Allan Barber looks at the financial results of the meat processors and explores their viability

By Allan Barber

It’s becoming harder to track meat industry performance with only two companies, Silver Fern Farms and Alliance, reporting annually within two months of the season’s end.

ANZCO will continue to report to the Registrar of Companies at the end of March, while AFFCO is no longer required to publish its result.

Therefore performance comparison is a matter of studying the available annual reports and gleaning scraps of information from farmer meetings and the grapevine.

On the basis of published information, SFF had its first good year since the bitterly contested Richmond acquisition and Alliance experienced its worst result since 2007.

However these bare facts don’t fully explain the relative situations, nor do they indicate a permanent deterioration by Alliance.

Silver Fern Farms

SFF’s improved result produced an operating pre-tax profit of $34 million, a major turnaround from the previous year’s loss of $8.5 million, although it includes $42.3 million of sundry income in the revenue line. This is made up of several items including $19 million of foreign exchange gains, $6.2 million of gains on the disposal of assets from Te Aroha, classified as incurred in the normal course of business, and sundry items of $15.6 million which include storage and rental income from vacant properties and receipts under the PGW contract.

The bottom line profit is further clouded by the inclusion of $12.2 million of gain over book value from the insurance payout. However the full reinstatement budget for the Te Aroha plant is nearly $60 million of which $20 million was spent last year with another $28.2 million committed at balance date.

Alliance

Alliance suffered massively from the spring storms in its two main catchment areas, Southland and lower North Island, estimated by CEO Grant Cuff to have cost the company between $10-20 million. Under the circumstances the operating result and pool payment are considered reasonable.

He also made the point companies with substantial beef businesses suffered less from the storms because young cattle were not as badly affected as lambs.

It is possible, if not entirely reliable, to assess the competitive performance positions of ANZCO and AFFCO, the third and fourth largest processors both with turnover in excess of $1 billion annually, from a combination of past performance and information in the public arena.

AFFCO

The word from AFFCO’s supplier meetings suggests the 2011 profit was a bit lower than last year’s $21 million, but still respectable, although 2010 included an equity accounted loss by Open Country Dairy.

However future performance will benefit from the substantial investment in upgrading its Malvern plant to full export certified multi species capability.

This continues the trend to capital investment in plant improvement which has been a feature of AFFCO’s operation since Talley’s took control. Another feature has been greater efficiency as a consequence of an increasing number of the workforce going onto individual employment agreements.

ANZCO

In contrast ANZCO’s 2010 reported after tax profit was substantially down on its average performance since 2000 and indicated it had lost its position as the leading meat industry performer, a position it had held for much of the century’s first decade. The reasons for the lock out at the company’s CMP Marton plant reinforce the view ANZCO believes its wage rate structure needs attention, if it is to improve performance to keep pace with the rest of the industry. It won’t be possible until the end of March to see ANZCO’s annual accounts to assess its performance relative to its competitors.

Blue Sky Meats

Blue Sky Meats has a March financial year and publishes its annual result in July, but its 2011 result was satisfactory and much better than the previous year.

Blue Sky took a decision to source store lambs for finishing to offset the impact of the storms, anticipating firm market prices which turned out to be justified by events. It also should be noted Alliance is 15 times the size of Blue Sky and a programme of that type could not have been implemented on such a large scale.

Themes

There are three main themes mentioned by the processors which characterise the 2011/12 season: firstly, the slow start and the prospect of a more normal season with a defined peak, secondly the need to maintain balance sheet strength, and thirdly cautious optimism about market prices.

Lamb, sheep and cattle numbers to the works are well behind last year, 23% in both islands in the case of lamb, but the numbers are on the ground and will come out later to provide good plant throughput.

Grass growth has delayed the emergence of cull cows and the cold spring has slowed weight gain for prime cattle and lambs.

The urgent need for meat companies, if they are to achieve the level of profits essential to balance sheet strength, is to make sure procurement cost, especially for sheepmeat, is more closely aligned with the market.

The third factor will be how well market prices hold up in the face of global uncertainty. There is reasonable confidence about the beef price in North America and Asia, while lamb demand is expected to sustain a schedule of at least $6.50, close to $120 a lamb.

Under the circumstances, all participants should be satisfied, if not exactly dancing with joy.

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This piece was first published in Farmers Weekly, and is used with permission of the author.

Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he run a boutique B&B with his wife. You can contact him by email at allan@barberstrategic.co.nz or through his blog at http://allan.barber.wordpress.com.