Allan Barber notes that 2024 was yet another tough year for the capital intensive red-meat processing industry. He suggests the cooperatives make it hard for themselves by not being as disciplined as they should be with procurement

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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