Allan Barber is looking at the 7 major meat processors and wondering where future profits will come from as livestock numbers trend lower

In over 30 years working in and observing the New Zealand red meat sector I have seen exporters go through several cycles, veering between loss-making downturns and occasional periods of profitability. At least that has been the pattern among those exporters that report their financial results.

Since the 1990s there have been company collapses – Fortex and Weddel – and near misses. There have been takeovers and ownership changes: PPCS, now Silver Fern Farms, acrimoniously took over Hawkes Bay’s Richmond which had already bought Lowe Walker, Talley’s bought out AFFCO’s minority shareholders, ANZCO is now wholly owned by Japanese meat company Itoham, Silver Fern Farms had to sell half the cooperative to China’s Bright Meats and most recently Ireland’s Dawn Meats acquired 65% of the Alliance cooperative.

Meanwhile several plants have closed, reflecting both the age of the facilities and steadily declining livestock numbers. The only sizeable meat exporters that still report their annual results are SFF, ANZCO, and Alliance.  And, while all these companies have produced profits when times are good, notably during the pandemic, results have been inconsistent, with some large losses being incurred in difficult years. This suggests when margins tighten the procurement cost and the level of overheads remain too high.

None of the big three has been able to achieve an acceptable return on investment over the last 20 years which begs the question as to whether the red meat processing sector is permanently condemned to underachievement.

Alternatively are those other companies that fly under the radar somehow making good profits and, if so, what is their magic formula? I have no inside knowledge that would provide the answer, but it seems logical to assume the owners of these private companies are determined to make profits and achieve a satisfactory rate of return. I suspect their overheads are kept low enough to generate a profit even in a bad year, while employee numbers are kept under control and processing facilities well maintained.

There are many moving parts in the red meat industry, but the principles are quite simple. Buy the raw material at an affordable price, process it as efficiently as possible and sell it to the best returning markets.

Livestock procurement has long been the area of greatest volatility, more because of excess processing capacity than for any other reason. Processing depends on plant efficiency which is largely dictated by capital investment, process design and throughput. Sales and marketing are a matter of choice – complexity of the product range and overheads required to extract the best margins.

SFF CEO Dan Boulton confirmed to me the latest year’s improved result demanded very tight cost control, capacity adjustment to match livestock flows, and overall discipline within the business. Market conditions required a significant reduction in staff numbers, as was demonstrated by a reduction of $18 million in employee costs.

Boulton effectively acknowledged the company’s underperformance at the AGM when he spoke about the need to improve SFF’s resilience from better working capital management, scale and profitability. The goal is to achieve cumulative earnings before depreciation of $1 billion by 2030, equivalent to $200 million per year, and annual revenue of $5 billion. This ambitious target compares with combined EBITDA of $147 million in the last two years and revenue of $3.05 billion last year.

Although the market remains strong, boosted by a shortage of protein globally and a decline in the American beef herd, the likely cost inflation from the war in Iran will make these targets extremely tough, especially as SFF will need to perform more than twice as well as it has historically.

Some of the targeted improvements would have to come from an increase in throughput at the expense of its competitors in the face of lower livestock numbers. As history proves, this would cause a procurement war where the strongest come out on top. The only other sources of meaningful profit are dramatically improved processing efficiency, overheads and product margins.

The announcement of a $100 million upgrade of the Finegand plant signals the intention to increase efficiency, but nowadays that may not be enough to bring an old plant up to industry-leading standards.

I imagine the major competitors, including the more consistently profitable ANZCO, highly efficient AFFCO, Alliance under new ownership, Greenlea, Ovation and Wilson Hellaby with its refurbished plant, would be reluctant to allow their market share to be cannibalised without a firm response.

It is worth remembering what happened in the 1990s when PPCS upped the price of lambs at the low point of the season forcing Fortex to pay more than was economically viable to honour the union agreement at its new plant on PPCS’s back doorstep. The result was fatal.

Dawn Meats won’t have invested $270 million for two thirds of Alliance to continue achieving the previously poor return. The fact it means serious business has already been demonstrated by the swift termination of CEO Willie Wiese’s employment and the hands-on involvement of Dawn CEO Niall Browne.

It is encouraging to see the amount of investment being applied to making the red meat processing sector more efficient and competitive, ensuring choice and expertise for farmers and customers alike. I just hope there is enough livestock to give all the companies the chance to make a decent return on their investments.