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Allan Barber digs in to why meat company profits have varied so much. The industry is moving through a transition period where more focus is going on innovation in marketing and a shift to added-value food and healthcare products

Rural News / opinion
Allan Barber digs in to why meat company profits have varied so much. The industry is moving through a transition period where more focus is going on innovation in marketing and a shift to added-value food and healthcare products
sheep muster

With annual results now published for the companies which are required to report, it is possible to draw conclusions about their relative performance, although the huge discrepancy between them makes it rather difficult to make an informed assessment.

The inescapable initial impression suggests Alliance with a -$97.9 million pretax loss suffered by far the worst from a universally acknowledged difficult season, with Silver Fern Farms a poor third with ANZCO posting a satisfactory profit of $60.9 million; the smaller South Island processor, Blue Sky Pastures, showed it was possible to make a profit, albeit reduced, from sheep meat.

The first point to be made is the difference between the respective financial periods with Alliance still reporting at a September year end, aligned with the traditional meat industry season, and Blue Sky a June year, while the other two companies balanced at 31st December in accordance with the requirements of their major shareholders.

Secondly Alliance was particularly affected by the predominance of lamb and mutton through its plants, when by general consent beef processors were less badly hit by sudden market price drops.

Other mitigating factors were the after effects of Covid and the decision to put on extra processing capacity to handle a forecast drought peak which never arrived. Apart from these points, there should be no excuses for what can only be considered a very poor result and a major disappointment after the previous year’s record surplus.

The main reason for the substantial loss was evident from the detailed financial statements – revenue declined year on year by -9% or $207 million, whereas the cost of sales was only -$6.7 million lower. This indicates a disastrous failure to reflect market conditions in the procurement schedules, while the excess plant capacity and labour availability destroyed productivity and efficiency. In addition, finance charges were $11.1 million higher because of increased debt.

SFF’s loss of -$36.4 million for the calendar year 2023 was almost as disappointing in that it was the first loss for several years and followed a $262.4 million pre-tax profit in 2022. Analysis of the financials here shows a broader set of causes than Alliance. Revenue was down by almost half a billion dollars partly offset by a $309 million reduction in direct costs, but employee benefits were $54.8 million higher, interest costs were three times greater and other operating expenses (presumably overheads) rose by 15% or nearly $47 million. The upshot of these swings and roundabouts was a decline in profit performance of $299 million.

SFF Cooperative Chairman Rob Hewitt blamed Cyclone Gabrielle and the disruption to its North Island processing plants at Pacific in Hawkes Bay and Dargaville, as well as the challenging market conditions for the result. But it is clear from the financial statements that intended moves to control ballooning costs were not implemented during last financial year and it is now up to the recently appointed CEO Dan Boulton to apply the brakes to the overspend. While the company’s market-led approach remains the preferred strategy, the current year must show clear signs of improvement, if the Chinese major shareholder is to continue its tolerance.

Both Alliance and SFF accounts indicate their suppliers, whether cooperative shareholders or not, enjoyed greater reward for their supply than they should have. This contrasts with the annual result for the year ended 30th June 2023 by Blue Sky which admittedly does not extend to the period when Alliance experienced the sudden drop in its inventory values. Blue Sky posted a solid pre-tax profit of $4.9 million, down from the previous year’s $24.6 million, but it obviously managed its cost base well on declining revenue from the highs of 2022, with total expenses $19.4 million lower. Although a fraction of the size of its neighbours, Blue Sky demonstrated the benefit of focusing on its core business.

The year’s star performer of the quartet was ANZCO with an excellent profit in challenging circumstances which CEO Peter Conley attributes to having a very clear strategy around its core business and carefully chosen added value products, boosted by the acquisition of Moregate Australia which forms part of ANZCO Biosciences. Profit was helped by $28 million in compensation for the m. Bovis outbreak at the 5 Star beef feedlot, but this was offset by the six month stand down period and cost of livestock depopulation. The accounts show a $100 million increase in interest bearing loans which was necessary to cover the substantial tax following the 2022 profit, 5 Star repopulation, and the growth of the biosciences business which generates high margins requiring large initial investment.

Conley also attributes the strong performance to a different overseas office model which is focused on driving incremental returns with the minimum of overheads.

The overseas office network plays a fundamental role in building key customer relationships and informing livestock procurement to meet customer expectations. Recent adjustments include opening a China office with one employee to start with and the closure of the Taiwan office. ANZCO’s future performance improvements are to be achieved by growing the value added food and healthcare business, adding more value to the raw material, and careful investment in IT and infrastructure.

The current trading year is proving to be tough, a sentiment echoed by all the companies, with no bounce back in China expected until next year, slow improvement in Europe and continuing volatility in the United States.

One CEO confirmed profit last year was sound and anticipated a similar trend this year, while Greenlea’s Tony Egan felt the industry was moving into a transitional phase in which greater value would be extracted from innovation and product development, combined with partnerships to achieve greater scale. He cited specifically the investment in the Waitoa protein processing facility as an example which will produce greater returns, ultimately to the benefit of suppliers.

2024 will be a challenging year for the meat industry, as companies attempt to repair or strengthen their balance sheets. Those that lost money last year will be determined to correct that under threat from banks or major shareholders, while profitable companies will be keen to maintain or improve performance.

Current schedule and saleyard prices are available in the right-hand menu of the Rural section of this website.

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The fact that the Alliance Group has a far greater ratio in its processing of sheep meat than its competitors is rather telling. On the other hand the rancorous and clumsy takeover of Richmond by SFF (then PPCS) tells another story for while it gave some greater seasonal advantage for early chilled lamb supply the main gain has certainly been the acquisition of beef processing and especially as dairying increases, so too does the stock going to slaughter and this is what helps make SFF’s balance sheet somewhat less bad. In the mid 80’s NZ’s sheep flock peaked at about 75 mill, with a lamb slaughter about 35 mill.  PM Muldoon’s SMP subsidies and a short lived contract with the Shar’s Iran, obscured the fact that not only was the UK no longer the guaranteed home market and nor was the consumer’s diet going to continue as before. The lamb carcass when further processed yields less than 40% of high end cuts, but the revenue for those is hard pressed to cover the forequarter & brisket much lesser returns plus the cost of processing them. In those halcyon days of the 80’s there were returns to be had as well for byproducts, offals, slipe wool and pelts which are today at best negligible. While the excellent advancement of quality NZ lamb, especially chilled, has undoubtedly added value the ever increasing negativity to economies of scale,  in a highly labour intensive industry,  have mostly negated the benefits. To sum up, a simple question, when was the last time a new sheep meat processing plant in NZ was commissioned, as opposed to the continuous closures.