Are forestry conversions and land use change really the cause of struggling productivity of the meat industry? The livestock volume decline will have the greatest impact on the processors with the least efficient plants.
The combined losses of -$137 mln recently reported for those meat exporters required to publish annual reports from turnovers of $6.26 bln, which implies serious doubt on continued viability of at least part of the meat processing and exporting sector.
This follows a disappointing season of 2023 when Alliance lost -$97.9 mln and SFF -$36.4 mln, partly offset by ANZCO’s standout profit of +$60.9 mln. These two financial years are in stark contrast to Covid-influenced 2022, when the three companies posted combined pre-tax profits of +$515.1 mln, while 2021 was also profitable across the board.
All three have commented on the difficult trading and climate conditions that adversely affected their performance, but the obvious question is whether the two loss-making companies can return to their previous profitability without a reduction in overheads
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.
This highlights the point that not 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 ageing plant and declining volumes is starkly illustrated by the over $50 mln cost of closing Alliance's Timaru Smithfield plant.
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.
It was noted earlier this year in a Farmers Weekly opinion article that cooperatives are an incredibly efficient model that permits their returns from procurement and processing to be bundled to set the benchmark livestock price against which all companies are judged.
The authors maintained 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 indicates 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.
It is public knowledge 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.
Fonterra and Zespri, were cited 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.
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. The nature of the livestock market model is driven by maximising the price of the entire carcass, not just the prime cuts that are always commonly referred to, with only up to 15% of the carcase able to command a market premium, paying over the odds for procurement for the other 85% makes it very difficult to recover the additional investment.
It is worth noting a brief time warp of our Meat co-operatives – SFF 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 investments in 2016, SFF now shows signs of falling into the same trap again. The key to success, whether a cooperative or not, is discipline and a focus on the basic model.
New Zealand now has at least 100 registered cooperative businesses and organisations. Together, their annual revenues exceed $43 billion – almost 15% of our GDP. Globally there are an estimated 2.6 million cooperatives that turn over at least $US3 trillion a year and employ 250 mln people.
The names Thomas Borthwick and Sons, Vestey, CWS and Swift and Co may not mean much today, but they are etched in New Zealand’s red meat sector history.
For almost a century they and other foreign-owned processors dominated NZ’s export meat industry.
To break their industry stranglehold, groups of farmers up and down the country banded together through the 1950s, ’60s and’70s to establish cooperatives to compete with the predominantly United Kingdom-based companies.
AFFCO, Hawke’s Bay Farmers Meat Co and PPCS, among others, were formed to give shareholders skin in the game and to share in the profits captured by the foreign owners.
It also gave suppliers a presence beyond the farm gate and ultimately the cooperatives helped the industry become mostly locally owned.
About 15 years ago Silver Fern Farms, like Alliance today, failed in its attempt to raise capital from its shareholders.
This drove SFF to seek outside capital, in this case hybrid ownership of its processing arm by Silver Fern Farms Co-operative and Shanghai Maling.
The reluctance of Alliance shareholders to commit is not helped by two financially tough years for sheep and beef farmers.
Nor is it helped by shareholder resentment at the board’s refusal to address what many consider favourable treatment for third-party traders.
In a related mover (that failed), instead of considering what they were losing, sheep farmers allowed an end to the strong wool levy and without that income, the value of strong wool has been lost.
This is another crisis moment for the meat industry with the Alliance board left with few options. The risk is that by extension, their ultimate decision could also leave the wider sheep and beef sector with few options as well.
The Alliance shareholder group believes the recapitalisation failure is also impacted by a lack of understanding at what a cooperative is and what will be lost.
Will the shareholders meekly and with little debate accept an outcome that ends Alliance’s status as a cooperative, citing the demise of the wool industry as an example?
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