Allan Barber looks at the losses by big meat industry firms this year and assesses how their liabilities might look to their bankers

By Allan Barber

The levels of debt carried by at least some of the major meat companies must be causing concern to the bank syndicates that are providing external working capital to fund their operations.

In total the big three have bank debts of a minimum of nearly $750 million.

Silver Fern Farms is operating on a three month extension to its bank facility which expired at the end of September, but reported current (expiring within 12 months) loans of $316.7 million at the end of its 2012 financial year.

In its last published annual accounts to September 2011, ANZCO had current and non-current loans of $220 million which must surely have increased in the very challenging 2012 year.

Lastly at the end of September Alliance had $331.8 million of assets and non-current loans of $196.1 million which are clearly not causing any immediate concern.

The two big cooperatives published their annual reports last week and neither makes pretty reading. Both results benefited from a large tax loss which, to be effective, must of course be offset eventually by profits.

Alliance’s financial position was fully flagged in its announcement of a $50.8 million post tax loss including the $19.4 million write down of its Mataura sheep processing unit, which was actually a pre tax loss of $70.6 million before tax credits. Its balance sheet with 51% equity ratio is still strong, although not nearly as strong as twenty four or even twelve months earlier.

Silver Fern Farms had already announced an after tax loss of $32.2 million which was also in reality a loss of $44.2 million pre tax, which included no restructuring costs. Debt rose during the year from $111 million to $316 million, a massive increase which was largely accounted for by the inclusion of $35 million insurance payout for Te Aroha in the 2011 accounts, the cost of the rebuild, $83 million of higher livestock and finished product inventory, and the funding of the annual loss.

A careful study of the annual reports sheds an interesting light on the company’s banking arrangements. Its 2010 report stated that its facilities had been renewed for two years till September 2012 and included $75 million for repayment of its SFF030 bonds.

The 2012 report notes that its facilities expire in September 2012, hence the classification of all secured loans as a current liability, as was the case in the 2011 accounts. I understand from CFO Keith Winders that SFF has been operating on a temporary extension to its banking facilities since the end of September; he claimed this was quite normal because of the annual renewal arrangement with its bankers.

However it appears unusual to me, because firstly SFF previously had a two year facility and secondly it can’t be ideal to carry $300 million of bank loans into the new financial year without negotiating secured banking arrangements.

However the directors must have received solid assurances of the company’s continued trading ability to allow it to continue to operate and incur liabilities.

Winders was also quite definite that there would be no significantly different terms and conditions attached to the new facility when finalised. This suggests the operating environment since September must be at least stable, although there is little evidence of an improvement in market demand, especially for sheepmeat which caused all the problems last season.

The only major improvement I can see is the reduction in lamb prices which have fallen from $140 to $90 in a year for a 17.5 kg lamb, but the season hasn’t yet got sufficiently into its stride for trading performance to have recovered many of last year’s losses.

What is absolutely crystal clear is that the banks will be watching their exposure to the industry like hawks and will demand some dramatic improvements for the rest of this season for which the critical period will be from January to May.

Last season’s problem was that the price was much too high to start with and none of the processors was brave enough to lead the way to get it down when stock numbers were low.

I imagine none of the meat companies will have any appetite for chasing market share at the expense of margin this year and, if they do, their banks will be down on them like a ton of bricks.

Farmers had a bonus last season, but there’s no point in hoping for a repeat any time soon.

This presupposes that processing capacity is fairly well aligned with livestock volumes because the last thing the industry can afford is a procurement led price war. Unfortunately my impression is that there is still excess capacity in the country, even after the closure of Mataura, but for the time being the companies will all be determined to rebuild their balance sheets.

Past experience suggests industry peace will only last as long as necessary to repair the damage before the companies find the prospect of grabbing market share too hard to resist.

The only long term remedy will be rationalisation of processing capacity and ownership, combined with seasonal supply commitment like the dairy industry.

The banks are one of two critical factors in a change of this nature, but they would have to work together and accept write offs in the interest of a lasting solution.

Farmers are the other critical factor, but the process of converting them to seasonally committed suppliers is a slow one and nothing will make this happen overnight.

The meat industry appears likely to be consigned to a further period of instability, but this season may give some indication of whether it is heading in the right direction.


Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country where he runs a boutique B&B with his wife. You can contact him by email at or read his blog here »

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Allan, debt and the meat industry have been hand in hand as long as I can remember. SFF should not have purchased Richmonds but they did, driven by meglomaniacs who wanted to be top dog.
 Sheep farming is a mess, I dare say worse than dairy, both industries for some reason feel they need to pay more than they can afford for product. I dont see anyway that farming can pay its debts back, the problem is that production is also promised to the banks as the income backing  the debt in the housing market.
 We have a major problem because the government is going to be forced to cut spending going into a recession making it much worse. I don't know a single farmer happy with his lot at present, the late frosts devastating the grape and fruit industry and a very dry spring with little feed are not helping.

What do you think, more to come?

1- 900ha freehold (woolshed, yards & cattle yards) asking price $2,500,000
2- 352.84 Ha freehold dairy unit 250,000 M.S., 2 homesteads & single mans quarters, 54a bale rotary shed, asking price $18 M.S or $4,500.000
Lets not forget those on kiwifriut

YMMV, nAndrewJ.  Climate is micro, not macro, and there are pockets doing very nicely, ta very much.  Low-input farming (which also means low debt if that can happen) is fairly resilient.

Unfortunately for you  Waymad you get to pay the tax for those of us less able. Then they will bring in asset taxes, how else can they run the government. Someone has to pay, and it looks like its going to be people like you.

Seems to be common themes - debt, rationalisation, egos, mergers, cracks papered over until a bad year of drought or something similar comes along.
As a city slicker I really don't understand how farmers survive with such high debt, high input prices and returns for livestock, milk and wool that fluctuate all over the show.

Average debt $7200 a cow, average milk solid production per cow 335kgs, average costs per cow $1100. Do the math.

OK - here's my maths:
Average Cost of Debt:
7200 @ 5% - $360, @ 6% - $432, @ 7% - $504
Assume costs per cow fixed (for a 1 year model anyway) - $1100
Gross income @ $5/kgms & 335kgms/cow - $1675, @ $6 - $2010, @ $7 - $2345
NPBT - worst case (7% int. and $5/kgms) = $71/cow. Best Case (5% int and $7/kgms) = $885/cow
Worst case scenario demonstrates why interest rates aren't increasing in a hurry, drawings cannot be covered, CAPEX cannot be covered and a financier would be concerned.
Best case scenario demonstrates why good operators are happy to enter the market even with high debt loading.
Also proves why averages are dangerous and misleading.

the meat industry seems to have always been troubled. It seems to me there is too much processing capacity and no co-operation. Surely we are a small enough and smart enough country to be able to bang heads together, agree which plants are the best and most efficient (maybe 2 or 3 in each Island) and then agree a fair processing toll that works for all parties.
The export arm should follow the Fonterra model instead of various meat companies competiting against each other in the off-shore markets. The big super-markets of the world must love it when 2 or 3 NZ meat processers turn up with their quality product and then compete against each other and drive the price down.
Lamb is a great product, we can produce it very cheaply and should be able to dominate the global market.
The NZ wine industry suffers from a similar problem (all competing against each other in the global market and not optimising manufacturing capacity on-shore).

Well done Allan, you've at long last said it, rationalisation of ownership. 

Clearly SFF and Alliance need to merge as a first step. This has been bleedingly obvious for some time. Unfortunately tribalism and egos have triumphed over common sense. Getting the leadership of these co ops to recommend this is akin to getting turkeys to vote for xmas.
Our pasture fed red meat industry should be creaming it given the hugely inflated cost of production of our grain fed international counterparts. That we are not is systematic of weak marketing and inefficient procurement systems. We sheep and beef farmers only have ourselves to blame for being disorganisied rabble. 

shagssheep, its good to have you back.
 Im not keen on mergers, you just create a bigger monster, I worked in the industry, hated it but gave me a feeling for how they are run.  Id go for small and inovative every time, the big guys don't care that much about you, more interested in their bonus, golfswing,mistress, the BMW they get as a perk and where to take their winter break. In fact you are just a nuisance,  a necessary pain in the butt.
    I dont think we have a cost of production advantage of if we do its shrunk a lot, costs are where farmers need to focus. I have a friend who is a dairy vet in Wisconsin. He tells me they are making huge strides both in production per cow and in costs of production. Moving to sand in the stalls and innovating all the time, Fuel is still cheap, running digestors they are getting good at what they do.
 I can buy a large Aussie back leg of lamb in Costco for $20, I can get grass fed organic mince for $4.00 a lb. I get roast beef at $3.00 a lb. Chicken is super cheap, organic drumsticks $2.40 a lb, breast  $4.00 a lb, whole large organic birds $10.00 each.Non organic a bird is $5.00  I got some ducks for $5 each last week. 
Food is much cheaper here, electricity is cheaper, petrol is back to $3.30 a gallon, tax on gasoline is .36c a gallon, gas is incredibly cheap. My electricty, gas, internet and rates including rubbish in a mid sized house with two gas fires, 6 people 5 of them women who have 20 minute showers each, came to $200 last month. My 4x4  Chev Tahoe takes $65 to fill and does 300 miles, in style.
 I think the USA could become an export powerhouse, they have some issues and there is a lot of corporate ownership, but still i'd be careful in a very high cost country which is doing nothing to address the rise in costs, in fact if anything is looking to pass on more costs.
The USA is determined to keep its dollar low, keep its energy price competitive and start employing, we on the other hand are determined to keep the status quo.
 NZ needs to stop talking about its cost advantages and look whats really going on.
 In cased you missed it, Im living in North California, its wet, huge amount of rain in the last week.  Snow all around us. We are all going to the UK for Christmas ( $713.00 Virgin Atlantic, San Fran to London return,  x seven of us)  so have a good one in the South, Andrewj

Sounds good Andrew, but don't you find your fellow yanks self absorbed and insular, despite the cheap food and energy, and hints of innovation in the dairy sector? I read a book a little while back called 'The Omnivore's Dilemma', by Micheal Pollan (a book that was well written and researched by an enlightened US person), and it seem Monsanto, Congress, and big Ag call the shots in farming over there.....bit like here come to think of it??

I talked to a guy in finance and he thought that farmers in the States got in a lot of debt in the 70's, the banks took over the farms and then sold to corporates, which he suspects the banks still have a significant interest in. So could be the future for many of our farms.
 Sometimes I get a little scared, like when you are waiting by the lights and some guys loosing it alongside you. This week,waiting to cross the road a homeless guy in fatiges was ranting beside me, and I though of the beggar who pushed some guy in front of a train in NEw York this week, and I took a step back.
 NZ angus, grass fed roast beef, on the bone, $37 at Trader Joes, that's right up there with a decent bottle of single malt Whiskey or 8 chickens, 15 bottles of wine or 3 roasts of pork.  It better be bloody good.
 I must  say that there is a lot of money here, its just not spread so even. Life can look a little unfair but that's America today.

Hi Aj, greetings from the south. I have been following your US adventures through this site, keep up the informative contributions.
I respectfully disagree with your views re a merger of the co ops. Most of the cockies down here are supportive in principal and indeed approx 60% hold shares in both. Its the guys in suits who dont want it.The logic of having two southern based meat co ops with duel overheads  competing against each other at the farm gate and then again in the overseas markets escapes me. Of course that would require farmers to support such a co op with supply as to not erode its market share and therefore its processing efficiency and clout in the markets.
As for your observations re cost of living in the states, do you not think its more reflective of the competition at retail level as opposed to their cost of production? In any event I want my lamb selling for a premium at Wholefoods not discounted at Costco. Last time I worked it out a store steer of 400kg/lw in the States was selling forNZ $4/kg ie $1600 and that was before putting it on US $8 bushel corn for 100 days or more. I sold 300kg /cw finished hiefers the other day for about nz$1150 net. I know there is a frieght component but these numbers truely dont add up. To me we have just traded off our lower cost of production to the purchaser?
Anyway must get back and drench some more lambs...Im sure your missing that Aj! 

Shags sheep, I was laughing with my daughter last night. She's doing Veterinary at high school ( she's 17), its of a high standard. They were studying sheep and the teacher was talking about  lambing ewes with dead lambs inside, my daughter said she felt like dry retching and almost needed to leave the class, the teacher guessed she had done it before. So no we dont miss the lambing too much.
 A senior pupil committed suicide last night, she has to go to conselling which she is thrilled about. A couple of years ago they lost 6 male pupils in a fairly short time so the school is hyper-sensitive plus its California not Detroit.
 Cattle farmers here are very happy at the moment and just want to see their dollar keeping on going down.
 I still doubt that mergers will solve your problem, do you still have the 'Tartan' Mafia down your way or did SCF clean them out?
 I think we should own an interest in retail in the UK, that way we can keep the markup down and stop profiteering, may have to do it in NZ too. i think the meat industry should just be involved in processing the marketing needs more brains and that includes Beef and Lamb.
 I think the banks may get the last say either way.

Shags sheep, this is a I think a weakness we could use to our advantage
I think from the finisher to the plate the USA must have massive efficiency advantages over us. It must be huge I mean really massive, how much markup can a supermarket get from a $5 chicken? They probably have Mexican workers in the processing part and they must have huge cost advantages over us.\ right to the consumer.
 All I know is that NZ grass fed angus frozenroast  beef at $40 which wouldn't even feed my family is too expensive.

@ Andrewj...Regarding USA as an export powerhouse. I saw an interview on BBC Hardtalk this week with the CEO of Royal Dutch Shell. He said basically the same thing. Energy input costs in the USA are very competetive. He also mentioned many manufacturing jobs returning to the States. 

Its a bit of a no brainer, with interest rates this low, come back home and automate as much as possible. Min wage here is very low and they work long hours and hard.  they need jobs and they need them soon, its much more about jobs here than people outside the USA realise.

SS - I'm with you on the weakness of marketing issue. I think farmers need to be more proactive in this area as others who don't have the same financial interest involved take over this role and I don't think it has a favourable outcome to the producer.
NZ lamb at the bottom of the shop freezer in the UK looks terrible. I recently bought some export lamb from a supermarket here in Christchurch and it was not good in looks or flavour. It is well washed down and then packaged in plastic which is not what the quality kitchens are wanting.  There is a massive difference in flavour between homekill and supermarket meat and if NZ farmers want paid more this will have to be addressed to obtain a higher premium. There is also the other very irritating issue of supermarkets and some butchers who pump the meat to add weight which ruins the texture and taste of the meat If the product isn't tasting great here it is not good advertising for the product on the whole.
What are these horrible slimy packs of silverside, they are horrendous to eat and nothing like the cut of meat is supposed to be. A couple of years back I had some unexpected city visitors arrive at tea time and we shared our farm raised and killed silverside with them. I was shocked when they asked me what the meat was as they hadn't eaten it before. They wouldn't believe me when I told them silverside. They told me that it was the best meat they had ever eaten and wanted to know where they could get some the same from. 
Quality control of the product is imperative otherwise the product has the problems of mass production and cheapness surrounding it. I don't think it does NZ farmers any benefit if we are known as the Meat Warehouse.
If SFF and Alliance were to merge I see the problems of quality above escalating as already these two can't be bothered with small overseas buyers who have specialist niche markets for product. Local farmers who have got their own market for product sorted have problems getting the product killed as the two big players don't want to know about small quantities. 

the   question  is  
'who  owns  the  debt '
In   limited  liability  company  and  cooperatives   the  owners  are  effectively   faceless.
Unless  of   course  one  accepts  the  fact  that  the  respective  Directors  really  own  the  debt.
They  are  responsible  for   accepting  the  levels  of  debt  on  behalf  of  their   entities.
They  should  accordingly  accept  a   high   degree  of  personal   responsibility  and  accountability  for  it.
Does  one  think  they  have  done  this  over  the  last   twelve  months  in  this   industry  sector ??
Be   interesting  to  see  how  it  plays  out .

Not sure I agree with you SS, re most farmers down here believe in the principal of a merger between SFF and AGL. When push comes to shove, they back off. You will have noted over recent times some shareholder comment either on radio or newspaper that $90/lamb is enough with good production. My mind boggles at that sort of comment. Where's the forward thinking?. How little Johnny or Jill will pay Mum and Dad for the farm and farm sheep I'll never know!!

Im in agreeance with your last point Stevie.There should be blood on the floor of meat company CEOs but as usual passive old sheep farmers just grin and bear it. We are way too accepting of our lot. When supply was decimated by the 2010 storm we saw the colour of the supermarkets money but clearly we overplayed our hand pushed it too far too fast burned demand.When supply came on again im sure the supermarkets were delighted to see how far we were prepared to drop our pants.If farmers were prepared to support a large co op with at least 60% of the supply we could limit the ability of the supermarkets to control the game.

AGM's of both co-op's next week SS which could be interesting but probably not reffering to your way too accepting comment. Did you realise the average equity across NZ sheep and beef farmers was 80%. This is half the problem, some are way to comfortable and I refer to the $90/lamb comment being enough. So don't hold your breath!. Banks are having their say and the simplest way to fix meat company balance sheets is pay less for inputs,ie stock. Brilliant!!.
Regarding your comment limiting the ability of the supermarkets to control the game, I wholeheartedly agree but obviously other farmer shareholders don't or they don't understand how big business works and how we play to their strengths.
Question; Why do you say CEO heads should roll?.