ANZCO Foods has just released its result for 2024 which completes the reporting season for those meat exporters required to publish annual reports. Although ANZCO declared a small pre-tax profit, unlike its South Island based competitors, the combined annual losses make ugly reading. Alliance lost $120.8 million before tax including the Smithfield closure on turnover of $1.772 billion, Silver Fern Farms was $29.8 million in the red on $2.637 billion, while ANZCO posted a profit of $13.5 million from $1.85 million revenue.
That all adds up to a combined shortfall of $137.1 million from turnover of $6.26 million which casts serious doubt on the continued viability of at least part of the meat processing and exporting sector. This follows the disappointing 2023 when Alliance lost $97.9m and SFF $36.4m, partly offset by ANZCO’s standout profit of $60.9m. These two financial years are in stark contrast to Covid influenced 2022 when the three companies posted combined pre-tax profits of $515.1 m, while 2021 was also profitable across the board.
All three have commented on the difficult trading and climate conditions which adversely affected their performance, but the obvious question is whether the two loss making companies can sustain previous high profits without a reduction in overheads. Forestry conversions and land use change will inevitably exacerbate livestock volume decline and promote procurement competition which will have the greatest adverse impact on the processors with the least efficient plants.
Other exporters spoken to agree last year was harder, but maintain there were satisfactory margins there for both farmers and processors. A clear focus on cost control was essential for an acceptable performance, as shown by ANZCO’s ability to remain profitable.
ANZCO CEO Peter Conley makes the point all the industry’s assets are getting older, but some companies have done a better job than others of investing in upgrades. The combined effect of an ageing plant and declining volumes is graphically illustrated by the over $50 million cost of closing Smithfield. Conley also points to ANZCO’s improved systems for matching livestock purchases to customer specification instead of chasing market share as a key factor.
The published results cast serious doubt on the need for all the industry’s processing capacity, as a combination of greater plant efficiency, more shifts and lower peak kills suggests some plants are quite simply no longer required. I have seen an analysis which indicates the North Island lamb and mutton kill could easily be handled with fewer plants, while the South Island kill could be handled at a pinch if Alliance plants were no longer operating. This of course assumes normal weather conditions with no drought, although the trend to forestry will eventually reduce the peak, requiring less processing capacity.
In the February 24th issue of Farmers Weekly Dr James Lockhart and Professor Hamish Gow argue cooperatives are an incredibly efficient model which permits their returns from procurement and processing to be bundled to set the benchmark livestock price against which all companies are judged. They maintain it is essential for Alliance to remain a cooperative, as otherwise that benchmark will be lost and the remaining companies will only pay what they have to, while returning the rest to the owners.
Past experience in the meat industry tells me the industry’s schedule setting process, still unchanged for 40 years, calculates the market value of each component of the carcase according to the week’s exchange rate and direct costs. Having arrived at the schedule for each species, companies then decide on any premiums for supply to a particular specification, for seasonal variation or volume.
Everybody knows there are special deals available to large suppliers and third parties in times of need, although the two cooperatives have often been the ones offering them when supply from shareholders has fallen short.
The higher the above schedule premiums, the higher the cost of livestock with the obvious impact on profit, unless the excess can be recovered from the market. With only about 15% of the carcase able to command a market premium, paying over the odds for the other 85% makes it very difficult to recover the additional investment in specific livestock quality attributes.
Lockhart and Gow cite Fonterra and Zespri as two successful examples of the value of the cooperative model. Unfortunately this ignores the failure of this model in the highly competitive environment of red meat processing and selling where farmers have a choice. Meat cooperatives – Alliance and AFFCO in the late 80s, Silver Fern Farms from 2012, and Alliance again today – have tended not to invest enough in their assets, pay too much for livestock and allow overheads to balloon, resulting in more core debt, higher interest costs and declining shareholder funds.
After being rescued by outside investment in 2016, SFF now shows signs of falling into the same trap again. The key to success, whether a cooperative or not, demands discipline and a focus on the basics.
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7 Comments
Good article Allan. Bad news for our productivity when the processors are misallocating funds on such a scale. That doesn’t end well no matter what ownership structure.
curiously I can’t recall any scandals about fraud between those favoured suppliers and the procurement reps. Human nature, no matter what the system….Perhaps it is kept secret when discovered? Always entertaining to closely watch a stock auction, who is in, who misses out. Know when to hold em, when to fold them
The overarching mentality of throughput being a priority has never weakened. The greater number stock processed, the better the economies of scale per plant. Except that advantage is meaningless if the resultant products sold do not return more than their purchase price plus all the processing cost and associated overheads. In the mid eighties the trading banks forced consolidation on the industry from which in terms of major players the abovementioned three and AFFCO emerged. Simultaneously there were significant and widespread plant closures. History may now need to repeat vis a vis Alliance & SFF as at least that would tighten up those sought after economies of scale by way of relative plant closures and scale back overheads such as administration and field staffing.
As a shareholder in SFF I feel the pain of a business on its way to bloating itself into extinction.
The senior management is out of control.
Their enforcing the use of preferred transporters to supposedly improve efficiency has done nothing but cost them customers. As farmers we form long term relationships with the guys that come up our driveway, they ignored that and it is costing them..
And when the hell did they ask me as a dairy farmer if I wanted my hard earned money tipped into wool?
After many, many years of loyalty I am about one unit load away from changing processor..
The private companies currently have it all over the co-ops in the red meat sector.
And to add to the misery recently they have been regularly 10-20c kg behind on beef.
Watching your shares go from $1.50 to .75c in a couple of years sure ticks a man off.
The farm, the processor and the market. None of the three segments can survive without the other two except of course, the market can always turn its back at which point the other two become somewhat stranded. It’s unfortunate that SFF as processors are now being considered as overbearing as their origin in 1948, and ensuing success was in the form of a highly efficient co-operative and as they neither owned nor operated any actual works, their profitability lay in the straightforward purchase of stock, its processing under contract and its marketing all under the then open door policy. Ironically then, now as NZ’s largest processors they appear to be conducting their business in the very same mode as all the old dinosaurs that they had previously outmanoeuvred and supplanted. In other words having risen to being a major player in the industry without generating income from processing, and in fact having to pay for it, their business has now evolved to prioritising processing profits at, it would seem the expense of the legion of farmer support that created the co-operative in the first instance.
That,s right Wilco, What business has SFF to delve into the wool scene? Bad move in my opinion. Still I have confidence in SFF as they tried to face reality and drop the shedule when the dollar went up and tariff uncertainty prevailed. But what did everyone else do, just carry on and try to get as much through as possible. That in a nutshell is the problem. If the lamb price hits $10 we will end up with a drop in consumption like last time. And who losses, the processors. And who do we need to keep profitable for the survival of the meat industry. The processors of course.
As I have stated many times, without the processing industry we may as well stop farming. Cos there ain't nowhere for our stuff to go!
And to add, this is in the farmers court. We need to stop playing the game of who will pay 10c more. For anyone to invest millions into processing infrastructure they need certainty of supply and I guess that is the crux of this article.
Hans - I respect your opinion on needing to stay solvent but how are Green Lea,, Affco, and UBP able to pay more for beef week in and week out? I don't have the stats but anecdotal stories are SFF is losing market share in this area. If the stories are true a declining through put and increasing overheads makes staying in business even more difficult.
As a farmer supplier I am pro the Co-op structure, however co-ops need to apply the same business practices as their competitor companies.
As an example when the Farmsource group is being well managed and running lean and keen it more than matches its competitors.
I also hope we don't hit $10 as we will pay the price long term of consumers swapping protein sources to pork and chicken or worse away from meat..
Yes agree with what you are saying, having moved away from SFF recently ourselves. Mainly as they are paying a premium on quantity. Which may sound fair but smaller suppliers combined make up large numbers.
Probably thinking longer term survival of our industry over all.
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