing cows, bulls, steers and heifers from farmer suppliers across the Waikato region.

It joins a network of 23 Silver Fern Farms processing facilities employing over 7,000 staff throughout the country. Te Aroha will employ up to 380 staff when operating at full capacity with two shifts in peak season with an annual capacity of 125,000 cattle.

At the plant’s official opening in December last year, Silver Fern Farms chief executive, Keith Cooper, said the new design reflected the company’s focus on plant economics and best practice processing and the investment was testament to the co-operative’s strong confidence in the sector.

The plant has been designed in consultation with internationally recognised experts in process layout and ergonomics. It is compliant with New Zealand, EU, US Department of Agriculture (USDA), and Chinese hygiene requirements and also to halal standards for the Middle East, Malaysia and Indonesia.

Te Aroha incorporates the latest meat processing technologies; including sophisticated traceability and yield measurement systems.

Te Aroha, December 2013: Computerised Marel Streamline technology monitors meat as it passes through slaughter, grading and boning processes. The plant is configured with a custom-designed two-level Milmeq slaughterboard. Extensive use is made of RFID tags, with scanning stations at slaughter, grading and boning stages, monitored through the new Marel Streamline computerised deboning and trimming system. The process has been designed for complete traceability and to enable Silver Fern Farms to closely monitor key production indicators.

Rapid feedback

This system has the capability to deliver rapid feedback to plant staff on how closely they are meeting customer requirements for particular cuts. This fits with Silver Fern Farms’ plate-to-pasture strategy where consumer requirements are driving process improvements in order for the company to extract higher value returns from products.

This data collection is underpinned by the Primary Growth Partnership FarmIQ joint venture programme – an investment of $151 million by Silver Fern Farms, Landcorp Farming, Tru-Test Group and the Ministry of Primary Industries.

Over the seven years of the programme the aim is to integrate the red meat value chain to maximise returns to farmer partners.

For farmers, information collected at the Te Aroha plant on meat yield and quality can be used to inform farm management decisions as they look for avenues to lift farm system performance. This information can also be married with information from the insights FarmIQ will bring from consumers so farmers can produce to target higher-value returns from specific consumers.

Trimming to specification

Boning room technology at SFF Te Aroha.Following break-down and deboning, the primal cuts are distributed to work stations on the trimming line, based on operator availability. They are then trimmed according to individual specifications and all cuts are fully traceable. The automated conveyor system will enable Silver Fern Farms to closely monitor and control critical key production indicators in real time throughout the complete processing cycle. These include yield, throughput, cutting performance, giveaway and loss of sales. These are automatically registered and monitored for the entire line as well as for the individual operator, using Innova intelligent production control software.

Provision has been made for future installation of technologies including robotic bagging.

Sustainability top-of-mind

Eco-efficiency and sustainability were top-of-mind considerations. As a result, the new plant uses significantly less electricity and water per head and discharges less effluent per animal processed, setting new benchmarks in line with global customer requirements.

Keith Cooper says the rebuild gives the company an opportunity to review the environmental footprint of the operation. “Our focus is improving environmental efficiency while reducing costs through better use of resources and reduction of waste.”

The plant has also been orientated to ensure noisy areas and truck movements are at the centre or the rear of the plant, away from neighbours. Every effort has been made to reduce noise coming from the plant, even to the point that refrigeration equipment, undamaged by the fire, was relocated.

Health and safety focus

Te Aroha, December 2013: Trim stations are individually tailored for each workeer's reach to meat, height and access to work stations.Health and safety was another major focus for the company when developing the specifications for the new facility. Process areas have been designed to minimise workstation hazards. A suite of solutions to minimise lifting, turning and carrying were factored into the design. The boning room has European-designed workstations intended to maximize productivity by minimising operator fatigue and discomfort. At trim stations adjustable work heights, reach to meat and easy access to work positions make for a safer and more comfortable work environment for staff.

Separate viewing areas let people observe the slaughter and boning processes without interfering with workers on the floor. The plant layout also factors in separation between pedestrian and heavy vehicle movement areas to provide a safer environment for people.

Throughout the rebuilding process, Silver Fern Farms endeavoured to provide alternative options for staff whose livelihoods were affected by the fire, to the extent of making positions available at other company plants in the North Island and providing accommodation supplements in the early stages. The company’s significant capital spend also has provided positive spin-offs to the local economy as a result of the number of contractors throughout the region engaged during the course of construction.

Cooper says the co-operative’s loyal farmer-suppliers in the area were particularly supportive of the company through the re-build.

“We are grateful to those suppliers who have stood by us and persevered while we got the new plant up and running – we know the disruption has been an inconvenience for many. But we are enthusiastic about the service levels and advantages we can now offer them as a result of our investment.”

Pictured at the Te Aroha opening are (left to right): local MP Scott Simpson; John Key; Eoin Garden chairman Silver Fern Farms; Keith Cooper, chief executive Silver Fern Farms; Kevin Winders, chief operating officer Silver Fern Farms.

Pictured at the Te Aroha opening are (left to right): local MP Scott Simpson; John Key; Eoin Garden chairman Silver Fern Farms; Keith Cooper, chief executive Silver Fern Farms; Kevin Winders, chief operating officer Silver Fern Farms.

 

This article has appeared in Food NZ magazine (February/March 2013) and is reproduced here with permission.

PGP project suggests meat industry ready to co-operate, says Barber

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Allan BarberYesterday’s announcement of the Red Meat PGP Collaboration Programme for Greater Farmer Profitability at a total investment of $65 million is fantastic news for the whole industry, says meat industry commentator Allan Barber. The key words are ‘collaboration’ and ‘farmer profitability’, he writes.

The first of these has usually been notable by its absence, while the second combination of words has only been evident at irregular intervals.

Half the funding will be made available from the Ministry for Primary Industries (MPI)’s Primary Growth partnership fund, while 30 percent will come from farmers through Beef & Lamb New Zealand Ltd (B+LNZ) and Meat Board reserves and the balance from six meat companies, two banks and Deloitte.

B+LNZ’s contribution is contingent on levy paying farmers voting in support of the proposal at its annual meeting on 8 March. Although nothing is ever certain, it would be a shock if this support wasn’t forthcoming, because the programme represents a significant step towards fulfilling the objectives of the Red Meat Sector Strategy conducted by Deloitte and completed nearly two years ago.

The aim of the programme is to lift the performance of all farmers to match that of the best performers which was identified in the strategy as the best way of improving industry profitability. There is a significant gap between the top and bottom performers in farming methods and profitability. If this gap can be closed the gains for the sector and New Zealand are enormous.

The participation of the six meat processors – AFFCO, Alliance, ANZCO, Blue Sky, Progressive Meats and Silver Fern Farms – is as meaningful as it is welcome. These are the key sheepmeat processors which is recognition that it is the sheep meat sector in particular where the greatest gains are to be made. However, the focus behind the farm gate shouldn’t obscure the fact that there are substantial gains to be made from greater collaboration in the market place.

A striking aspect of yesterday’s press releases by Ministry of Primary Industries, B+LNZ, Alliance and Silver Fern Farms (SFF) was the difference in tone between the statements by the two meat companies and the enthusiasm with which Beef & Lamb is greeting the opportunity.

The tone of SFF’s press release was less than enthusiastic, emphasising the need for a levy vote in support before the programme could begin and the care taken to ensure this programme did not cut across SFF’s Farm IQ programme which was the first project out of the blocks.

In spite of a first sentence which confirmed SFF’s support for the collaboration programme, the main impression from the statement was that the company was a somewhat unwilling participant and would be guided by the farmers’ decision. If this happened not to be supportive, I was left with the feeling SFF would not be particularly upset.

In comparison with Keith Cooper’s guarded support for the programme, Alliance chief executive Grant Cuff was positively euphoric, stating:

“This new coordinated collaborative initiative will enhance the knowledge and capability in the sheep and beef sector and help improve farm performance, productivity and profitability.

“New Zealand can make significant gains in its export earnings by ensuring all parts of the value chain collaborate so suppliers are using the best available farm and business management practice and tools.

“This initiative is an important step in the implementation of the Red Meat Sector Strategy. We’re supportive of any steps to lift the industry’s game and improve on-farm profitability.”

After my recent call for a sheep meat strategy, I am cheered by this progress. Admittedly, results won’t happen immediately, but it provides an investment over several years during which industry participants will work together for the collective good.

This must be one of the best possible outcomes for an industry which is noted more for its divisiveness than its potential to cooperate in the interest of a better future for all the parties.

Allan Barber is a meat industry commentator who writes a number of columns on the topics. He has his own blog Barber’s Meaty Issues.

Red meat industry to work together

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Wayne McNee, MPI.The red meat industry has agreed to work together to promote and assist in the adoption of best practice by sheep and beef farmers, as part of a new $65 million dollar sector development project with Government co-funding.

Wayne McNee, director-general of the Ministry for Primary Industries (MPI), has just approved a commitment of up to $32.4 million from MPI’s Primary Growth Partnership Fund (PGP) for the red meat sector’s new Collaboration for Sustainable Growth programme.

This seven-year programme will bring together a number of participants in New Zealand’s red meat sector including co-operatively owned and privately owned processing companies that together account for a substantial majority of New Zealand’s sheep and beef exports, two banks and Beef + Lamb New Zealand Ltd.

It aims to ensure that red meat producers consistently have access to and are able to effectively use the best-available farm and business management practices, by addressing gaps in technology transfer and ensuring stronger co-ordination between organisations and individuals working with farmers.

MPI Director General, Wayne McNee says the new PGP programme will transform the delivery of knowledge and capability within the sheep and beef sector.

“Importantly this is the most comprehensive collaboration of its type ever seen in the red meat sector, and the opportunities are very exciting. The Collaboration programme will build base capability, delivering benefits across the sector and aligned with other PGP programmes.”

The next step to establish this PGP programme is to develop the contract with the Crown and to seek farmer support for their portion of the investment. It is anticipated that once the required farmer and company approvals and contracts are in place programme delivery can begin, expected to be in the third quarter of this year.

Organisations presently in this initiative are: AFFCO, Alliance Group, ANZCO Foods, ANZ Bank, Beef + Lamb New Zealand, Blue Sky Meats, Deloitte, Progressive Meats, Rabobank and Silver Fern Farms. The programme is designed to be open, enabling others to invest. Participants will establish a formal partnership to run the Collaboration programme.

Chairman of the programme’s Steering Group, Dr Scott Champion says the Collaboration programme is built on the findings of the Red Meat Sector Strategy and will deliver significantly on the Strategy’s sector best-practice theme.

“This initiative is evidence that the industry is committed to delivering on the recommendations of the sector strategy. More industry collaboration is high on the list of Strategy actions, and so to have the red meat industry focused on supporting farmers and united in this programme is of major significance. Importantly, the Strategy also underlined the returns available to all farmers by lifting productivity and management towards that of the country’s highest performing farms.”

The PGP programme comprises several elements, including investigating how farmers prefer to receive and use new information and what drives their profitability, as well as benchmarking and integrating relevant databases. New tools, services and knowledge will be packaged and delivered in a range of ways by programme partners.

“With a new awareness of what drives farm profitability, the Collaboration programme will change the sector’s focus from one that is dominated by price to one focused on performance, productivity, profitability and the factors we can control,” Champion said.

“This investment will support the sector to better control its future and ensure confidence for continued investment.”

The Red Meat Sector Strategy was jointly developed by Beef + Lamb New Zealand and the Meat Industry Association, with funding support from the Government. It was released in May 2011.The Strategy identified a range of activities that, when implemented, will improve sector productivity and profitability, and provide greater certainty for participants.

 

Is this the year for a sheepmeat strategy, asks Barber?

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Allan BarberIs this the year for a sheepmeat strategy, asks meat industry commentator Allan Barber in his latest column. The key question for the meat industry this year is whether anybody will make any money, he writes.

After last season when farmers enjoyed unprecedented procurement prices and the meat companies lost millions of dollars as a result, prices have headed south and look set to remain there for the foreseeable future.

Sheepmeat is the product most under threat with the traditional markets all showing serious signs of indigestion. As an example, a US importer has been reported as saying he has a year’s worth of inventory and can’t buy any more and neither is anyone else. This signals a major problem for middle cuts like lamb racks, while Europe isn’t exactly rushing to buy any product either.

This explains the amount of cheap sheepmeat available on our domestic market, although unfortunately local consumers have been turned off buying lamb as a standard part of their diet by last year’s high prices – no different from the rest of the world; and expecting New Zealand’s minute population to absorb any significant part of the oversupply is a bit like expecting Fiji to win the World Cup or the Black Caps to win the series in South Africa for that matter.

Beef may resist the worst of the price downturn because US demand remains steady against a backdrop of falling domestic cow numbers and consequently an increased share for imported beef. Asian demand will also remain firm, while New Zealand exporters may be able to pick up some of Australia’s market share, as Australian supply to the USA is anticipated to take the lion’s share of the increase there.

But even beef will continue to struggle under the impact of our dollar which is set obstinately at about 84 US cents with the greenback unlikely to strengthen at all, unless Congress can agree on a fiscal solution to the enormous American debt problem. In spite of averting the fall over the fiscal cliff, the US really hasn’t solved its long-term problem, merely postponed a decision.

The main difficulty for sheepmeat is the amount of inventory held by wholesalers and exporters which is waiting to be sold into a market which doesn’t need it and, even if it did, can’t afford to pay a price for it which will compensate for our exchange rate sitting at 52p and 0.63 Euro. This inventory problem will only be exacerbated by another season’s production which will hit its peak in less than three months.

If my pessimistic assessment is even only half correct, 2013 bears all the signs of an extremely difficult season for all participants in the sector. MPI’s forecast for farm incomes, down on last year, is still reasonably positive at least in historical terms, but it must come under pressure from any further price drops or cost increases. There is most unlikely to be any spare cash around.

After the beating taken last season by the processors, shown factually in the annual accounts of Silver Fern Farms, Alliance and Blue Sky Meats, and by implication in the results of the others, all the meat companies will be under pressure to get back into the black. The only way they can achieve this is to reduce procurement costs, increase operational efficiencies and sell inventory into the market, preferably with a profit margin on what it cost them.

This last one will be by far the hardest. There is already plenty of evidence of product being offered at very competitive, or silly, prices in spite of Keith Cooper’s claim before Christmas that working capital tied up in inventory is ‘good’ debt because it restrains companies from dumping product. Now if that isn’t a case of making a virtue out of necessity, I don’t know what is.

Logically if there is an inventory problem, it makes sense to quit it at the going rate rather than waiting for the market to recover by which time there will be more inventory in the freezer tying up more working capital.

The meat industry is becoming increasingly a division between sheep (very hard to make a consistent profit) and beef (quite or extremely profitable, mostly because of the livestock sourced from the dairy industry). Those companies which specialise in beef from dairy regions, notably Greenlea and Universal, appear to be very profitable without interference from the volatility of sheepmeat pricing.

Alliance has traditionally been the outstanding performer among the processors with a commitment to the sheep industry. Silver Fern Farms has reinvented itself as a company with a significant beef business which has reduced its vulnerability. But as last season’s results showed, the sheepmeat business placed serious pressure on their balance sheets which will inevitably continue throughout this year.

This may be the year when some serious strategic thinking is applied to finding a viable industry model for sheepmeat alone, instead of trying to find a single solution for the meat industry as a whole.

This column has appeared in NZ Farmers Weekly and interest.co.nz and is reproduced here with permission. Allan also has his own blog Barber’s Meaty Issues.

 

Debt is good under some circumstances, says Barber

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Allan BarberAfter Allan Barber’s column last week about meat industry debt levels, Keith Cooper, chief executive of Silver Fern Farms, took him to task for incorrectly reporting the situation with Silver Fern Farms’ debt facility, he writes in his latest guest blog.

I stated that these expired in September 2012 and therefore the company was operating on a temporary extension. The correct position was that the debt facility was originally negotiated for two years from September 2010 and consequently due to expire in September 2012. This remained the position at balance date in September 2011. However in the 2012 annual report, the facility was stated as expiring on 31 December 2012.

Clearly, the company had arranged a three month extension at some point before the original two year facility expired and this was not a temporary facility, as I implied. Nevertheless, it was no more than a three month extension, while the next longer term arrangement was being negotiated.

I apologise for any incorrect interpretation, but still maintain the company’s current debt level at balance date was higher than could be considered comfortable.

However, in an interview with Jamie Mackay on the Farming Show last week, when asked to comment on the industry’s debt level, Cooper gave his opinion that the debt was a good thing. Because it was tied up in inventories, it would ensure the industry acted responsibly. This is almost exactly what I wrote last week, although I saw the discipline on the companies as a necessity, not a virtue.

In Cooper’s radio interview, he stated after record prices last year, meat companies are reining things in.

“It’s a damn good thing we do have stock in store and we do have high debt because that means meat companies are acting responsibly, and are feeding the product to market to create stability of price. I’m quite happy that us and other companies have debt because that means they’ve got stock in store and that means we’re managing markets well.”

I must give Keith credit for being unreservedly a ‘glass half full’ kind of guy which you have to be to survive in what I believe is New Zealand’s toughest industry. He promises farmers that things will improve.

“We are living in volatile times. There will be volatility, but through the volatility we will see a steady increase in the price we will receive from offshore,” and he expects meat companies will pay farmers around 90 dollars per lamb this year.

I’m not sure the glass is quite as half full as Keith Cooper suggests, especially in the sheep meat market. Although lamb leg prices in the UK are holding fairly well, especially for chilled product, prices for middle cuts, like racks, loins and tenderloins, in North America and Europe are under pressure.

The price of loins and tenderloins have dropped by as much as 30 percent in the last couple of months, while there are fears of another collapse in lamb rack prices because of competition from low priced Australian product. As a result, importers are not placing orders for New Zealand lamb, because they remember the last time prices collapsed.

The Middle East has gone quiet on lamb shoulders because of cheaper Australian product, although China is still firm. Here, it appears New Zealand exporters benefit from less Australian competition with fewer China licensed plants in Australia.

All this explains why the New Zealand consumer is able to buy plenty of well priced lamb available on the domestic market. But this won’t provide more than a minimal contribution to managing the existing inventory levels and it certainly won’t cope with next year’s peak production. The industry will be keeping its fingers and toes crossed for an early economic uplift in our main markets, UK, Europe and North America, because otherwise the glass won’t have much in it at all.

Allan Barber is an agribusiness commentator, with particular interest in the meat industry. He has his own blog Barber’s Meaty Issues. This item has also appeared at www.interest.co.nz.

Glamming up for the competition

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The competition is heating up for the 2013 Beef + Lamb New Zealand (B+LNZ) Golden Lamb Awards, aka the Glammies.

More than 100 entries from across the country will be competing next year for the Grand Champion title.

The competition, sponsored by Pfizer Animal Genetics, which aims to find New Zealand’s most tender and tasty lamb is entering its seventh year and sees farmers from across the country vying for the Grand Champion title.

B+LNZ Ltd chief executive, Scott Champion, says the competition is an excellent opportunity to profile the quality product New Zealand farmers produce.

“The Glammies gives farmers a chance to showcase breed lines and demonstrate how their animal management talent and hard work in the field culminates in great tasting lamb.”

Winning the top prize is not easy; entries will first be scientifically tested at Carne Technologies to find the top 20.

From here it will be down to the tastebuds of a panel of judges at the Upper Clutha A & P Show in Wanaka on 8 March 2013, where the winner will be determined. Butchers also have an opportunity to profile their product with the Glammies Retailer of the Year Award.

The competition is supported by processing plants across the country. These include: AFFCO, Alliance Group Ltd, Ashburton Meat Processors Ltd, Auckland Meat Processors/Wilson Hellaby, Blue Sky Meats, Cabernet Foods/Kintyre Meats, Harris Meats, Land Meat NZ, Lean Meats, Silver Fern Farms, Taylor Preston/Ken Wilson Meats.

Silver Fern Farms’ Te Aroha opening

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Pictured at the Te Aroha opening are (left to right): local MP Scott Simpson; John Key; Eoin Garden chairman Silver Fern Farms; Keith Cooper, chief executive Silver Fern Farms; Kevin Winders, chief operating officer Silver Fern Farms.

Prime Minister opens new SFF Te Aroha plant

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Pictured at the Te Aroha opening are (left to right): local MP Scott Simpson; John Key; Eoin Garden chairman Silver Fern Farms; Keith Cooper, chief executive Silver Fern Farms; Kevin Winders, chief operating officer Silver Fern Farms.

Prime Minister the Rt Hon John Key opened Silver Fern Farms’ brand new flagship processing plant at Te Aroha this afternoon.

The new plant, the first to be built by the farmer co-operative under its current name Silver Fern Farms, replaces the beef processing plant seriously damaged by fire on the site in December 2010.

The ceremony was attended by representatives of central and local government, local iwi, and members of the Te Aroha community in addition to Silver Fern Farms’ board of directors, leadership team, plant management and contractors involved in the project.

Silver Fern Farms’ chairman, Eoin Garden, and chief executive, Keith Cooper, welcomed a large gathering of all those associated with the rebuild including contractors, local government representatives, local iwi and members of the Te Aroha community.

At the opening, Garden said the investment of $67m to commission the state-of-the-art facility was testament to the co-operative’s strong confidence in the sector and he indicated the clear alignment of this investment with the Government’s business growth agenda.

Keith Cooper spoke of the importance this plant has, not only to farmer-suppliers in the surrounding rural areas, but also to the local Te Aroha community. The fact the plant will be fully operational ahead of the new season is welcome news for the township, with the prospect it will employ up to 380 staff when operating at full capacity.

“The whole community has been behind the project every step of the way” said Te Aroha plant manager, Lance Warmington. “The company’s commitment to rebuilding Te Aroha is a big deal here – it means future security for hundreds of families in the area.”

Positive spin-offs for local community

Throughout the rebuilding process, Silver Fern Farms endeavoured to provide alternative options for staff whose livelihoods were affected by the fire, to the extent of making positions available at neighbouring plants and providing accommodation supplements in the early stages. In tough times, the company’s significant capital spend also has provided positive spin-offs to the local economy as a result of the number of contractors throughout the region engaged during the course of construction.

“Our whole team are extremely proud of the facility we’ve designed and created,” Warmington added.

“The company culture and the Silver Fern Farms brand and all it stands for are really embedded in the overall look and feel of the new plant, and our people are responding really positively to the new working environment.”

Eco-efficiency and sustainability “top of mind”

Developed in consultation with internationally recognised experts in process layout and ergonomics, the plant incorporates the latest meat processing technologies, including sophisticated traceability and yield collection systems. Cooper said the new design reflects the company’s focus on plant economics and best practice processing, and that eco-efficiency and sustainability were top of mind considerations.

“The rebuild gave us the opportunity to review the environmental footprint of our operation. Our focus is improving environmental efficiency while reducing costs through better use of resources and reduction of waste.” he said . “As a result, the plant sets a new industry benchmark in line with global customer requirements – it uses significantly less electricity and water per head and discharges less effluent per head processed.”

In his address, Cooper also thanked the co-operative’s loyal farmer-suppliers in the area for supporting the company through the re-build.

“We are grateful to those suppliers who have stood by us and persevered while we got the new plant up and running – we know the disruption has been an inconvenience for many. But we are enthusiastic about the service levels and advantages we can now offer them as a result of our investment.”

Silver Fern Farms intends to open the plant to farmer-suppliers and the local community in a series of open days in February 2013.

 

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.